Journalists in search of juicy monetary policy stories are fond of asking the governor of the central bank what keeps him up at night, and Stephen Poloz is usually prepared with a rote answer designed to keep the nightmares at bay.

But when the Bank of Canada published its quarterly outlook for the economy this week, it modelled the possible impact of a full-fledged global trade war. And there, laid out succinctly in box number 2, is where the nightmare comes alive.

Canada is more or less weathering the trade storm for now, the bank’s research shows. But if the tensions persist and drag in the rest of the world, forcing other countries to pick sides and take aggressive tariff action, then Canada will suffer deeply — more than most, since we have a trade-dependent, open economy.

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Whether or not the central bank purposefully meant to make a point to policy-makers, the findings are a cautionary tale. Canada needs to play its cards carefully or risk a dramatic contraction of its economy.

Before interpreting the Bank of Canada’s nightmare scenario, let’s take a look at what they calculate as the damage so far.

China and the United States have imposed steep tariffs on their trade with each other over the past year, curtailing bilateral trade but also disrupting supply chains for exporters and importers around the world, and undermining confidence.

The direct effects on Canada hurt, but are limited to specific industries. We have had to deal with U.S. tariffs on aluminum and steel, which have now been lifted. We are still contending with China’s blocking of our canola, and more recently beef and pork. That’s billions of dollars in trade, and the federal government has had to put together rescue packages.

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The indirect effects are broader but also difficult to measure. The unpredictability of U.S. President Donald Trump and his tendency to lash out at trade partners has made for a confusing and jittery environment for investors around the world, including in Canada. As a result, oil prices have probably been lower than they should have been.

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It’s not all bad news for the time being. Every time the United States took action against China, China responded by cutting tariffs to everyone else. Those tariff cuts apply to about $6 billion worth of goods that Canada sells to China, including auto and auto parts, some seafood and some metals. So Canadian exporters have the potential to expand in those markets without American competition. Canadian sales of wheat, auto and meat — until recently — have climbed noticeably, although not enough to offset the canola disaster.

All told, senior deputy governor Carolyn Wilkins says the central bank has had to increase its estimate of the pain Canada is feeling from the trade war. Exports will keep growing, but export growth is likely 1.5 per cent — $10 billion — lower than it would have been otherwise. Investment in 2021 will be 3 per cent — $8 billion — lower than otherwise. And by the end of 2021, the bank figures the trade tensions will have taken a 2-per-cent bite out of Canada’s gross domestic product.

That’s not the nightmare scenario though.

Bank researchers have calculated what would happen if the United States slapped a 25 per cent tariff on imported goods from everywhere; and then the rest of the world did the same thing back to the U.S.

It’s ugly for Canada. Before long, the global economy would deteriorate, commodity prices would plunge, and Canada would be hit hard by both. Secondary effects would then kick in, with confidence evaporating, investment fleeing down to the United States, prices rising as import costs go up, consumption falling off as employment sinks. And the Canadian dollar would depreciate.

Canada’s gross domestic product would face a 6 per cent hit over the next two years or so — about twice as severe as the hit to the global economy in general, the bank calculates.

Over the longer term, and using some different modelling, the Bank of Canada research suggests a full-out trade war would prompt American exports to drop by 69 per cent — basically a collapse. But the American economy would shrink just 1.1 per cent. That’s because it has a large, diverse domestic economy that could pick up the slack.

Trade-exposed Canada, on the other hand, would still be in deep trouble. Our exports would drop 32.5 per cent and our economy would take a 3.1 per cent hit.

In a new forecast published Friday, Scotiabank economists also project a severe recession for Canada if the U.S. were ever to impose a 25-per-cent tariff on everyone, and everyone fought back. They see a 1.6 per cent contraction in 2020 alone for Canada.

To be clear, these are all worst-case scenarios and fingers are crossed that the nightmare won’t come true. But given the outsized damage that Canada would suffer if the world even starts heading down that path, we’d better do our damnedest to make sure that doesn’t happen.