Bank of Canada governor Tiff Macklem at a news conference in Ottawa on Sept. 4.Blair Gable/Reuters
Bank of Canada Governor Tiff Macklem warned Tuesday that changing patterns of global trade could add upward pressure to inflation and cautioned governments against using national-security concerns as a “pretext for inefficient protectionism.”
International trade is being “rewired” by geopolitical tensions, digital technology and China’s transition from being a supplier of low-cost goods to a producer of advanced technologies, such as electric vehicles and semi-conductors, Mr. Macklem said in a speech to the Canada-UK Chamber of Commerce in London.
Tariff walls are rising and globe-spanning supply chains are being reconfigured in real time. That creates opportunities for businesses and governments willing to seize the initiative, Mr. Macklem said. But it also creates risks, not least for central bankers trying to keep inflation under control.
In recent decades, the expansion of global trade helped push down the price of many goods.
“Going forward, with globalization slowing, the cost of global goods may not decline to the same degree. All things equal, this could put more upward pressure on inflation,” Mr. Macklem said, adding that “trade disruptions may also increase the variability of inflation.”
The speech, which was delivered less than a week after the central bank cut its benchmark interest rate for the third consecutive time to 4.25 per cent, avoided near-term questions of monetary policy. Instead, Mr. Macklem focused on a topic that has moved to the centre of political discourse in Canada, the United States and elsewhere.
Trade has become a key issue in the U.S. presidential campaign, with Republican nominee Donald Trump promising punishing tariffs on Chinese goods and a baseline tariff on all imports into the United States. Mr. Trump launched a number of trade wars while he was president, including putting tariffs on Canadian aluminum.
U.S. Vice-President Kamala Harris, the Democratic nominee, has been critical of Mr. Trump’s tariff plans. But her administration, led by President Joe Biden, has kept Trump-era tariffs against China in place for the past four years and raised them on a range of goods, most notably placing a 100-per-cent tariff on Chinese electric vehicles.
Ottawa is also increasingly reaching for tariffs, following the U.S. lead in its trade conflict with China.
In late August, the federal government announced a 100-per-cent levy on Chinese electric-vehicle imports and a 25-per-cent tariff on Chinese steel and aluminum. Finance Minister Chrystia Freeland is weighing additional tariffs on Chinese batteries and battery parts, semi-conductors, solar products and critical minerals. China has responded by launching an anti-dumping investigation against Canadian canola products.
Canada, the U.S. and the European Union are all trying to manage the threat that lower-cost Chinese electric vehicles pose to their heavily subsidized domestic auto industries. All three have raised trade barriers, although the EU has done so within the context of World Trade Organization rules, while the U.S. and Canada have acted outside of the usual channels for trade disputes.
Some Western politicians have also argued that Chinese investments and high-tech goods, such as EVs, pose a risk to national security. Canada has leaned on this argument in banning Chinese telecom company Huawei from its 5G networks and preventing some acquisitions of Canadian mines by Chinese companies.
Mr. Macklem did not address the latest round of Canadian tariffs. However, he spoke about the importance of supporting multilateral institutions, such as the WTO, and upholding the rules and norms that have governed global trade since the Second World War. The WTO and other international organizations have tended to advocate for lower tariffs and less protectionism.
“Trade restrictions increased sharply around the world starting in about 2018. So did industrial policy to bolster domestic players against imports and respond to security concerns,” Mr. Macklem said. “Security risks are real and need to be addressed, but it is important they not become a pretext for inefficient protectionism.”
In a press conference after the speech, the central-bank governor was asked about the risks another Trump presidency and the threat of new tariffs pose to the Canadian economy.
Anything that disturbs the Canada-U.S. trade relationship “could have a significant effect on the Canadian economy,” he said. “It’s very much in the interest of both countries, and I think both those countries will want to see it continue.”
While much of the speech was about the risks posed by changing trade patterns, Mr. Macklem also stressed that there are opportunities. Canada’s key trade partners are looking to replace Chinese products, and Canadian companies could stand to benefit.
This will require both entrepreneurial initiative and smart policy choices, he said. All levels of government in Canada need to invest in better transportation and port infrastructure and address long-standing interprovincial trade barriers. Companies need to focus on producing goods and services in high demand globally.
“We need to build better relationships, produce the products people want to buy, build and maintain the infrastructure to get those products to market, and boost our productivity to compete globally,” Mr. Macklem said.
At the press conference, Mr. Macklem doubled down on a monetary-policy message he delivered after last week’s rate announcement. He said that more interest-rate cuts are likely, but the bank is not on a predetermined path.
“If inflation proves to be stickier, it may be appropriate to slow the pace” of rate cuts, he said.
At the same time, “if the economy is materially weaker than we’re expecting, inflation is weaker than we were expecting, it could be appropriate to take a bigger step,” he said, acknowledging the possibility of a rate cut larger than the usual 0.25 percentage points.
With a report from Paul Waldie in London