Analysis: A Trade War Boon for Canadian Oil Industry?

When I’m wrong, I’m wrong. Early last decade I stayed bearish crude oil prices far too long, failing to foresee the Chinese oil consumption juggernaut. Last October, failing to foresee President Donald Trump wanting at least a few friends for his global trade war, I argued the North American Free Trade Agreement (NAFTA) was dead. Here and now, I do an about face. The combination of a successful NAFTA renegotiation and U.S.-initiated global trade war could have significant positive implications for Canada's oil and gas industry, assuming we gain access to tidewater and maintain relatively cordial international relations in a world gone awry.

In my defence, there were lots of reasons to be negative about NAFTA. The U.S. had been the leader of global free trade since the end of the Second World War, but this suddenly changed with the election of Trump to the presidency. Candidate Trump ran on an anti-free trade, “America First” platform, claiming that free trade agreements as a rule are rigged against the U.S., leading to large and ongoing bilateral trade deficits with numerous countries and substantial job losses, especially lower middle-class jobs in the manufacturing sector.

One of Trump’s first actions upon taking office in January 2017 was to pull the U.S. from the 2016 Trans-Pacific Partnership Agreement (TPPA) with Canada, Mexico and nine other Asia-Pacific countries, while letting negotiations for the Transatlantic Trade and Investment Partnership (TTIP) with Europe wither on the vine. In addition, Trump also threatened numerous times to pull the plug on the 2012 United States-Korea Free Trade Agreement (KORUS) with South Korea and the 1994 NAFTA treaty with Canada and Mexico.

On Oct. 17, at the news conference at the end of the fourth round of the NAFTA renegotiation, Canadian Foreign Affairs Minister Chrystia Freeland accused the U.S. of deliberately attempting to undermine NAFTA by adding a number of “unconventional” proposals over the previous two rounds of talks. These proposals included: a sunset clause that could end NAFTA after five years; an end to the binational dispute mechanism; the dismantling of the quota system for the Canadian dairy industry; strict Buy American rules for the U.S. government; and a requirement of at least 50 per cent U.S. content for automobiles produced in North America.

The first shots of the global trade war were fired at the end of January, with the Trump administration imposing tariffs on solar panels and washing machines, but the war did not begin in earnest until March 1 — when Trump indicated plans to impose tariffs on U.S. imports of steel and aluminum. The primary target of the war, based on Trump’s actions and rhetoric to date, is the People’s Republic of China, the rising superpower and challenger to America’s dominance of the world order. Important secondary targets of Trump’s trade war are the EU, especially Germany, as well as South Korea, and until recently, Mexico.

The first hint that I may be wrong about the NAFTA renegotiation came on March 8, when the Trump administration agreed to temporary tariff exemptions on imports of steel and aluminum from Canada and Mexico, with the understanding they would become permanent upon a successful renegotiation of the NAFTA treaty.

On March 20, there was further confirmation, with news of U.S. negotiators appearing to back down from their previous demand for a strict limit on U.S. content in automobiles produced in North America — the first significant concession on the part of the Americans. In addition, a number of sources, including Canada’s ambassador to the U.S., David MacNaughton, have noted a sudden warming of tone in the previously frosty talks as the Trump administration now appears keen on securing a quick NAFTA agreement.

The combination of a successful NAFTA renegotiation and a U.S.-initiated global trade war could be beneficial for Canada’s oil and gas industry in two interrelated ways — by decreasing competition for our oil and gas in foreign markets, especially Asian ones such as China and South Korea, by backing out U.S. sales; and by making Canada — and Mexico — even more important to America’s energy security and Trump’s goal of energy dominance.

Numerous countries have already threatened retaliatory trade actions against the U.S., with the Europeans possibly the most vehement — nothing like an ally scorned. In response to the steel and aluminum tariffs, which are to take effect on March 23, European Commission President Jean-Claude Junker said the EU was prepared to target imports of iconic U.S. brands such as Harley-Davidson motorcycles, Levi’s jeans and Kentucky bourbon whiskey.

Trump further escalated matters in one of his infamous tweets, threatening to slap an import tax on automobiles made in continental Europe in response, a trade action that would drastically increase the probability of the EU closing its borders to rapidly rising imports of crude, petroleum products and natural gas from the U.S. Despite the Trump administration doing more to harm transatlantic relations in a little over a year than Russia has accomplished since the end of the Second World War, the EU remains hopeful of a temporary exemption on the steel and aluminum tariffs at this late date.

In the months before the NAFTA renegotiation began on August 16, U.S. Energy Secretary Rick Perry made it abundantly clear that the Trump administration would like Canada and Mexico to forge a North American energy strategy with his country, something the U.S. should want all the more in a world of rising superpower rivalry and trade protectionism. Mexico is becoming an increasingly important market for U.S. natural gas and petroleum products, and a longstanding exporter of heavy crude to the U.S. There is substantial two-way traffic of crude, products and gas between Canada and the U.S., with Canada continuing to be a substantial net-exporter of these on the whole.

As long as Canada’s oil and gas industry can gain access to tidewater — with construction of additional oil pipeline capacity to the West Coast and LNG plants — and maintain relatively cordial foreign relations, increased oil and gas revenues from new international trade should more than make up for lost North American revenue. In this case, additional U.S. oil and gas would need to find a home in North America, given a loss of access to some offshore markets, and possibly lead to lower regional oil and gas prices as well. In 2017, Canada and Mexico combined already accounted for almost a third of America’s 6.34 million bbls/d of crude and petroleum product exports, and a whopping 82 per cent of its 8.68 bcf/d of natural gas exports.