CIBC says U.S. auto tariffs could cut GDP by a per cent, put Ontario in recession

TORONTO – CIBC Capital Markets says U.S. tariffs on auto imports could shave a per cent of Canada’s economy and send Ontario into a mild recession.

A research report by the bank says that a 25 per cent U.S. tariff on all foreign imports could cut Canadian auto production by more than 400,000 units a year, while tariffs on only Canadian imports would lead U.S. buyers to find other imports and cut production in Canada by almost 900,000 vehicles.

Adding in a potential 10 per cent U.S. tariff on parts, and the fewer foreign inputs that would be required, CIBC estimates the widespread tariffs would result in a 0.5 per cent drag on Canada’s GDP, while tariffs that single out Canada would cut the GDP by a full per cent.

CIBC, however, says the most likely scenario is widespread tariffs with a temporary exemption for Canadian producers because of pressure from major U.S. auto producers with cross-border operations.

But CIBC Capital Markets chief economist Avery Shenfeld says even a temporary exemption would be a “sword of Damocles” that would pressure auto makers to shift more production to the U.S., pressure allies into a more U.S.-tilted trade deal, and demonstrate a toughness on trade to his voting base.

He says the impact of tariffs and reduced auto production on the Canadian economy would be tempered by a resulting much lower loonie, and a lower path for interest rates.