Chinese manufacturing imports are trimming Canadian consumer inflation by about 0.1% per year, finds a new paper published by the Bank of Canada.

The discussion paper investigates the direct effect of Chinese imported goods on consumer prices in Canada. It finds that, on average, from 2001 to 2006, the direct effect of consumer goods imported from China is estimated to have reduced the inflation rate by about 0.1 percentage points per year.

This disinflationary effect is due to two causes, it explains: the Chinese share of Canadian imports has been increasing rapidly in recent years; and, the price of these goods is much lower in China than it is among Canada’s other import sources, as well as domestic producers.

“Chinese goods will continue to have a disinflationary impact on Canadian prices as long as the price of these goods remains lower than what can be produced in Canada, or by other trading partners, and as long as the Chinese share of Canadian imports continues to increase,” it says.

If China’s import share accelerates to reach 100% in 10 years, the paper estimates that the direct effect could be as large as -0.6 percentage points per year. “This scenario is, however, extreme and unlikely to occur. A more plausible scenario is to assume that China’s share in Canadian imports of consumer goods will stabilize over time, as price levels converge, in which case the direct effect of China on Canadian prices would gradually fade away,” it concludes.