OTTAWA (Reuters) - The tit-for-tat tariffs imposed by Canada and the United States will trim Canadian exports and imports by 0.6 percent and boost inflation by about 0.1 percentage point, the Bank of Canada said on Wednesday.
The tariffs, along with related uncertainty about U.S. trade policy that hangs over Canada’s export-driven economy, will subtract about 2/3 percent from GDP by the end of 2020, the central bank said in its quarterly monetary policy report.
“The size and timing of the effects (of the U.S. tariffs) will depend on multiple factors, including the capacity of Canadian exporters to absorb the tariff costs or to pass them on to their U.S. customers,” the bank said.
The U.S. tariffs on C$16.6 billion of Canadian steel and aluminum imports - about 2.5 percent of total Canadian exports - will cut the level of real Canadian exports by C$3.6 billion, or about 0.6 percent, the bank said.
The 25 percent U.S. steel tariff will reduce exports by about 0.4 percent in the fourth quarter of 2018, while the 10 percent aluminum tariff will trim Canadian exports by about 0.2 percent, according to estimates by the central bank.
The impact will be felt mostly in the second half of 2018, but could take longer to materialize, it said.
Separately, Canada’s retaliatory tariffs on C$16.6 billion of U.S. imports, mainly steel and aluminum but also consumer products, will cut real imports by C$3.9 billion, or about 0.6 percent, starting in the third quarter, the bank estimated.
“They are also likely to have complex effects on other sectors of the Canadian economy, notably through higher costs for users of steel, iron and aluminum, as well as for firms using other items made from these products,” it said.
The two sets of tariffs will temporarily boost CPI inflation by about 0.1 percentage point until the third quarter of 2019.
“Consumers’ purchasing power would be reduced, which would weigh on household spending,” the bank said.
The U.S. steel and aluminum tariffs were imposed on June 1, while Canada’s countermeasures took effect on July 1.
Reporting by Andrea Hopkins and Dale Smith