The New ERA tour - Trump's Trade Tariffs
Border security, home-shoring industry, national security, upending global trade or just a land-grab - WTF?
In the New Era of Trump’s trade tariffs, tariffs trump trade.
In January 2022 I heard the news about the build up of Russian troops and armour on the Ukraine border. I thought that this was just a negotiation tactic - a show of force to get some concessions and then say that these really were just the military “exercises” that had been claimed all along - and all those who forecast war were just exposing their anti-Russian bias (etc etc)? They wouldn’t really invade… Boy, was I wrong.
Three long years later, I thought Trump’s threat of tariffs was just a negotiation tactic to ensure action on illegal immigration and drug trafficing. They wouldn’t really slap tariffs on their best neighbour…. Boy, was I wrong.
The Art of The Deal
The argument that Canada’s relatively small trade surplus with the US is an unacceptable subsidy, that Canada “owes” billions to the US seems to be easily refuted. The pros and cons of trade can’t be captured in such a simple metric. It is possible that the trade defecit is driving the narrative (and policy) on tariffs - but listen hard and you keep hearing about border security, about terrorists and about fentanyl.
Now, close your eyes, concentrate and listen harder… breathe… can you hear a deeper sound, a low grumbling about an unreliable neighbour whose progressive policies on immigration1, organized crime, and acceptance of / acquiescence to foreign influence is unacceptable to Washington 2025 vintage.
"I never get too attached to one deal or one approach. For starters, I keep a lot of balls in the air, because most deals fall out, no matter how promising they seem at first."
The Art of the Deal
Confused
Am I the only one confused about "25% tariffs"?
You want to stop Chinese EVs destroying the domestic car market - slap on a tariff and make them more expensive. Consequently, consumers find the "all-in" price of Chinese EVs less attractive and buy local instead. Makes sense. Unless of course you got elected on a promise to fight inflation.
Also, energy just doesn’t work like that. But let’s take this slowly.
Who Pays The Tariffman?
Let us side-step the awkward question of whether the USA’s “trade defecit” with Canada is a good or bad thing… and look at the tariffs.
The US is proposing 25% tariffs2 - which means that US importers would have to pay the US government 25% of the price they pay to the Canadian seller. So a barrel of oil bought at US$80 would require an additional US$20 to be paid by the US importer to the US government. President Trump just announced the all new ERA (“External Revenue Agency”) to collect these gazillions of dollars.
These import tariffs would be passed on, so $80 Canadian crude would appear in the US market as costing $100/bbl - and for a globally traded commodity that kind of arbitrage should mean that no one in the US would want to buy Canadian oil (its not that simple - but hold on… we’ll get back to this).
At which point this becomes Canada's problem because it has lots of pipelines going south into the USA and very few going west to the Pacific and international markets (and none going east - other than through the USA). This rather unusual set-up is partly due to geography and partly due to politics. The net result is that Canadian oil becomes "stranded" - something that has happened in the past simply due to supply/demand mismatches. When supply >> export capacity Western Canadian Select (“WCS”) has traded at discounts of $30-$40/bbl to WTI.
The problem with this is that two big oil refining platforms in the Mid-West are tied to Canadian oil by pipelines and have limited alternatives ("Petroleum Administration for Defense Districts" PADD 2 and PADD4).
As a small anecdote - if you follow the oil export pipelines from Alberta and Saskatchewan south-east, you can see how these cross into the US and then you can trace these back up to Southern Ontario and indeed to Montreal. Oil crosses into the US and refined products (and crude oil) cross back to Canada… gonna make for some interesting accounting. And on that note - the simple argument of the oil “trade deficit” can be seen to be more complicated. The US is a net exporter of oil and refined products. Thus, on a whole-picture basis, some of the imported oil is exported as products - creating a trade surplus, which should be offset against the “deficit” of buying the oil in the first place… but I digress.
Most significantly, the crude oil produced in the US (especially the shale oil from Texas) needs heavier Canadian crude to blend prior to refining. Re-tooling the refineries is a non-starter due to the significant capex and time needed. Alternative sources of suitable crude are Venezuela, Brazil and Ecuador. None of which are in any useful way connected to Indiana, Michigan, Illinois, Ohio and Minnesota.
Thus, there is a bit of a stand-off. President Trump says that the US doesn’t need anything from Canada - and on a holistic approach the US could complement its production with other international barrels. Thanks to the shale revolution, the US has massively reduced its dependence on imported barrels. But as noted above, crude oil is not entirely fungible. The US needs heavy oil, which Canada has an abundance of and the pipeline network is rigidly fixed to get Canadian crude to mid-west refineries.
Tariffs as a Tool
The world uses about 100 million barrels of oil a day. Almost as much ink is used in writing about Trump. Suffice to say he is unpredictable, mercurial and polarizing. The Canada Tariff Saga seems to be a classic case of stated “aims”, tangential desires and consequences both intended and unintended. Is this really about border security? At first blush this seems unlikely - the number of immigrants crossing southwards and the volume of drugs seized indicate that the 49th Parallel is a rounding error compared to the southern border.
However, the numbers are not the whole story by far. Whilst this is way out of my wheelhouse, one can find people joining the dots of malign foreign influence, money laundering on a vast scale, the craziest housing price bubble and organized drug crime. Likewise, whilst the number of illegals crossing southwards is small, the number of “very undesirables” is off the charts:
The whole thread is here - and even if only a fraction is true - it is a scary read.
There is an argument that Canadians should be responsible for catching the bad guys coming north and the Americans responsible for those going south - so why is it Canada’s problem? This logic is the international “norm” but it is plainly silly (even if it might be the legal structure). I’d surmise that Trump’s issue is not with the border per se; his issue is with Canada’s other borders.
The Soft Underbelly
The perception is that Canada is a soft-touch for undesirables, for drug traffickers and foreign agents. Very lax rules for entering Canada and bizarre support for anyone who wants to undermine the values that make Canada great. By an amazing coincidence of timing, less than a week after Trump’s inauguration - Canada (finally) deported the foreign-funded law-breaking climate activist, Zain Haq. There is a separate article (or better, an independent enquiry) that needs to look into the symbiotic relationship between anti-energy eNGOs and anti-energy elected officials. One reason Canada is in a cripplingly weak position in the current trade war is its inability to export crude to anywhere except the US Mid West (TMX excepted). How much of the TMX cost over-run was due to “NGOs” (sometimes government funded, making a mockery of the “NG” part)? The ability to oppose, obsturct and ultimately frustrate Northern Gateway and the Energy East pipelines has left Canada hostage to US policy. Who benefits?
A question for every Canadian (and indeed every citizen of a Western Democracy) - if foreign influence by adversarial powers is supporting one particular party and/or ideology - should you assume that is for, or against, the best interests of your country?
Thus, the longest undefended border in the world is suddenly a problem - it can be so easily exploited. It would be very difficult to harden the 49th parallel (Canada has been doing some symbolic actions, such as leasing a couple of Blackhawk helicopters and adding drone capabilities… But did I mention that Canada is really big?3).
When dealing with a bully, the conventional wisdom is that they are really just cowards who will back down if someone stands up to them. Maybe… but generations of bullied and bruised kids might dispute this. Stand up to a bully and more than likely you will take a beating… noble perhaps, painful for sure. Alternatively find what pain is causing the bullies behaviour - if you can’t run and hide - can you do something about it?
Whilst illegal immigtrants and drugs, as well as the “trade deficit” arguments are probably important to Trump, I’d surmise that the pressure on Canada is aimed at “regime-change”: covering its entire approach to immigration, drugs, money laundering, border security, political interference, energy and climate policy, DEI, (and on and on) and the use and abuse of these by foreign actors. Recall that China has a policy of “Agents of Chaos” - using Canada as a front for getting fentanyl into the US is obviously unacceptable to Washington. It should be unacceptable to Ottawa without being asked/pressured. Whilst hard to countenance, it seems that Canada is seen as not just unreliable, but a National Security Risk to the US.
Can't We Just Be friends?
But maybe President Trump is being a good friend (bear with me here!…)
I’m not sure you would find many Canadians who are not concerned about crime, housing prices, foreign interference in Ottawa… etc. On the radio, a talking head says “We have always been the best of allies”. Canadian firefighters in LA last month and boots on the ground in post-9/11 conflicts notwithstanding, Canada along with the rest of NATO has simply ignored the funding issues that Trump has highlighted since 20164. Immigration is being restricted, the border made more secure, drug “busts” suddenly happening in transport and in factories… My guess is that this kind of window-dressing will not suffice to placate the Donald. His beef is with the progressive ideology that has allowed these infections to take hold and spread.
Simply asking countries to play by his rules would be too slow - he wants change “now” - probably in recognition that he has realistically only 2 years before mid-terms undermine his power base. Hammering the message with tariffs is blunt, uncouth, insulting but… probably quite effective. Reverting to 20th Century Power Politics leaves the question of how much collateral damage will be done, how long will the mistrust last, and what of the unintended consequences?
As the eponymous and best-selling book noted - some countires are indeed Prisoners of Geography. Canada and Mexico are contiguous to the US and thus “clear and present”, but this trade-war will rumble across the Atlantic and Pacific. Europe is being stressed by its climate and immigration policies - expect Trump to turn up the heat once focus shifts from Canada and Mexico.
Why should we assume that there is a single objective and that many of the apparent targets are distractions? More likely, border-security, “regime change” in progressive allies AND restructuring global trade are all objectives. A few helicopters and drones won’t fix this.
May you live in interesting times.
Note: in the spirit of transparency I am an immigrant in Canada - so maybe I am the problem causing all this economic turmoil.
Since I started writing the tariffs on energy will be 10% - but the logic is the same
To get an idea - watch a recent documentary called “500 Days in the Wild” one woman’s journey across Canada by foot, bike and canoe. Spoiler alert - “500 days” was a magnificent underestimation and is used only ironically in the title.
Only the invasion of Ukraine has created some realism in some parts of Europe.
French press reports 10 % tax on Canadian crude, less of a killing factor.
Reminds me of the La Fontaine's tale "The wolf and the lamb". Le loup et l'agneau. Worth a reading.