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Almost four decades ago, the Mulroney government concluded the Canada-United States Free Trade Agreement with the aim to gain access to the much larger U.S. market. The Chrétien government followed in 1994 with the North American Free Trade Agreement that included Mexico, creating one of the largest trading blocs in the world.

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Despite trade frictions from time to time, all three countries benefited from higher economic growth and more jobs by removing many trade barriers, thus enabling import competition to improve productivity. Undoubtedly, NAFTA meant Canada would become even more dependent on the U.S. for trade than it was in the past.

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Following the successful export-led strategies pursued by Asian countries after the Second World War, China quickly grew into a superpower in just 40 years, grabbing global market shares in many key industries with its excess capacity. Unlike past economic liberalization, today’s world is more nationalistic, a point made by Yale historian Odd Arne Westad in his recently published book, The Coming Storm: Power, Conflict, and Warnings from History.

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Nationalism has given rise to protectionist policies including trade barriers and business subsidies in the name of “industrial policy.”  It was therefore no accident that Donald Trump won two elections in 2016 and 2024 with the promise to impose tariffs to counter trade deficits and deindustrialization as well as pay for his competitive tax cuts.

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Canadians did not expect the U.S. president’s insults and the aggressive behaviour toward his northern neighbour that started in 2025. With his “elbows up,” Prime Minister Mark Carney contends that the Canada-U.S. relationship is ruptured forever (whether that will be the case, time will tell). Hence, he argued that Canada should diversify its trade to lessen our dependence on America.

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Yet, trade diversification is not so simple. It works if free trade principles guide more exports to other countries, which has not happened in the past despite the trade agreements with Asia and Europe concluded in recent years. Instead, diversification pushed by government policy will come as a major cost to the Canadian economy with lost GDP and jobs.

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In 2025, 73 per cent of Canada’s exports were destined for the U.S. Key sectors remain heavily dependent on American trade: energy (84 per cent), motor vehicles and parts (92 per cent), chemicals, plastics and rubber (85 per cent), forest products (81 per cent) and consumer products (79 per cent). In total, over half of Canada’s merchandise exports are at least four-fifths dependent on the America market.

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Can Canada compete profitably in other markets to substitute for exports to the U.S. market? As shown in the table below, Canada is just one of many global competitors. When it comes to other major countries, Canada’s share of their imports is minuscule, even less than our share of world GDP (two per cent), except for the U.K. and the U.S.