Make America Great Again . . . With Tariffs?
The choirs of energy and economic experts are singing the same song: Tariffs are not the way to make America great again.
Free trade – trade with no tariff barriers – is a good thing. Don’t take my word for it. Here is what economist Henry George (1839-1897) had to say about it: “Blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protectionism teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.”
Perhaps Henry George is too antique for your taste. Here is what Kent Lassman, CEO of the Competitive Enterprise Institute, wrote in “The Case for Free Trade” in Project 2025, the Presidential Transition Project of the Heritage Foundation, “When people try something repeatedly and it still doesn’t work, they should stop doing it especially when the consequences turn out to be just what conservative economists have long predicted they would be. With tariffs, the proper reform is not only to get rid of the individual tariffs that have backfired, but also to build institutional safeguards against future abuse.”
However, the preceding chapter in Project 2025, “The Case for Fair Trade” by Peter Navarro, seems to have been more influential. That chapter takes the opposite point of view, and Navarro is now Senior Counselor for Trade and Manufacturing for U.S. President Donald Trump.
For the record, this author takes a middle course. Whereas tariffs, subsidies, and other barriers to free trade are in general injurious, as often pointed out in the economic literature, there are circumstances in which they are justified for non-economic reasons – for example, to encourage the development of a new industry, or to ensure the domestic supply of a critical commodity.
President Trump is proposing to indiscriminately levy widespread tariffs on the importation of foreign goods. This will be a good thing for some sectors of the economy, not so much for others. One of the big losers is likely to be the oil industry. This is ironic because this is an industry Trump has frequently identified as a favored economic sector, one which has a central role in addressing the National Energy Emergency. What is going on? We focus here on Canada and Mexico, on whom tariffs are scheduled to be imposed on March 4.
In recent years, substantial parts of U.S. refinery feedstocks have been Western Canadian Select and Mexican Maya crude. Despite the fancy names, neither of these are luxury petroleums like West Texas Intermediate (WTI). They are viscous, high-sulfur liquids that are hard to refine. Their marriage to sophisticated U.S. refineries that can deal with low grade oils has been a huge win-win. Our neighbors have a ready market for their inferior grades of oil, and U.S. refineries can take – at a significant discount from WTI – crudes that almost no one else can process as efficiently. We buy these low grade crudes cheap and turn them into gasoline and distillate, which are high value products that we very profitably export to other countries – including Mexico. It has been a two-way conveyor belt of money, textbook Adam Smith. Imposing tariffs on Mexican and Canadian crudes is extremely unlikely to speed up those conveyor belts.
In addition to the economic benefits, the integration of North American oil industries has provided a comforting margin of energy security. Politicians can repeat “drill, baby, drill” all they want, but the United States simply cannot produce the twenty million barrels of oil a day it consumes in its cars, trucks, locomotives, jet aircraft, stationary diesel engines, and petrochemical plants. We need foreign oil. If it doesn’t come from our neighbors, it has to come from places further away and potentially less friendly. Memories of the gasoline lines of the 1970s have faded but, as it is said, those who do not learn the lessons of history are doomed to repeat it.
The North American conveyor belts of money are not just about oil. They are also about steel. We have all seen pictures of drilling rigs, those miniature Eiffel Towers that are the symbols of “drill, baby, drill.” They are made of steel, but that is not where most of the steel is. There is far more steel underground in the form of oil country tubular goods – steel pipes which keep the wells from collapsing and which convey hydrocarbon fluids to the surface from crude oil and natural gas reservoirs miles deep. There are also huge amounts of steel in the several million miles of gas gathering pipelines, and hundreds of thousands of miles of long-distance oil, natural gas, and product pipelines, all of which need to be constantly extended. It is estimated that the announced twenty-five percent tariff on imported steel will increase U.S. domestic oil and natural gas production costs by five to ten percent.
From 2019 to 2023, Mexican exports of oil to the United States was trendless, varying between 500,000 and 700,000 barrels per day, but now seem to be decreasing. The new PEMEX 360,000 barrel per day Dos Bocas refinery has been slow to be commissioned, but once it is fully on line, probably in 2026, more Mexican heavy oil is likely to be diverted from the U.S. market. However, these losses are not expected to have much effect on the massive U.S. Gulf Coast refining industry, which has access to seaborne cargoes from the rest of the world. Mexican oil is nice to have, but not essential.
The Canadian situation is quite different. Canada now exports about four million barrels of oil a day to the United States, nearly twice as much as all other nations combined. Moreover, three-quarters of this oil goes to refineries in the Upper Midwest and Rocky Mountain states. Canada’s oil export capacity and the Midwest/Rockies import capacity are both limited by geography, producing a near monopoly-monopsony situation: the buyer has only one main seller and the seller has only one main buyer.
Any change of price affecting three million barrels of oil per day in a market comprising 30% of the population of the United States is going to be noticed. Perhaps this is the reason Trump dialed back his across-the-board 25% tariff on Mexican and Canadian goods to 10% for energy products from Canada.
To summarize, the chorus of energy analysts is joining the chorus of economists in singing the same tune: tariffs are a bad idea. The American oil industry is by many measures the strongest in the world. It is in no need of protection. During the 2024 presidential campaign, Trump claimed that he hadn’t read the Heritage Foundation Project 2025 plan. This is one of Trump’s few statements that no one challenged. Perhaps he would be well advised to have a look at both chapters on trade.
Dr. Robert L. Kleinberg is Senior Research Scholar at the Columbia University Center on Global Energy Policy and Senior Fellow at the Boston University Impact Measurement and Allocation Program. His principal interest is the intersection of technology and regulation.
Image: nikonka1/ Shutterstock.com.