Tariffs: what will be their impact on consumption?

In January 2025, however, the Canada-US stability was broken. The Trump administration announced the imposition of tariffs on Canadian imports, thus ending a period of relatively peaceful economic kinship between our two countries. Justin Trudeau’s answer came a few hours later: Canada announced tariff countermeasures aimed at billions of dollars worth of American exportations. A tariff war was now underway.

As a business with a pronounced interest in consumption and market behaviours, we want to offer our unique perspective on this conflict: our take on it, as a team of marketing professionals. We think it’s important for us to do so, as people’s day-to-day purchases and consumption habits will be the first things impacted by this new reality.

Through an analysis of historical examples and economic data, let us explore the concrete effects of tariffs on consumption together and determine the best strategies to adopt in order to mitigate their impact and exercise an economic influence.

The direct effect of tariffs: an inevitable price hike

A customs tariff isn’t absorbed by governments or by big businesses: mainly, it is consumers and importers who absorb its costs. Although many believe that foreign exporters adjust their prices to compensate tariffs, that is not actually the case: many studies show that foreign businesses rarely let these costs affect their margins.

During the commercial war between the United States and China in 2018 and 2019, the price of imported goods affected by tariffs rose by an almost proportional amount to the taxation rate, which means that the near-totality of tariff costs were supported by American consumers and businesses. (Amiti, Redding & Weinstein, 2019).

On the Canadian side, we can expect price hikes on many product categories, especially in:

• Food: fruits, vegetables, coffee, meat and dairy products imported from the US;
• Manufactured goods: electronic devices, appliances, automobile parts;
• Construction materials: stones, precious metals and wood products.

A study by Cavallo and al. (2021) confirms that tariff price hikes are directly transmitted to consumers via retail prices, indicating that tariffs have an immediate inflationist effect and are not absorbed by foreign businesses.

A generalized inflation thus becomes inevitable, amplified by the fact that Canadian businesses, confronted with increases to their production costs, offset these hikes by upping their sales prices.

This phenomenon is alarming, as, according to Gopinath (2019), when tariffs are imposed on key products, the increases in prices aren’t limited to the directly targeted goods, but extend also to substitution products and adjacent sectors.

Faced with this inflation, the Bank of Canada could be forced to raise its interest rates to stabilize prices, which would have a direct effect on loaning rates, reducing the purchasing power of households even more.

It’s clear that customs tariffs are not just a question of international commerce: they have immediate and concrete repercussions on the wallets of consumers at large by affecting the cost of everyday consumer goods, housing prices, and even loaning rates.

An increased pressure on local businesses

While big chains can absorb part of the tariff price hikes thanks to their massive purchase volumes and their ability to negotiate with suppliers, independent retailers don’t have access to those measures. Rising stock costs, combined with consumers’ refusal to pay more, risk putting certain shops in deeper financial pressure.

The work of Cavallo et al. (2021) shows that tariffs increase costs for retailers long before they affect consumers, which forces retailers to make difficult decisions about their pricing, product offerings, and loyalty-building strategies.

In other words, even though consumers feel the effects of price hikes when it’s time for checkout, retailers feel these pressures even earlier, as soon as they have to buy their stocks and negotiate with their suppliers.

The 2018 tariff struggle between Canada and the US serves as a concrete proof of this reality: many retailers specializing in American products (textiles, liquor, kitchen equipment, and certain specialized grocery stores) saw their margins crumble. Indeed, Amiti, Redding and Weinstein (2019) point out that importers were unable to negotiate lower prices with their foreign suppliers, which amplified the pressure on businesses at the other end of the chain.

For many, this has meant:

• A loss of profitability, making it difficult for local businesses to survive without raising their prices;
• Less in-store visits, consumers preferring online alternatives or distributor brands;
• Definitive closures for some businesses unable to absorb these new constraints while competing with e-commerce platforms and superstores.

Again, the 2018 US-China tariff war illustrates this phenomenon fairly well: in the months following the imposition of tariffs, US importers and retailers reduced their purchases, which led to a shrinking of retail sales and a restructuring of markets (Bown, 2021).

Independent stores were the first to suffer, as they were unable to negotiate competitive prices or to quickly diversify their supply sources.

Faced with this reality, the only viable response is to adapt, which means:

• Promoting local products and reducing our dependence on American suppliers;
• Diversifying supply sources by exploring European or Asian alternatives or by developing local partnerships;
• Increasing the value of the customer experience to counter the rise of e-commerce giants. This can be done by providing customized service as well as distinctive offerings.

Economic studies on previous tariff wars  show that the businesses that survived were often those that knew how to pivot quickly and how to adapt their offerings to the new realities of the market (Fajgelbaum et al., 2019). This means that, even though the situation is concerning, proactive retailers can limit the impact of tariffs by optimizing their positioning and by reinventing their business model.

Real estate and consumption: don’t underestimate the impact

Tariffs on construction materials don’t only translate to increased costs for real estate promoters and construction entrepreneurs: they also directly affect consumers’ wallets by raising housing prices and reducing the capacity of households to buy or renovate their properties (Amiti, Redding & Weinstein, 2019).

This effect is generally amplified by the rising costs of adjacent materials, such as steel and aluminium, as well as by supply chain problems that prolong construction delays.

In a context where the Canadian real estate market is already shaken by an accessibility crisis, adding tariff pressures on top could lead to:

• Slowed down construction projects, because of the rising cost of materials and of how difficult it is for promoters to maintain good margins.
• A reduced capacity for households to invest in real estate, especially due to the rise of interest rates in response to the inflation caused by tariffs.
• Increased inequality, as only the richest households will be able to absorb these price hikes and remain on the real estate market, while medium and lower income households will see their access to property become more and more limited.

In addition to all this, the trade war between the US and China in 2018 and 2019 showed that tariffs on materials brought disruptions in the residential and commercial construction sectors.

The conclusion is clear: imposing new tariffs on construction materials will only amplify the current tensions plaguing the Canadian real estate market, while also slowing down the supply of new housing and raising the financial barriers for buyers.

Response strategies: how can consumers regain control?

The imposition of tariffs doesn’t mean consumers need to remain passive, far from it. Indeed, some strategic choices can not only limit the individual economic impact of tariffs, but also send a clear message about the country’s economic priorities.

Prioritizing local purchases and diversifying supply sources

One of the immediate effects of tariffs is to create a price distorsion that indirectly benefits local products. Consumers can therefore make the most of the situation by reorienting their purchases towards Canadian alternatives or even European ones:

• Food: prioritize local agriculture and producer cooperatives to reduce dependence on US imports.
• Manufactured goods: explore European or Asian alternatives when possible, especially for electronic goods and clothes.
• Construction materials: turn to Canadian suppliers to avoid the cost increases due to tariffs on the targeted products.

Concrete case study: during the 2018 Trump Tariffs, the “Buy Canadian” campaign allowed many local brands to increase their market share, thus compensating for the decrease in US imports. This dynamic benefited Canadian businesses which were able to showcase their local origin and their commitment to a national production.

Avoiding a dependence on US platforms and services

Big US businesses dominate many strategic sectors (e-commerce, financial services, search engines, social media). Reducing this dependence also lessens the impact of tariffs by redirecting economic flows toward local or more diverse alternatives. Also:

• Buying on Canadian e-commerce websites instead of using Amazon.
• Opting for local banks and financial services instead of big American institutions.
• Using alternative search engines like DuckDuckGo instead of Google, and using local platforms for digital marketing and advertising.
• Consuming local media instead of those controlled by American platforms, by supporting newspapers such as Le Devoir or La Presse.
• Consuming local entertainment by watching shows and movies on Tou.TV instead of depending on YouTube or Netflix for your cultural content.

Concrete case study: in Europe, regulations on data protection (RGPD) encouraged the creation of platforms that serve as alternatives to the digital giants, thus reducing European dependence on American services.

Consuming in a more sustainable way and prolonging how long your products last

Tariffs make new products more expensive. Instead of accepting to pay more, consumers can choose to optimize their use of what they already have. Such an adjustment can reduce demand for imported products and limit the impact of tariffs. Here are a few good reflexes to develop:

• Repairing instead of replacing: engage in repairs (clothes, appliances, electronics) to increase how long your products last.
• Buying used or refurbished: prioritize participating in the circular economy, which lessens the pressure on global supply chains.
• Sharing and renting instead of buying: encourage models of collaborative consumption (ex: renting tools, ride-sharing, bartering).

Concrete case study: During the 2018-2019 trade war between the US and China, many consumers looked for more affordable alternatives, notably by buying refurbished or used products and by prioritizing repairs instead of replacements.

Conclusion: the role of consumers in trade wars

Economic history is full of examples showing that trade wars are never free of consequences for consumers. Whether it be the Smoot-Hawley law in 1930, the trade war between the US and China in 2018 or the tariffs on Canadian wood in 2017, the schema is always the same: rising prices, the disruption of markets, and economic uncertainty.

Even though official justifications speak of protecting local industries, the reality is that the main effect of these measures is to raise the cost of living and worsen economic tensions. However, it would be a mistake to reduce these crises to simple macroeconomic events.

While tariff-related decisions are taken in political contexts, it is the choices of businesses, consumers and workers that dictate their real impact. Businesses react by adjusting their supply chains, diversifying their commercial partners and modifying their pricing strategies. In the same way, consumers and workers have much broader powers than it might seem at first glance.

The truth is that the votes that directly influence the economy don’t take place in voting booths, but rather in individual consumption and employment decisions. With each purchase, consumers orient economic fluxes by benefiting one business over another. In a similar way, by choosing in which sector to work and which company to work for, individuals help to fashion the productive ecosystem of tomorrow. 

In a world where economic uncertainty has become a constant, reclaiming control doesn’t happen through political promises, but rather through concrete choices. Those who understand this reality don’t merely feel the effects of trade wars passively: they fight these effects by supporting their local economy.

Sources

Amiti, Mary, Redding, Stephen J., & Weinstein, David E. (2019). The Impact of the 2018 Tariffs on Prices and Welfare. Journal of Economic Perspectives. https://www.aeaweb.org/articles?id=10.1257/jep.33.4.187

Bordo, Michael D., & Levy, Mickey D. (2019). Tariffs and Monetary Policy: A Historical Perspective. National Bureau of Economic Research (NBER). https://www.nber.org/system/files/working_papers/w24154/w24154.pdf

Bown, Chad P. (2021). The US-China Trade War and Phase One Agreement. Peterson Institute for International Economics. www.piie.com

Cavallo, Alberto, Gopinath, Gita, Neiman, Brent, & Tang, Jenny (2021). Tariff Pass-Through at the Border and at the Store: Evidence from US Trade Policy. https://www.aeaweb.org/articles?id=10.1257/aeri.20190536

Fajgelbaum, Pablo D., Goldberg, Pinelopi K., Kennedy, Patrick J., & Khandelwal, Amit K. (2019). The Return to Protectionism. Quarterly Journal of Economics. https://www.nber.org/papers/w25638

Gopinath, Gita (2019). The Lasting Impact of the US-China Trade War. International Monetary Fund (IMF) Research Bulletin. https://www.nber.org/system/files/working_papers/w29315/w29315.pdf

Irwin, Douglas A. (2017). Peddling Protectionism: Smoot-Hawley and the Great Depression. Princeton University Press. https://press.princeton.edu/books/paperback/9780691178066/peddling-protectionism?srsltid=AfmBOoo0DU6wTKWle7zPT-_cRBHNuRfHGJsOeYeTy0_knpvTZ1ZScRO-