The tariff threats from Donald Trump, the president of the United States, are not subsiding. Both before and after his second inauguration, he has threatened to impose blanket tariffs of 25% on all goods entering the U.S. from Canada, Mexico, and China. The reasons he gives for these threats are varied, ranging from funding tax cuts in the U.S. to reinforcing North American borders.

But what exactly are tariffs? They are a tax on goods or services imported from another country. For instance, the U.S. has previously imposed taxes on Canadian softwood lumber, steel, and aluminum, which are used by American furniture makers or automotive companies. This makes the importation of these tariffed items more expensive for businesses, leading them to either increase the selling price of their products or find alternatives to avoid importing the items.

Trump has promised to establish an External Revenue Service to collect the proceeds of these tariffs. He stated during his inauguration address on Jan. 20, “Instead of taxing our citizens to enrich other countries, we will tariff and tax foreign countries to enrich our citizens.” However, it is the business importing the tariffed goods that pays the tax directly to their own government who imposed the tariff.

So, why would Trump or any government impose a tariff? There are a few reasons. First, to increase revenue. Proceeds from a tariff can be used to boost a government’s budget or fund new services or tax cuts. Secondly, tariffs can protect a domestic industry from external competitors. Lastly, tariffs can be used as a negotiating tactic to secure concessions from a trading partner.

However, the impact of tariffs on the economy is not always positive. When tariffs are in place, demand for tariffed goods decreases because they cost more for the importing business. This can hurt the economy of the country facing tariffs. Experts warn that a tariff war between Canada and the U.S. would negatively impact economies on both sides of the border and could result in a recession in Canada, with job losses expected in industries that rely heavily on trade with the U.S.

In response to tariffs, a country can impose retaliatory tariffs. In the case of the U.S. and Canada, this would mean that Canadian businesses would pay duties on goods brought into Canada from the U.S., leading to a boost in government revenues and potentially higher prices for consumers. This is what Prime Minister Justin Trudeau referred to as “dollar-for-dollar matching tariffs.”

It’s clear that tariffs and trade wars have far-reaching implications for economies, businesses, and consumers alike. As the situation continues to unfold, those interested in investing will be watching closely.