The relationship between Canada and the United States has always been one of deep economic ties.
But now, trade tensions have thrown those ties into uncertainty.
US President Donald Trump has threatened sweeping 25% tariffs on Canadian goods, shaking investor confidence and putting Canada’s economic reliance on its southern neighbour under the spotlight.
The temporary pause in tariffs may have offered a moment to breathe, but the damage is already being felt.
Business investment is drying up, industries are rethinking their supply chains, and political leaders are scrambling to respond.
Is Canada too dependent on the US?
Trade has been at the heart of Canada’s economy for decades.
The 1988 Canada-US “Free Trade Agreement” was the beginning of the country’s deep economic integration, which was later strengthened by NAFTA in 1994 and the USMCA in 2020.
Today, 80% of Canada’s exports go to the U.S., making it one of the most trade-dependent economies in the world.
By comparison, Canada accounts for only 3% of the US economy.
The imbalance means the US holds more negotiating power, and Trump’s threats of tariffs have already exposed this weakness in Canada.
With such a heavy reliance on US trade, even the suggestion of tariffs has rattled investor confidence.
If the tariffs go through, Canada could face a severe economic shock, with potential job losses, rising consumer prices, and a slowdown in key industries like manufacturing and energy.
Trump is already aware that he holds the upper hand in this trade relationship, hence why he is claiming he wants to make Canada the “51st State.”
The trade deficit myth
Trump has framed the US trade deficit with Canada as proof that America is “subsidizing” its northern neighbor.
He has claimed the deficit is as high as $200 billion, although the actual figure in 2024 was $63 billion, which is just a fraction of the US’s overall $1.2 trillion trade deficit.
Source: Truth Social
More importantly, trade deficits are not subsidies.
The US runs a trade deficit because it consumes more than it produces, not because of unfair trade policies.
According to the US Census Bureau, Canada remains the largest buyer of US goods, purchasing $349.4 billion worth in 2024, more than Mexico or China.
At the same time, the US benefits from cheap Canadian exports, particularly oil and aluminum, which lower production costs for American industries.
Investment is already leaving Canada
The uncertainty alone has been enough to drive businesses out.
A recent KPMG survey found that nearly half of Canadian businesses plan to shift production or investment to the US to avoid potential tariffs.
This is particularly the case in the auto industry, where companies rely on seamless cross-border supply chains.
Auto parts made in Ontario can cross the border up to eight times before final assembly, meaning new trade barriers would significantly increase costs.
The Bank of Canada recently cut interest rates, partly in response to weakening business investment.
GDP per capita has declined in eight of the last nine quarters, and economists warn that Canada’s economy is ill-prepared for a trade war.
If investment continues to decline, job creation could slow, and economic growth could stagnate.
The energy factor: can Canada find new buyers?
One of Canada’s biggest exports to the US is energy.
Oil, natural gas, and electricity make up about one-third of Canada’s total exports.
If the U.S. imposes tariffs on these commodities, Canada could struggle to find alternative markets.
The country lacks the infrastructure to quickly redirect oil shipments to Asia or Europe.
At the same time, US refiners are heavily dependent on Canadian heavy crude, which their facilities are specifically designed to process.
While the US has ramped up domestic oil production, it still relies on Canadian imports to balance its refining needs.
Shutting off Canadian oil would create major disruptions in the US energy market, making it an unlikely target for tariffs.
A wake-up call for Canada’s economy
The biggest lesson from this crisis is that Canada needs to diversify its trade relationships.
Successive governments have talked about reducing dependence on the US, but little progress has been made.
Infrastructure constraints, regulatory barriers, and a lack of international trade agreements have kept Canada locked into its current trade patterns.
One immediate policy response has been renewed talks about removing interprovincial trade barriers.
Provinces are beginning to recognize that internal trade must improve if the country is to become more resilient.
There is also growing political will to invest in infrastructure, such as pipelines and ports, that could help Canada expand its reach to global markets.
The next Canadian government will have to make this crisis a top priority.
Economic resilience will require a mix of trade diversification, infrastructure investment, and regulatory reform.
Canada may not be able to escape its economic ties to the US, but it can certainly work toward reducing its vulnerability.
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