Trump's tariff threat is a sign Canada should diversify beyond the U.S.

United States President-elect Donald Trump has announced 25 percent tariffs on Canada and Mexico if border control and the entry of illegal drugs into the United States are not reduced. Federal and provincial leaders have scrambled to address the potential threat posed by such a significant trade sanction.

Trump's approach to tariffs is well known. During his first presidency, Trump renegotiated the North American Free Trade Agreement (NAFTA), replacing it in 2020 with the United States-Mexico-Canada Free Trade Agreement. The updated agreement renegotiated new terms and conditions governing trade between the United States, Canada and Mexico.

There is no doubt that the United States remains Canada's largest trading partner. More than 70 percent of Canadian exports go to the United States, a volume greater than that of the next ten trading partners combined. This situation highlights Canada's heavy dependence on American trade and the resulting vulnerability.

Canada could reduce its dependence on the United States by diversifying its trading partners. Establishing stronger ties with emerging economies and expanding exports to other markets would strengthen Canada's negotiating position with the United States. However, diversification is easier said than done.

Former President Donald Trump, Republican presidential candidate, speaks during a campaign rally at the Salem Civic Center, November 2, 2024, in Salem, Virginia. (AP Photo/Evan Vucci)

It is unlikely that Canada will be able to significantly diversify its trading relationships in the short term. It will take time for Canada to replace its exports to the United States with other foreign markets due to the decades of interconnected trade agreements and shared infrastructure that have been built to facilitate trade between the two countries.

For now, the most practical approach is for Canada to focus on negotiations with the United States to avoid or mitigate any punitive tariffs. A 25 percent increase would make Canadian exports prohibitively expensive for Americans, could harm the Canadian economy and could also harm American businesses.

It is possible that Trump will use tariffs as a bargaining chip to force Canada to grant more concessions. However, Canada-US interdependence allows Canada to assert that maintaining strong bilateral trade is mutually beneficial.

Opportunities beyond North America

Canada's long-term path to economic resilience is to pursue deeper engagement with other global markets. As a member of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Canada can increase trade with countries such as Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Mexico's successful trade diversification offers Canada a valuable lesson. Between 2016 and 2023, bilateral trade between Mexico and China increased from US$42.6 billion to US$100.22 billion. Trading volumes have more than doubled, with annual growth.

The Canadian government could follow suit by entering into trade agreements with other economies beyond the United States. Such agreements would grant Canadian exporters access to the markets of other countries while opening Canada to imports from those countries. This approach not only diversifies trade partnerships, but also has the potential to reduce inflation by introducing cheaper imports.

Canada could also learn from Singapore, which has maintained strong economic ties with the United States and China by remaining neutral and refusing to side with either. As trade tensions escalate between the United States and China, Canada has an opportunity to position itself as a similar peacemaker.

Prime Minister Justin Trudeau with Lee Hsien Loong, then Prime Minister of Singapore, at the Singapore Istana in September 2023. THE CANADIAN PRESS/Sean Kilpatrick

Likewise, establishing trade links with other emerging economies such as China and the Association of Southeast Asian Nations (ASEAN) presents enormous opportunities for Canada and its export growth. in the long term. ASEAN members include Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam.

Collectively, ASEAN countries have a market with a GDP of over $4 trillion and a population of 647 million, making it one of the fastest growing economies in the world.

As much of the Western world moves toward deglobalization and economic decoupling, emerging economies are increasingly interconnected and integrated into the global economy. Canada should therefore take advantage of the opportunity to engage effectively in these markets.

Canada is in a good position

Some critics have argued that opening Canada's borders to more trade could cause Canadian industries to lose competitiveness and lead to job losses.

While these sentiments are valid to some extent, Canadian companies that do not have a competitive advantage could be squeezed out, but the overall economic benefits of diversification far outweigh the disadvantages.

Canada is well positioned to strengthen its trade ties with emerging economies. Canada has several inherent advantages, including abundant natural resources, a highly educated and skilled population, and good institutions.

While Canada cannot immediately reduce its dependence on U.S. trade, it must lay the foundation for a more resilient and diversified economy. By expanding its trading relationships with emerging markets, Canada can strengthen its economic position and reduce its exposure to the vagaries of U.S. trade policy.

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