New study finds Canada's trade diversification push faces steep odds, but energy and minerals exports offer a path forward
A new report from the Fraser Institute argues that China and India represent Canada's most promising markets for reducing its economic reliance on the United States, even as the study's authors caution that decades of similar diversification efforts have made only marginal progress.
The report was authored by Fraser Institute senior fellows Jock Finlayson and Steven Globerman and examines the Carney government's stated goal of doubling Canadian exports to non-US markets by 2035, a strategy launched in response to tariffs imposed by the Trump administration and continued uncertainty around the future of the Canada-US-Mexico Agreement.
Using the gravity equation, a well-established economic model that predicts trade volumes based on market size and physical distance between trading partners, the authors conclude that the sheer size and proximity of the US economy make it exceptionally difficult for Canada to meaningfully diversify away from its largest trading partner.
The report notes that up to 90 percent of the added costs associated with cross-border trade tied to distance stem from factors other than freight, including differences in language, regulation and business practice, costs that don't disappear even as shipping technology improves.
Despite this structural challenge, the report identifies China and India as standout opportunities. Together, the two countries are expected to account for roughly 45 percent of global economic growth between 2026 and 2030, and both are significant importers of energy and natural resources, sectors where Canada holds a measurable competitive advantage, known in trade economics as revealed comparative advantage.
Where Canada's advantage lies
The report calculates that Canada's revealed comparative advantage in merchandise exports sits at 1.11, supporting the view that goods, rather than services, represent the country's strongest card to play internationally.
Energy products make up the largest share of Canada's overall merchandise exports at just over 25 percent, followed by metal and non-metallic mineral products, consumer goods, and motor vehicles and parts.
The composition shifts notably when looking specifically at exports to China and India. Farm, fishing and intermediate food products made up roughly 29 percent of Canadian merchandise exports to China in 2024, with metal ores and non-metallic minerals and energy products following closely behind. For India, farm and food products again led at nearly 27 percent, trailed closely by metal ores, forestry products and energy.
The authors point to liquefied natural gas as a particular growth opportunity, noting China is the world's top LNG importer and that new production capacity coming online in British Columbia could position Canada to capture a larger share of that demand particularly if instability in the Middle East pushes Asian buyers to diversify their own energy suppliers.
The report also flags a practical constraint specific to Canadian small and mid-sized exporters: many are already embedded in supply chains tightly integrated with the United States, particularly in automotive, aerospace and food processing, making a pivot toward Asian markets both costly and risky.
Recommended policy priorities in the report include pursuing narrower sector-specific agreements with China rather than a full free-trade deal, given existing Canada-US-Mexico Agreement constraints on Canada's ability to negotiate independently alongside a more comprehensive economic accord with India, continued investment in port and pipeline infrastructure, and expanded travel and education ties with both countries.