Let’s talk tariffs. President-elect Donald Trump is set to take office on January 20th, 2025. President Trump indicated back in November 2024 that one of his first agenda items in the White House will be to impose major import tariffs on Canada and Mexico.
If the United States follows through with these tariffs, 2025 may prove to be a tumultuous year for the Canadian economy, and especially for the Canadian energy sector. This 5-minute read dives into the need-to-know on tariffs, their potential impact, and how Canada’s energy sector plays in.
Tariffs are taxes applied to goods imported from another country (tariffs can also be applied to domestic exports, but only import tariffs are discussed here). They’re usually imposed on imports with a goal of:
The importer of a good is responsible for paying the tariff. In practice, companies often determine who will pay the tariff through commercial contracts. Regardless of which commercial party pays a tariff, the tariff’s ultimate cost is borne by the consumer of the imported good. In theory, tariffs function to increase the price of imported goods, meaning consumers are driven to cheaper, domestic alternatives.
However, many economists argue that, in reality, tariffs can function to hurt the country that imposes them. Along with gross domestic product (GDP) decline, the boost to a particular industry touted by governments that impose tariffs is often overblown.
Tariffs of varying size, format, and application are fairly common around the world and are regulated by the World Trade Organization. Canada’s own import tariff rules can be found in this 1434-page document.
President Trump has pledged a 25% tariff on all Canadian (and Mexican) imports, to be enacted immediately upon his inauguration. This tariff would pose a significant threat to Canada’s economy.
As most Canadians know, the US is more than just a southernly neighbor: they’re a big-time trading partner as well. Approximately 75% of Canadian exports were destined for the US in 2023.
To use a classic trope as an example: for every four bottles of maple syrup Canada produces, three of them are sold to the US. With the imposition of a tariff on Canadian imports, US consumers might consider buying cheaper New Hampshire maple syrup, for example, which puts Canada’s maple syrup sales at risk.
On the Canadian side, the impact of a 25% tariff would be massive. Experts at the University of Western Ontario estimate that the tariff would cause the loss of 1.5 million Canadian jobs and a GDP contraction near 2.5%. On top of that, the federal government’s monetary response to the tariff would likely trigger higher inflation rates.
One estimate suggests the total impact of a 25% tariff for each individual Canadian at approximately $2700. That’s a lot of maple syrup…
For Americans, the negative implications of a tariff on Canadian imports are also potentially significant. Most of Canada’s exports to the US are business inputs, such as manufacturing supplies (think metals and lumber) and energy (oil, natural gas, and hydroelectricity, especially).
The jobs created directly and indirectly through importation of Canadian goods – including in manufacturing plants, refineries, and processing facilities – will be put at risk by a 25% tariff, raising costs for consumers on both sides of the border.
If you’re reading a YCR blog, you probably already know how crucial Canada’s energy sector is to the country’s economic prosperity.
Production (and export) from western Canada’s rich oil and natural gas reserves have accounted for a large chunk of the country’s GDP for decades, and continue to meaningfully contribute to the economy. Should a tariff be imposed, industry faces a major challenge.
Canada’s energy sector – along with other resource-based industries like forestry and mining – are likely to take the biggest hit should President Trump’s tariff be imposed.
A quarter of all Canadian exports are oil and natural gas, and Canada’s energy exports to the US alone near $150 billion annually. Millions of barrels of oil flow south from Canada to the US daily.
All but one of Canada’s export pipelines go to the US. While newly completed gas pipelines to the west coast allow producers to tap into Canada’s rich natural gas reserves and send LNG to Asia, a majority of Canada’s energy export is currently crude oil headed to the US Midwest to be refined.
Across Canada, leaders have recognized the power of Canada’s energy sector in recent weeks as President Trump’s tariff becomes increasingly probable. The sector is being viewed in two contrasting ways with regard to the tariff, which underscores the power of Canada’s energy as a bargaining chip with the US.
On one hand, the federal government as well as a handful of provincial premiers view cutting off the United States’ supply of Canadian oil and gas a powerful tool in backing President Trump down from his tariff threat. A recent meeting of the premiers made clear that some provinces – including Ontario and Quebec – view the threat of “turning off the taps” to the US as a key negotiating chip.
On the other, Alberta Premier Danielle Smith opposes the idea that Canada’s energy should be sacrificed as a bargaining tool in retaliation to the tariff. While the motivation behind possibly cutting off the United States’ energy supply is to back President Trump down from imposing the tariff (or to force him to revoke it), the means used to achieve this would have a major impact on Alberta’s economy.
Much of Canada’s oil and gas exports hail from Alberta. North of 138,000 Albertans are employed in upstream energy production alone. Further, royalties and other energy-related revenues collected by the Alberta government have represented between 26% and 36% of the government’s total revenue in recent years, illustrating the massive importance of industry to Alberta’s prosperity.
Alberta’s reluctance to agree to potentially sacrificing Canada’s energy supply is shared by some experts. The major reason cutting off energy supply to the US may not be wise is that the US has the upper hand on Canada in terms of energy. Most of Canada’s oil and gas needs to be piped down to the US to be refined.
Without realistic alternatives to US refineries, Canada cannot do much with its crude – and certainly cannot shut down all production. Further, Canada’s west-east Line 5 pipeline travels through Michigan, which would present challenges should Canada try to “get back” at the US.
The reality is that Canada is dependent on the US for a prosperous energy sector and a functioning economy as a whole.
However, just as Canada relies on its favourite trading partner, the US also relies on Canada. Approximately 60% of the United States’ imports of crude oil are Canadian. Midwestern refineries have run more than 4 million barrels of Canadian oil in the last year alone. Tariffing or cutting off Canadian energy hurts both parties: it’s a lose-lose scenario in both instances.
It’s currently unclear whether President Trump’s 25% tariff will become a reality and whether or not there’ll be a carveout for Canadian energy imports. If the tariff is imposed and includes Canadian oil and gas, it’s further unclear how the federal government will manipulate the sector to parry the tariff’s impacts.
What is clear – and has been clear for many years – is that Canada’s strong, resilient oil and gas sector will continue to be an important contributor to Canada’s prosperity. Canadian energy has impacts around the globe, and playing on its strong roots in the US will be tantamount to successfully negotiating with the so-called Tariff Man.
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