How Tariffs Move Through a Production Network to Reach Consumer Prices

A tariff is levied on an imported good. But the price a household eventually pays can be shaped by much more than the direct cost of that good.

A Bank of Canada research framework quantifies how tariff changes on imported goods affect sectoral and aggregate consumption prices through two routes: direct channels, where the tariff shows up in the price of the imported item itself, and production-network channels, where the affected input is used by firms that make other things, so the cost travels up and across the economy.

The estimate uses Canada's input-output matrix — the table that maps which sectors buy from which — alongside administrative firm-good import data covering the universe of Canadian firms, to estimate price elasticities for tariffs on U.S.-imported goods. In plain terms: the question is not only "what does this tariff cost at the border," but "how far does that cost ripple once firms have bought the taxed input and built it into something else." Input-output accounting is the tool for following that path.