Economics research points to deep structural forces standing in the way of Ottawa's diversification push
Canada's ambition to break its reliance on the United States as an export market runs headlong into one of the most durable laws in trade economics.
That’s according to a new Fraser Institute analysis that uses the so-called gravity model of trade to assess just how realistic Ottawa's diversification drive really is. The report, authored by Jock Finlayson and Steven Globerman, argues that Canada's dependence on the US as a destination for its goods and services is the predictable outcome of economic size, geographic proximity, shared institutions, and decades of deeply interwoven cross-border commercial networks.
The gravity model holds that trade flows between two countries are proportional to the size of their economies and inversely related to the friction involved in doing business across borders.
On both measures, the US wins easily. With a 2024 GDP of $23.8 trillion, it is the world's largest economy, roughly 27% bigger than China in second place. Canada, meanwhile, has about 70% of its population clustered within 100 kilometres of the US border, and shipping from Vancouver to Los Angeles takes a vessel just 1,245 nautical miles, compared to 5,151 to Shanghai or 10,000 to Mumbai.
"It is perhaps not surprising that Canada's export infrastructure and the main focus of Canadian exporters have for many years pointed largely towards the United States: The world's largest market and our only neighbour," said Finlayson.
Friction-free trade?
A significant portion of what economists call trade resistance stems from what researchers Head and Mayer have labelled "dark costs": imperfect information about foreign market opportunities, localised consumer preferences, and what amounts to a trust deficit between buyers and sellers who lack shared legal institutions or business cultures.
Canada and the US have almost none of these frictions between them. They share a language, broadly similar legal frameworks, and an estimated CA$1.3 trillion in Canadian outbound foreign direct investment parked in the US by end of 2024, having grown 3.7 times since 2012.
The report also points to the deep integration of manufacturing supply chains, particularly in vehicles, auto parts, and industrial equipment, as a structural anchor to the bilateral relationship.
Many Canadian exporters, especially smaller and medium-sized firms, are effectively locked into North American production networks that cannot be redirected to Asian or European markets overnight, even where free trade agreements with those regions exist.
On the policy front, the authors offer a mixed verdict on the tools Ottawa is reaching for. The Carney government's 2025 budget included a $10 billion Trade Diversification Corridor Fund over seven years, and the prime minister has sought agreements with China, India, Europe and Gulf states.
Research on regional trade agreements suggests these efforts can bear fruit, particularly in agriculture, manufacturing and services. But the picture is notably less encouraging for energy and mining, which together account for around 40% of Canada's merchandise exports. Studies find no positive effect from trade agreements on bilateral flows in those sectors, which complicates the math considerably.
Timing challenge
There is a further timing problem. Trade agreement effects tend to be slow to materialise, with full adjustment potentially taking up to a decade. Short-run trade elasticities are consistently lower than long-run figures, meaning that even well-designed deals shift export patterns gradually rather than decisively.
The report does identify some potential upside from the current environment. Trump administration tariffs on a wide range of countries could, the authors suggest, generate informal resistance to US products in some foreign markets, opening ground for Canadian exporters in sectors ranging from oil and natural gas to financial services and digital offerings.
"Even with substantial investments in new trade infrastructure and new trade deals, the favourable attributes of the US market for Canadian exporters will make it very challenging to achieve Ottawa's goal of doubling exports to non-US markets by 2035," said Globerman.
Canada's export concentration in the US is the product of gravity, not inertia, and gravity is hard to fight. The authors describe the deep bilateral ties as producing a form of "trade hysteresis," meaning decades of integration have created structural resistance to any sharp redirection of trade flows. Whether Trump-era disruption is severe enough to break that pattern, they say, remains to be seen.
