November 27, 2024 - President-elect Donald Trump Nov. 25 promised to impose 25% tariffs on all products imported from Canada and Mexico, as well as 10% tariffs on goods entering from China, in a move that could have significant energy sector implications — should Trump follow through on the warning.

In social media posts, Trump said the proposed tariffs would be in place from day one until Mexico and Canada cracked down on drug flows and illegal immigration into the US; Trump also tied tariffs on China to a call for tougher policies on Fentanyl.

Because the president-elect has favored tariffs as a tool in international diplomacy and economic policy, it is unclear whether the tariffs will ultimately materialize as described or serve as leverage ahead of negotiations.

Canada and Mexico are the US' top trading partners for energy-related goods, and the US-Mexico-Canada Agreement — a trade pact between the three countries signed during Trump's first term — is scheduled for review in 2026.

Canadian products comprised the largest share of energy-related imports into the US in 2023, at 48.5% of the total, or $126.8 billion. Mexico came in second at 9.3% or $24.3 billion, according to the US International Trade Commission.

Canada is by far the largest supplier of imported crude in the US, reflecting over half of the total 6.3 million b/d in August, US Energy Information Administration data showed.

The proposal for a 25% tariff on imports from Canada and Mexico would drive up costs for US refiners who depend on heavy and medium crudes from both countries and would likely pass those costs on to consumers via higher refined products prices, experts said. 

Uncertain Prospects 

Manav Gupta, analyst with UBS, in a research note however, said it was not clear at this point if crude will be included or excluded from the potential tariffs.

"I seriously doubt that the tariffs are intended to cover commodities because the energy systems both on the US-Canadian border and the US-Mexican border are so closely intertwined," said David Goldwyn, president of the international energy consultancy Goldwyn Global Strategies. He suggested that there are no substitutes for some of the US energy imports on a seasonal basis, and retaliatory tariffs could be "really devastating" because of the high volume of gas and refined products shipped to Mexico.

Joshua Zive, senior principal at Bracewell, said Trump could use either the International Emergency Economic Power Act or Section 232 of the Trade Expansion Act, which has national security tariffs provisions, to carry out his plan.

"[E]ither of these tools provide the president pretty broad authority so that the president could probably do this," Zive said. "The bigger question is whether he actually intends on imposing those tariffs or [is] just threatening them in order to secure some commitments on narcotics and or immigration, and that's still, I think, the more likely scenario right now."

Zive suggested the potential for economic disruption and price shocks could ultimately persuade Trump not to impose the tariffs. "The energy sector is one that's going to be hit most dramatically by these sorts of tariffs, given the energy trade across our southern border," he said.

Trump campaigned on lowering inflation and cutting energy costs. Oil and gas interests already have sought to make the case that any future across-the-board tariffs should exclude energy on the front end — so as to align with Trump's broader goal of advancing energy infrastructure development, increasing production and lowering prices.

Some experts anticipated exemptions for energy imports to avoid increased costs for consumers.

Cross-Border Flows 

As for US energy exports, Mexico was the top recipient of US energy-related products, valued at $46.6 billion, or 14% of the total, in 2023. Canada came in third, with $29.4 billion, or 8.8%, in US energy exports to the US' northern neighbor that year, the ITC data showed.

The US and Mexico have a synergistic relationship when it comes to natural gas. Mexico is an important outlet for US gas production, and the country to the south relies heavily on US gas supply, particularly for industry, as it lacks the resources to develop its own reserves.

US gas flows to Mexico have averaged almost 6.4 Bcf/d this year, a record high, and strong growth is expected out to 2029 thanks to rising demand in Mexico, both domestically and for exports.

The US and Canadian gas markets also are closely interconnected.

Net Canada-US flows have been over 5.7 Bcf/d during 2024, their highest since 2016, but could drop from 2025 as Canada begins to export LNG. The majority of Canadian exports flow to the Pacific Northwest, with much of it then flowing further south to California. The US Northeast imported an average 1 Bcf/d during January and exported an average 600 MMcf/d to Canada during May. 

Metals, Renewables 

The proposed tariffs could make US more dependent on China for some metals, some industry officials said.

Canada supplies the US with about half of its nickel needs, Pierre Gratton, president and CEO of the Mining Association of Canada. "It could lead to the US importing nickel from Indonesia instead, which would then increase US dependence on Chinese production, as China dominates nickel production in that country," Gratton said.

As for the solar sector, the vast majority of imports for solar modules and cells come from Southeast Asia, rather than Canada, Mexico and China.

The US imported 15 GW of solar panels and 4.2 GW of cells in the third quarter of 2024 according to S&P Global Market Intelligence Global Trade Analytics Suite data. The US imported 8.4% of its panels from India, 11.8% from Cambodia, 13.4% from Malaysia, 23% from Thailand and 32.5% from Vietnam and 11% from the rest of the world. For cells, the US imported 3.7% from Laos, 4% from Vietnam, 19.9% from South Korea, 27.6% from Thailand and 37.3% from Malaysia with 7% from the rest of the world.

Executives at Fluence Energy Inc. said the energy storage technology developer would not be materially impacted by an additional 10% tariff on battery cell imports from China, even if there could be some "short-term" market disruptions.

Duties on US imports of Chinese battery cells for use in the energy storage industry already are set to increase to 25% in 2026 from 7.5% currently.

"If the tariff is raised even further or ahead of the current schedule, it could cause some short-term disruptions in the market, while the markets digest the new prices," Fluence Energy President and CEO Julian Nebreda told equity analysts on a Nov. 26 earnings call.