Why Canada Became Too Dependent on U.S. Trade—And How It Can Fix It

By Robert Muehlen | BusinessBear

For many years, Canada has depended significantly on trade with the United States, establishing the U.S. as its predominant trading partner. In 2022, almost 75% of Canadian exports were directed to the U.S., with only a small portion exchanged among Canadian provinces. What led to Canada's significant dependence on its southern neighbor? Furthermore, what strategies can Canada implement to lessen this reliance and promote inter-provincial trade? Let us analyze it step by step.

1. Exporting to the U.S. is simpler than shipping to another province. One of the most intriguing contradictions in Canada’s economy is that a company in Ontario frequently finds it simpler to sell its products in New York than in British Columbia. What is the reason? Inter-provincial trade barriers in Canada are unexpectedly restrictive—at times, they can be even more complex than international exporting.

• Each province has its own regulations, standards, and taxes, creating bureaucratic challenges for conducting business across provincial borders.

• Transportation expenses are considerable, and Canada's vast landscape contributes to costly logistics.

• Certain provinces favor local enterprises over those from other regions, resulting in subtle trade protectionism within Canada.

Consequently, numerous businesses discover that shipping their products directly to the U.S. is more straightforward, given that trade regulations under NAFTA (now CUSMA) are well-defined and tariffs remain low.

Answer:

• Canada requires a more robust national trade agreement among provinces to facilitate sales from Ontario to Alberta with the same ease as to the U.S.

• Implementing standardized regulations across provinces would help eliminate bureaucratic obstacles.

2. Geographic Convenience: The U.S. Market Is Easily Accessible For Canadian businesses, the U.S. stands as a significant economic force nearby—and this closeness has influenced Canada’s trade dynamics for more than a hundred years.The U.S. boasts a population of 330 million, nearly 10 times that of Canada, resulting in a larger customer base and expanded markets. Many Canadian businesses are geographically closer to major U.S. cities than to other Canadian cities. For instance: o Toronto to New York City: 550 km (6-hour drive) Toronto to Calgary: 3,400 km (a flight duration of 4 hours!) Vancouver to Seattle: 230 km (2.5-hour drive) Vancouver to Toronto: 4,300 km (a journey across the country!) Selling to the U.S. is more logical and cost-effective compared to shipping products across Canada.

Solution:

• Enhance national infrastructure to reduce the expenses associated with transporting goods between provinces.

• Broaden domestic supply chains to reduce reliance on U.S. suppliers.

3. U.S. Free Trade Agreements Created an Irresistible Allure Since the signing of NAFTA in 1994, Canadian businesses have benefited from duty-free access to the vast U.S. market. This facilitated trading with the U.S., making it easier and more lucrative compared to concentrating on Canadian markets. Even after NAFTA was replaced by CUSMA (Canada-United States-Mexico Agreement) in 2020, the fundamental concept persisted:

• Minimal trade restrictions

• Simplified investment regulations

• Reduced limitations compared to inter-provincial trade rather than focusing on enhancing trade within Canada, numerous businesses opted for the simpler path of expanding into U.S. markets.

Solution:

• Canada ought to revise its inter-provincial trade policies to ensure that domestic sales are as competitive as exports to the U.S.

4. Foreign Investment Concentrated on the U.S., Not Canada

Traditionally, foreign investors have viewed Canada primarily as a pathway to the U.S., rather than recognizing it as a market deserving of investment on its own.

• Numerous Canadian industries are dominated by U.S. or multinational corporations, resulting in trade and supply chain decisions that frequently prioritize the U.S. above all else.

• Canada’s limited population and stringent regulations render it less appealing than the U.S. for international investment. Consequently, foreign capital often moves through Canada into the U.S., rather than bolstering Canada’s domestic economy.

Solution:

• Encourage foreign companies to invest in Canada’s domestic market, rather than solely serving as an export hub for the U.S. Canada is now going to be seen as a much more stable economy, without political outbursts than are going to mark the US economy.

5. A Deficiency in a Robust “Buy Canadian” Culture In contrast to the U.S., which actively champions "Buy American" initiatives, Canada has not established a vigorous national effort to prioritize Canadian-made products.

• American consumers frequently show loyalty to their local brands, whereas Canadians often gravitate towards U.S. products without much consideration.

• Numerous businesses fail to promote their products as "Proudly Canadian", despite having the opportunity to do so.

Solution:

• Initiate a nationwide "Buy Canadian" campaign to enhance awareness of products made in Canada.

• Inspire businesses to showcase their Canadian heritage in branding and marketing efforts.

Strategies for Canada to Address Its Dependence on U.S. Trade Canada can still maintain strong trade with the U.S., but it’s time to build a stronger domestic economy by:

•  Reducing inter-provincial trade barriers – Simplifying the process for Canadian businesses to sell within Canada.

• Enhancing national supply chains – Decrease dependence on U.S. imports and foster the growth of Canadian manufacturers.

• Enhancing infrastructure – Allocate resources towards improving transportation and logistics to reduce shipping costs between provinces.

• Promoting local production – Back Canadian enterprises through tax incentives and financial support.

• Establishing a “Buy Canadian” initiative – Encourage consumers to prioritize local businesses.

  
  

  Final Thoughts: Canada must expand its internal trade, and also to look for other countries to export in the world. Now More than ever with increasing uncertainty in U.S. politics and the potential for new tariffs, Canada cannot afford to rely too heavily on the U.S. market. By enhancing domestic trade, production, and investment, Canada can cultivate a more self-reliant economy—one that flourishes independently of Washington’s endorsement. Now is the moment to prioritize Canada and enhance inter-provincial trade to strengthen the economy, foster independence, and ensure a resilient future.

  What are your thoughts? Should Canada prioritize the development of its internal economy instead of depending heavily on the U.S.?

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