Macroeconomic Impacts of a Canada-U.S. Tariff War

We use a vector autoregressive (VAR) model to produce macroeconomic forecasts conditional on two trade war scenarios between the United States and Canada. The first scenario examines the impact of tariff imposition on Canadian exports to the United States, while the second scenario incorporates the effect of Canadian retaliatory tariffs on imports from the United States. Our results show that these trade tensions would have significant consequences on the Canadian economy, with notable declines in GDP and employment. The analysis highlights a more pronounced contraction when imports are also affected, emphasizing the amplifying effects of retaliatory measures. In the trade war scenario with retaliatory tariffs, the model predicts a GDP decline of 4.2%, corresponding to the loss of approximately 700,000 jobs in Canada. Furthermore, the model interprets these scenarios as negative demand shocks for the Canadian economy, leading to deflationary pressures and an adjustment of interest rates by the Bank of Canada. These results illustrate the relevance of risk scenarios in the analysis of economic shocks and their usefulness for economic policy design.