A provincial plan to ‘punch back’ at Trump tariffs
Don Wright is a PPF Fellow, senior counsel for government relations and strategic communications firm Global Public Affairs and a former head of the B.C. public service.
As incoming President Donald Trump’s threat to impose 25-percent tariffs on all Canadian exports has ramped up over the past couple of months, there has been a domestic tempest within Canada over suggestions to put export limits or export taxes on Canadian natural resource products, in particular oil and gas, as a way of “punching back” at the tariffs.
Alberta and Saskatchewan were quick to condemn such an approach, stating that as the owners of their natural resources their provinces would never accept restrictions or taxes on exports.
While there is a long history of mutual suspicion between the Trudeau Liberals and Canada’s oil and gas exporting provinces, exacerbated by fights over pipelines and emissions caps, calm analysis shows that it may actually be in the interests of the resource-owning provinces to punch back at Donald Trump.
The short-run impact of any tariff or export tax put in place between two countries will be partly felt by consumers/importers via higher prices and partly felt by producers/exporters via lower net revenues. What Team Canada should be attempting to do is ensure as much of the incidence of the Trump tariffs fall on U.S. businesses and consumers and as little of the incidence of these tariffs fall on Canadian exporters. How can this be done in the context of Canadian natural resource exports?
As the owners of the natural resources, provincial governments should set minimum prices for the resources they own. These prices could be benchmarked against the international prices for the particular products (for example, Canadian heavy crude would have a minimum price set at $15 below the West Texas Intermediate price benchmark).
By doing this, the provincial governments ensure that U.S. importers would pay the minimum price plus the Trump tariff, rather than pressuring Canadian producers to lower their prices to account for the tariffs. The provincial governments would be protecting their revenue bases while at the same time Team Canada would be inflicting the maximal political cost on Donald Trump — hence the provinces’ interests are aligned with punching back at Donald Trump, if done the right way.
However, it is not clear whether the provinces have the jurisdictional authority to do this on their own. So the provinces would need to be supported in these efforts by the federal government — using its constitutional responsibility for international trade to administer the export permitting process that would be necessary to properly police this.
Furthermore, federal involvement would provide legal cover for the provinces, to prevent some party arguing in court that the provinces are acting ultra vires to their constitutional powers.
In the short run, it will be difficult for U.S. consumers to find alternative sources of supply. Many U.S. refineries, particularly in the Midwest, are engineered to refine Canadian heavy crude. U.S. LNG facilities are set up to export, not import, LNG, so the U.S. relies on Canadian gas to complement its own supply. It would also be challenging to find alternative sources of Canadian mining products — in particular uranium and potash. Any attempts to increase imports from countries other than Canada would be likely to drive up the world price of that particular commodity, making it more economic for Canada to export to the rest of the world instead of to the U.S.
This approach would be difficult to sustain in the longer term. Higher U.S. prices would lead to more U.S. production and more retooling of refineries to take non-Canadian crude. If there are not equivalent Trump tariffs put on imports from countries other than Canada and Mexico, the economics of those countries exporting to the U.S. would improve.
Our hope is that engaging in a trade war with the Trump administration would not go on for a long time, but rather that it would be resolved quickly on reasonably favourable terms. A strategy focused on maximizing the short-term pain to American consumers and the Trump administration while minimizing the short-term pain experienced by Canadian producers and provincial governments is most likely to achieve this desired outcome.