The Production Network Amplification of Retaliatory Tariffs

Christian Bustamante, Xing Guo, Lu Han, Soyoung Lee, Gaelan MacKenzie, Mariel Yacolca Maguiña and Jacob Short

Staff Working Papers from Bank of Canada

Abstract: We develop a framework to quantify how tariff changes on imported goods affect sectoral and aggregate consumption prices through direct and production-network channels. Using Canada's input-output matrix and administrative firm-good import data for the universe of Canadian firms, we estimate price elasticities for tariffs on U.S.-imported goods. Tariffs on machinery and equipment and transport equipment generate the largest effects on final prices, reflecting their widespread use as intermediate inputs. On average, two-thirds of the total price response stems from higher intermediate input costs passing through domestic supply chains. Applying the framework to Canada's 2025 counter-tariffs, we estimate consumption price increases of 1.56 and 0.72 percentage points for the pre- and post-September 2025 phases, respectively; alternative packages of equal import value could reduce aggregate price effects by three to seven times. A hypothetical CUSMA breakdown reverting to MFN tariffs would raise final-good prices by 0.64 percentage points.

Keywords: Monetary policy; Inflation dynamics and pressures; Structural challenges; International trade, finance and competitiveness (search for similar items in EconPapers)
JEL-codes: D D5 D57 E E3 E31 F F1 F13 F14 (search for similar items in EconPapers)
Pages: 23
Date: 2026-10
New Economics Papers: this item is included in nep-bec
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:26-35

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