Bank of Canada warns trade disruptions could put pressure on inflation

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Slowing globalization and ongoing trade disruptions could put upward pressure on inflation, making it harder for central banks to consistently hit their two per cent targets, Bank of Canada Governor Tiff Macklem told a U.K. audience on Tuesday.

“Going forward, with globalization slowing, the cost of global goods may not decline the same degree,” Macklem said in a speech in front of the Canada-U.K. Chamber of Commerce in London. “All things equal, this could put more upward pressure on inflation.”

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Macklem said global trade has shifted thanks in large part to the West’s changing relationship with China. China is no longer the lowest-cost supplier of consumer goods and it has moved up the value chain, now leading the world in exports of solar panels, electric vehicles, computers and broadcasting equipment.

This development has sparked security concerns and the worry that Chinese technology could displace domestic industry, he said. Trade restrictions began to increase sharply in 2018, with recent decisions by the United States and Canada to apply a 100-per-cent tariff on Chinese-made electric vehicles as the latest manifestation.

“Security risks are real and need to be addressed, but it is important they not become a pretext for inefficient protectionism,” Macklem said.

Global trade routes have also shifted, as businesses try to diversify their supply chains and find friendlier trade partnerships. This shift combined with increased trade protectionism, means supply chains have gotten longer.

“Fragmentation has economic costs. Businesses have to focus on national security and geopolitical uncertainties, not just efficiencies and productive partnerships,” Macklem said. “The IMF estimates that costs of trade fragmentation could range from 0.2 per cent to seven per cent of global GDP.”

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Canada has 15 trade agreements, covering 51 countries worldwide, but its close trading partnership with the United States is a key advantage, he said. Trade represents two-thirds of Canada’s GDP and nearly 75 per cent of Canada’s exports go to the U.S.

“But even with the broad market access, growth in Canada’s exports has slowed the past 10 years,” Macklem said. “The pandemic obscures the overall trend, but it’s clear that goods exports have not kept up with economic growth in Canada’s two biggest markets — the United States and the European Union.”

While exports of goods have slowed globally, services have risen as a share of global trade. Macklem says the global trade environment is challenging, but Canada is well-positioned to meet the moment.

“To leverage these strengths, we need to invest in trade infrastructure and reduce trade barriers so that integrating Canada into the North American value chain is more attractive for businesses,” Macklem said. “This includes investing in our electricity grid and transportation infrastructure. And businesses need to invest in new equipment and innovation to be globally competitive.”

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As for what the new global trade environment means for monetary policy, Macklem emphasized the central bank should not add to the uncertainty.

“That means we have to focus on risk management, balancing the upside risks to inflation with the downside risks to economic growth,” Macklem said. “That means ensuring inflation is low, stable and predictable even as global trade is being rewired, recast and redirected.”

• Email: jgowling@postmedia.com

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