Will Trade Diversification Work for Canada?

Mark Carney’s Trade Diversification Strategy

Mark Carney’s Davos speech (Jan 20) framed a decisive rupture in the post‑war multilateral economic order: the old rules no longer guarantee stability or prosperity, and countries — including middle powers like Canada — must diversify away from overreliance on unpredictable superpowers. Carney urged Canada to reduce dependence on the U.S., seek new trade relationships (illustrated by his China visit and a limited EV import agreement), and prepare for a more fragmented global trade environment. Domestically his message won praise but exposed political risks: provincial tensions (notably Alberta separatist sentiment and a resurgent Québec sovereigntist movement), partisan shifts in Ottawa, and fragile federal‑provincial relations complicate implementation. Renewal of CUSMA remains uncertain amid U.S. tariffs and political unpredictability; public anxiety and economic nationalism have risen. Key points:

• Carney’s central claim: the post‑war multilateral economic order has ruptured; a return to past multilateralism is unlikely.
• Policy implication for Canada: diversify trade partners, reduce dependence on an unpredictable U.S., and build resilience to sectoral tariffs and trade shocks.
• International and domestic reactions mixed: praise from some middle powers, pushback from the Trump administration, and political friction at home (provincial disagreements, Alberta separatist activity, and a strengthened Québec sovereigntist movement).
• CUSMA renewal and Canada–U.S. trade relations remain uncertain; sectoral tariffs and U.S. unpredictability fuel economic anxiety and consumer responses (boycotts, reduced travel).

Canada’s Huge Internal Trade Problem

A recent IMF Report notes that Canada is one of the world’s most open countries internationally, but its internal market remains fragmented by provincial and territorial policy differences. New analysis estimates these non-geographic barriers are equivalent to an average 9% tariff nationally and are much higher in services (sometimes 40%+). Eliminating internal trade frictions would raise long-run real GDP by about 7% (~C$210 billion), with the largest gains coming from liberalizing services and removing barriers in economy-wide enablers like finance, transport, and telecommunications. Reforms require cooperative federalism: mutual recognition, targeted exceptions, benchmarking, and federal catalytic incentives. This is also a sore point with the United States and will probably be raised during the upcoming trade negotiations in a few months. Main points:

• Internal barriers are large: estimated average equivalent of a 9% tariff across Canada; services bear the biggest burden.
• Economic gains: full removal of non-geographic barriers could lift real GDP ~7% (≈C$210 billion) mainly via higher productivity and better allocation of capital and labour.
• Distribution: smaller and remote provinces would see largest percentage gains; all provinces benefit in absolute terms through integrated supply chains.
• Priority reforms: focus first on services and economy-wide enablers (finance, transport, telecom, professional licensing) to amplify broader gains.
• Implementation: success needs cooperative federalism—mutual recognition, transparent exceptions, benchmarking, and federal leadership via incentives and convening.

History of US-Canada Trade Friction

Canada’s long economic dependence on the United States and repeated U.S. protectionist moves — from 19th‑century tariffs through Nixon’s 1971 “shocks” to Trump’s 2018 tariffs — has forced Canada to react, rethink and diversify.

It has been a long-standing policy objective in Canada since the 1970s under the government of then Prime Minister Pierre Trudeau for a ‘third option’ to move trade beyond North America. Thus, what the current Prime Minister Mark Carney is doing is not new.

Canadian trade policy has often been defensive and reactive, prompting shifts such as the Macdonald Commission’s embrace of freer trade, efforts to diversify toward Europe and Asia, and recent initiatives to attract foreign investment and reduce U.S. vulnerability. That U.S. unilateralism creates both danger and opportunity for Canada to update strategy and institutions for a different global economy. Key points:

• Canada’s economy has historically been highly dependent on one market (the U.S.), making it vulnerable to U.S. protectionist measures across decades.
• Major episodes (e.g., Nixon’s 1971 policies, the Auto Pact disputes, Trump’s tariffs) revealed Canada’s exposure and eroded trust in the U.S. as a stable partner.
• Canadian responses included diversification efforts, investment screening and promotion (e.g., Foreign Investment Review Agency, Invest in Canada hub) and policy shifts toward freer trade (Macdonald Commission, CETA, CPTPP).
• The current environment is both a threat and an opportunity: Canada can use openings created by U.S. withdrawal from multilateral deals to deepen ties with other markets and modernize domestic trade and investment policy.

Implimentation and Practical Issues

Canada’s Prime Minister Mark Carney has declared a Cabinet-wide push to reduce dependence on the United States for trade after rising U.S. protectionism under Trump.

There are several problems that make it difficult to carry out this strategy. First is the the fact that Canada is right next to the United States. With the huge economy of over 30 Trillion USD versus about 2 Trillion USD for Canada, the size of the US economy is 15 times or more the Canadian one. Thus, according to the Gravity Model of international economics, Canada’s trade will be dependent on the US. The gravity model is similiar to the one in physics with analogy being the US has gravitational pull and Canada being a much smaller economy right next to US means that most trade will be with the US. Another reason is that Canada exports lots of energy and minerals and transport costs mean the US is still the most viable destination.

In short, Canada’s trade remains heavily U.S.-centric, and history, distance, existing supply chains (notably China’s regional dominance), and infrastructure gaps (e.g., LNG) make rapid redirection of exports difficult. Subsidies to push exports into the region risk replacing efficient U.S. trade with less efficient, taxpayer-subsidized trade across oceans. Greater near-term gains likely lie in expanding Canada’s services trade—especially with the U.S.—but this requires significant regulatory and trade-agreement work (e.g., CUSMA). Policymakers should prioritize deepening regional ties within North America and be cautious about costly, indirect subsidies targeting the Indo-Pacific.

As noted earlier, the government is racing to diversify exports — prioritizing Europe, the Middle East, China and India — and aims to double non-U.S. exports within a decade. The effort has produced an adminstrative problem of overlapping ministerial roles, an unfinished official diversification strategy, and political debate about priorities, transparency and feasibility. Key points:

• Urgency and scope: Carney treats U.S. trade pressure as a generational shift, ordering Cabinet-wide “trade diversification” efforts across sectors and ministries.
• Current dependence: About two-thirds of Canada’s economy is trade-driven and roughly 75% of exports go to the U.S., prompting the push to find new markets.
• Priorities and tools: Europe is the top long-term target (CETA under‑used), defense exports and dual-use goods are being leveraged, and the Gulf, China and India are next on the outreach list.
• Coordination and transparency problems: New portfolios and overlapping mandates (trade, industry, defense, foreign affairs) have created confusion; the promised diversification roadmap has been delayed and lacks public detail.
• Political and strategic trade-offs: The pivot includes riskier engagement with China and India while avoiding some sensitive tech ties (AI); Conservatives criticize a lack of clear results and transparency in U.S. negotiations.