Canada's key resource against Trump's potential trade war

0:01NPR

0:11President Donald Trump is threatening to place a 25 % tariff on imports from its two biggest trading partners, Canada and Mexico. These tariffs could go into effect as soon as Saturday. And on today's show, we're going to focus on how this news is affecting our neighbor to the north. After the break, we'll talk with Paul Haverschrud, who hosts a podcast and radio show for the Canadian Broadcasting Corporation called Cost of Living. He'll explain why Trump's tariff threat has a lot of Canadians, frankly, kind of freaked out, and how officials there are bracing for a possible trade war.

1:14your customers happier. That's the Zendesk AI effect. Find out more at zendesk.com. Paul Havershrood is a business reporter and host of the CBC's Cost of Living podcast, a show a lot like ours about the economy and business. Paul, thank you so much for being here. Well, thanks for having me. Like we said, Trump's threatening a 25 % across-the-board tariff on Canadian imports. How big a deal would that be for the Canadian economy? It's hard to overstate how big of a deal this would be for us. Like, if you look at trade and how important it is to Canada, exports make up nearly a third of our economy.

1:51For the US, I think exports make up around like 10%, maybe less. So that's a big difference. Huge difference, right? Now, there's the caveat of will Trump actually follow through on these tariffs? And if he does follow through and it is Saturday, is it going to be 25 % or a smaller number? But if we take that at face value, like three quarters of our trade goes south to the US, we get a 25 % tariff. If we're looking at a recession in Canada, maybe a pretty sharp recession, this is going to hit the biggest sectors of our economy, right? Energy, autos, agriculture, mining. We would be looking at people losing their jobs.

2:23I mean it runs into real stuff, Adrian. Not like, hey, we're talking about back-to-back quarters of negative GDP growth. But we're talking about people like losing their jobs, losing their homes. Like this is economic hard times like in a way that is just scary for us. I think some people are going to hear this and say like, but wait a second. Don't the U.S. and Canada have a free trade agreement like along with Mexico, the U.S. MCA? Yes, we do have a trade deal. But if you put a 25 percent tariff on us, then do we really have a trade deal? Like Trump will come up with ways to do that, loopholes in different agreements, the Trade Act of 1974 or the International Emergency Powers Act.

3:01He'll say this is an issue of national security. But like do you really think so? He said that about steel and aluminum tariffs in 2018. And was it really an issue of national security or was he just trying to leverage us in NAFTA negotiations at that time? So, yeah, like the USMCA has dispute reconciliation mechanisms, but that's going to take years at least. So what kind of response, if this does happen, are Canadian officials thinking about doing? Well, the conversation now is really about retaliatory tariffs. You hit us. We hit you. It's tit for tat. It's dollar for dollar. We'd be coming after things like Florida oranges, Kentucky bourbon.

3:37And, you know, they say no one wins a trade war. We don't want to be in a trade war. But if we get these tariffs, like what else are you going to do? Like that is the response. In addition to kind of tariffing little things like booze and oranges, my understanding is that Canada is also contemplating something even more drastic with oil. Yeah. If you look at where we actually could hit you where it would hurt, oil is definitely the biggest arrow in our quiver. It's the one thing that we have here that you really actually do need. Like we export about 4 million barrels of oil a day to you. So that's nearly one out of every four barrels that you refine comes from Canada, a little less than that.

4:20Yeah, most of that goes to the Midwest. So there's a really active discussion in Canada right now about, well, if we wanted to hit them in a way that it hurts, oil is the way we do that. We could restrict oil exports, a bunch of different mechanisms we could use to do that. What does that do? Well, it sends gasoline prices up in mostly the Midwest. Of course, voters in the Midwest, a lot of swing states in the Midwest, Michigan, Wisconsin, et cetera, they don't like it when gasoline prices go up. So, you know, this is risky. Politically, we're not aligned on this in Canada. Not every province wants to do it, but it's something that is being discussed.

4:52Like when you say there are mechanisms to do this, like what would that involve? There's three ideas being floated right now. There's export tariffs, which could be a really bad idea for Canada's economy. I mean, that's a different, you know, we've been talking about tariffs as tariffs on imports, but this would be taxing exports of oil. From Canada. Exactly. That gets complicated. We could go export restrictions on the federal level, but we've got like some state and federal friction. So if the feds came along and said to Alberta, which is where most of Canada's oil comes from, hey, we're going to restrict the flow of oil.

5:24Basically, our premier's equivalent of our state governor's, her head would pop off. So that's going to be a really big problem. But there are other ways you could do that. You could actually say, look, natural resources are under provincial jurisdiction. Why don't we let the province curtail exports? Or we could say something really wild and say, hey, why don't we take away our laws around competition policy and let Canadian oil and gas firms collude, essentially act like OPEC in their own best interests? Canadian oil and gas firms could say, look, these tariffs come in. We're going to trim output.

5:54But we know exactly what's happening in oil markets, and we're going to keep Canadian oil prices high. And then if Canada wanted to turn the screws just a little bit more and say, well, why don't we get more aggressive with this, Adrian? Why don't we not just keep oil prices high, but why don't we let drivers in the Midwest? And, hey, we like drivers in the Midwest. Again, we don't want to hurt anybody. We just want to make a point. So it's, again, if Canada is looking at using all the tools in our toolbox or at least having those tools on the table, oil is our biggest tool, and it's one we're contemplating using.

6:22President Trump has talked about opening up oil drilling in more parts of the U.S. Do you feel like, you know, the U.S. finding more of its own oil supply could soften that blow if Canada decides to go that direction? If you look at the way the U.S. oil industry has grown up, gasoline and refineries are very much regional because those refineries in the Midwest, from Illinois all the way down through to Oklahoma, they're designed. They were made to take heavy oil from Canada. It's kind of like refineries are kind of like cars where some cars only take premium and some only take regular. Exactly.

7:00And what they take is heavy crude from Canada. And so, yeah, you could drill for oil, but it wouldn't be the right kind of oil. And moving it around is it's unclear how that would happen. You know, there's one thing that you said when I first reached out to you. This looming tariff threat has got some people, some economists or policy wonks saying like, this might be a crisis, but let's not let a good crisis go to waste. This is an opportunity to sort of rethink the Canadian economy. Yeah, well, part of the discussion in Canada is also like, why are we so vulnerable to this tariff threat? Shouldn't we be more resilient?

7:34You know, shouldn't we be more diversified? And yeah, Canada should always be more diversified, but we live next to the richest country in the world. You know, there's 340 million of you and you're the best customer in the world. We don't have a lot of incentive to diversify. Maybe we do now. So there's like we have this pipeline project to the West Coast, Northern Gateway that got canceled. The oil industry is saying, see, we need to build that now. We need to be able to get our oil to customers in Asia. Others are saying this is the time to get rid of interprovincial trade barriers or dismantle our system of supply management for dairy or, hey, how about we lower corporate taxes because that's going to make us more attractive to international companies to come here.

8:09So all of the hobby horses are being trotted out right now. Some of them may be good ideas. Some of them may be just opportunistic. But it's basically a lot of folks right now trying to get some of the stuff they've wanted to get done for a long time. And they're taking this opportunity to put that on the agenda. I guess we'll see what happens on Saturday. For now, Paul, any parting thoughts? We don't want a trade war, Adrian. And all this rhetoric about Canada being a bad actor and taking advantage of you. Like, yes, we have trade irritants, as everyone does in a relationship. But the idea that these are somehow a national security threat or we're taking advantage of the U.S.

8:43on a grand scale, it's a fiction. Plus, Canadians, we like America. We like Americans. We like going there. I want to see Patrick Mahomes win a third Super Bowl in a row. I love going to a U.S. diner. It's like one of my favorite things in the world. You do breakfast just so well. Well, if nothing else, hopefully our country's respective economic daily podcasts can get along. I can. That's the one thing I think we can guarantee. Paul Haverschrude is host of the CBC's Cost of Living podcast and radio show. Paul, thank you for coming on and breaking all this down. Thanks, Adrian. This episode was produced by Julia Ritchie with engineering by Neil Tevold.

9:25It was fact-checked by Sierra Juarez. Kickin' Cannon is the show's editor and the indicators of production of NPR.