October 24, 2018 / 2:26 PM / a year ago

Bank of Canada: U.S.-China trade tension could have major impact

OTTAWA, (Reuters) - Increasing trade tensions between the U.S. and China, and tariffs imposed by both countries, could become an major drag on global economic growth, the Bank of Canada said on Wednesday.

FILE PHOTO - A commercial truck exits the highway for the Ambassador Bridge to Canada, in Detroit, Michigan U.S. August 30, 2018. REUTERS/Rebecca Cook

The U.S. has targeted about $250 billion in Chinese imports so far in 2018, while China responded with countermeasures of about $110 billion, the central bank said in its quarterly monetary policy report.

“Rising trade tensions between the United States and China could have a significant and lasting impact on the global economy,” the report said.

If the tariffs are made permanent, real GDP in the United States will drop 0.2 percent by the end of 2020 and in China it will fall by 0.5 percent over the same period, it estimated.

Consumer price inflation in the U.S. is likely to rise by 0.2 percent if the tariffs are fully passed onto consumers, while there will be a greater impact on goods and services directly targeted by the tariffs, the report said.

The net effect on the Canadian economy, which is closely tied to its southern neighbor, will be “negative, but small”, the central bank said.

The main risks from the trade dispute come from a potential disruption of global value chains that could hurt productivity globally. In addition, there could be spillover that damages investor confidence in particular in emerging economies, as well as greater inflationary pressures.

Separately, the central bank said the effects of U.S. tariffs on steel and aluminum and Canadian countermeasures had so far only been partially measured by trade statistics.

“According to recent trade data, U.S. tariffs and Canadian countermeasures have reduced steel exports and imports, but have not yet visibly affected aluminum shipments,” the bank said.

“The trade data provide only a partial view of much broader negative impacts of the tariffs and countermeasures on many firms.”

Reporting by Steve Scherer, editing by David Ljunggren and Dale Smith

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