The US Tariff Shock Exposes Canada’s Real Trade Failure 

From: Jerzy Konieczny  
To: Trade diversification watchers  
Date: July 30, 2026 
Re: The US Tariff Shock Exposes Canada’s Real Trade Failure 

Last week’s announcements of sweeping new US tariffs on many Canadian products – including goods that qualify under CUSMA – are another reminder that Canada’s lack of export diversification is a strategic vulnerability. 

The issue is not that Canada trades too much with the United States. The issue is that Canadian firms capture a surprisingly small share of business opportunities elsewhere. 

Roughly three-quarters of the world economy lies outside the United States, yet Canadian firms earn far less export income from those markets than firms in other advanced economies. 

Proximity to the world’s largest economy has brought enormous benefits. But it may also have reduced the incentive to develop markets beyond North America. 

Two explanations are commonly offered for Canada’s lack of export diversification: geography and the large role of natural resources. Neither is sufficient. 

Geography explains why Canada trades heavily with the United States; it does not explain why Canada trades so little with everyone else. Resources help explain the composition of exports, but not the striking weakness of Canada’s presence in non-US markets. 

A simple comparison makes the point. Measure merchandise exports outside a country’s main trading partner as a share of GDP. On that basis, Canada ranks last among comparable advanced economies, even when, for European countries, exports to  the entire European Union are excluded. 

Excluding the United States, Canada’s merchandise exports amount to only about 6 percent of GDP. 

That figure is not merely low. It is anomalous. Even the United States, which exports much less relative to GDP than Canada does, sends a slightly larger share of its GDP to markets outside its principal trading partner, Canada. 

The contrast with peers is similarly revealing. Japan exports roughly 16 percent of GDP outside its main partner, the United States; Australia 8 percent outside China; and South Korea 29 percent outside China. Outside the entire EU, the United Kingdom exports about 10 percent of GDP and Germany about 15 percent.  

Austria offers perhaps the closest comparison. Like Canada, it borders a much larger country with which it shares a language. Yet Austria exports almost 26 percent of GDP outside Germany and 12 percent outside entire Europe.  

It is sometimes argued that Canada’s resource exports naturally flow south because the US market is nearby and transportation costs matter. They do, of course. But for many commodities, Canada’s abundant resources help explain what Canada exports, not necessarily where it exports. 

The same pattern appears in manufacturing, where resource endowments matter far less. Canada only sends only about 10 percent of its manufacturing output to non-US markets, far lower than most peers. 

For the United States it is about 17 percent; for Australia 14 percent; for Japan 20 percent; for South Korea about 33 percent and, outside the entire EU, for the United Kingdom 21 percent and for Germany 25 percent. 

Diversification is not a slogan. It requires sustained investment by governments and firms over many years. For decades, Canada has largely relied on privileged access to the US market instead. 

Trade agreements alone will not solve the problem. Canada already has agreements with Europe and much of the Indo-Pacific, yet the geography of Canadian exports has barely shifted. Market access on paper does not automatically create exporters in practice. 

Two structural constraints dominate. First, Canada’s infrastructure remains oriented north-south rather than toward transoceanic trade at scale. Second, firms face substantial fixed costs when entering distant markets: regulatory compliance, certification, distribution networks, after-sales service and local presence. Those costs deter many mid-sized exporters. 

Addressing this will require a joint effort by government and business. 

Ottawa should continue to strengthen east-west infrastructure; expand tidewater port and rail capacity; deepen export credit and risk insurance; and pursue regulatory mutual recognition in key sectors. Canada has already done this in pharmaceuticals with the EU and the United Kingdom, and in many industrial products under the Canada-EU CETA conformity-assessment protocol. Trade promotion should be concentrated where Canada has genuine comparative advantage, rather than spread thinly across every possible market. 

But policy cannot substitute for private initiative. Diversification ultimately requires firms willing to build markets beyond the United States. 

Exporters often say it is easier to ship to Buffalo than to Brussels. That may be true. But firms in the United States, Germany, Britain, Japan and South Korea also cross oceans to reach customers, and they succeed. Canada has deep diaspora and family networks around the world. It has no structural excuse for insularity. 

Encouraging examples already exist. Saskatchewan firms, for instance, have successfully expanded into new markets, demonstrating that diversification is possible when businesses and governments work together. 

Governments can negotiate trade agreements, improve infrastructure, provide export financing and organize trade missions. Helping more Canadian firms become exporters may ultimately matter as much as negotiating new agreements. Government action can help, but it cannot substitute for private initiative. 

Jerzy (Jurek) Konieczny, emeritus professor of economics at Wilfrid Laurier University is the editor of the Review of Economic Analysis. 

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.