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‘The consequences only mount’: Trevor Tombe on why oil and gas should not be used in a tariff trade war with Trump

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United Conservative Party leader Danielle Smith addresses party members in Red Deer, Alta., on Nov. 2, 2024. Jeff McIntosh/The Canadian Press.

Trevor Tombe, Hub contributor and professor of economics at the University of Calgary joins managing editor Harrison Lowman to discuss where oil and gas exports should fit in Canada’s response to potential American tariffs.

You can read Trevor’s full analysis here.

The following is an automated transcript. If you are quoting from or referencing this episode, please refer to the audio to verify.

HARRISON LOWMAN: Hello everyone. Welcome to the latest edition of up to speed, The Hubs YouTube program where we talk to our contributors about their articles this week. Today, we welcome Trevor Tombe. He is a professor of economics at the University of Calgary. Trevor, thank you so much for joining us today. Really appreciate it.

TREVOR TOMBE: Thanks for having me on. Really great to be here.

HARRISON LOWMAN: You’re welcome. Okay, so we’re in chaotic times here in Canada, much talk of us out the gate using our strongest weapon in terms of this retaliatory trade war, restricting or taxing oil and gas exports to the US. You wrote a column for us this week entitled Premier Smith is right that restricting oil exports is a bad idea. Here’s a better option. First question, I want you to give us a sense of the whole picture here, when it comes to US exports, what are the top three? Say, sectors that Canadian workers and businesses you know, earn the most money from? Can you give us a sense for our listeners?

TREVOR TOMBE: Yeah, that’s right. So the graph that we’re looking at here, the first one in the piece, really traces out where income earned by Canadians, workers, businesses, governments, too, comes from, in terms of our exports to the United States and far and away, the top source of income generated by exports to the United States is oil and gas. If we think about motor vehicle manufacturing, which many you know probably intuitively think of as an important export commodity, and it is an important export item for Canada, generates about $11 billion a year, in contrast to oil and gas is nearly 150 billion now you know this changes from one year to the next depending on commodity prices, but without a doubt, the contribution from oil and gas exports to income, and ultimately, GDP in Canada is enormous, and part of the reason for this is motor vehicles and manufacturing generally does Use a lot of imported parts.

You know, about $100 billion worth of our exports to the US is made up of imports from the US in terms of component parts. And so not all of our exports generate income in Canada. And in part, that’s why you have a much smaller amount of income generated by motor vehicles than you might guess, other important sectors, wholesale, metal manufacturing, professional services and so on. But they’re all considerably less in oil and gas. So for oil and gas, how many Canadian jobs do they provide overall? That was another graph. I think you provided it. Yeah, that’s right. That’s a great question too. So you can think about the employees who are associated with the production of oil and gas that’s exported to the US. But you wouldn’t want to stop there. You’d also want to look at jobs that are indirectly affected by oil and gas. These are the suppliers to the exporters, and we have some great data on this. And the latest from 2022 is about 230,000 jobs in Canada are accounted for by exports to the United States, or supported by exports to the United States, and that is the largest sector in terms of employment generated by those exports. The second largest sector is professional, scientific and technical services, not because they export a lot directly, but supplier relationships matter as well. Motor Vehicles does matter, but that’s at about 84,000 jobs. So about 1/3 of the total employment that we find due to oil and gas extraction exports to the US.

HARRISON LOWMAN: One of the things I was surprised by in your piece is, how many of the oil and gas jobs exist outside of Alberta? Do you have a sense of what that looks like in the pie graph?

TREVOR TOMBE: Yeah, about 40% of the oil and gas. Sorry. The jobs in oil and gas tied to exports to the United States are outside of Alberta, and that’s because the sector does buy a considerable amount of inputs, whether capital goods or services, financial services from Quebec, for example, it buys inputs from across the country, and so supports employments nationally.

HARRISON LOWMAN: What would the effect be of restricting or taxing the oil and gas exports. What do you point to?

TREVOR TOMBE: So it sort of depends on how the restriction is done. You know, if we put a tax on those exports, that would have the effect of lowering the price effectively received by producers here by the amount of the tax. And of course, it would generate revenue. And so then we’d have a have to have a conversation about what’s done with that revenue to understand the full implications of it. But you know, we send four, four and a half million barrels a day to the United States, and so a $1 per barrel change is quite significant and relative to current prices, if we’re thinkingAbout things on the order of 25% like we have with the tariffs being floated by the US administration, that could be a considerable drop in the price received by producers here. Then longer term, the consequences only mount, because you would have changes, likely reductions in investment levels planned by producers in that sector, and so you might depress the whole future growth trajectory of the sector. So it’s not just a short term consequence, but also a long term one.

HARRISON LOWMAN: I know you’re not advocating for that within the oil and gas sector, but also, let’s be clear, you’re not advocating for restricting or taxing auto exports as well, right?

TREVOR TOMBE: That’s right, yeah, so I would suggest that shutting down the auto sector to retaliate against the US is also unwise. I think retaliation we need to keep in mind what its purpose is. I certainly understand the instinct to retaliate in the face of tariffs. Many do want to fight for the sake of it, but the goal is ultimately to change the US, behavior if they do levy tariffs, to have them change their mind. And so retaliation is meant to do that, and the way in which it might work is if we can enact a policy here that induces economic costs to be incurred in the United States. That’s very difficult for a small country to do. You know, if we put a tariff on imports in our imports from the United States, that doesn’t really get shifted to US producers. That’s ultimately a tax on Canadian consumers. And so it’s enough for them to actually feel it. We’re not a large share of demand for US output for almost anything. And so in order for us to have a hope of having a tariff that causes an economic cost in the US, we would need to be a much larger buyer of certain items than we are. And so I’d say that back in 1971 the last time the US implemented broad tariffs, kind of across the board, we didn’t retaliate then, and I think that maybe is the route to go now, engage on other issues, try and think about addressing some of the concerns raised by the United States, whether we think they have merit or not, and so border security. We’ve seen some moves by the federal government to spend more on border security, and I think, to their credits, and we might see more of that thinking about accelerating timelines on boosting military spending and so on. But I think what I point out in the piece that we should think about a little more than we are is how do we shrink the trade deficit that the US has with Canada? That is by far the number one item cited more frequently by President Trump than almost any other issue, and it’s something that results, at least in part, because of financial outflows from Canada.

If we were to take steps to improve the investment environment, strengthen productivity growth, really boost the economy, improve investment incentives in Canada, either through tax reform, regulatory improvements, a long list of economic policy changes we could think of, and we start to then generate more investment and capital inflows into Canada that’ll have the effect of raising the value of the Canadian dollar. That would have the effect of making imports from our perspective cheaper, that would make the exports from the Americans perspective more expensive, and so the trade deficit would shrink, and conceivably, we could have a large enough change that it might turn into a trade surplus. So measures that we should really just take you know whether or not there are trade disruptions with the state’s efforts to boost our economy and turn around what has been a really disappointing few years in terms of productivity and economic growth, that can also help, ultimately take off the table the key source of concern of the president.

HARRISON LOWMAN: You say, if we’re going to retaliate, it should be smart retaliation. I think that’s the term you used in your piece.

TREVOR TOMBE: yeah, and smart in the sense that really keep in mind what we’re trying to do with retaliation, and that is change behavior in the States. And so retaliation, if we’re going to do it, it would be on, you know, a very small set of targeted products that might be useful as a component in a government relations or public relations campaign in the States. And so some have talked about putting a tariff on Tennessee whiskey or Kentucky bourbon, or certain kind of visible products that are important for certain constituencies in the states connected to influential decision makers in Congress, and from the Canadian consumers perspective, you know those who enjoy Tennessee whiskey, I can appreciate that that would be a strain on them in terms of higher prices, but ultimately not something that would really disrupt the economy overall. These would be on items that we could substitute pretty easily into other things. And so that’s the type of retaliation that for non economic PR or marketing or communications purposes. We might think about levying those, I’ll leave those. I think for people who know how public opinion can be, can be shifted, and maybe even that would backfire. But 80% of our trade is is basically in the form of capital goods and intermediate inputs. And definitely, we do not want to put a tariff on things that we use to make goods and services. It would disrupt the very structure of Canada’s production that would ultimately drag productivity and economic growth even further, without much economic consequence in the States at all, just because we are a relatively small market. So it’s a trade war and a PR war.

HARRISON LOWMAN: I’m going to end in this just because you mentioned PR, because I’m in Ontario and you’re in Alberta. I know I’m being a bit cheeky here, and you’re not a political scientist, but just maybe putting a political scientist hat on for a sec here, given that we, Premier Smith, I think, has tweeted your article out. You know, you providing the numbers for the a lot of, a lot of the arguments that her government’s making and trying to convince people here in Ontario about, what do you make of this idea that folks here in Ontario, say, Ontario or sorry, Alberta is being precious here. It needs to be an all hands on deck approach, and we do need to float or threaten these oil and gas restrictions as a retaliatory response that Alberta, quote, unquote, needs to do its bit for the country. How do you sort through all that?

TREVOR TOMBE: So it is easy to say that when the economic costs are not borne largely by Ontario, I think, though, importantly, there would be economic consequences of an oil and gas export restriction nationally. It is not just resource producing provinces that benefit from oil and gas exports, as we noted at the top 40% of the jobs connected to those exports are outside of Alberta. But those are costs that are maybe not top of mind, but picture what it would how people might react in Ontario if one were to suggest that maybe we should cut off the Ambassador Bridge in retaliation, you know, like, really disrupt auto parts and the auto sector in order to have Michigan incur some economic costs. You know, in order for a threat to be taken seriously, I think it needs to be credible. It has to be something where we would follow through on it, be able to sustain it, and at least in the case of oil and gas export restrictions, it would be incredibly costly for the Canadian economy overall, in terms of lost incomes, lost jobs, and ultimately, not something that would damage the US enough to make them change behavior. Indeed, as I note in the piece some really, I think, really smart insight from my colleague here, who is a political scientist at the U of C, Lisa Young, noted that it would provide the administration with potential cover by being able to blame high gas prices in the Midwest on Canada’s export restrictions on oil and gas, rather than The administration’s tariff policies. So we do need to be smart not threaten things that we won’t follow through on. And all options really shouldn’t be on the table. You know, bad ideas really shouldn’t be let’s just have good ideas on the table and talk through those and try and get through this with the least damage to Canada’s economy.

HARRISON LOWMAN: Well, I hope we did our bit here for that alliance between Ontarians and Albertans today. So I thank you for that. That is Trevor Tombe. He is a professor of economics at the University of Calgary. We thank him so much for joining us today on up to speed.

The Hub Staff

The Hub’s mission is to create and curate news, analysis, and insights about a dynamic and better future for Canada in a single online information source.

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