When President Donald Trump signed an executive order in April to impose a tariff on Canadian softwood lumber, the administration and its supporters heralded the move as an equalizing measure meant to bolster domestic timber production.
For Trump, the tariff was the latest move meant to build on his “America First” campaign platform. The action his administration took amounted to a tariff in the form of an import tax totaling around 20 percent for softwood lumber imports from Canada. Commerce Secretary Wilbur Ross estimated the measure could result in $1 billion a year from Canadian lumber imports, which make up about one-third of the U.S. lumber market.
But the tactic — and others like it that have been floated by the White House — has the potential to stem not just this type of trade, but also a burgeoning cross-border energy industry at the heart of Trump’s economic priorities.
According to the Congressional Research Service, the value of the energy trade between the United States and its North American neighbors exceeded $140 billion in 2015, with $100 billion in U.S. energy imports and over $40 billion in exports.
Many segments of North American energy trade are growing, too, including cross-border sales of hydropower and wind energy as well as oil and gas. All of that could be jeopardized by the Trump administration’s plans to renegotiate the North American Free Trade Agreement that went into effect in 1994.
“When you look at our industry, and our business is a global industry, we are trying to find the places where we have the greatest opportunity, but also where we are welcomed and provide certainty,” the American Petroleum Institute’s president and CEO, Jack Gerard, said at a recent NAFTA panel sponsored by the Bipartisan Policy Center.
“The situation in Mexico in particular — and it has been in Canada for many years — provides great certainty for us now, and so anything that would discourage that or create uncertainty would have a tendency to chill the very economic activity that I think we all want to see and we all want to achieve.”
Trouble With Timber
For Canada, the timber action represented the latest salvo in increasing trade hostilities, and the country began to investigate retaliatory actions, including the potential blockade of U.S. thermal coal exports through its Vancouver shipping terminal — one of the major export facilities for U.S. coal to its Asian markets. (Thermal coal is used for power production as opposed to coal used to make coke for metal production.)
In a May 5 letter to Prime Minister Justin Trudeau, British Columbia Premier Sally Clark requested that the Canadian government stop the exports through her province as a means to reduce greenhouse gas emissions.
“For many years, a high volume of U.S. thermal coal has been shipped though [British Columbia] on its way to Asia,” Clark wrote. “It’s not good for the environment, but friends and trading partners cooperate, so we haven’t pressed the issue with the federal government that regulates the port.”
She added, “Clearly, the United States is taking a different approach.”
In 2016, 6.2 million tons of U.S. thermal coal moved through the Vancouver port, and the shipping center estimates that total is only likely to grow as U.S. shipping centers in states like California, Oregon and Washington continue to face environmental opposition.
Trudeau, for his part, responded in May that Clark’s proposal was under consideration by the government, partly in response to the trade restrictions imposed by the Trump administration
This tit-for-tat represents the stakes at play as the Trump administration looks to upend trade relations with its North American neighbors. And as Congress looks to influence how the administration goes about reworking and renegotiating the North American Free Trade Agreement, the cross-border energy considerations may prove vital to any outcome.
“Could it be in play? Yes,” says Senate Energy and Natural Resources Chairwoman Lisa Murkowski, a Republican from oil-and-gas-rich Alaska. “But, hopefully, there is a very keen recognition — and it’s not just with Canada, but with Mexico as well — making sure you have that continuity and certainty there.”
In a May 30 letter sent by a bipartisan group of 60 House members to U.S. Trade Representative Robert Lighthizer, lawmakers led by New York Republican Tom Reed and Alabama Democrat Terri A. Sewell urged that any negotiation on NAFTA recognize and maintain energy supplies that ensure an energy-independent North America.
“Ensuring the United States has unimpeded access to crucial energy supplies is vital for our national security,” the group wrote. “Given the strategic and economic relationship with Canada and Mexico, the United States is better off securing its energy supplies on the continent than from less reliable sources.”
The letter brought together unlikely co-signers from across the political spectrum, including signatures from Rep. Bobby L. Rush of Illinois, the top Democrat on the Energy and Commerce Energy Subcommittee, and Texas conservative Louie Gohmert.
That bipartisanship shows the breadth of geographic areas affected by the cross-border energy trade.
The Flow of Oil
Nowhere is that energy relationship bigger than the crude oil trade.
While the United States outproduces Mexico and Canada in crude oil production — mainly attributable to its increase in shale gas and oil production over the past decade — the U.S. in 2015 was a net importer of approximately 2.7 million barrels per day of crude oil from Canada, according to Energy Information Administration.
That was a 75 percent increase from 2006, and it makes Canada the United States’ largest provider of imported crude oil. The imports were worth approximately $47 billion, according to the Census Bureau.
U.S. crude exports to Canada, meanwhile, have increased 1,700 percent since 2006, totaling 427,000 barrels per day in 2015. Analysts predict that trend will continue to rise.
Energy trade between Mexico and the United States leans heavier on refined petroleum products — like motor oil, gasoline or propane. The United States had a $14.7 billion trading surplus on petroleum products with Mexico in 2015, exporting 690,000 barrels of refined product a day to the country, according to the EIA.
Much of that refined material stemmed from imported crude oil from Mexico, which is then sold right back to the country after the refining process, supporting close to 3,000 jobs alone in Houston, according to the American Petroleum Institute.
Mexico also imports the vast majority of its natural gas from the United States — as much as 81 percent, according to the CRS report. In the past decade, the country has made a sharp turn toward natural gas-fired electricity generation.
Natural gas pipelines cross U.S. borders at 40 different locations — 24 at the Canadian border and 16 at Mexico’s. Six main pipelines carry crude oil from Canada to the U.S.
Sensing a threat to North American co-dependency in the Trump administration’s protectionist attitudes, the oil lobby has begun exerting its influence on cross-border energy trade.
“The geopolitics of energy around the globe has changed dramatically, and North America is really becoming the epicenter of energy in the world, something nobody would have thought about 10 years ago,” said the API’s Gerard.
“That interdependency today . . . greatly benefits the United States of America,” he added. “I think we want to take a deep breath and think long and hard about how we approach any potential changes, and then clearly understand the implications.”
Those are some of the same arguments that conservative groups, such as Freedom Partners backed by the Koch brothers, had made about the border adjustment tax, which has fallen out of favor as a revenue solution in a potential tax code overhaul.
According to a report by Freedom Partners, petroleum importers would have seen an additional $10 billion in taxes had the border tax existed in 2016, resulting in a gas price increase of 30 to 40 cents a gallon.
Oil-state senators have been the most vocal opponents of a border adjustment tax. In a June 8 letter to Lighthizer, a group of eight senators led by Texas Republican John Cornyn and North Dakota Democrat Heidi Heitkamp argued that any changes to NAFTA should not affect the energy trade.
“Free trade — and free trade agreements such as NAFTA — allows the United States to maximize the benefits of being the world’s largest energy producer,” the letter said.
The group sent an outline of energy points that any new agreement should contain: the free flow of energy products across borders, zero tariffs on energy products, open access for U.S. investors for Canadian and Mexican energy markets and the protection and safeguard of investor and intellectual property rights, consistent with U.S. law.
It’s not just commodity trade under threat from a change to cross-border policies. Infrastructure and energy transmission are as interconnected between the countries as the oil and natural gas trade, and maintaining and upgrading those facilities depends on bilateral cooperation.
Take the Columbia River Treaty. The 1964 agreement set the stage for United States-Canada collaboration on the construction of four dams and more than 100 hydropower stations, with power from them shared across British Columbia and the Pacific Northwest.
Hydroelectric plants in the Columbia River Basin account for 29 gigawatts of generating capacity and produced 44 percent of U.S. hydroelectric generation in 2012, according to the EIA.
The treaty is under review by both parties, with infrastructure upgrades and environmental considerations at the center of those ongoing negotiations. And there are fears that other squabbles could enter the talks.
“On both sides of the border, we need to make infrastructure investments, but right now, there are a bunch of other issues that are getting thrown into the larger U.S.-Canada discussion,” says Washington Democratic Sen. Maria Cantwell. “It’s frustrating because our farmers and the economy in the Northwest depend on that good effective hydro system to work.”
Hydropower from Canada is the largest source of U.S. electricity imports, largely benefiting consumers in the Northeast, including a portion of the power for New York City, with hopes of more in the future.
In total, according to the CRS, “the value of electricity imports from Canada to the United States rose (overall) from approximately $1.9 billion in 2011 to about $2.95 billion in 2015.” The total value going the other way equaled approximately $300 million.
While those import figures represent less than 1.5 percent of total U.S. electric generation in 2015, the interconnectedness of the two countries’ grids also provides a safety blanket for grid reliability in case of power outages or disruptions.
“In addition to trade benefits, the heavy integration of the U.S. and Canadian grids improves grid reliability in both countries—a critical benefit not necessarily reflected in electricity volumes,” the CRS said in its report.
The future of that transmission relationship is set to grow, especially as it relates to the trade of renewable generation. New transmission lines connecting the two countries are popping up across the northern border.
For instance, the Montana-Alberta transmission line went into operation in 2013 connecting wind facilities on both sides of the border. Meanwhile, companies in New England and Minnesota are in the process of obtaining permits for new transmission lines connecting to Canadian hydro resources.