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Chemicals industry, freight rails brace for Trump tariffs on Canada, Mexico

A Canadian National Railway locomotive pulls a train through the CPKC Waterfront Layover Yard on August 21, 2024 in Vancouver, British Columbia, Canada. 
Andrew Chin | Getty Images News | Getty Images
  • President Donald Trump's threat to place 25% tariffs on Canadian and Mexican trade will hit U.S. industries and critical sectors far beyond autos.
  • Canada exports about 80% of the chlorine used to disinfect drinking water for the West Coast states, and overall, Canada is the No. 1 trading partner with the U.S. for critical chemicals.
  • The U.S. chemicals industry also has a huge export market for its products in Canada, and much of the cross-border trade is handled by freight railroads, with 15% of the total trade between the nations traveling by rail.

U.S. trade with Canada and Mexico is back in the crosshairs of the second Trump administration, with the threat made by President Trump to place 25% tariffs on goods from both North American border nations to start on February 1. Much of the focus has centered on autos and other consumer items, but Canada is also the top trading partner of the U.S. for critical chemicals, an industry now bracing for the potential impact.

In 2023, U.S. firms sold more than $28 billion in chemicals to customers in Canada and approximately $25 billion in chemicals from Canadian partners are exported to the U.S. annually, according to the American Chemistry Council. Canada is also a top critical mineral provider to the U.S. for EV battery production.

Mineral firms in Canada are considered domestic sources under Title III of the Defense Production Act and have received U.S. federal funding for critical minerals projects in Canada. The U.S. and Canada also have a Minerals Security Partnership along with additional countries to facilitate public and private sector coordination on critical minerals investments. Canada is the third-largest source of foreign direct investment in the United States ($671.7 billion).

Canada is also the largest supplier of U.S. energy imports, including crude oil, natural gas, and electricity. Canada's share of U.S. crude oil imports roughly doubled from 2013 to 2023.

Railroads play a critical role in the movement of chemicals across the U.S. and Canada given safety requirements for the cargo.

Rand Ghayad, chief economist at the Association of American Railroads, said the interconnected rail network between the U.S. and Canada is a cornerstone of North American trade, underpinning economic growth and supply chain resilience.

In 2023, rail transported approximately $113.8 billion worth of goods across the U.S.-Canada border, accounting for 15% of total trade between the two nations. According to AAR data, this included a balanced mix of imports and exports, with key commodities such as vehicles and parts, mineral fuels, and plastics driving industrial productivity. The top chemical-producing states — Texas, California, Louisiana, North Carolina, Illinois, Ohio, Indiana, New York, Pennsylvania, and Iowa — account for approximately 66% of total U.S. chemical production, with the rest imported.

The chemical industry is one of the largest customers in freight rail, according to the American Chemical Council, and Canada is the No. 1 source of chemical imports to the U.S., followed by China and South Korea. The latest annual chemical trade showed the U.S. imported $24.3 billion in chemicals from Canada (18.1% of total chemical imports in 2023).

Canada exports about 80% of chlorine to the U.S. that is used for chemicals to disinfect drinking water for the West Coast states, according to Eric Byer, CEO of the Alliance for Chemical Distribution. "This is just one example," said Byer. "The U.S.-Canada chemical trade relationship supports other trades."

Byer cited large amounts of phenol exported by the U.S. for use in the wood products industry in Canada, and once that wood is treated, some of that lumber is exported from Canada back into the U.S. for domestic consumption and home building. "If there is a trade war between the two countries, the price of critical chemicals could create inflationary pressures on U.S. consumers and industries," he said.

On Wall Street, though, the situation is being viewed as manageable. John Lovallo, UBS homebuilders and building products analyst, said while 25%-30% of U.S. framing lumber is imported from Canada, "a good chunk" could likely be resourced domestically, if needed. "Canadian lumber already carries pretty steep tariffs, so it's unclear how much more would be added under Trump," he said.

Josh Teitelbaum, senior counsel of Akin, which advises U.S. shippers, says the business community is pleased to see Trump take a gradual approach before moving forward with wide-ranging tariffs. Trump signed an executive order directing all government agencies to review unfair trade practices. Logistics experts tell CNBC U.S. shippers have not contacted them yet to frontload any product but they are cautious.

Teitelbaum said that the administration studies will be done quickly and will come with some tough recommendations. "President Trump is still the decider on his trade policy," he said. "He can move more quickly if he wants to, like on tariffs on Mexico and Canada. Given what we know President Trump ultimately wants on trade, this was a positive start to the administration."

Jason Miller, assistant professor of logistics in the department of supply chain management at Michigan State University's Eli Broad College, explained that one of the key reasons Canada and Mexico are such large trading partners with the U.S. is the fact the distance between the countries is shorter, translating into lower transportation costs in supply chain management.

Suppliers from Canada are closer to manufacturing plants in Michigan, Ohio, Indiana, and Wisconsin, than are some suppliers in the United States. "Think the integration of motor vehicle production between Detroit and Windsor," said Miller.

But he noted that Canada constitutes a large share of U.S. imports for various commodity goods, such as crude oil, natural gas, primary aluminum, soybean oil, lumber, and phosphatic fertilizers. "The fact Canada is such a source of intermediate inputs means that inflationary effects from tariffs will take some time to materialize (possibly apart from gasoline prices in the Midwest), as these costs will need to be passed through to end buyers," Miller said.

Mexico has been a source of constant trade rhetoric from Trump. It rose to be the No. 1 trading partner to the U.S., in part due to China's ability to circumvent U.S. tariffs under the USMCA deal that Trump's first administration negotiated. The role of autos in any new trade war can't be minimized, and is linked in a major way to the rail business. According to the AAR, seven out of 10 cars produced in Mexico are moving by freight rail. The Federal Reserve Bank of Chicago estimates about 80% to 85% of motor vehicles assembled in Mexico and destined for the U.S. and Canada are transported by rail.

But the concerns about the new trade battles are spreading far beyond autos.

Chris Spear, president of the American Trucking Association, said it is no surprise that Trump is turning to tariffs again to address specific policy issues. "We firmly support policies that will secure our borders and protect legitimate trade, but we must also recognize that imposing massive tariffs over the long-term could hurt the trucking industry and consumers as well," Spear said.

Stephen Lamar, CEO of the American Apparel and Footwear Association, warning these tariffs would lead to retaliatory tariffs, which will also be deeply damaging to the trade relationships, and undermine confidence in the USMCA. "Because so many U.S. fashion companies work with North American co-production partnerships to support the U.S. textile industry while providing a cost competitive near shoring option, a 25% tariff on our USMCA partners would be a particularly painful, self-inflicted injury that would raise costs and likely increase prices for many products," said Lamar. "Get ready for more expensive jeans, given that one in five of our denim pants come from Mexico.

"The only surprise on day one was the lack of tariffs," said Safiya Ghori-Ahmad, senior director of global public affairs for strategic advisory firm APCO. "President Trump will remain focused on our using tariffs as a bargaining chip globally, but this will be more acutely felt by our USMCA allies, Mexico and Canada. Both Mexico and Canada have a vested interest in working with the U.S., and I believe that they will find ways to work together to address China's unfair trade practices." 

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