Executive Summary:
Amid escalating US tariffs and protectionist measures, Canada has pursued a trade diversification strategy which involves doubling its exports to non-US partners by 2035 and expanding its trade agreements with partners in Europe and the Asia-Pacific. However, despite these diplomatic advancements, the country’s existing agreements remain underutilised. For example, fewer than two-thirds of Canadian exporters make full use of the EU-Canada Comprehensive Economic and Trade Agreement (CETA). Although CETA removed 98% of tariffs between the two regions, the EU still merely accounts for less than 9% of Canada’s trade.
This policy brief argues that Canada’s capacity to diversify is not constrained by its ability to develop new partnerships, but rather by domestic structural barriers such as insufficient port and transportation infrastructure, interprovincial trade barriers, and a decline in business investment per worker, which hinder the effectiveness of these deals. While diversification is crucial to Canada’s success, until domestic barriers are addressed, new agreements risk outpacing the country’s ability to deliver on them.
Introduction:
In response to the uncertainty that tariffs and protectionist measures from the Trump administration have brought on Canadian exports of steel, aluminium, cars, and lumber (Finlayson and Globerman, 2026), Prime Minister Carney’s government has committed to doubling the country’s non-US exports by 2035 (One Canadian Economy, 2026). Carney has framed this shift as a rupture in the international rules-based order that followed WWII and emphasised that when Canada negotiates bilaterally with a hegemon, it performs sovereignty while accepting subordination (Forum, 2026). This has led to Ottawa signing a number of new trade agreements with partners in Europe and the Asia-Pacific. However, the pace at which Canada is signing new agreements and strengthening partnerships risks obscuring a more fundamental challenge.
Canada’s capacity to diversify is not constrained by a lack of partners, but rather by structural issues domestically such as inadequate trade transportation and infrastructure, interprovincial trade barriers, and a continual decline in business investment per worker, which has fallen 9% since 2015 (Bafale and Robson, 2025). Thus, the central question is whether Canada’s diversification strategy addresses the domestic constraints that actually limit diversification or merely the political urgency of being perceived to take action.
Analysis:
In 2017, Canada and the EU provisionally applied the EU-Canada Comprehensive Economic and Trade Agreement, which eliminated 98% of tariffs between the two regions (EU-Canada trade, 2016). While the agreement has increased trade in goods and services by 81% between 2016 and 2025, fewer than two-thirds of Canadian exporters make full use of it (Minhas, 2025). For example, although CETA was predicted to increase Canadian vehicle exports from 13,000 to 100,000 units per year, its exports remained below that at roughly 24,000 units in 2021 (DiCaro, 2022). In 2025, the EU only accounted for 8.7% of Canada’s total trade (EU-Canada, 2026). As such, while trade agreements remove policy barriers, they cannot guarantee successful diversification.
Canada’s integration with the US has led to underinvestment in trade infrastructure such as ports, railways, and airports (Sharma, 2025). Marine infrastructure alone would need an investment of $15 billion to $21.5 billion to keep up with growing trade, currently experiencing a $2.8 billion annual shortfall (Bergman, 2025). Since diversification depends on increasing trade with the EU and the Asia-Pacific, Canada depends on the port infrastructure to remain competitive in these markets. The Asia-Pacific is especially important as it holds three-fifths of the world’s population and some of the most rapidly developing economies (Finlayson, 2026). While the Port of Vancouver and the Port of Prince Rupert are Canada’s only ports that connect to the Asia-Pacific (Transport Canada, 2026), the World Bank’s Index ranks them among the world’s lowest-performing ports, with Prince Rupert at 362nd and Vancouver at 389th globally (Finlayson, 2026). Limited competition, fragmented governance preventing private investment, and poor maintenance have left ageing port infrastructure that produces long wait times, operational inefficiencies, and supply chain issues (Sharma, 2025). Thus, while new Asia-Pacific agreements lower the policy barriers, Canada’s ability to export is reliant on its inefficient and congested ports, creating a bottleneck in expanding trade.
Canada faces persistent barriers to interprovincial trade, which restrict the movement of goods and services across provincial borders (Intergovernmental Affairs, 2017) and have been found to cost the country $91 to $161 billion in GDP (Cotton and Teeter, 2025). A fragmented internal market constrains the scale that firms can achieve domestically, and firms which are unable to grow across their own markets are less capable of building the volume and competitiveness that increasing exports to the EU or the Asia-Pacific requires. Only recently were interprovincial barriers on alcohol partially addressed by nine of the thirteen provinces and territories (Ridder and Farrell, 2026), which underscores how domestic reforms are lagging behind the speed of new trade agreements.
Business investment per worker has fallen from a peak of $19,400 in 2014 to roughly $15,000 by 2025, while the average Canadian worker now has 9% less capital to work with than in 2015, with machinery and equipment being down by 20% (Bafale and Robson, 2025). With lower capital per worker, workers have diminished tools, lowering the output per hour and making Canadian businesses less competitive internationally. Canadian workers receive 55 cents of new capital for every dollar received by US workers, and only 70 cents relative to the OECD average. Canada invests only 32 cents in intellectual property for every dollar the US invests per worker (Bafale and Robson, 2025). As such, when new agreements are made, Canadian firms are not equipped to compete in and supply these external markets.
Conclusion
Canada’s ability to diversify depends on addressing domestic barriers that currently prevent the country from fully exploiting its trade agreements. Gaps remain across infrastructure, interprovincial trade, and business investment. Addressing these gaps requires targeted action across three areas:
- Infrastructure: Increasing infrastructure funding to meet the shortfall and prioritising port expansion.
- Interprovincial barriers: Through unilateral liberalisation, the provinces could remove existing barriers without the need to go through the federal government.
- Investment: Introducing a temporary general investment tax credit (around 5%) would address the tax competitiveness gap created by US reforms (Bafale and Robson, 2025). By raising business investment and capital per worker, this would lift productivity and export capacity, better equipping firms to compete in and supply Canada’s new trade partners.
Until these domestic barriers are addressed, new trade agreements will continue to outpace the country’s capacity to deliver on them.
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