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            december 15, 2019

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Bank of Canada maps out potential impact of global trade wars


The Bank of Canada - Canada's central bank - has begun to count the potential costs of escalating trade wars on the Canadian economy in a series of analyses as part of a rate decision, reports Bloomberg.
The trade war is already creating a C$18 billion (US$13.7 billion) crater in the Canadian economy, according to the Bank of Canada.
The fallout from higher tariffs between the US and China prompted the Bank of Canada to increase its estimate for how much the enduring clash over cross-border commerce is weighing on domestic and global exports as well as business investment relative to April.
These negative effects, plus China's import restrictions on Canadian canola vegetable oil and meat, more than offset the positive impact from the withdrawal of American tariffs on steel and aluminum and optimism surrounding the passage of the renegotiated North American free trade agreement.
This uncertainty means Canadian exports will be 1.5 per cent lower by the end of 2021 than would otherwise be the case, and capital spending will be curbed by three per cent over the same time frame, the bank said.
The quarterly Monetary Policy Report also mapped out estimates for how much better or worse the picture could get as the situation evolves.
Trade conflict remains the top risk to the central bank's outlook. Although it's a two-sided concern, the potential effects are asymmetric - and Canada is twice as exposed to the swings as the world at large.
If all protectionist measures were rolled back and the uncertainty surrounding the multilateral trading order disappeared, global activity would be roughly one per cent higher by the end of 2021 relative to current forecasts, and the Canadian economy would be about two per cent larger.
Yet in an all-out trade war in which every country in the world were to impose 25 per cent levies on imported goods, the Canadian economy would be six per cent smaller relative to the base case, with the global economy taking a three per cent hit.
The simulation suggests commodity prices would fall by 30 per cent while the Canadian dollar depreciates by 25 per cent.
A staff analytical note released alongside the MPR on Wednesday shows how the US is more insulated from the harshest trade war scenarios than its neighbours. If every country in the world were to impose 25 per cent levies on imported goods, the US economy would take a long-run hit of 1.1 per cent, compared to 3.1 per cent for Canada and 2.8 per cent for Mexico.

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