OTTAWA (Reuters) - Changes to U.S. trade policy and protectionist measures under U.S. President Donald Trump will certainly be negative for Canada and could be a major shock, Bank of Canada officials said on Thursday, warning of a hit to already sluggish productivity.
Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins took turns warning a Senate committee of the possible impact of as-yet unknown changes to U.S. trade policy, saying it is the greatest risk to Canada's economic outlook.
"The threat of U.S. protectionism, that's something that is very, very significant for Canada and ... it's very difficult to analyze it in advance because it could take so many different forms. It certainly will be negative and it could even be a major shock," Poloz told the committee.
Poloz and Wilkins were in a second day of testimony after releasing the bank's closely watched monetary policy report on Wednesday, which bumped up growth forecasts but argued it was too early to conclude Canada's economy was on a sustainable growth path.
The Bank of Canada held interest rates steady on Wednesday, keeping them near historic lows amid uncertainty over the economic outlook. [L1N1HK0AQ]
Canadian exporters have shuddered at the prospect of a border adjustment tax targeting Canadian goods destined for the U.S. market, and Canada's Liberal government is lobbying to protect trade relationships that have developed under the North American Free Trade Agreement. U.S. President Donald Trump has said he wants to fix NAFTA to protect U.S. jobs.
Asked what impact a 10 percent border adjustment tax would have on Canada's economy, Wilkins said it could be a "major" negative hit.
"It would not be good news for the United States or for us ... there will be an impact on demand but also an impact on supply and on Canada's growth potential that would be fairly significant," Wilkins said.
"You can expect supply chains that will be much less productive, so there could be a shock to our productivity rate, which is already not very high," she added.
Still, Wilkins said the potential impact need not be entirely negative, if Canadian business and manufacturers adjust by diversifying beyond the United States.
"They might find other markets, they might find other value chains elsewhere in the world that don't involve the United States," Wilkins said. "I can tell you there are base cases that could be very negative for Canada."
Reporting by Andrea Hopkins and Leah Schnurr; Editing by Chizu Nomiyama