Tariffs and Global Trade: Study Notes
Tariffs: Overview and Impacts
Tariffs are essentially taxes on imports, often framed as surcharges or duties. They make imported goods more expensive for domestic buyers.
Importers pay the tariff when bringing in a product from another country and often pass the added cost to domestic consumers through higher prices.
In the short run, some companies may absorb the tariff costs to avoid price increases for customers, but this is not the typical outcome.
Firms sometimes respond by importing more before a tariff takes effect (a notification period) to stock up inventories and maintain previous price levels; this buffering allows them to avoid raising domestic prices immediately.
In general, tariffs increase the price of imports in the domestic market, which is one primary rationale for imposing them.
Types of tariffs and their purposes
Revenue tariffs: designed to generate income for the government; tariffs are a source of government revenue.
Protective tariffs: designed to protect domestic industries by raising the price of imported goods to level the playing field for domestic competitors and potentially reduce imports.
In practice, these purposes are interrelated: tariffs generate revenue and can protect domestic industries at the same time.
Example context: tariffs are used by countries such as the United States and Canada to influence their domestic markets and industries.
US–Canada tariff dynamics: a practical timeline
March: initial tariffs of on goods imported from Canada and on energy products.
March 7: tariff exemptions apply to goods compliant with the US–Mexico–Canada Agreement (USMCA in the U.S.; CUSMA in Canada).
August: tariffs on non-energy goods rise to ; energy tariffs remain at .
June 4: tariffs on steel and aluminum imports (and derivatives) rise to .
Canada’s response: counter-tariffs on U.S. imports; note that about of Canada’s exports go to the United States, highlighting exposure and leverage in the tariff dynamic.
Negotiations ongoing: the aim is to a) remove or reduce remaining tariffs and b) maintain a stable, rules-based trade relationship.
September 1: Canada removed most counter-tariffs on U.S. imports; tariffs remain for steel, aluminum, and cars in some cases.
USMCA (CUSMA) context and ongoing negotiation reality
The agreement replacing NAFTA is USMCA (Canada–United States–Mexico Agreement) in the U.S.; Canada uses the term CUSMA.
The U.S. renegotiated NAFTA under Donald Trump, arguing the previous deal was unfair; the current framework is USMCA/CUSMA.
Ongoing negotiations around tariff levels and sector-specific protections (e.g., energy, steel, automotive) continue as part of broader trade relationship management.
Tariffs are not solely about U.S. policy; they affect domestic exporters in Canada who face tariff implications on U.S. markets and vice versa.
Tariffs and China: a broader context
Canada has implemented 100\% tariffs on Chinese-made electric vehicles (EVs) and 25\% tariffs on steel and aluminum.
China retaliated with tariffs in 2024: 100\% on canola oil, canola meal, and peas; 25\% on pork, fish, and seafood.
The broader picture shows a bilateral tariff war between major economies, with both sides imposing countermeasures and seeking strategic advantages.
Canada’s approach includes balancing retaliation with broader economic strategy and seeking other markets and trading partners.
Government responses to tariffs: programs and supports
Duties relief program: allows qualified companies to import certain goods without paying tariffs if those goods are ultimately exported (e.g., components that are later assembled into export-ready products).
Tax relief: deferring or delaying corporate income tax payments for companies affected by tariffs.
Large enterprise tariff loan facility: provides liquidity/cunding to large Canadian enterprises negatively affected by tariffs.
Strategic response fund: supports large-scale projects to invest in the Canadian economy, creating resilience and longer-term competitiveness; includes measures to help steel and agricultural sectors.
Sector-focused supports: specific measures to aid the steel and agriculture sectors in light of tariff exposure.
Investing in the future: AI compute strategy and federal investments
The government launched a Canadian Sovereign AI Compute Strategy to build public and private capacity for AI computing needs.
2024 Budget allocations for AI and compute infrastructure:
(CAD) designated for short-, medium-, and long-term AI needs.
to purchase AI compute resources for innovative Canadian SMEs (small and medium enterprises; defined as up to 99 employees for small and 100–499 for medium).
to support industry–academia–private sector projects to build Canadian AI data centers.
for new AI supercomputing systems through the infrastructure program.
in the short term to augment existing public computer infrastructure for immediate needs.
The aim is to ensure Canada remains competitive in AI development and deployment, with broad access to compute power for innovators and researchers.
Non-tariff barriers and the broader free-trade environment
Non-tariff barriers exist in addition to tariffs and can include regulatory hurdles, administrative rules, quotas, and other trade restrictions.
While not the focus of the current role-play, non-tariff barriers are acknowledged as part of the overall trade environment.
Global trend: a shift toward freer trade, fewer tariffs and non-tariff barriers, and reduced regulation.
Organizations exist to monitor trade policies and promote free trade, sometimes providing monetary assistance to countries under certain conditions.
International institutions and concepts: a backdrop for trade policy
GATT (General Agreement on Tariffs and Trade, 1947): aimed to reduce tariffs and non-tariff barriers.
WTO (World Trade Organization, established 1995): successor to GATT, with about member countries; mediates international trade disputes.
World Bank and IMF (International Monetary Fund): provide funds and financial support to countries; they promote free trade by enabling lending with expectations of lower barriers in return.
The objective across these institutions is to promote freer trade and reduce barriers while helping economies stabilize and grow.
Levels of economic integration and examples
Free Trade Area (FTA): members trade freely among themselves without tariffs and with reduced trade restrictions. Example: CUSMA (US–Canada–Mexico) – the largest free trade zone due largely to the U.S. market.
Customs Union: members trade freely among themselves and share a common external tariff against non-members.
Example: Mercosur (Argentina, Brazil, Paraguay, Uruguay; Bolivia in process).
Common Market / Economic Union: most integrated form; trade rules unified, common policies, and often common currency (e.g., the euro in the EU for many members).
Example: European Union (27 member states, post-Brexit).
Canada has FTAs with multiple partners (EU, TPP, etc.) and holds a broad network of agreements that collectively cover a large portion of global GDP and consumer markets.
Global reach: FTAs cover countries across separate agreements, representing roughly of global GDP and about consumers.
Notable alignment: EU–Canada free-trade agreement (CETA) started in 2017 and is viewed as one of the most comprehensive, covering virtually all sectors.
Other major frameworks: Trans-Pacific Partnership (TPP) and various bilateral FTAs (e.g., with Chile, Colombia, Costa Rica, and others).
How firms go global: strategies and market-entry options
Before expanding, firms assess:
Growth potential of target foreign markets.
Expenditure and investment required to enter a market.
Operational complexities and the best way to organize operations.
Political-economic factors that could pose barriers or opportunities.
Market-entry strategies (from least to most involved):
Exporting and importing: selling home-produced goods abroad or importing foreign goods for domestic sale.
Contract-based agreements: franchising, licensing, or subcontracting arrangements.
Direct investment: acquisitions, joint ventures, or establishing overseas subsidiaries.
Exporting and importing: definitions and types
Exporting: selling domestically produced goods in overseas markets.
Direct exporting: selling directly to customers in foreign markets.
Indirect exporting: product becomes part of another product that is sold abroad (e.g., auto parts that go into vehicles exported internationally).
Importing: bringing in goods produced abroad to sell domestically, often because they are cheaper or not available domestically.
Contract-based agreements in global markets
Franchising: a franchisor grants a franchisee the right to produce and/or sell the franchisor’s product under the brand name under agreed terms.
Example: top global franchise brands (predominantly U.S.-based): McDonald’s, KFC, Burger King, Pizza Hut, 7-Eleven, Marriott, InterContinental, REMAX, Subway, etc.
Licensing (foreign license agreements): one company allows another to produce or sell its product or use its trademark/patent/manufacturing process in a specific region in exchange for royalties.
Subcontracting: hiring local firms to produce, distribute, or sell goods/services rather than establishing a local operation.
Direct investment and joint ventures
Direct investment: the most involved form of international presence; a company operates production and marketing in a foreign country.
Acquisition example in Canada: Target acquired Zellers (a Canadian retailer).
Joint venture example: Toyota and Mazda built a shared plant in Alabama.
Benefits of direct investment and JVs: shared risk, shared costs, and access to local knowledge and markets.
The world’s leading multinationals (Forbes Global 2000, 2025)
The list is dominated by U.S. and Chinese companies, with a few from other economies (e.g., Saudi Aramco).
Most top firms are banks or tech/consumer sector leaders; the majority are headquartered in the United States or China.
Example brands on the list: JPMorgan Chase, Berkshire Hathaway, Alphabet (Google), Microsoft, Aramco, etc.
Geography note: nine of the top ten are headquartered in the United States and China; a few are from other countries.
Global vs multi-domestic strategies: choosing a strategic approach
Global business strategy: sell the same product in essentially the same way worldwide; suitable for products with universal appeal and broad consumption.
Examples: universally standardized products like certain chemicals, metals, or soft drinks (e.g., Coca-Cola’s model).
Multidomestic strategy: tailor products and marketing to each market’s tastes, customs, and buying habits; the core product remains the same, but local variations are added.
Example: McDonald’s adapting menu items to suit local preferences in different countries.
Final reflections for the week
Tariffs are part of a broader set of trade restrictions (tariffs and non-tariff barriers) that governments use to influence trade patterns.
The global economy has moved toward greater openness with ongoing negotiations and evolving trade agreements, but tensions persist with major economies like the U.S. and China.
Understanding the balance between protectionism, revenue generation, and the benefits of free trade is central to analyzing policy choices and business strategies in a global context.
Note: In your role-play exercises, reference these tariff dynamics, relief programs, and strategic investments (e.g., AI compute strategies) to discuss how the government and businesses respond to current trade pressures and to illustrate potential pathways for resilience and growth.