Tit for Tat: What Do Retaliatory Tariffs Mean for Canadian Imports, Growth and Inflation?

To get a sense of how the retaliatory tariffs will affect the Canadian economy, it’s important to dig into the details. Namely, which imported goods will tariffs be applied to, and how significantly will price changes impact demand for those goods? 

Looking at the federal government’s lists of targeted goods, there doesn’t seem to be a clear strategy of largely applying tariffs to just those imports that Canadians can easily substitute with similar goods produced at home or abroad. Instead, other selection criteria were also used, such as the impact on US exporters or reciprocity of tariffed goods on both sides of the border. As a result, the 25% tariffs on select imports from the US should broadly translate to an eventual 25% reduction in demand.

Due to the size of the actual and proposed counter tariffs and the types of imported goods they apply to, inflation in Canada could be about 0.6 percentage points higher over the next year than it would be otherwise. It would be even higher if not for the drag on real GDP from the tariffs on both sides of the border. However, it’s important to note that Canada would be hard pressed to avoid a recession because of the trade war, even if it decided not to apply retaliatory tariffs.