A lengthy trade war with the U.S. States would cause lasting damage to Canada’s economy, says Bank of Canada Governor Tiff Macklem.

Macklem made the the comments during a speech to the local board of trade in the Toronto suburb of Mississauga, Ont. He warned that the central bank has limited tools to counteract such a structural shift toward protectionism.

“If US tariffs play out as threatened, the economic impact would be severe,” said Macklem. “A protracted trade conflict would sharply reduce exports and investment. It will cost jobs and boost inflation in the next few years and lower our standard of living in the long run.”

His comments come as Canadian commercial real estate investors are rethinking potential acquisitions and development projects in all asset classes due to looming U.S. tariffs.

“With trade conflict on our doorstep, we need to focus our resources on the most pressing and important issues for our framework review,” said Macklem. “In my view, now is not the time to question the anchor that has proven so effective in achieving price stability.”

Macklem’s speech highlighted the risks posed by the U.S. tariff threats. U.S. President Donald Trump has proposed 25% tariffs on Canadian imports, with slightly lower levies on energy products.

While implementation has been delayed until March 4, Trump has already announced 25% tariffs on steel and aluminum, effective March 12, and has threatened additional duties on automobiles and other products.

“In the pandemic, we had a steep recession followed by a rapid recovery as the economy reopened,” said Macklem. “This time, if tariffs are long-lasting and broadbased, there won’t be a bounceback.

“We may eventually regain our current rate of growth, but the level of output would be permanently lower. It’s more than a shock—it’s a structural change.”

The BoC recently examined possible trade war scenarios, finding that if the U.S. imposed 25% tariffs on all imports and its trading partners retaliated, Canada’s GDP growth would slow while inflation would rise. Macklem said such a scenario would see Canadian exports fall by 8.5% and business investment decline by nearly 12%. Companies would be forced to cut production and lay off workers.

“What would this all mean for economic growth?” asked Macklem. “In our January projection with no tariffs, we forecast growth of about 1.8% in both 2025 and 2026. But in the tariff scenario, the level of Canadian output falls almost 3% over two years. That implies tariffs would all but wipe out growth in the economy for those two years.”

The central bank would face challenges in responding, as tariffs could simultaneously slow growth and push up consumer prices.

“Provided the inflationary impact of tariffs is not too big, monetary policy can help smooth the adjustment by supporting demand so it doesn’t weaken too much more than supply,” he said. “But how much support monetary policy can provide is constrained by the need to control inflation.”

With inflation currently running below the bank’s two per cent target, at 1.9 per cent in January, the BoC has cut interest rates in six consecutive meetings, bringing the benchmark rate to 3%, following a prolonged series of hikes and holds. Financial markets are pricing in one to two more cuts before the end of 2025, The Globe and Mail reported.

Macklem stressed that governments must take a more active role in supporting economic growth. He called for the elimination of barriers to interprovincial trade, expediting regulatory approvals, and improving transportation links to facilitate exports.

“As Canada confronts the reality of increased trade friction with the United States, a concerted focus on productivity has rarely been more important,” he said.