Canada has what the U.S. needs. How the country can fight back in a trade war

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To the extent that these things can ever fully be counted, Canada currently sits atop a bounty of oil, potash, uranium and other critical minerals worth $1.1-trillion, give or take a few billion dollars. And every year, vast swaths of those resources are scooped from the ground and sent to feed the voracious economic appetite of our neighbours to the south.

Come Monday, the United States is set to become a lot less neighbourly.

President-elect Donald Trump has vowed that soon after being sworn into office on Jan. 20, he will slap a 25-per-cent tariff on every item the U.S. imports from Canada, an opening shot in a trade war that many economists warn will hurl Canada into a recession.

But as political and businesses leaders scramble for a response to Trump 2.0, a brash yet risky idea has taken hold: Use America’s dependence on Canada’s natural resources to level the battlefield.

In the wake of Mr. Trump’s recent swipe at Canada that “we don’t need anything they have,” officials here have strained to make the point that, yes, in fact, the U.S. does badly need what Canada has. Mr. Trump’s blunderbuss approach to tariffs would imperil a trusted raw-material feedstock for American capitalism that can’t easily or cheaply be replaced, they argue, and that will make life in the U.S. more expensive. Instead, the pitch goes, the two countries should co-operate to boost ties.

Implicit in that message, however, is a warning to America: That’s a nice free-flowing supply of commodities you’ve got there. It would be a shame if something happened to it.

Though nothing concrete has been put forward, federal and provincial officials have openly toyed with the idea of using export taxes or outright export restrictions to disrupt the shipment of key resources to the U.S.

Both measures would face immense political and economic hurdles to implementation, and they could easily backfire in Canada’s face. Yet the goal with both is the same: to project strength in trade talks with a new U.S. President who excels in using outlandish threats – such as his repeated taunt about annexing Canada – to pressure counterparts into inking deals.

And, if it comes down to it, to convince those closest to Mr. Trump that Canada is prepared to play hardball by ensuring American businesses and consumers face higher prices.

This past Thursday, federal Natural Resources Minister Jonathan Wilkinson said Canada is considering imposing taxes on exports of critical minerals to the U.S. He did not specify which critical minerals could be subject to tariffs, but earlier in the week, in a speech in Washington, he stressed how much the U.S. relies on Canada for uranium, potash, germanium, zinc, nickel, copper and graphite.

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When asked if measures beyond taxes, such as export restrictions or export bans, are under consideration, Mr. Wilkinson said that “nothing was off the table.”

If the U.S. proceeds with tariffs, Canada will “look to maximize the pain that is felt by American producers of goods and minimize the concurrent pain that is felt by Canadians.”

Driving this sentiment is a realization that the conventional norms of trade conflicts, which played out during Mr. Trump’s first term, may no longer apply. In that episode, Canada matched U.S. tariffs on items such as steel and aluminum. But it also targeted specific industries to strategically create political headaches for Republican politicians – such as duties on imports of Harley-Davidson motorcycles and bottles of Kentucky bourbon.

That approach is unlikely to work this time because Mr. Trump has surrounded himself with staunchly pro-tariff advisors and has learned how to press the levers of power, said Kevin Milligan, a professor of economics at the University of British Columbia.

“This will be a total trade war and restricting ourselves to putting cutesy tariffs on stuff is a strategic error,” Prof. Milligan said. “We need to find things that will make this White House feel pain, and targeting the things we have that America needs is the right way to think.”

He is quick to acknowledge export taxes or targeted export bans would invariably inflict a cost on Canadian companies, workers and government coffers, but he argues that it’s a necessary hardship.

“There are few things we can do to retaliate that won’t hurt us, but when the other side comes at you with a trade war, you can’t put your head in the sand,” he said.

This week The Globe and Mail reported the federal government plans to once again unveil targeted countertariffs on at least $37-billion of U.S. imports. No decision had yet been made about export taxes or export restrictions.

If Canada chooses to eventually go down the road of resource shakedowns, Ottawa has the tools it needs to take action, said Martha Harrison, an international trade lawyer at McCarthy Tétrault, though she admitted we’re in “unprecedented” territory.

Export taxes could be administered through an order by the Minister of Finance, while existing export and import permit legislation “broadly” gives Ottawa the authority to issue quotas and limit the volume of exports of a commodity, Ms. Harrison said.

Now, if the thought of the federal government taxing Canadian companies as part of a trade war with another country seems befuddling, that’s because the whole concept of a Trump-style tariff war is illogical.

In a situation in which the U.S. slaps an import tariff on Canadian goods, the importer – an American company – is the one that pays the duty to the U.S. government, then typically passes the higher cost on to its customers. An export tax flips that around. Instead, the exporter – a Canadian producer – pays the levy to the Canadian government, then typically passes the higher cost on to its foreign customers.

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If the product being exported is easy for U.S. buyers to purchase from elsewhere, such as pens or rubber balls, the exporting company in Canada likely wouldn’t get the price increase it asks for. But if you’re talking about critical minerals or energy products, which are much harder to substitute, the price hike should go through more easily.

Either way, American consumers ultimately end up paying a higher price.

There is one instance in history when Canada taxed its own resource exports as part of a trade dispute. During a softwood lumber battle with the U.S. in the mid-1980s, Washington intended to slap a 15-per-cent tariff on Canadian lumber shipments. Instead, Canada imposed its own 15-per-cent export tax as part of an agreement between Ottawa, the provinces and industry.

The arrangement still had the effect of making Canadian lumber more expensive for American buyers, but the money generated by the tax stayed in Canada and was distributed to the provinces, said Don Campbell, a senior strategy adviser with Norton Rose Fulbright Canada and a former deputy minister who headed up the softwood talks with the U.S.

That’s where Mr. Campbell said the similarities to the current crisis end.

“This time around we’re not talking about a specific industry being affected. It’s across the board, and you’d never get the support of industry and the provinces on a broader scale,” he said.

The suggestion of export taxes or restrictions has indeed met with a frosty reception in Canada’s Prairie provinces, which depend heavily on their resource sectors for jobs, growth and tax revenues. This week, Alberta Premier Danielle Smith refused to join her fellow first ministers in pledging to use “any and all tools” in Canada’s response to Mr. Trump’s tariffs, citing the prospect of Canada “cutting off energy supply to the U.S.”

Such political discord isn’t necessarily a bad thing, said Meredith Lilly, an international economics professor at Carleton University. Nor is the lack of detail on how Canada might use its natural resource birthright to take on Washington.

“The fact that clarity is not being provided and the U.S. is hearing mixed signals from Canada at this stage is actually the right move from a negotiating perspective,” she said. “It makes it difficult for the Americans to predict what they should do. Trump thrives on being unpredictable, and it works.”

Still, she said, “restricting exports should not be something that we’re reaching for willingly or hopefully at this point.” But as a last resort, it needs to be considered.

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Oil-flation

Total U.S. crude oil imports in 2023: US$165.2-billion

Canada’s share: 56 per cent

Oil is central to Mr. Trump’s obsession with putting tariffs on Canada, and how Canada could potentially fight back.

While Mr. Trump cited border security as a motivating factor for his tariff push, he regularly rails against Canada for taking advantage of the U.S., citing America’s trade deficit with this country.

Yet that deficit is entirely because America is hooked on affordable, reliable Canadian oil. In the first 11 months of 2024, the U.S. had a US$55.7-billion trade deficit with Canada, according to the U.S. Census Bureau. Without oil and gas, that number flips to a US$41.5-billion trade surplus.

Simply put, America needs Canada’s oil. In 2023, the U.S. produced an average of 12.9 million barrels per day of its own crude, yet consumed an average of 20.2 million barrels. Imports make up the difference, and more than half of them now come from Canada.

For that reason, many experts expect Mr. Trump will carve out a tariff exemption for Canadian oil to avoid pushing up gasoline prices. If he does, Canada must decide if it will apply its own trade restrictions on its oil to force Mr. Trump’s hand.

Premier Smith has slammed the idea, warning it would spark a “national unity crisis.”

Yet there are ways to potentially win over support from Alberta, which relies on the oil sector for about 20 per cent of provincial gross domestic product, according to a report by Charles St-Arnaud, chief economist at Alberta Central.

While curtailing oil exports would have the biggest negative impact on Alberta because it would lead to a sizeable reduction in production, an export tax “would be a less harmful retaliatory option,” he wrote, so long as the proceeds were returned directly to Alberta. “Doing so could ensure that U.S. consumers pay a greater share of the U.S. import tariffs at the pump while minimizing the impact of a reduction in revenues on the province.”

Yet there are many experts who doubt taxing the supply of Canadian oil to the U.S. would boost inflation there enough to justify the damage to the energy sector here.

Peter Tertzakian, the founder and president of Studio.Energy, estimates a 25-per-cent tariff would only push up some U.S. gasoline prices by 50 US cents – about where they were about a year ago.

Nor is Canada in a position to play hardball with the U.S. on oil.

“It’s hard to look tough when central Canada is not energy secure and gets most of its oil from the United States,” he said, warning the U.S. could respond to export restrictions by cutting off its own oil exports to Canada. “We have to understanding our limitations,” he said.

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Potash and the American dinner plate

Total U.S. fertilizer imports in 2023: US$9.1-billion

Canada share: 48.2 per cent

Agriculture is a powerful lever in any trade dispute, according to Murad Al-Katib. He should know. As the founder and chief executive officer of Regina-based AGT Food and Ingredients Inc., he oversees a processor of pulses and food ingredients that exports to more than 120 countries.

To him, potash, a pink mineral used as fertilizer, is one of Canada’s “strongest weapons”, since it’s a vital input for farmers across the U.S. Midwest, he said during a panel discussion hosted by The Globe this past Wednesday and focused on Mr. Trump’s inauguration.

Canada is the largest producer of potash worldwide, and the U.S. is its hungriest customer – Canada accounted for 77 per cent of U.S. potash imports between 2019 and 2022, along with other types of fertilizer. The U.S. itself, meanwhile, has far less potash on hand than its farmers require, and substituting the supply from Canada would be very difficult.

If fertilizer costs rise due to import or export tariffs, it could push up the price of food. “We’ve got to be very stoic in the recognition that we have true economic advantages that are beneficial to the U.S. economy,” said Mr. Katib.

Canola is another major Canadian export to the U.S. that is deeply integrated into the American food chain, and not just as the oil that McDonald’s fries are cooked in. Canola meal, a processing byproduct, is widely used as a source of high-protein feed for dairy cows and three-quarters of American canola meal is imported from Canada.

For the threat of export restrictions to be credible, it helps if suppliers have access to a ready market elsewhere, said Mr. Al-Katib. That’s certainly not always been the case with Canada’s resources, and this moment should serve as a wake-up call for Canada’s to focus on newer markets, such as India.

“Our growth is going to come in decades forward,” he said. “We need new markets in order to absorb that and not continue to increase our reliance” on the U.S.

— Kate Helmore

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Critical minerals, critical needs

Uranium

Canada is the biggest supplier of uranium to the U.S., providing 27 per cent of its imports in 2022. That’s enough Canadian uranium to power the equivalent of almost 20 million homes across the U.S., Mr. Wilkinson said this past week in a speech in Washington. “This enables the U.S. to reduce exposure to less reliable uranium producers such as Russia,” he said.

Saskatoon-based Cameco Corp. is one of the world’s largest uranium producers. More than 50 per cent of its committed uranium sales are earmarked for customers in the Americas.

Germanium

Germanium is used in fibre-optic networks, infrared vision systems and solar panels. Last month, China, which had been the biggest supplier of germanium to the U.S., halted exports to that country citing national security concerns. Canada is able to fill part of that gap. In 2023, Canada supplied 25 per cent of germanium imports to the U.S. Vancouver-based Teck Resources Ltd. is the only Canadian supplier of germanium to the U.S. Mr. Wilkinson earlier this week proposed a joint investment with the U.S. to bolster production of germanium at Teck’s Trail complex in British Columbia.

While B.C. Premier David Eby lauded that proposal, he has also kept the door open to a tougher approach: “I hope it doesn’t come to a point where Canada needs to impose export tariffs or export bans, and in fact I hope we don’t end up in a situation where there are tariffs at all placed by the Americas,” he said in a video post on X. “But should it come to it, I support the federal government taking the steps that are necessary.”

Nickel

The U.S. is highly dependent on Canadian nickel given that it has limited domestic production, with only one small mine in operation. Canada is by far the biggest source of imported nickel into the U.S., accounting for 46 per cent of its imports of primary metal where it is mainly used: in the production of steel. The second-biggest foreign supplier of nickel to the U.S. is Norway, which supplies 9 per cent.

Foreign mining giants Vale SA and Glencore PLC are the biggest nickel producers in Canada, with major operations in Ontario, Manitoba, Newfoundland and Labrador, and Quebec.

— Niall McGee

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Electricity: turn off the lights

Few politicians have been as forceful in their threat to cut America off from what Canada has to offer than Ontario Premier Doug Ford. But unlike the natural resources being considered elsewhere, Mr. Ford has vowed to leave millions of Americans in the dark.

In between touting closer economic ties between the U.S. and Canada as part of a “Fortress Am-Can”, Mr. Ford has said if Mr. Trump hits Canada with tariffs, the province would suspend the flow of electricity to 1.29 million homes in New York, Michigan and Minnesota – though the move carries risks of retaliation, since Ontario itself imports some of its electricity from the U.S.

“Nothing is more important than keeping every tool in our toolbox, no matter if it’s energy, or other commodities like high-grade nickel from Ontario, or aluminum from Quebec, (or) potash from Saskatchewan,” Mr. Ford said this week. “You don’t negotiate through weakness. You negotiate through strength.”

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