While tariff threats pose immediate challenges, the long-term concern is the structural vulnerability of Canada’s economy, writes professor Paramjit Singh
Perspectives is a new series written by University of Niagara Falls Canada professors, offering in-depth insights into the pressing issues shaping our world. This article does not represent any official position of the university. It is the personal opinions of the author.
The past few weeks have been tumultuous for Canada following President Donald Trump's tariff threats on Canadian goods and services entering the U.S. In response, Canada decided to impose counter-tariffs on U.S. exports, raising concerns about a potential trade war between the two neighbours. With tariffs now being imposed, Canada will face major challenges such as slower economic growth, rising unemployment, and higher inflation. However, this stand-off reveals a deeper issue: Canada's heavy economic dependence on the U.S. While Trump's now-implemented tariffs pose immediate challenges, the long-term concern is the structural vulnerability of Canada’s economy due to overreliance on the U.S. market. Before exploring the implications of these tariffs, it is crucial to understand the roots of Canada's economic dependence.
Roots of Canadian vulnerability
Canada is a highly trade-dependent nation, with total exports accounting for nearly a quarter of its GDP and supporting over 3.6 million jobs in 2022, according to Statistics Canada1. Understanding its trade relationship with the United States is crucial in this context, as exports to the U.S. alone made up 17.8% of Canada’s GDP and generated over 2.4 million jobs. According to Global Affairs Canada, nearly $3.6 billion (US$2.7 billion) worth of goods and services crossed the Canada-U.S. border daily in 2023, reinforcing their status as each other's largest trading partners.2
However, Canada’s heavy reliance on the U.S. market is a critical concern. Statistics Canada data reveals that trade outside the U.S. accounts for only 23% of Canada’s overall trade and contributes just 5% to GDP. Canada’s top exports to the U.S. include energy, machinery and equipment, and minerals, with oil and gas extraction and transport equipment manufacturing particularly dependent—74% and 54% of their output, respectively, is destined for the U.S.3
But this relationship is not just about exports. Canada is also the largest buyer of U.S. goods, making it the top export market for American products. In the first three quarters of 2024, nearly US$350 billion in U.S. goods and services flowed into Canada. Canadian imports from the U.S. span various sectors, including vehicles and automotive parts, industrial machinery, electrical equipment such as computers and telecommunications devices, and agricultural products like grains, fruits, vegetables, and meat.
Despite this deep economic integration, discussions about the U.S. trade deficit with Canada persist. The reality is that this deficit is primarily driven by energy imports. Excluding energy, the trade balance tilts in favor of the U.S., highlighting an asymmetrical relationship that leaves Canada vulnerable to shifts in U.S. trade policies and economic conditions.
The consequences of a potential trade war
Tariffs affect multiple aspects of an economy, including spending, trade flows, government revenue, exchange rates, employment, GDP, and inflation. The latest Monetary Policy Report from the Bank of Canada discusses the significant economic disruption that U.S. import tariffs could cause in Canada. These tariffs make Canadian exports more expensive for U.S. citizens and businesses, reducing their competitiveness and leading to a decline in export volumes. Because these tariffs may apply to other U.S. trading partners – including Mexico and China, it will have global ripple effects, reducing trade volumes and lowering global GDP by disrupting integrated supply chains and trade agreements. This reduced global demand puts downward pressure on commodity prices, including oil—a major Canadian export—further impacting the country’s trade balance. A reduced export demand can cause the Canadian dollar to depreciate. A weaker Canadian dollar makes imports to Canada more expensive, which could contribute to inflation in the country.4
If Canada proceeds with its announced retaliatory tariffs—25% on $155 billion worth of U.S. goods—the economic impact will be felt domestically as well. U.S. imports make up approximately 13% of Canada’s Consumer Price Index (CPI) basket. With the imposition of counter-tariffs, these goods will become more expensive. When businesses and households struggle to find non-tariffed substitutes due to capacity constraints, it will result in slower economic growth and higher inflation. While the impact is less severe when viable substitutes are available, even then, economic growth prospects will be dampened.5
The repercussions extend to employment as well. In 2020, U.S. trade directly and indirectly supported over 2 million jobs across Canada’s provinces, now facing growing uncertainty. Some estimates claim that a prolonged trade war could push Canada’s unemployment rate up by 2 to 3 percentage points.6
Time to introspect?
Canada has long believed that deep economic integration with the U.S. would serve its best interests, promoting economic stability and minimizing political risks. This belief has shaped Canada’s approach of aligning closely with its southern neighbor, often acting as the perfect pliant ally. However, Trump’s actions have dispelled this assumption, revealing the limits of this approach. It is crucial to understand that this issue goes beyond tariffs—it signals that the U.S. is likely to continue using its economic power to secure ‘voluntary’ concessions on matters such as border control, immigration policy, military spending, and resource access, as a recurring feature of its foreign policy.
Perhaps it is time to revisit the ‘Third Option’ former Canadian External Affairs Minister Mitchell Sharp introduced in response to Canada’s growing economic dependence on the U.S. in the 1970s. Sharp outlined three strategies: maintaining the status quo with the U.S., deepening integration, or pursuing the Third Option—a long-term strategy aimed at reducing Canada’s vulnerability through trade diversification, domestic industrial investment, and greater economic self-sufficiency.7
As Canada grapples with persistent challenges to its economic autonomy, restructuring the economy to reduce dependence on the U.S. is imperative. This delinking from the U.S. involves diversifying trade partners by strengthening ties with non-U.S. markets to mitigate risks associated with overreliance on a single trading partner. Additionally, promoting domestic industry is crucial, with initiatives that promote local production and encourage consumption of Canadian-made goods. Enhancing interprovincial trade is equally important, as reducing trade barriers between provinces can help create a more resilient and unified internal market. Together, these measures are essential to securing Canada's long-term economic and political independence in an increasingly uncertain global environment. The actualization of this will not be an easy task. But a dependent and defensive Canada cannot withstand the radical shift Trump is poised to undertake—a shift that reaches far beyond the issue of tariffs. It is, indeed, a time to introspect and act decisively.
Paramjit Singh, an associate professor in University of Niagara Falls Canada’s Honours Bachelor of Business Administration program, is a passionate researcher who writes extensively on the intersection of economics and politics. He holds a Master of Arts, Master of Philosophy, and PhD in Economics, as well as a Master of Arts in Political Science.
References
[1] Statistics Canada - The Daily - Gross domestic product by industry, November 2024
[2] Global Affairs Canada – Canada-United States relations
[3] Statistics Canada - The Daily - Gross domestic product by industry, November 2024
[4] Bank of Canada – Monetary Policy Report – January 2025 – In focus - Evaluating the potential impacts of US tariffs
[5] News: Department of Finance Canada – Canada announces $155B tariff packages in response to unjustified U.S. tariffs
[6] RBC Thought Leadership – Economics – A U.S. Canada trade shock now in play: first economic takeaways
[7] St. Francis Xavier University – Brian Mulroney Institute of Government – The Third Option
