Tiff Macklem Warns of Permanent Economic Damage from Prolonged Trade War with U.S.

 

Bank of Canada Governor Tiff Macklem has issued a stark warning about the potential long-term impacts of a prolonged trade war between Canada and the United States. Speaking at an event hosted by the Mississauga Board of Trade and the Oakville Chamber of Commerce, Macklem emphasized that the economic consequences of broad-based tariffs would be severe and lasting.

Macklem highlighted that unlike the economic downturn caused by the COVID-19 pandemic, which was followed by a rapid recovery, the effects of a trade war would be structural. "In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened," Macklem said. "This time, if tariffs are long-lasting and broad-based, there won’t be a bounce-back. We may eventually regain our current rate of growth, but the level of output will be permanently lower. It’s more than a shock, it’s a structural change".

The governor pointed out that the first sector to feel the pinch would be Canada's export sector. As Canadian goods become more expensive, U.S. demand for those goods would decline, leading to lower household income and higher inflation due to retaliatory tariffs on U.S. goods coming into Canada. Macklem estimated an 8.5% decline in Canadian exports in the first year following the imposition of broad-based tariffs

Macklem also noted that the Bank of Canada has limited tools to mitigate the devastating effects of tariffs. While lowering interest rates could help support consumer demand, it could also risk adding fuel to the inflation fire. He urged the government to focus on making positive structural changes, such as removing interprovincial trade barriers and harmonizing provincial regulations, to help Canada weather the storm.

In conclusion, Macklem's warning underscores the potential for a prolonged trade war with the U.S. to cause permanent damage to the Canadian economy, highlighting the need for proactive measures to mitigate its impact.