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Canada and Mexico Could Significantly Hurt Trump’s Quest for US Energy Dominance
US President Donald Trump has proposed imposing tariffs on imports from not only China but also long-standing allies like Canada, Mexico, and Colombia. This move could significantly impact U.S. energy prices, especially in regions like the Midwest, and could lead to broader geopolitical consequences.
For instance, Chinese refineries might take advantage of the policy uncertainty to capture more market share, potentially at the expense of U.S. exporters. Additionally, global energy trading partners may begin to view U.S. energy trade policies as tools of political pressure, prompting concerns about reliability.
The relationship with Canada highlights the stakes. Canada is the largest supplier of crude oil to the U.S., providing about 62% of all U.S. crude oil imports in the first ten months of 2024.
Many U.S. markets, particularly those in landlocked areas, depend heavily on Canadian oil. Mexico also plays a crucial role, supplying about 7% of U.S. crude imports during the same time frame and serving as the largest buyer of U.S. natural gas and petroleum products.
Tariffs on imports from these two nations, the top suppliers of crude oil to the U.S., could have far-reaching effects on energy markets. U.S. refineries rely on crude imports to produce fuels like gasoline and diesel, which are either consumed domestically or exported.
Crude Oil from Canada
According to the Atlantic Council, heavy crude oil from Canada is essential for refineries in the Midwest, where alternative suppliers are scarce. Domestic oil production, which tends to be lighter and sweeter, cannot fully replace these imports since U.S. refineries are designed to process heavier grades of oil.
A 25% tariff on Canadian crude oil, according to studies by the Atlantic Council, would likely raise costs for refiners. These increases would likely be passed on to consumers as higher prices for gasoline and diesel, with the Midwest hit particularly hard.
Tariffs could also hinder U.S. exports of refined products like fuel oil and gasoline. Over time, countries in Latin America, Europe, and Asia might consider reducing their reliance on U.S. energy, fearing it could become a political bargaining chip.
Mexico, the largest buyer of U.S. oil and gas exports, may also begin exploring alternatives like liquefied natural gas (LNG) to reduce dependence on American supplies. A recent trade dispute with Colombia offers a glimpse of the potential fallout. When Trump threatened a 25% tariff on Colombian imports, Colombia responded with threats of retaliatory tariffs.
Though Colombian crude accounts for only 3% of total U.S. imports, it plays a vital role in certain areas, such as Houston, which receives significant quantities of heavy crude from Colombia. Tariffs on Colombian oil would likely raise costs for heavy U.S. crude products, making them less competitive internationally.
Such disruptions could create openings for countries like China. If U.S. energy prices rise, Latin American nations might look to China as an alternative supplier. China, already the world’s largest refinery market, has the capacity to export fuels, even as its own domestic demand for gasoline and diesel slows due to the rise of electric vehicles and LNG-powered trucking.
Tariffs will immediately drive up costs
U.S. policymakers should carefully consider the risks before imposing tariffs on energy imports from Canada or Mexico. For many U.S. regions, especially the Midwest, Canadian oil is irreplaceable, and tariffs would immediately drive up costs.
Retaliatory tariffs could also harm U.S. exports, particularly if Mexico reduces its purchases of natural gas or petroleum products from the U.S. This could lead to lower domestic prices and hurt the oil production sector.
Countries in Latin America, including Brazil and Argentina, would also monitor such moves. Rather than solidifying U.S. energy leadership, tariffs could push major trading partners to diversify and seek new alliances, potentially strengthening ties with China.
Beyond crude oil, tariffs on Canadian electricity and high-tech exports could hurt U.S. industries. In 2023, the U.S. imported 33 terawatt hours of electricity from Canada, much of which supports data centres powering artificial intelligence (AI) systems.
Higher electricity costs could slow AI development. Additionally, Canada’s exports of lithium-ion batteries, critical for technologies like drones, play a key role in U.S. military capabilities. Tariffs on these imports could weaken both U.S. and allied defence systems.
While Trump’s tariff threats aim to address issues like migration and fentanyl trafficking, the broader economic and geopolitical consequences should not be overlooked. Rushing into such decisions without thorough analysis risks long-term damage. A more strategic approach involving input from key advisers would help avoid unintended harm to the U.S. economy and its global standing.
