MONTREAL — The sudden escalation in the U.S.-China trade war could have serious consequences for Canada, according to economists at the Bank of Montreal.
In a client note this week, they predicted that, if all the tariffs the U.S. and China are threatening actually happen (which certainly seemed possible as of Tuesday afternoon), it would shave 0.8 percentage points off Canada’s economy.
That amount of economic activity supports about 150,000 jobs, BMO senior economist Sal Guatieri wrote in a report last week.
Watch: U.S., China raise tariffs in tit-for-tat. Story continues below.
Given that the Bank of Canada is predicting 1.2-per-cent economic growth this year, the trade war could shred two-thirds of Canada’s economic growth in 2019.
The U.S. itself would lose a full percentage point of GDP, equivalent to around 1.5 million jobs, Guatieri estimated. China would take the largest hit, with GDP down 1.7 per cent.
Canada would take an economic loss almost as large as the U.S. because of our reliance on trade with our partner to the south, Guatieri said.
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“The U.S. economy catches a cold, we get a fever,” he told HuffPost Canada by phone.
A large part of the damage to Canada would come from weaker commodity prices, because they tend to fall when the U.S. economy weakens, Guatieri added.
But because the Canadian dollar is linked to commodity prices, there’s a good chance the loonie would fall in that scenario. That would help make Canadian exports more competitive, helping the economy and offsetting some of the damage from the trade war.
In any case, the trade war would not be enough to send Canada, the U.S. or China into recession, Guatieri asserted.
Tit-for-tat tariff hikes
U.S. President Donald Trump on Friday raised tariffs on US$200-billion-worth of goods entering the U.S. from China, to 25 per cent from 10 per cent.
Trump said the move was retaliation after China reportedly backed out of some legal reforms it had agreed to as part of trade talks with the U.S.
China shot back on Monday, announcing new duties on US$60-billion-worth of U.S. goods, starting June 1. The duties will range from 5 to 25 per cent.
The Trump administration responded to that on Monday night with a proposal to slap tariffs on another US$300-billion-worth of goods, which would put virtually all U.S. imports from China under tariffs.
‘A real people’s war’
Trump has long complained about the trade deficit the U.S. runs with China, arguing it is the result of unfair and sometimes illegal trade practices, as well as theft of technology.
For its part, Beijing ramped up the pressure on Washington this week, with Chinese state media running aggressive editorials criticizing Trump.
“The trade war in the U.S. is the creation of one person and one administration, but it affects that country’s entire population,” the state-run Global Times said in an editorial, as quoted at Business Insider.
“In China, the entire country and all its people are being threatened. For us, this is a real ‘people’s war.'”