25% Tariff Imminent in the US-Canada-Mexico Trade War

Amid escalating trade tensions, President Donald Trump has threatened to impose 25% tariffs on goods from Canada and Mexico starting February 1. While much attention is focused on automobiles and consumer goods, the chemical industry is bracing for potential impacts, given its critical trade relationship with Canada.

According to the American Chemistry Council, U.S. companies sold over $28 billion worth of chemicals to Canadian customers in 2023, while Canada exported approximately $25 billion in chemicals to the U.S. Furthermore, Canada is a key supplier of minerals essential for electric vehicle battery production.

The Defense Production Act recognizes Canadian mineral companies as domestic resources, allowing them access to U.S. federal funding for critical projects. The U.S. and Canada have established partnerships to ensure mineral security and facilitate investments in this sector. Notably, Canada ranks as the third-largest foreign direct investment source for the U.S., contributing $671.7 billion.

Canada is also the largest supplier of energy imports to the U.S., including crude oil, natural gas, and electricity. The share of Canadian crude oil imports to the U.S. has roughly doubled from 2013 to 2023.

Given safety requirements for transporting goods, railroads play a vital role in the movement of chemicals between the U.S. and Canada. Rand Ghayad, chief economist at the Association of American Railroads, stated that the interconnected rail network is pivotal for North American trade, supporting economic growth and supply chain resilience. In 2023, railroads transported approximately $113.8 billion worth of goods across the U.S.-Canada border, accounting for 15% of total trade between the two nations.

The chemical industry is a major client of rail freight, with Canada being the largest source of chemical imports for the U.S., followed by China and South Korea. In 2023, the U.S. imported $24.3 billion in chemicals from Canada, which made up 18.1% of total chemical imports.

Eric Byer, CEO of the Alliance for Chemical Distribution, pointed out that Canada exports about 80% of the chlorine used for disinfecting drinking water in the western U.S. He noted, “This is just one example of how U.S.-Canada chemical trade supports broader trade.”

Byer further illustrated that significant amounts of phenol exported to Canada are used in the wood products industry, which could impact prices if a trade war ensues. He warned that the cost of key chemicals could lead to inflationary pressures for consumers and industries in the U.S.

However, Wall Street considers the situation manageable. John Lovallo, a UBS analyst, indicated that while 25%-30% of framing lumber is imported from Canada, a considerable portion could be sourced domestically if necessary. He added, “Canadian lumber already faces substantial tariffs, so it’s unclear how many additional tariffs will be imposed.”

Josh Teitelbaum, a senior legal advisor at Akin, noted that businesses are relieved to see a gradual approach from Trump before implementing broad tariffs. The President has signed an executive order directing government agencies to review unfair trade practices, and logistics experts report that U.S. shippers have yet to contact them about preemptive shipments, although caution is prevalent.

Teitelbaum remarked that government studies would soon conclude, potentially leading to stringent recommendations. “President Trump remains the decision-maker on trade policy,” he said, suggesting that he could act quickly if desired.

Jason Miller, a logistics professor at Michigan State University, explained that one key reason Canada and Mexico are primary trading partners is their proximity, which reduces transportation costs. For example, Canadian suppliers are closer to manufacturing plants in states like Michigan, Ohio, and Indiana, enhancing supply chain efficiency.

However, Canada significantly contributes to various U.S. imports, including crude oil, natural gas, aluminum, soybean oil, lumber, and phosphate fertilizers. Miller cautioned that the inflationary effects of tariffs may take time to materialize, potentially impacting gasoline prices in the Midwest sooner than other products.

Mexico has been a focal point of Trump’s trade rhetoric, with the U.S.-Mexico-Canada Agreement (USMCA) reshaping trade dynamics. The role of automobiles cannot be understated, as 70% of cars produced in Mexico are transported via freight rail. The Federal Reserve Bank of Chicago estimates that 80%-85% of automobiles assembled in Mexico and shipped to the U.S. and Canada are moved by rail.

Chris Spear, president of the American Trucking Association, emphasized that it’s not surprising for Trump to leverage tariffs to address specific policy issues. He stated, “We strongly support policies that ensure border security and protect legitimate trade, but we must also recognize that long-term tariffs could harm the trucking industry and consumers.”

Stephen Lamar, CEO of the American Apparel and Footwear Association, warned that such tariffs could lead to retaliatory measures, severely damaging trade relations and undermining confidence in the USMCA. He stated, “Imposing 25% tariffs on our partners will be a painful self-inflicted wound, increasing costs and potentially raising prices on many products.” He added, “With one-fifth of our jeans imported from Mexico, consumers should brace for more expensive denim.”

Safiya Ghori-Ahmad, senior director at APCO, noted that the only surprise was the absence of immediate tariffs. “President Trump will continue to use tariffs as a negotiating tool, but our USMCA allies, Mexico and Canada, will feel this impact more acutely. Both nations have a vested interest in collaborating with the U.S., and I believe they will find common ground to address unfair trade practices from China.”