Every day, we hear about the need to reduce our reliance on trading with the United States. In 2025, total Canadian exports of goods and services were slightly more than $1 trillion and 67 per cent of that went to the U.S. Our imports from America were only a little less.
The argument for diversifying our trade is partly economic and partly based on enhancing our sovereignty and national security, especially in light of U.S. President Donald Trump’s punishing tariffs and his frequent comments about using economic force to make Canada the 51st state.
Given the long-standing and strong economic case for trading with the world’s largest and richest market right next door, there will almost certainly be a price to pay for achieving greater trade diversification.
We will need to incur costs to open up new markets and develop new products to sell there – markets which may be more reliable but less easily profitable than the United States.
There will be costs associated with building resiliencies into our supply chains, including stockpiling critical inputs. For those things we decide to produce in Canada rather than import from the current lower-cost foreign suppliers, we will likely have shorter production runs and higher unit costs.
So, while we may end up being “better off” by enhancing our resilience and sovereignty through diversifying our trade, we probably won’t be richer in pure financial terms.
How much will Canadians be prepared to pay to get those benefits? We need to know these costs exist and have some idea of the size of the trade-offs involved. The time for discussing the issue is now.
But let’s start at the beginning and then circle back to these costs. What are the underlying objectives we are trying to achieve through greater trade diversification?
Real income growth
A long-standing goal of Canadian public policy has been to increase our material living standards, usually expressed as some measure of average real income. For decades, having mostly free trade with the United States was an important part of achieving that.
In recent years, however, there has been considerable concern about our sluggish real income growth and about widening income gaps between Canada and other advanced countries.
Donald Wright, a former senior government official, has described the sluggish growth in our real incomes as a “broken promise” to the younger generation. He tracks average real wages and real median incomes for the overall Canadian population and shows that both measures have grown much more slowly since the mid-1970s than they did in earlier decades.
Some groups, especially men between the ages of 24 and 35, have experienced an outright decline in real employment earnings over the past four decades. Raising Canadians’ sluggish incomes is therefore a challenge the federal government needs to take very seriously.
Income resilience
Yet focusing on improving our incomes, while necessary, is no longer sufficient. We also need to think about how resilient those incomes are to shocks of various kinds.
Economic downturns in our trading partners and declines in the international prices of our exports have always had the potential to threaten Canadian incomes. Aggressive protectionism these days from the Trump administration increases this threat markedly.
Having a more resilient Canadian economy sounds attractive, but what would this look like in practice?
Greater resilience means that when large negative shocks occur, our businesses can more easily change the mix of products they provide.
Resilient businesses can adjust their participation in domestic or global supply chains by switching to more reliable suppliers when disruptions threaten their access to key inputs. Resilient businesses can also redirect their sales away from markets where profitability is diminished and toward others where opportunities are more promising.
For example, Canada’s aluminum producers have shown unexpected resilience in the face of high U.S. tariffs, mostly by redirecting their products to other markets, although part of this was due to the tightening of the global aluminum market caused by the closing of the Strait of Hormuz.
Workers are also an important part of an economy’s resilience. Resilient workers are more able to relocate to different businesses, sectors or regions when shocks occur. In some cases, the acquisition of new skills will be required.
Failure to relocate and/or retrain will usually result in an extended period of unemployment and lower income, while greater worker resilience will result in shorter spells of unemployment and less lost income.
This gets us to two policy objectives – the level of average incomes and the resilience of those incomes in the face of various shocks.
Like any kind of insurance, most people are prepared to pay a modest price to avoid taking a serious financial hit. In other words, if diversifying our international trade can improves the resilience of our incomes, we should be prepared to accept lower average incomes in return. But are we?
Sovereignty and national security
Canadian sovereignty and national security are currently being tested, mostly by Trump’s open threats against our territorial integrity but also partly by the increasing belligerence of China and Russia, both of whom pose a direct threat to Canada’s Arctic sovereignty and to overall geopolitical stability.
But what is old is new again. Canadian sovereignty is a challenge as old as our country. It was a central motivation for Confederation in 1867, when the British North American colonies determined their future would be more secure by banding together rather than individually facing the threat of absorption by an expansionist United States.
Worries about sovereignty ebbed and flowed for the next few decades, but by the end of the Second World War and for several decades following that, Canadians rarely gave much thought to the issue, secure in the knowledge that participation in NATO and our proximity and close friendship with the world’s largest military power freed us to focus on other things.
But as Prime Minister Mark Carney argued in his acclaimed Davos speech in January, those halcyon days are over.
Enhancing Canada’s sovereignty and national security is a complex project, involving military preparedness, coalition-building with reliable allies and a careful balancing of geopolitical tensions and opportunities through effective international diplomacy.
But there are also crucial economic elements.
First, the rise of U.S. protectionism over the past several years has threatened our prospects in several key industries and regions, as well as revealing the need for greater economic resilience in those sectors and in Canada more generally.
Second, these American protectionist forces have been applied to other countries and have raised the risk of Canada being caught in the middle of trade battles between the United States and other countries, notably China.
Third, the rhetoric from the Trump administration has gone much further than trade policy and has threatened Canada’s sovereignty and that of our NATO allies.
In the face of such threats, Canadians are naturally led to wonder whether our traditional perspective on international trade should be modified – to be based less on the narrow economic gains available and more on the benefits to national security that would come from increasing the domestic supply of key products and securing our critical supply chains.
The upshot is that policy discussions about international trade have evolved markedly – for good reason.
For roughly half a century following the Second World War, Canadian policy (and that in many other countries) was focused largely on achieving greater trade liberalization and the benefits this would deliver to average real incomes. During those years, an emphasis on expanded trade with the United States, the world’s largest and most dynamic economy, made lots of sense.
How Canada can prepare for high-pressure U.S. demands on sovereignty and trade
Today, however, Canada needs to think about international trade in a way which clearly recognizes that enhancing our sovereignty and national security may require us to accept a lower path for average real incomes.
Former prime minister Stephen Harper acknowledged this at the recent Canada Investment Summit in Toronto when he said: “To maintain that sovereignty, we must pursue diminished reliance upon the United States. There will be significant costs to this effort, but those are costs that I hope and believe Canadians are able and prepared to accept.”
Uncharted territory
At this point, we are entering uncharted territory, or at least territory that we have long ago forgotten. The intermingling of economic policy with issues of national security – what is now being called geoeconomics – raises some challenging questions for all of us and especially for Carney.
How big of an economic hit are Canadians prepared to suffer in return for enhanced resilience and greater national security?
We can measure average income quite easily, but how do we measure national security and how will we know when we have enough of it? How do we conceptualize a unit of national security and how do we identify the best economic way to purchase those units?
Diversifying Canada’s trade by expanding our relationships with countries other than the United States, producing and exporting new kinds of products and redesigning our supply chains so we are less vulnerable to shocks will enhance the resilience of our average incomes.
Producing more military equipment and essential inputs in Canada will improve the reliability of our critical supply chains and enhance our national security.
But all of these actions will involve economic costs, which should be neither hidden nor ignored. How big are these costs and how can we keep them to a minimum? We need to be discussing these issues more openly and there’s no time like the present to begin that conversation.
