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

Summary

The Indicator from Planet Money: Canada’s Key Resource Against Trump’s Potential Trade War

Released on January 30, 2025

In this episode of The Indicator from Planet Money, NPR delves into the escalating tensions between the United States and Canada as President Donald Trump threatens to impose a 25% tariff on imports from his two largest trading partners: Canada and Mexico. Hosted by Adrian, the episode features an insightful conversation with Paul Haverschrud, a business reporter and host of CBC’s Cost of Living podcast. Haverschrud provides an in-depth analysis of the potential economic fallout for Canada and explores the strategic responses Canadian officials are considering to mitigate the impact of a possible trade war.

The Weight of the Tariff Threat

Adrian opens the discussion by highlighting the gravity of Trump’s tariff threat, stating, “President 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” (00:12). This immediate threat sets the stage for understanding the urgent economic implications for Canada.

Paul Haverschrud underscores the significance of this move for the Canadian economy, emphasizing that “exports make up nearly a third of our economy. For the US, I think exports make up around like, 10%, maybe less” (02:44). This stark contrast illustrates how heavily Canada relies on trade, particularly with the United States, making the potential tariffs a substantial risk.

Potential Economic Impact on Canada

Haverschrud elaborates on the possible consequences, noting, “If we take that at face value, like three quarters of our trade goes south to the U.S. we get a 25% tariff, we're looking at a recession in Canada, maybe a pretty sharp recession” (03:07). He highlights that key sectors such as energy, automobiles, agriculture, and mining would be severely affected, leading to job losses and economic hardship for Canadian citizens.

Navigating the USMCA and Legal Loopholes

The conversation shifts to the existing trade agreements, specifically the United States-Mexico-Canada Agreement (USMCA). Haverschrud points out, “Yes, we do have a trade deal, but if you put a 25% tariff on us, then do we really have a trade deal?” (03:57). He suggests that Trump might exploit loopholes within the Trade Act of 1974 or the International Emergency Powers Act to justify the tariffs under the guise of national security, drawing parallels to the 2018 steel and aluminum tariffs.

Canada’s Countermeasures and the Risk of a Trade War

Adrian and Haverschrud discuss the possibility of retaliatory tariffs from Canada. Haverschrud explains, “We’d be coming after things like Florida oranges, Kentucky bourbon. They say, no one wins a trade war, but we don’t want to be in a trade war” (04:38). This tit-for-tat approach could escalate tensions, potentially spiraling into a full-blown trade war that neither country desires.

Oil Exports: Canada’s Strategic Leverage

A significant portion of the discussion centers on Canada’s oil exports as a critical lever against the US tariffs. Haverschrud details, “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” (05:09). He outlines potential strategies Canada might employ, such as restricting oil exports or imposing export tariffs, which could disrupt gasoline prices in the US Midwest—regions pivotal to swing states like Michigan and Wisconsin.

Challenges with US Oil Production and Refinery Compatibility

Adrian raises the question of whether increased US oil drilling could offset the impact of Canadian export restrictions. Haverschrud responds, “The refineries in the Midwest … they’re designed to take heavy oil from Canada” (07:45). He explains that even if the US increases its oil production, compatibility issues with refinery infrastructure mean that US-sourced oil might not seamlessly replace Canadian heavy crude, limiting the effectiveness of this potential mitigation.

Opportunity for Economic Diversification

Amidst the looming crisis, Haverschrud sees a silver lining: “This is an opportunity to sort of rethink the Canadian economy” (08:21). He discusses ongoing debates within Canada about diversifying the economy to reduce dependency on US trade. Suggestions include expanding pipeline projects to Asia, dismantling interprovincial trade barriers, reforming supply management systems, and lowering corporate taxes to attract international businesses. These measures aim to build a more resilient and diversified economic foundation for Canada.

Closing Thoughts: Avoiding Conflict and Fostering Cooperation

In his concluding remarks, Haverschrud urges against the escalation of trade tensions, stating, “We don’t want a trade war, Adrian” (09:39). He emphasizes the strong cultural and economic ties between Canada and the US, highlighting mutual affinities and shared interests. Haverschrud’s final sentiment reinforces the desire for amicable resolutions and continued collaboration between the neighboring nations.

Conclusion

This episode of The Indicator provides a comprehensive overview of the potential economic challenges Canada faces in the wake of President Trump’s tariff threats. Through expert analysis and strategic insights from Paul Haverschrud, listeners gain a clear understanding of the complexities involved in international trade disputes and the critical importance of diversification and resilience in national economies. As the situation unfolds, the episode underscores the delicate balance between safeguarding economic interests and maintaining harmonious international relations.

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Notable Quotes:

• Adrian [00:12]: "President Donald Trump is threatening to place a 25% tariff on imports from its two biggest trading partners, Canada and Mexico."

• Paul Haverschrud [02:44]: "Exports make up nearly a third of our economy. For the US, I think exports make up around like, 10%, maybe less."

• Paul Haverschrud [03:07]: "We're looking at a recession in Canada, maybe a pretty sharp recession."

• Paul Haverschrud [03:57]: "If you put a 25% tariff on us, then do we really have a trade deal?"

• Paul Haverschrud [04:38]: "We’d be coming after things like Florida oranges, Kentucky bourbon."

• Paul Haverschrud [05:09]: "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."

• Paul Haverschrud [07:45]: "The refineries in the Midwest … they’re designed to take heavy oil from Canada."

• Paul Haverschrud [08:21]: "This is an opportunity to sort of rethink the Canadian economy."

• Paul Haverschrud [09:39]: "We don’t want a trade war, Adrian."

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This summary was produced based on the transcript of "Canada's key resource against Trump's potential trade war" from The Indicator from Planet Money. For more insightful analyses on economic and business topics, tune in to the podcast weekday afternoons.

Transcript

[NPR]

NPR.

[Adrian]

President 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.

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[Adrian]

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.

[Paul Haverschrud]

Well, thanks for having me.

[Adrian]

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?

[Paul Haverschrud]

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. For the US I think exports make up around like, 10%, maybe less.

[Adrian]

So that's a big difference.

[Paul Haverschrud]

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 U.S. we get a 25% tariff, 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. I 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 losing their jobs, losing their homes. This is economic hard times in a way that is just scary for us.

[Adrian]

I think some people are going to hear this and say, but wait a second, don't the US And Canada have a free trade agreement along with Mexico, the usmca?

[Paul Haverschrud]

Yes, we do have a trade deal, but if you put a 25% tariff on us, then do we really have a trade deal? Trump will come up with ways to do that. Loopholes in different agreements. The Trade act of 1974 or the International Emergency Powers act, he'll say, this is an issue of national security. But 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 gonna take years at least.

[Adrian]

So what kind of response if this does happen? Are Canadian officials thinking about doing?

[Paul Haverschrud]

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. They say, no one wins a trade war, but we don't want to be in a trade war. But if we get these tariffs, like, what else are you going to do? That is the response in addition to.

[Adrian]

Kind of tariffing Little things like booze and oranges. My understanding is that Canada is also contemplating something even more drastic with oil.

[Paul Haverschrud]

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. Yeah. 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. 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, etc, they don't like 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.

[Adrian]

Like when you say there are mechanisms to do this, like, what would that involve?

[Paul Haverschrud]

There's three ideas being floated right now. There's export tariffs, which could be a really bad idea for Canada's economy.

[Adrian]

There's export, 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.

[Paul Haverschrud]

Exactly. That gets complicated. We could go export restrictions on the federal level, but we've got like some, 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, basically our premier's equivalent of our state governors, 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 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. 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's 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.

[Adrian]

President 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?

[Paul Haverschrud]

If you look at the way the US 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.

[Adrian]

It's kind of like refineries are kind of like cars, where some cars only take premium and some only take regular.

[Paul Haverschrud]

Exactly. And 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, and moving it around, it's unclear how that would happen.

[Adrian]

You know, there's one thing that you said when I first reached out to you. This looming tariff threat 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.

[Paul Haverschrud]

Yeah, well, part of the discussion in Canada is also, look, why are we so vulnerable to this tariff threat? Shouldn't we be more resilient? You know, shouldn't we be more diversified? And, yeah, Canada should always be more diversified, but we to the richest country in the world. 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. So 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.

[Adrian]

I guess we'll see what happens on Saturday. For now, Paul, any parting thoughts?

[Paul Haverschrud]

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 or we're taking advantage of the U.S. on 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 US Diner. It's like one of my favorite things in the world. You do breakfast just so well.

[Adrian]

Well, if nothing else, hopefully our country's respective economic daily podcasts can get along.

[Paul Haverschrud]

That's the one thing I think we can guarantee.

[Adrian]

Paul Haverschrud is host of the CBC's Cost of Living podcast and radio show. Paul, thank you for coming on and breaking all this down.

[Paul Haverschrud]

Thanks, Adrian.

[Adrian]

This episode was produced by Julia Ritchie with engineering by Neil Tiefoldt. It was fact checked by Sierra Juarez Cake and Cannon is the show's editor and the indicators are production of npr.

[NPR]

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