Oil/gas exporters have demanded “optionality” for years, why not provide more market options for all Canadian export sectors?
In 1988, I voted in a Saskatchewan riding for the Conservative candidate because I backed free trade, the defining issue of that election. Critics of the deal warned that becoming even more dependent on one trading partner would come back to haunt Canada. Not even they, however, could have anticipated Donald Trump.
One Canada’s birthday that 30-year old warning seems downright prescient as the federal government’s tariffs countermeasures come into effect today. About $16.6 billion worth of US products will be affected by surtaxes, including $5.6 billion of steel products (25%), $2.7 billion of aluminum products (10%), and $8.3 billion of select consumer products (10%).
Caught up as we are in our angst at the unfairness of the tariffs and Trump’s stupid rationalization of them – WE’RE security threats?!? Canada?!? – this might be a good time to take a moment to consider what comes next.
Canadians should keep in mind we’re only 18 months into Trump’s presidency. And it appears that year and a half has just been a warm up.
Let’s ask ourselves this question: does anyone want to bet against a Trump victory in 2020? Or a Mike Pence (or a Pence-like facsimilie) win in 2024 and 2028?
The very real possibility exists that the current White House approach to trade could last long enough to become structural, to be the new normal.
While the Trudeau Government’s trade countermeasures may be appropriate in the short-term, a medium-to long-term trade war with an increasingly erratic and irrational United States government is definitely not in Canada’s best interests.
So, what should Canada do?
How about take a cue from Alberta oil and gas producers.
Oil companies, in particular, have long argued for “optionality,” which simply means being tied to one customer (99% of crude oil exports head south of the border) is bad for business.
The United States may be awash in light sweet crude oil, thanks to rapid expansion of the shale basins, but American refineries still import a lot of heavy crude, about four million b/d according to a recent IHS MarkIt study, Looking South: A Canadian perspective on the US Gulf Coast heavy oil market.
With Venezuela’s economic implosion and preciptious drop in heavy crude production, US Gulf Coast refineries need Alberta heavy crude more than ever. The IHS study estimates that Canada already supplies about 800,000 b/d of heavy to the Gulf Coast. American heavy crude refinery capacity has actually risen by 130,000 b/d over the past five years.
The US Gulf Coast has been an attractive market for Canadian heavy crude oil, says Kevin Birn, director of the Oil Sands Dialogue for IHS MarkIt, but the system that supports those exports doesn’t always work well.
“Keystone XL – which has been mired in regulatory for delays for a decade – is the poster child for a trade system that is sometimes inefficient and sometimes breaks down. Which is why we need the optionality for Canada to move its crude offshore in the face of things like NAFTA renegotiations,” he said in an interview.
“Americans will think in terms of security of supply and Canadians should think of it as security of demand.”
In 1988 Canada negotiated away inefficient trade protection for, in part, security of demand from the United States.
If Trump is reneging on that compact, and I’m not sure how one could argue he isn’t, then Canada has every right to pursue security of demand in more stable markets.
Again, Canada can follow the lead of Alberta oil producers and look to Asia. In fact, why not use crude oil as the leading edge of this strategy?
In my June 2 column, I argued that if Prime Minister Justin Trudeau wants to send a pointed message to Trump he should announce that Canada will build the northern energy infrastructure corridor already pioneered by Eagle Spirit Energy and, in a somewhat different form, endorsed by the Canadian Senate and Transportation Minister Marc Garneau.
I still think that’s a legitimate response to what appears to be an escalating trade war with the United States.
But pipeline corridors and more pipelines take a long time to plan and execute.
Canada needs to send a message today.
That message should be that Canada can no longer rely on its historic trading partner and that in the future Ottawa will be promoting “optionality” for all exporting sectors.
Canada doesn’t have to abandon existing American markets, but if Trump is willing to disrupt Canada’s “demand security” for no good reason, then the Trudeau government should put more effort into developing markets that can provide that security.
Foreign Affairs Minister Chrystia Freeland says that Canada has always been a “safe, secure and reliable” supplier steel and aluminum to the United States and that Trump’s tariffs are “protectionist and illegal” under international trade rules.
“The real solution to this unfortunate and unprecedented dispute is for the United States to rescind its tariffs on our steel and aluminum,” she said.
Maybe that isn’t the only solution.
Maybe the time has come to announce to the United States and the rest of the world that “optionality” is the new principle for Canadian trade development.
Ottawa has made progress by negotiating free trade agreements like the Trans-Pacific Partnership (Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam) and CETA (Canada-European Union Comprehensive Economic and Trade Agreement).
Perhaps this effort could be accelerated because, clearly, Canada needs more secure and reliable trading partners.