The estimated direct impacts of the recently announced tariffs on the Canadian CPI

(Source: *Note that these impacts have been calculated based on data from Finance Canada and Statistics Canada.)

On July 1, 2018, tariffs took effect on imported US Steel, Aluminium and selected other goods, as published by Finance Canada. The tariffs collected on these items at the border may be passed on to governments, industry as well as consumers. The purpose of this paper from Consumer Prices Division is to estimate the portion of these that could be directly felt by consumers and reflected in the CPI.

An increase of 0.07 percentage points in the annual Canadian CPI is estimated as an upper bound of the direct impacts of the tariffs that took effect against select US imports on July 1, 2018. An amount of up to 600 million dollars of tariffs per year may be passed through to consumer prices, which may cause a decimal place increase in the posted CPI change during a limited period of time. This paper shows which CPI categories are likely to be impacted and estimates the upper bounds of the impacts at various aggregation levels of the CPI, everything else being equal, assuming that the imposed tariffs are fully passed on to either consumers, industry or governments.

Overall impacts of tariffs

The tariffs from the published tables, were tabulated and their potential impacts on the CPI estimated. According to Finance Canada and based on trade data from Statistics Canada, this represents $16.6 billion CAD of US imports in the year 2017 that would be subject to the new tariffs.

The tariffs announced amount to the following dollar figures collected at the border:

Figure A – Tariff expected to be collected on imports from the US

Table	Targeted imports 2017 billion CAD	Tariff %	Tariffs to be collected yearly in billion CAD (Estimate)
1. Steel	5.6	25	1.40
2. Aluminium	2.7	10	0.27
3. Mostly consumer items	8.3	10	0.83
Source: Statistics Canada 2017 trade data, Finance Canada tables of tariff items.

If we assume the same volume of imports for these products as in 2017 and no sourcing changes are made by Canadian importers, $2.5 billion CAD in tariffs would be collected by the Canadian government.

We expect that steel and aluminium tariffs from the first two tables will almost completely work their way into intermediate input, governments and gross capital formation and not be passed on to consumers directly. This is because in the Supply and Use model of the Canadian economy, households consume close to zero of all metal products in the economy across various categories of semi-transformed metal products like pipes.

Accordingly, there are only $0.83 billion CAD in Table 3 tariffs that could potentially make their way directly to household expenditures. 

Of this amount, we estimate that up to $0.6 billion CAD could impact directly upon consumer final demand, and may be reflected in the CPI. The remainder will not be transmitted to consumers directly in the short run, but rather to industry and governments. There may be long-run pressures on Canadian prices due to industry facing higher prices for US-imported goods from all three tables. However, industries have the ability to substitute inputs and change their production function in order to deal with changing input prices, hence dampening the pass-through to other industries or to consumers. Hence, these indirect impacts are separated from direct impacts and not discussed further here.

Direct impacts of tariffs on CPI major categories

As of July 2018, the Canadian CPI basket consists of $885 billion CAD in yearly consumer expenditures.  The expected upper bound of direct tariff impacts are a maximum of $600 million CAD as previously mentioned. This 0.07 percentage points increase may lead to a rounding up in the year over year CPI change published in any given month as this amount passes through to consumer expenditures. After this amount is fully passed through, it will cease to impact the CPI, because it will appear in the price reference period as well as in the current period, i.e. the numerator and denominator.

We tabulate the tariffs collected on Table 3 that are expected to be partially passed on to consumers and we assign them to CPI major categories in Figure B below.

Figure B – Expected direct impacts of tariffs on CPI major components

	Upper bound of tariff impacts (Millions CAD)	Total CPI Expenditure (Millions CAD)	% Impact on Major category
Food and non-alcoholic beverages	233.1	142,949	0.16
ShelterFigure B footnote 1	14.4	236,414	0.01
Household operations, furnishings and equipment	262.9	111,493	0.24
Clothing and footwear	0.0	47,682	0.00
Transportation	0.0	181,996	0.00
Health and personal care	29.7	43,796	0.07
Recreation, education and reading	54.8	97,203	0.06
Alcohol and tobacco	5.1	23,935	0.02
Source: CPI Calculation system, July 2018 effective weights. Figure B footnote 1 The treatment of owner-occupied housing in the CPI means that these items, related to the repair and maintenance of household capital equipment, will not be reflected in the CPI. The Canadian Consumer Price Index Reference Paper, chapter 10. Return to figure B footnote 1 referrer

Direct impacts of tariffs on low-level CPI categories

Figure C gives the expected impacts by CPI category at the lowest classification level.

Figure C – Expected direct impacts of tariffs at detailed CPI level, in order of impact %

CPI Category description	Upper limit of potential impact %
Plastic supplies	5.5
Household paper supplies	3.3
Mayonnaise, salad dressings and other condiments (including vinegar)	2.9
Water - bottled	2.7
Personal soap	2.6
Boats (including canoes)	2.3
Roasted or ground coffee	2.3
Ketchup, other sauces and sauce mixes	2.0
Soup	2.0
Other pre-cooked frozen food preparations	1.8
Detergents and rinse agents for dish washing	1.7
Vegetables prepared or preserved by vinegar or acetic acid (including pickles and olives)	1.5
Other household cleaning products	1.4
Confectionery	1.3
Other games (excluding video games), puzzles and recreational equipment	1.2
Laundry and dishwashing appliances	1.0
Non-electrical kitchen utensils, tableware and cookware	1.0
Other bedding	0.9
Stationers and office-type paper (including cards, wrapping paper)	0.9
Orange, grapefruit and other fruit juices (excluding concentrated)	0.8
Whisky purchased in stores	0.8
Refrigerators and freezers	0.8
Hair preparations and other toilet preparations	0.8
Upholstered furniture	0.7
Jam, jelly and other preserves	0.7
Springs, mattresses, bases, frames	0.6
Other horticultural goods	0.5
Sugar and syrup	0.3
Other household supplies	0.3
Camping and picnic equipment (excluding barbecues)	0.0
Yogurt	0.0

Methodology

The method consists of:

1. Determining the dollar amount of the affected items that were imported from the US and applying the announced tariff rate.
2. Concording these categories to the most recent Supply and Use model of the Canadian economy.
3. Using the Supply and Use model to determine what dollar amount of these tariffs are likely to be passed directly to households. This means determining what proportion of domestic Canadian demand is intended for direct household consumption, as opposed to intermediate demand, governments, and gross capital formation.
4. Taking the ratio of the expected dollar amounts in tariffs (in Canadian dollars) that may pass through to households directly, compared to the total dollar expenditure of the CPI consumption category that they correspond to, at various levels of aggregation.

In this study, we did not calculate the impact of additional sales taxes in our calculations. While most food items are exempt from sales tax, other consumer items would also be subject to an additional increase proportional to the GST/HST rate.

Table 1, 2 and 3 items were tabulated by Statistics Canada by Harmonized System (HS) Code at the 8-digit level.

2014 Supply and Use^{Footnote 1} tables are free and publically accessible on Statistics Canada's website.

The following Table 3 items were excluded from further tabulation, as little of this imported dollar value is likely to go directly to consumers, based on the category description:

7321.90

All types of cast iron grilles

4822.10.00

Of a kind used for winding textile yarn

4822.90.00

Other bobbins, spools, caps and similar supports

4412.39.00

Other plywood, consisting solely of sheets of wood (other than bamboo), each ply not exceeding 6 mm thickness: Other, with both outer plies of coniferous wood

4412.99.90

Other: Other plywood, veneered panels and similar laminated wood

8450.20.00

Machines, each of a dry linen capacity exceeding 10 kg

The following categories of imports were forced, in spite of Supply and Use percentages, to be fully allocated to household demand. This is because the HS category description included indications that these products were all for retail sale:

3808.91.10

Insecticides: In packages of a gross weight not exceeding 1.36 kg each

3808.92.10

Fungicides: In packages of a gross weight not exceeding 1.36 kg each

3808.93.10

Herbicides, anti-sprouting products and plant-growth regulators: In packages of a gross weight not exceeding 1.36 kg each

For all other categories, household proportions of final demand were obtained from the Supply and Use tables. We followed a Domestic concept, excluding Canadians abroad, but including non-residents making purchases in Canada. Exports and re-exports were subtracted from the denominator.

Household % of tariffs = (Total Household demand – Canadians abroad + Non-residents)/ (Total demand – exports- re-exports)

The dollar amounts of expected tariffs were multiplied by the proportion of households out of final demand to arrive at the proportion of the tariffs that will likely be transmitted directly to consumer expenditures.