Tariffs are back. President Donald Trump has threatened to levy tariffs on imports from not only China, but also longstanding US partners such as Canada, Mexico, and Colombia, among others. Raising import taxes on crude oil imports from these countries, especially Canada and Mexico, could have huge implications for US energy prices, especially in the US Midwest. A trade dispute could also have lasting geopolitical ramifications. Chinese refineries, for example, might use the uncertainty of US policy to grab market share at US exporters’ expense. Additionally, energy trading partners around the world might fear that the United States will use energy trade as a tool of political coercion. Given market realities and geopolitical risks, the administration should pause major actions on tariffs or at least exclude energy from any tariffs he does impose.
The Canadian energy partnership is a case in point. Canada is the United States’ largest crude oil partner, by far, and many landlocked US markets lack alternative suppliers. Through the first ten months of 2024, the True North comprised about 62 percent of all US crude oil imports. Mexico is also a significant player, accounting for about 7 percent of all crude oil imports over the same period (and more in markets along the southern border). It is also the largest purchaser of US natural gas and petroleum products, as well as a supplier of crude oil to US refineries.
Tariffs on Canada and Mexico, the two largest crude oil exporters to the United States, would have profound implications for US energy markets. That’s because crude oil imports, including from these two countries, are transformed by US refineries into crude products for domestic consumption or export.
Take heavy oil imports (HTS Code: 2709001000). Notice that Canada is by far the largest exporter of heavy crude oil to the United States. In some US markets, such as the Midwest, there is no alternative import supplier of heavy oil.
Nor can domestic US crude production completely replace imported crude. US crude oil production is typically of light, sweet grades, while the United States’ “complex” refineries are optimized to run on heavier grades—such as Canadian and Mexican crude. Indeed, imports account for about 39 percent of the crude used by domestic refineries.
Accordingly, if the United States imposes 25 percent tariffs on imports of Canadian crude oil, domestic energy prices would likely spike, especially in states in the US Midwest. Most of the economic literature suggests that costs would be passed on immediately to consumers in the form of higher retail gasoline and diesel prices.
Tariffs on crude oil imports will also impair US exports of crude products, like fuel oil, diesel, and gasoline. Additionally, over time there could be negative impacts on the US natural gas trade, as countries in Latin America, Europe, and Asia potentially see reliance on US supply as a political vulnerability. Mexico, the largest recipient of US oil and gas exports, could also look to liquefied natural gas (LNG) to hedge against the reliability of the US supply.
To see how tariffs could harm US exports, consider the recent US-Colombia trade spat. Due to a dispute over migration, Trump threatened a 25 percent tariff on Colombian imports, with a potential increase to 50 percent, while Colombia threatened its own retaliatory tariffs. While imports of Colombian crude only comprise about 3 percent of total US crude oil imports, this isn’t true across all markets and products. Colombia provides a significant amount of heavy crude oil imports (HTS Code: 2709001000) to the United States—and especially to Houston, where it shipped more than 137,000 barrels per day through the first eleven months of 2024, according to the US Census Bureau.
Since Houston exports more refined products than any other US district, tariffs on Colombian oil would, all things being equal, raise the prices of heavy US crude products, such as marine fuel, diesel, and gasoline. Accordingly, tariffs on Colombian (or Canadian, or Mexican) imports would likely make US exports relatively more expensive and therefore less competitive in international markets—even before considering second-order consequences, such as reciprocal tariffs.
Disruptions to US crude product exports could also have geopolitical ramifications across Latin America, including for the US-China competition. Several Latin American countries lack domestic refining capacity and rely on the United States for their energy security needs. To hedge against US unpredictability, Latin American countries may seek out other arrangements, including by finding alternative suppliers.
If US crude products become less attractive for importers across Latin America and beyond, China might attempt to exploit the opportunity. China is the world’s largest refinery market, by capacity, and its domestic gasoline and diesel demand may have already peaked due to a combination of electric vehicles and LNG for trucking. Accordingly, Chinese refineries may increasingly seek to export crude products abroad, including to Latin America, although it’s worth noting that Chinese global fuel exports are currently subject to export quotas.
US policymakers should think deeply before placing tariffs on energy imports to Canada or Mexico. Domestic markets will be impacted by higher taxes on crude oil imports because they will raise refiner acquisition costs. In many US markets, such as states in the US Midwest, there is no alternative to Canadian oil imports, so the inflationary impact will be immediate and likely proportional to the size of the tariff.
The United States should also not discount the potential impacts of retaliatory tariffs. While Mexico is most likely to retaliate against US tariffs by imposing duties on agricultural products, any serious reduction of US exports of natural gas or petroleum products to Mexico would sharply lower prices in the United States, potentially impacting domestic crude oil production. Refinery economics would be punished to the extent that importers substitute crude oil from other countries. If Mexico and Canada are targeted, there’s no question that Brazil, Argentina, and other major markets in Latin America will be watching as well. Rather than establishing US energy dominance, tariffs on energy products could accelerate the desire of major US hydrocarbon partners to diversify trade with other countries, including China.
Energy tariffs could impact the competition with China in other ways. Tariffs on Canadian electricity and advanced energy exports might hamstring the US artificial intelligence (AI) development complex and military capabilities. In 2023, the United States imported 33 terawatt hours of electricity from Canada, helping power US data centers needed for AI. If domestic electricity prices rise, then US AI capabilities would suffer. Additionally, Canada is a significant exporter of lithium-ion (Li-ion) batteries to the United States, and these batteries often have dual-use implications, including for drones. If the United States places tariffs on Canadian Li-ion imports, then it could diminish US and allied military capabilities.
Trump has made it clear that he seeks to address migration and fentanyl trafficking, and that he intends to do so with the threat and possible use of tariffs. These threats have certainly drawn the attention of US neighbors. But the short-term gains earned by threatening or imposing tariffs could lead to harmful direct and second-order consequences. A number of factors need to be weighed, and it would be useful if the administration paused major actions until its appointees were in place so they can provide strategic thoughts and input before precipitous actions are taken.
David Goldwyn is president of Goldwyn Global Strategies, LLC, chairman of the Atlantic Council Global Energy Center’s Energy Advisory Group, and the former special envoy and coordinator for international energy affairs at the US State Department.
Joseph Webster is a senior fellow at the Atlantic Council’s Global Energy Center and Indo-Pacific Security Initiative and editor of the independent China-Russia Report.
This article reflects their own personal opinions.
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Image: A general view of the Phillips 66 Company's Los Angeles Refinery, which processes domestic and imported crude oil into gasoline, diesel fuel, and other petroleum products, in Carson, California, US, March 11, 2022. Picture taken with a drone. Picture taken March 11, 2022. REUTERS/Bing Guan.