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It’s difficult to put hard numbers on just how big a threat the escalating U.S. tariff wars pose to Canada’s economic health. But given the export-heavy nature of the Canadian economy, the starting point of any analysis is that it’s not good.

Bank of Canada deputy Governor Sylvain Leduc summed up the big picture nicely this week: “For a small, open economy like Canada, where trade is important, those measures are not the type of measures that are conducive to a good environment.”

But in terms of direct impact, the U.S. tariffs on steel and aluminum from Canada (among other Western allies), and Canada’s retaliatory charges on U.S. steel, aluminum and other products, won’t mean much for the overall Canadian economy.

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Steel and aluminum shipments to the United States last year represented 3 per cent of Canada’s total U.S. merchandise exports, and about 2 per cent of the country’s total exports. In a report this week, Royal Bank of Canada calculated that steel and aluminum production, combined, account for about 0.5 per cent of Canadian jobs and gross domestic product.

Even if exports to the United States shrank to nothing and Canada ceased producing steel and aluminum, it would only shave a tiny sliver off the Canadian economy. And these tariffs aren’t going to wipe out an industry; at worst, they will put a dent in demand and pricing power. Bad news for the industry, and for some of the people working in it and related businesses – but likely containable for the broader economy.

“The tariffs … will likely have a moderately negative but manageable impact on all countries involved,” RBC senior economist Nathan Janzen said.

Economists said Canada’s countermeasures, which take aim at U.S. steel and aluminum as well as a diverse selection of consumer goods, will have the effect of increasing prices for those products for Canadian buyers – just as the U.S. tariffs will increase the cost of imported metals for U.S. buyers. “The new tariffs … ultimately act as a tax on consumers and producers,” said Douglas Porter, chief economist at Bank of Montreal, in a note to clients.

However, again, the U.S. goods in question amount to only about 2 per cent of Canada’s imports. Economists figure that the impact on Canada’s consumer price index (CPI) inflation will be only about 0.1 to 0.2 percentage points.

“These tariffs are likely to have a very minor direct effect on economic activity, jobs and consumer price inflation,” Toronto-Dominion Bank concluded in a research note.

The bigger issue, economists say, will be the impact that the rising tide of U.S. protectionism, and the further deterioration of the Canada-U.S. trade relationship, could have on business confidence and investment prospects in Canada.

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Last month, the Bank of Canada estimated that “uncertainty surrounding U.S. trade policy” could subtract more than 1 per cent from Canadian exports by the end of 2020 – and, more importantly, more than 2 per cent from business investment in Canada, a critical growth engine for the Canadian economy.

A Bank of Canada spokesperson said this week that this equates to roughly a 0.35-per-cent drag on Canada’s level of GDP by the end of 2020, or nearly 0.1 per cent annually, beginning with 2017. While that doesn’t sound like a lot, the implication is that Canada’s economy will have earned $7.5-billion less than it would have otherwise – merely owing to uncertainty, let alone the direct impacts of trade disputes.

And those estimates predate this latest serious escalation of U.S. trade actions and the swift retaliation by its trading partners. They don’t account for what happens if the trade environment continues to significantly deteriorate – if the U.S. proceeds with threatened tariffs on the much bigger auto industry, attacks other industries or walks away from the North American free-trade agreement talks – potentially signalling open season on a wider range of Canadian and Mexican exports to the United States.

“Not knowing which industry could be next means that any industry could be next, and that means more uncertainty for all trade-intensive businesses,” Mr. Janzen said.

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