The Production Network Amplification of Retaliatory Tariffs

We develop a framework to quantify how tariff changes on imported goods affect sectoral and aggregate consumption prices through direct and production-network channels. Using Canada's input-output matrix and administrative firm-good import data for the universe of Canadian firms, we estimate price elasticities for tariffs on U.S.-imported goods. Tariffs on machinery and equipment and transport equipment generate the largest effects on final prices, reflecting their widespread use as intermediate inputs. On average, two-thirds of the total price response stems from higher intermediate input costs passing through domestic supply chains. Applying the framework to Canada's 2025 counter-tariffs, we estimate consumption price increases of 1.56 and 0.72 percentage points for the pre- and post-September 2025 phases, respectively; alternative packages of equal import value could reduce aggregate price effects by three to seven times. A hypothetical CUSMA breakdown reverting to MFN tariffs would raise final-good prices by 0.64 percentage points.