Scotiabank: Timing Canada's Response to U.S. Trade Tariffs

As the political landscape shifts with the incoming U.S. administration, Canada braces for potential trade tariffs, with Scotiabank offering insights into the timing and implications of a possible response. The Canadian government is preparing retaliatory measures, but the timing and extent of these actions depend on several factors.



Firstly, the actions of President-elect Donald Trump will significantly influence Canada's response. If Trump follows through with his plans to impose a 25% import tax on Canadian goods, Canada is ready to retaliate with tariffs on a list of American products, including ceramic products, steel products, furniture, and alcoholic beverages like Bourbon and Jack Daniels whiskey (CNN, 2025-01-20). However, the Canadian government is also drafting longer lists of potential tariffs, depending on the breadth and severity of U.S. tariffs (Bloomberg, 2025-01-20).

The Bank of Canada's policy rate decisions will also be influenced by the retaliation threshold. If Canada retaliates with tariffs that are less than half the tariffs imposed by the United States, the Bank of Canada would not need to hike rates. This is because the demand side factors would dominate, leading to lower inflation and, in turn, a lower Bank of Canada policy rate. However, if Canada retaliates with tariffs that are equal to or greater than half the tariffs imposed by the United States, then tariffs would be inflationary and lead to a higher Bank of Canada policy rate (Macroeconometric model, 2025-01-20).



The economic implications of Canada retaliating to less than half of U.S. tariffs are significant. A partial retaliation would result in a smaller impact on Canada's GDP, with a decline of up to 0.8% without retaliation, and even less with a partial response. Inflation would also be less affected, with demand side factors dominating and leading to lower inflation. Consequently, the Bank of Canada would not need to hike rates, and the U.S. dollar's appreciation against other currencies would be less pronounced.

In conclusion, the timing and extent of Canada's response to potential U.S. trade tariffs depend on several factors, including Trump's actions, the retaliation threshold, and the economic implications of a partial response. As the situation unfolds, Scotiabank will continue to monitor the developments and provide insights into the potential impact on the Canadian economy and financial markets.