The Bank of Canada’s governing council members think Canada’s economy will be hurt more by a protracted trade war than that of the United States, according to minutes released by the central bank on Wednesday.

“GDP would be lower in both Canada and the United States, but the GDP loss would be significantly larger for Canada because Canada has a more open economy, and its exports are so concentrated with the United States,” the minutes said. “Governing Council members also noted that the adverse impact on the level of GDP would be permanent, and the growth of GDP would be reduced until the Canadian economy adjusts to the tariffs.”

In late January, the Bank of Canada decided to cuts its policy rate by 25 basis points, bringing the rate down to three per cent. The decision was made in part to support economic growth, but it was also due to looming trade uncertainty with the U.S.

“Members agreed that a 25 basis point cut would be helpful to support growth and better balance inflation risks,” the deliberations said. “Members also agreed that the threat of tariffs had increased uncertainty, and this would weigh on business confidence and investment intentions, as well as consumer sentiment.”

The deliberations were from the weeks preceding Feb. 1, when U.S. President Donald Trump followed through on his threat and signed an executive order imposing a 25 per cent tariff on all Canadian goods and a 10 per cent tariff on Canadian energy. In response, Trudeau promised 25 per cent retaliatory tariffs on $155 billion worth of U.S. goods. A 30-day pause on the tariffs was secured on Feb. 3, after Trudeau promised to direct more resources to the Canada-U.S. border.

In its monetary policy report released on Jan. 29, the central bank’s “benchmark calibration,” which assumes price changes in line with patterns observed with previous tariffs, a 25 per cent U.S. tariff on all imported goods and subsequent equal retaliation from trading partners would lead to a hit of 2.5 percentage points to Canada’s GDP at the end of the first year.

Members discussed how the impacts of a trade conflict on Canada in the short-term would add significant pressure on incomes in Canada’s export sector and the Canadian dollar would depreciate further — although by what amount would depend on how much the market had already priced in tariffs.

In the long-term, members discussed how a protracted trade war would require monetary policy to guard against any second round impacts from tariffs, including higher inflation expectations. They also discussed how monetary policy would have to take into account any fiscal responses Canadian governments might take and that they would have to “consider the downward pressure on inflation from weakness in the economy and weigh that against the upward pressure on inflation from higher input prices and supply chain disruptions.”

Policymakers also discussed at length how trade uncertainty, even absent applied tariffs, had already lead companies to re-evaluate investment in Canada. Members of the governing council agreed this supported the case for a lower policy rate.

“Members discussed recent survey results from the Business Leaders’ Pulse and anecdotal information that indicated that some businesses were considering shifting investment to the United States. This would likely lead to negative effects on hiring, labour income and household spending.”

Bank of Canada governor Tiff Macklem has already acknowledged this in a speech hosted by the Bank for International Settlements in Mexico City on Feb. 6.

“President Donald Trump’s threats of new tariffs are already affecting business and household confidence, particularly in Canada and Mexico,” he said. “The longer this uncertainty persists, the more it will weigh on economic activity in our countries.”

Members also acknowledged monetary policy would not be able to offset the longer-term implications of a trade war, but would “only be able to smooth the path in the short-term as the economy transitions to a lower productivity and lower output trajectory.”

• Email: jgowling@postmedia.com

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