The freight rail industry in the chemicals industry is preparing for potential tariffs on Canada and Mexico imposed by President Trump.

• The imposition of 25% tariffs on Canadian and Mexican trade by President Donald Trump will have a significant impact on U.S. industries and essential sectors beyond the automotive industry.
• The West Coast states rely heavily on Canada for the chlorine used to disinfect their drinking water, with Canada being the top trading partner with the U.S. for essential chemicals.
• The chemicals industry in the U.S. has a significant export market in Canada, with freight railroads handling much of the cross-border trade, accounting for 15% of the total trade between the nations.

The second Trump administration has put U.S. trade with Canada and Mexico back in the spotlight, with President Trump threatening to impose 25% tariffs on goods from both North American countries starting in February. While much attention has been given to the impact on autos and consumer items, Canada is also the top trading partner of the U.S. for critical chemicals, an industry that is now preparing for the potential fallout.

In 2023, U.S. companies sold over $28 billion in chemicals to Canadian customers, while approximately $25 billion in chemicals from Canadian partners are exported to the U.S. annually, according to the American Chemistry Council. Additionally, Canada is a leading supplier of critical minerals to the U.S. for the production of electric vehicle batteries.

Canadian mineral firms are classified as domestic sources under Title III of the Defense Production Act and have received U.S. federal funding for critical minerals projects in Canada. Additionally, the U.S. and Canada have a Minerals Security Partnership with other countries to enhance public and private sector coordination on critical minerals investments. Canada is the third-largest source of foreign direct investment in the United States, with $671.7 billion invested.

Aside from being the largest supplier of U.S. energy imports, Canada's share of crude oil imports nearly doubled from 2013 to 2023.

The transportation of chemicals across the U.S. and Canada relies heavily on railroads due to safety regulations for the cargo.

The interconnected rail network between the U.S. and Canada is a vital component of North American trade, driving economic growth and ensuring supply chain resilience, according to Rand Ghayad, chief economist at the Association of American Railroads.

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. 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.

In 2023, the U.S. imported $24.3 billion in chemicals from Canada, which accounts for 18.1% of total chemical imports, making Canada the No. 1 source of chemical imports to the U.S., followed by China and South Korea. The chemical industry is one of the largest customers in freight rail, according to the American Chemical Council.

The U.S.-Canada chemical trade relationship supports other trades, as seen in the fact that Canada exports about 80% of chlorine to the U.S., which is used for chemicals to disinfect drinking water for the West Coast states, according to Eric Byer, CEO of the Alliance for Chemical Distribution.

If a trade war occurs between the U.S. and Canada, the cost of essential chemicals may increase, leading to inflationary pressures on American consumers and businesses.

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

Akin's senior counsel, Josh Teitelbaum, states that the business community is content with Trump's gradual approach to imposing wide-ranging tariffs. Trump has issued an executive order directing all government agencies to review unfair trade practices. Logistics experts report that U.S. shippers have not yet contacted them to frontload any products, but they are cautious.

Teitelbaum stated that the administration's studies will be completed swiftly and will include stringent recommendations. He added that President Trump retains the final say on his trade policy and can act more quickly if desired, such as on tariffs with Mexico and Canada. Given the information available, Teitelbaum considered this a positive beginning for the administration's trade policy.

The reason for Canada and Mexico's significant trade partnership with the U.S. is due to the shorter distance between the countries, resulting in lower transportation costs in supply chain management, as explained by Jason Miller, assistant professor of logistics at Michigan State University's Eli Broad College.

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

Trump has frequently used Mexico as a subject of his trade rhetoric. Despite China's ability to evade US tariffs under the USMCA deal, Mexico has become the US's top trading partner. The automotive industry plays a significant role in any potential trade conflict, and is closely linked to the rail business. According to the AAR, 70% of cars produced in Mexico are transported by freight rail. The Federal Reserve Bank of Chicago estimates that 80-85% of motor vehicles assembled in Mexico and destined for the US and Canada are transported by rail.

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

The American Trucking Association's president, Chris Spear, stated that it is not surprising that Trump is turning to tariffs again to tackle specific policy issues. While Spear supports policies that secure borders and protect legitimate trade, he emphasized that imposing massive tariffs in the long run could harm the trucking industry and consumers.

Stephen Lamar, CEO of the American Apparel and Footwear Association, warned that tariffs on USMCA partners would lead to retaliatory tariffs, harm trade relationships, and undermine confidence in the USMCA. "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," Lamar said. "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." As a result, one in five of our denim pants come from Mexico, and consumers can expect to pay more for jeans due to the increased costs.

"Safiya Ghori-Ahmad, senior director of global public affairs for strategic advisory firm APCO, stated that the only surprise on day one was the absence of tariffs. President Trump will continue to use tariffs as a bargaining chip globally, but this will be more intensely felt by USMCA allies, Mexico and Canada. Both countries have a stake in working with the U.S., and I believe they will find ways to collaborate to address China's unfair trade practices."