North American energy and minerals industries brace for trade war

Energy products and minerals will likely be on the frontline of a North American trade war if Donald Trump imposes tariffs on imports from Canada and Mexico, former trade negotiators said Thursday.

Trump is expected to impose tariffs of up to 25% on imports from Mexico and Canada shortly after his inauguration in Washington on Monday.

That could unleash a trade war between the three countries. Natural resources such as oil and gas are likely to be in the crosshairs of any dispute, especially between the US and Canada.

"This is a very aggressive action and we're going to have to respond," Steve Verheul, Canada's chief negotiator during the talks on the United States-Mexico-Canada (USMCA) trade agreement, said Thursday.

"From Canada's perspective, probably our most effective levers are going to be in the resources sector, whether it's critical minerals or oil and gas," Verheul said, speaking during a webinar hosted by the Wilson Center, a US-based foreign policy thinktank.

Retaliatory actions from Canada will focus on what Verheul called the country's "key points of leverage: energy, critical minerals, various natural resources that the US does not produce enough to supply its own needs. They rely heavily on Canada."

The American Fuel & Petrochemical Manufacturers (AFPM) association estimates that about 60% of crude imports in the US come from Canada, while about 11% come from Mexico's federal oil company Pemex.

Mexican retaliation

"Mexico without a doubt will retaliate... very likely in the same degree as the US," Juan Carlos Baker, Mexico's undersecretary of foreign trade during the USMCA negotiations, told the webinar. 

Baker did not specify which imports from the US might be targeted by Mexico for retaliatory action.

When choosing which products to target, the Mexican government would consider factors such as their political impact, the potential contribution to inflation, and whether there are alternative sources of supply.

Baker said any tariffs levied by the US would also be a breach of the USMCA treaty.

In the event of US tariffs being imposed, Mexico would likely initiate a dispute settlement panel under the auspices of the USMCA, Baker said.

USMCA review

The tariff threat comes as the clock ticks down to a scheduled review of the USMCA in 2026.

Participants in the webinar said that of the various scenarios for 2026, it was most likely that the three countries would not immediately decide to extend the agreement.

Instead, the USMCA would be subject to annual reviews for the following 10 years.

"The most likely outcome is that we have a graduated constant negotiation,” Earl Anthony Wayne, former US ambassador to Mexico, told the webinar. “I just don't think Trump is going to give away his leverage. He's going to want to maintain that ability to intervene.... to push both parties to give more in certain areas.”

Trump will not have it all his own way in the negotiations, Wayne said.

"If he starts raising prices and raising supply problems for US companies, that's going to be very costly to him. He has a lot of supporters from states that are gaining a lot from the trade with Mexico and Canada."

"It's in the interest of all three countries that the USMCA survives," Verheul said. "If not, we're going to be in a worse place. I hope common sense prevails."