Supply chains drive two-thirds of tariff price impacts
Higher tariffs on intermediate imports transmit two-thirds of their total consumer price impact through domestic supply chains, according to a Bank of Canada staff working paper. The study finds Canada's 2025 counter-tariffs increased aggregate consumption prices by up to 1.56 percentage points.
Machinery and transport lead cost spillovers
Tariffs on machinery and appliances as well as transport equipment exert the largest pressure on final consumption prices, generating an elasticity of 0.05 percentage points per 1 percent tariff increase.
Authors Christian Bustamante, Xing Guo, Lu Han, Soyoung Lee, Gaelan MacKenzie, Mariel Yacolca Maguiña, and Jacob Short show that a 25 percent tariff on these goods generates a 1.2 percentage point rise in consumer prices.
Using 2022 input-output tables and administrative firm-level customs records across 20 sectors, the researchers find that indirect intermediate input linkages account for roughly two-thirds of total price transmission.
For mineral products, indirect effects reach 83 percent.
Optimizing targets cuts inflation by sevenfold
Canada's pre-September 2025 counter-tariffs on C$96 billion of U.S. goods raised aggregate prices by 1.56 percentage points, while the post-September phase covering C$50 billion added 0.72 points.
However, redesigned retaliatory packages covering the same import values could have limited price increases to 0.46 and 0.10 points, respectively.
A complete CUSMA breakdown with most-favored-nation tariffs on C$334 billion in goods would raise prices by 0.64 percentage points.
A blind spot in trade policy
Trade retaliation designed to maximize economic pain often inflicts severe self-harm on domestic consumer prices.
By ignoring input-output networks, policymakers needlessly amplify imported inflation across supply chains.
Smarter tariff targeting can achieve identical retaliatory leverage at a fraction of the price shock.