Tariffs must not become an inflation problem – Canadian central banker

TORONTO (ICIS)–Canada’s central bank will work to ensure that US tariffs, and Canada’s reciprocal duties, will not turn into an inflation problem, the bank’s governor said during a webcast event on Thursday afternoon.

• Monetary policy cannot solve a trade conflict
• Tariffs to impact oil, farming, manufacturing
• Tariffs are a structural change that needs a structural response

While the tariffs will slow Canada’s GDP growth and raise prices, the tariff-induced direct price increases must not be allowed to spread into “ongoing generalized inflation”, Tiff Macklem, governor of the Bank of Canada, said in a speech to the Calgary economic development agency in Alberta.

US tariffs on Canadian exports will be paid by the US company buying those goods, and the company will pass at least some of the cost onto the US consumer, Macklem said.

However, the same goes for the retaliatory tariffs Canada imposes on goods imported from the US, he said.

As such, higher tariffs will raise prices, causing inflation to rise for a period as the upward pressure on prices from higher costs will outweigh the downward pressure from a weaker economy, he said.

Businesses have already lowered their sales outlooks, notably in manufacturing and sectors that depend on consumer spending, he said.

Companies are also holding back on investment plans.

“Businesses are telling us they are delaying or cancelling investments and scaling back on hiring,” Macklem said.

However, as Canadians worry about trade uncertainty, “we don’t want them to have to worry about inflation as well”, he said.

What the bank can and must do is ensure that higher prices from a trade conflict do not become ongoing inflation, he said.

“We are committed to maintaining price stability over time,” he said, adding: “There should be no uncertainty about that.”

The tariffs and resulting uncertainties will – if maintained – particularly hurt certain sectors and regions in Canada, he said.

ENERGY
For oil-rich Alberta province, the impact on the energy industry from a 10% US tariff is “a major concern”.

At the same time, however, the tariffs are also “a big issue” for US Midwest refineries that have invested in equipment to refine heavy Canadian oil, he said.

About 94% of Canadian crude oil exports go to the US, mostly through north-south pipelines, he said.

The launch of the Trans Mountain oil pipeline expansion last year increased access to overseas markets for Canadian oil, and new export capacity for liquefied natural gas (LNG) is due to come online, he noted.

These capacities would help to diversify markets for Canadian energy exports, he said, but also pointed out that these investments are designed to increase Canada’s export capacity – not replace US demand, he said.

FERTILIZERS
Although the US has temporarily exempted fertilizers, including potash, from tariffs, “uncertainty remains,” he said.

With spring seeding to begin soon, farmers on both sides of the border are already feeling pressure from low grain prices, he said.

US farmers import potash from Saskatchewan to add potassium to their soil, while Canadian farmers often need US phosphate to fertilize their crops, he said.

Canadian farmers also buy machinery and equipment from the US, he said.

He also noted that China has imposed a 100% tariff on Canadian canola, effective 20 March, in retaliation for the 100% tariff Canada placed on electric vehicles (EVs) from China.

China is the top market for Canadian canola, with an export value of close to Canadian dollars (C$) 5 billion ($3.5 billion), he said.

ALUMINUM, STEEL
Industries in other parts of Canada, particularly in Ontario and Quebec, will be disrupted by the 25% US tariffs on steel and aluminum.

In 2024, the US imported about one-quarter of its steel and 40% of its aluminum from Canada, and Canada imported one-quarter of its steel and one-fifth of its aluminum from the US, he said.

Those cross-border flows mean these sectors will be hit by both US tariffs and counter-tariffs, he said, adding: “It’s going to hurt output and increase prices.”

Monetary policy could not target specific industries or regions, he said.

“We have one monetary policy for the whole country,” he said.

A challenge for the Bank of Canada will be trying to assess by how much tariffs will dent demand, how much of the tariff burden will be passed on to consumer prices, and how quickly the burden will be passed on, he said.

A faster pass-through means inflation will rise faster, but it will also come down faster, “provided monetary policy does its job”.

“So, we’re watching closely how the costs of tariffs and uncertainty pass through to consumer prices,” he said.

“Our mandate is price stability, and low inflation is the best way we can support the economic and financial well-being of Canadians in good times and bad,” he said.

While monetary policy “cannot solve a trade war”, the bank could help avoid adding damage to the economy by ensuring that inflation remains anchored at the bank’s 2% inflation target, he said.

Helping the Bank of Canada will be its co-operation with central banks around the world, he said.

Central bank governors meet regularly to exchange information and consult each other, he said.

“As central banks, we are all in this together,” Macklem said.

STRUCTURAL CHANGE
If not resolved, Canada’s tariff conflict with its largest trading partner by far would become a “structural change” that requires a structural solution, Macklem said.

High tariffs would put Canada on a permanently lower growth path, he said.

“We are going to earn less, we are going to consume less, because we are going to have less income,” he said.

One way to at least partially offset the negative structural change caused by the tariff conflict would be “positive structural reform”, he said.

Such a reform would include removing the barriers to the country’s interprovincial trade, he said.

Despite many attempts over the years, Canada never agreed on interprovincial free trade as in many cases it is easier to trade north to south, rather than across Canada.

The barriers between the country’s 10 provinces and three territories include actual trade restrictions, as well as different provincial regulations for the accreditation of professionals, Macklem said.

With the tariff conflict, Canada may now finally remove its interprovincial barriers, which would increase commerce east-west across the country, he said.

This positive structural reform could offset “at least some of the consequences of this very negative structural shock we are facing with the US,” he said.

It would, however, be difficult and take time for Canada to try to replace the millions of US consumers it may be losing, he said.

While hoping for the best, Macklem did not seem too optimistic about the chances of resolving the tariff conflict with the administration of US President Donald Trump.

“There is a certain level of trust that has been broken,” he said, and he noted that “Trump has threatened our sovereignty, repeatedly referring to Canada as the 51st state.”

Regarding Canada’s upcoming federal election, Macklem said the bank’s commitment to low inflation was independent of which political party is in government.

Canada’s new prime minister, Mark Carney, is expected to call an election on Sunday (23 March), which will likely be held on 28 April or 5 May, public broadcaster CBC reported on Thursday, citing unnamed government sources.

Carney, who took over from Justin Trudeau on 14 March, is a former governor of the Bank of Canada and of the Bank of England.

CHEMICAL INDUSTRY
Trade group the Chemistry Industry Association of Canada (CIAC) has said that to cope with the tariff challenge, Canada needs a competitiveness framework to attract investment and stimulate economic growth.

CIAC wants the government to implement pro-growth tax and regulatory policies; strengthen the country’s infrastructure; improve labor relations to avoid supply chain disruptions; and help diversify and expand Canada’s trade into new markets beyond North America.

In chemicals and plastics, the tariff conflict affects about C$115 billion in US-Canada chemicals and plastics trade, according to CIAC.

Focus article by Stefan Baumgarten

$1 = C$1.43

Please visit US tariffs, policy – impact on chemicals and energy

Tumbnail photo of Tiff Macklem, governor of the Bank of Canada; photo source: Bank of Canada