Tariffs and trade uncertainty are hurting the Canadian economy

Governor Tiff Macklem discusses how uncertainty about the trade war with the United States has shaken businesses and consumer confidence. He also reiterates that the Bank of Canada must ensure that high prices from tariffs do not lead to ongoing inflation.

US tariffs will hurt key Canadian industries

The United States has imposed tariffs on some Canadian exports and threatened more tariffs that could come into effect in early April. Canada has retaliated with tariffs on some US imports and has promised more counter measures if the trade war escalates.

Broad-based and long-lasting tariffs will hurt Canadian exports and overall output and will push prices higher. Tariffs will also have a big impact on key Canadian industries and many regions of Canada. These include:

• the oil and gas industry in Alberta, which could be hit with 10% tariffs on US exports
• potash producers in Saskatchewan, who export a lot of fertilizer to the United States
• farmers in the Prairies, who use US phosphate on their crops and buy machinery and equipment from the United States
• the steel and aluminum industry, which now faces tariffs on both exports and imports

Even without tariffs, uncertainty is taking a toll

While some US tariffs have been implemented, many have been delayed. Exemptions have also been made, and US tariff policy continues to change frequently. The constant policy reversals have created a lot of uncertainty, which can be broken in two categories:

• uncertainty about the tariffs, including which ones will be imposed and how long they will last
• uncertainty about how the tariffs will affect the economy

The unpredictability of US policy has already led some businesses to lower their outlook for future sales. Businesses are also delaying investment and new hiring. Many households plan to spend more cautiously.

If broad-based tariffs are imposed and stay in place, it’s unclear how exactly households and businesses will react. What is clear is that there will be less demand, less economic growth and higher inflation.

The Bank must focus on controlling inflation

Tariffs will increase the cost of imported goods and add to business costs. Prices will rise. But it’s not clear how quickly or how fully the cost of tariffs will be passed on to the prices Canadian consumers pay. There is also a risk that one-time price increases could spread to other goods and services and become ongoing inflation.

The Bank must ensure higher prices from tariffs have only a temporary effect on inflation. So the Bank will be:

• tracking cost increases from tariffs through to consumer prices
• using improved data and modelling to see if inflation is spreading
• reaching out to more Canadian households and businesses to understand how they are reacting to the uncertainty and escalating trade conflict