Out and about giving presentations, two questions have been coming up a lot lately: 1) How do tariffs work; and 2) will President-elect Trump’s proposed tariffs on imports into the U.S. include Canadian oil and natural gas?

The latter is on the minds of a lot of Albertans because oil and gas exports to the U.S. are a major driver of the provincial economy. At $127 billion, Alberta’s oil and gas exports (including refined petroleum) accounted for over 80% of the province’s merchandise sales to the U.S. last year.

Back to tariffs.

A tariff is a tax (a.k.a. a fee) on an imported good or service imposed by a government to generate government revenue, encourage the development of an infant industry, or “protect” domestic suppliers. (A tariff could also be used to “punish” a country for things such as human rights violations or military aggression.)

For example: Country A imposes a 10% tariff on widgets from country B.* If a package of widgets is sold to a buyer in country A (e.g., a manufacturer that uses widgets or a store that sells them) for  $100, the buyer in country A pays $10 to the government of country A. As a result, widgets from country B are 10% more expensive in country A than they otherwise would be.

It can get complicated quickly with tariffs affecting everything from the exchange rate and the cost of production to retail prices, but the extra cost is typically paid by country A’s consumers or absorbed by country A’s buyers (leaving less capital for things like wages, new technology and returns to investors). The foreign seller might bear some or all of the cost of the tariff by lowering its prices, but this is not usually what happens.

Tariffs generate government revenue, but how do they “protect” domestic suppliers?

The idea is that by making a foreign good or service more expensive, domestic buyers are pressured to seek out domestic suppliers for those goods.

There is an ongoing debate about the pros and cons of this type of “protectionism.” For example, some argue that protectionist practices like tariffs are justified if a foreign supplier is “cheating” by not following the same environmental standards, is heavily subsidized, or is not paying its workers a decent wage. At the same time, tariffs raise costs and can lead to lower quality products as the positive effects of competition are reduced.

So what about Canadian oil and gas? Will the U.S. include or exclude this sector if it imposes new tariffs on Canada?

We won’t know for sure until the specifics of what the incoming Trump Administration plans to do are available and until we see if Canada can arrange an exemption of some sort—perhaps as part of the negotiations over the renewal of the Canada-United States-Mexico Agreement (CUSMA).** With that said, there are two key arguments why Canadian oil and gas may not face new U.S. tariffs:

1) Integration of the North American oil and industry - Canada’s oil and gas industry is highly integrated with the U.S. oil and gas industry. As such, a tariff on oil and gas flowing from Canada to the U.S. would “damage” rather than “protect” U.S. industry. And, even if U.S. refineries wanted to use more U.S. oil, many of them are specifically designed for the type of oil that comes from Alberta’s oil sands. Then there is the fact that many U.S. producers are focused on exporting to other countries rather than supplying the domestic market and this would not be easy to change.

2) Energy costs - Because a tariff on Canadian oil and gas would lead to higher prices at the pumps and on home heating and cooling bills, this runs counter to President-elect Trump’s pledge to cut energy bills by “more than half.” As Trump’s former U.S. Commerce Secretary Wilbur Ross recently said: “I can’t imagine that the [he] would want to tax [Canadian energy] because all it would do would be to raise our costs and not help anything with more American jobs.”

*This is called an ad valorem tariff because the fee is calculated as a percentage of the value of the product. There is also the option of a fixed-fee tariff (e.g., a $1,000 tariff on vehicles coming into a country).

**Under the CUSMA ) review clause, on July 1, 2026, the U.S., Mexico, and Canada will confirm in writing whether or not to continue the agreement.

Answer to the previous trivia question: Alberta has never surpassed the most populated province (Ontario) in GDP, but there was one month when it exported more goods internationally and that was July 2022.

Today’s trivia question: Notable protectionist Robert Walpole served as Prime Minister of what country?