Tariffs Meet the Fuel Surcharge

Tariffs are often sold as a lever with a single satisfying clunk: raise the barrier, protect the factory, win the argument. In practice, they enter an economy as a bundle of contradictory instructions. They can suppress trade, investment and hiring while raising costs for the firms still trying to make, move and sell things. The consumer receives this contradiction not as a seminar in political economy but as a receipt.

That is the bind described in Bank of Canada Governor Tiff Macklem’s September remarks. New US tariffs affect products representing about 5% of Canada’s goods exports to the United States, according to the Bank’s assessment. That is not a national-economic asteroid, but it is large enough to hurt exposed industries—especially autos, steel and aluminum—and to chill decisions beyond the customs line. If the tariffs remain, the Bank says fourth-quarter growth could be roughly halved to below 1%.

Meanwhile, a longer Middle East conflict has disrupted shipping and damaged refineries, lifting fuel costs. The neat tariff narrative therefore meets the old physical economy: ships need routes, factories need inputs, and trucks remain famously uninterested in geopolitical messaging. The Bank’s point is less dramatic than the stump speech and more useful: weak demand may restrain firms’ ability to pass on costs, even as some costs rise sharply. Higher costs do not automatically produce proportionately higher shelf prices. They produce a contest over margins, volumes and survival.

The most important distinction in this episode is between an announced tariff and an experienced price increase. The Bank expects Canadian counter-tariffs to have only a modest direct inflation effect because they are aimed largely at non-consumer goods that can be replaced with Canadian substitutes. That does not mean nobody pays. It means the burden may surface first in procurement spreadsheets, altered sourcing contracts and thinner corporate margins rather than on a conspicuous sticker in aisle seven.

The more immediate consumer-pressure channel, in the Bank’s account, is fuel. Under normal conditions, a 10% increase in oil prices adds roughly 0.2 percentage points to CPI inflation. Recent gasoline prices, Macklem said, were consistent with oil about US$40 higher than its previous level; CPI inflation had hovered around 3% largely because fuel was more expensive. This is the distinction tariff politics routinely misplaces: customs duties are targeted and mediated through supply chains, while energy is a surcharge applied with startling democratic impartiality.

The central bank says it has not yet seen much evidence of energy costs spreading widely through other goods and services. That is a deliberately narrow comfort. A household can still feel poorer when the pump is dearer, even if core measures are behaving themselves in a respectable spreadsheet. And the risk rises if businesses begin treating a temporary shock as a new permanent cost base—then adjusting prices, wages and contracts accordingly. As Macklem put it, the Bank cannot make tariffs or global oil prices disappear: “Monetary policy cannot offset the effects of tariffs or influence global energy prices.”

The implication is uncomfortable for everyone hoping for one institution to solve the problem. Interest rates can contain a broader inflation psychology; they cannot reopen a trade negotiation, repair a refinery, or persuade a container ship to ignore a dangerous route.

There is, however, an adaptation story beneath the alarms. Canada’s non-energy exports rose 14½% in the second quarter to their highest level since early 2025, although the Bank cautions that temporary factors helped the quarterly result. Firms have been adjusting supply chains, changing sourcing strategies and deepening relationships with overseas customers. More than two-thirds of exporters surveyed said they planned to expand into new markets over the next two years, including Europe and the Asia-Pacific.

This is what tariffs actually do when they persist: not merely tax a transaction, but alter the map in executives’ heads. A company does not need to abandon the US market for the threat of tariffs to change where it invests, which supplier it qualifies, or how much inventory it holds. The United States will remain Canada’s largest trading partner, the Bank says. Yet “largest” is not synonymous with “sufficiently predictable to organize one’s future around.” Supply-chain diversification is rarely glamorous; it is mostly a long courtship with alternative vendors, standards paperwork and warehouses. It is also capital allocation in work boots.

That may explain why business investment rose at an annualized 8.8% rate in the second quarter even as uncertainty remained high. It is not proof that trade friction is harmless; adaptation is often the bill paid after the damage. Still, it shows why tariff effects cannot be read solely from the next inflation print. Some of the consequence is deferred, embedded in plant locations and supplier lists, then visible years later as a changed industrial geography.

The Bank is trying to steer through this with a new forecasting model, Prima, while keeping its 2% target as its stated anchor. Macklem’s formulation is appropriately unromantic: “Our beacon is our 2% inflation target, and we are committed to keeping inflation close to target over time.” A beacon, regrettably, is not a tugboat. It can help chart the passage; it cannot move the rocks.