Why Canada Is Changing Its Trade Strategy

What was life like before NAFTA? I found this fascinating, and it explains why people who remember the 1980s and early 1990s feel like something fundamental changed.

Before NAFTA, Canada and the U.S. traded finished goods. A car was built in Canada or the U.S., then sold across the border. There were tariffs (usually 5-15%), customs delays, and different production standards. This meant:

• Canadian prices were often 20-30% higher.
• Selection was narrower.
• Cross-border shopping was a thing because the price gaps were real.
• But we still had our own industries.

After NAFTA, something different happened. Instead of trading finished products, we integrated production. Now a single car part might cross the border 5-7 times during manufacturing. The engine is cast in Canada, machined in Michigan, assembled in Ontario, with electronics from Mexico.

This caused:

• Massive cost reductions (no tariffs on parts moving back and forth)
• Price convergence (same product, same supply chain, similar prices)
• Trade volumes exploded (because we're counting the same product multiple times as it crosses the border)

So before NAFTA, we had high trade dependence but segmented markets. After NAFTA, we have high trade dependence and integrated supply chains.

That's why modern tariffs feel more disruptive than old ones. Pre-NAFTA tariffs hit finished goods. Modern tariffs hit inputs mid-production and multiply costs across multiple border crossings.

For your business
If you import finished products, tariffs are annoying but straightforward. If you're part of an integrated supply chain, tariffs can hit you multiple times on the same product.

So would we really collapse without CUSMA? No. But some things would get more expensive and less convenient.

I remember what life was like before NAFTA (which became CUSMA). We had trade with the U.S., but it was different. Prices were higher. Selection was narrower. Cross-border shopping was a thing because the price gaps were real.

But we weren't living in poverty. We had cars, TVs, vacations. We just had fewer choices and paid a bit more for some things.

What's changed since then is that we've built our entire economy around INTEGRATED supply chains. Not just trade, but production that crosses the border 5-7 times for a single product. Unwinding that would be disruptive, especially for certain industries like autos, manufacturing. But it wouldn't be the end of the world.

I think of it like this. Canada without CUSMA would look more like it did in the 1980s. That would lead to fewer choices, higher prices, slower growth not national collapse.

Good question, because the numbers can be misleading.

Trade volume is the dollar amount ... how much stuff we buy and sell. In 1993 (pre-NAFTA), Canada-U.S. trade was about $212 billion. In 2024, it's around $909 billion. That's a huge increase.

Trade dependence is the percentage ... how much of our total trade goes to one partner. In 1993, about 70-80% of Canadian exports went to the U.S. In 2024, it's about 76%.

See the difference? The volume exploded, but the dependence stayed roughly the same.

Here's why this matters for your business
If 80% of your revenue comes from one customer, you're dependent on them ... whether that's $10,000 or $1 million. The percentage tells you about risk. The dollar amount tells you about scale.

Canada's problem isn't that we trade with the U.S. It's that we haven't meaningfully reduced the percentage going to one market, even as the total pie got bigger.

People confuse these all the time, so let's clear it up.

Trade deficit means you import more than you export. If Canada buys $100 billion from the U.S. and sells $80 billion to them, we have a $20 billion deficit.

Trade dependence means a large percentage of your trade goes to one partner, regardless of whether it's balanced.

You can have a trade surplus with the U.S. (we sell more than we buy) and still be dependent (if 76% of our exports go there). You can have a trade deficit with the U.S. (we buy more than we sell) and still be dependent.

Why this matters
Trade deficits are about money flow. Trade dependence is about leverage and options.

If 76% of your sales go to one customer, they have power over you ... even if you're profitable. That's Canada's situation. We're not 'losing' to the U.S. in trade. We're vulnerable because we don't have enough alternatives.

For your business
If you are not actively following a 'buy Canadian' policy ... don't worry about whether you buy more from the U.S. than you sell to them. Worry about what percentage of your revenue depends on U.S. customers. That's your risk exposure.

Yes, Australia. It's experience is instructive.

Australia and Canada are remarkably similar. Mid-sized populations, resource-rich, export-dependent, liberal democracies, security-aligned with the U.S.

What was Australia's path?
They became heavily dependent on China for exports (iron ore, coal, education). They enjoyed huge growth for two decades. China imposed sudden sanctions (2020-2022) over political disputes. Australia had to scramble to diversify under fire. It was painful and expensive, but they survived.

What was Canada's path?
We became heavily integrated with the U.S.. We enjoyed efficiency and prosperity through NAFTA and CUSMA. We are now experiencing U.S. trade coercion. We are trying to diversify BEFORE a full crisis.

What is the lesson?
Australia learned, 'Never let one buyer dominate your exports'. Canada is learning, 'Never let one system dominate your economy'.

Carney's approach looks a lot like Australia after the lesson. Diversify before you're forced to, not during a crisis.

A tariff is a tax on imports. Simple as that. If you import a $100 widget and there's a 10% tariff, you pay $110.

But here's what makes modern tariffs more painful than they used to be.

Before integrated supply chains
These tariffs were charged just on the final, finished good. 

• Tariff hits once (on the finished product).
• You decide: absorb the cost, pass it to customers, or find another supplier.
• It's a one-time hit.

With integrated supply chains
These tariffs act as a "cascading" tax, where costs accumulate at each production stage, rather than just on the final, finished good. 

• The same product crosses the border multiple times during production.
• A 10% tariff might hit the raw material, then the semi-finished part, then the final assembly.
• That 10% compounds into 30% or more by the time the product is done.

Example 
Let's say steel is imported from the U.S. (10% tariff). It's formed into auto parts in Canada. Those parts go back to the U.S. for assembly (another 10% tariff). The finished car comes back to Canada for sale (another tariff).

The same steel got taxed three times.

This is why unwinding NAFTA/CUSMA would be so disruptive. It's not just about making trade more expensive. It's about breaking production systems that were built around zero friction.

For your business
Track where your inputs come from and how many times they might cross the border. The more integrated your supply chain, the more tariffs hurt.

Both ... and they're connected.

• The trade angle
  Canada is creating the conditions for businesses to diversify export markets and supply chains. Carney can't force companies to find new customers or switch suppliers. But he can remove barriers, negotiate market access, and reduce the risk of doing business in new markets.
• The security angle
  Canada is investing in Arctic defense and stepping up our contribution to continental security. The big example is NORAD modernization. It is a joint Canada-U.S. commitment where Canada is investing $38.6 billion over the next 20 years to upgrade early warning systems, Arctic surveillance, and infrastructure.

The $6 billion Australia radar deal is part of that. We're not replacing the U.S. partnership. We're strengthening our contribution to it so we're a more capable, equal partner rather than a dependent junior one.

Canada is also coordinating with NATO allies (Norway, Denmark/Greenland, Iceland, Sweden, Finland) on Arctic security. This isn't about distrust of the U.S.. It's about Canada taking responsibility for defending Canadian territory rather than outsourcing it.

This is about sovereignty and resilience. It's being able to see what's happening in our own backyard and respond if we need to.  It's also about Canada finally stepping up after decades of underspending on U.S. defence.

• Why are they connected?
  Economic dependence creates security vulnerability. If one country controls your markets, your supply chains, or your critical infrastructure, they have leverage over you. That's not paranoia. It's how power works.
• What does this mean for small businesses?
  You probably don't need to worry about Arctic defense. But you do need to think about supply chain resilience, customer diversification, and not being completely dependent on one market or one supplier.
  
  The same principles apply at every scale. Options = Resilience.

Because Europe and North America integrated in fundamentally different ways, some think Carney is trying to shift Canada toward the European model.

What Europe did

• Integrated internally first (removed barriers between member countries).
• Built redundancy and resilience (even if it cost more).
• Avoided letting any one country dominate critical supply chains.
• Only then negotiated external trade deals as a bloc.

What North America did

• Integrated externally first (deep ties with the U.S.).
• Optimized for efficiency and lowest cost.
• Built supply chains that cross borders 5-7 times.
• Left internal barriers in place (provinces still restrict trade with each other).

The result is Europe has slightly higher costs, but much more resilient. North America has maximum efficiency but, maximum vulnerability.

Some people say Carney is trying to adopt Europe's logic without copying their institutions. His Davos speech calls its a web network. He wants Canada to:

• Fix internal barriers first (One Canadian Economy Act).
• Build redundancy (multiple trade partners).
• Accept slightly higher costs for more security.

This isn't about abandoning the U.S. market. It's about not being completely hostage to it ... which is exactly what Europe designed their system to avoid.

For your business
Think of it like insurance. You pay a bit more for coverage you hope you never need. That's what resilience costs.

Why does the Arctic matter for trade? Three reasons: shipping routes, resources, and sovereignty.

1. New shipping routes
   Climate change is opening the Northwest Passage and other Arctic waters. Ships can now travel between Europe and Asia through Canadian Arctic waters instead of going through the Panama or Suez canals. This is faster (saves days or weeks), cheaper (shorter distance = less fuel), and strategically important (whoever controls these routes has leverage).
2. Resources
   The Arctic has oil and gas, critical minerals (rare earths, lithium, cobalt), and fish stocks moving north as waters warm. If Canada doesn't have a presence there, other countries will claim access.
3. Sovereignty
   Here's an uncomfortable truth. In international law, presence matters. If you can't monitor, patrol, or respond in your own territory, other countries start treating it like it's open for business.
   
   Russia already has dozens of Arctic bases. China calls itself a 'near-Arctic nation' (it's not) and wants access. The U.S. has been pressuring Canada to do more.

Why this matters for trade
If Canada can't control its own territory, it has less leverage in negotiations. It's the same principle as your business ... if you don't control your critical assets, someone else will.

For your business
Arctic trade routes are 5-10 years away from being routine. But if you export to Asia or Europe, keep an eye on this. Shorter shipping routes could change logistics costs significantly. I've started reading Canada may open a commercial waterway in the Northwest Passage as one way to establish presence.

And that's where NORAD comes in.

NORAD stands for North American Aerospace Defense Command. It's the joint Canada-U.S. system that watches for threats coming from the air or space ... missiles, bombers, now drones and hypersonic weapons.

It was created in 1958 during the Cold War, and it's been quietly protecting North America ever since.

Why it matters now

• The Arctic is warming, opening new shipping routes and access to resources.
• Russia and China are increasing their presence in the Arctic.
• Old radar systems can't detect modern threats (low-flying cruise missiles, hypersonic weapons).
• If Canada can't monitor its own territory, someone else will.

What Canada is doing
Investing $38.6 billion over 20 years to modernize NORAD, including new radar systems (like the $6 billion Australia partnership for Arctic radar), satellites and drones, and northern infrastructure (runways, ports, communications).

Why this connects to trade
Economic dependence creates security vulnerability. If you can't defend your own territory, you have less leverage in trade negotiations. Carney is saying Canada needs to be a capable, equal partner ... not a dependent junior one.

For your business
You probably don't need to worry about Arctic defense directly. But understand that security and trade are connected. A country that can't defend itself has less negotiating power.

Critical minerals are elements that are essential for modern technology but have limited sources. Think lithium (batteries), cobalt (batteries, electronics), rare earth elements (magnets, electronics, defence systems), graphite (batteries), and nickel (batteries, steel).

Why they're 'critical'
You can't make the stuff that is part of our society today - electric vehicles, smartphones, wind turbines, solar panels, or advanced weapons systems without them.

The problem
China controls 60-80% of global processing for most of these minerals. Even when they're mined elsewhere, they usually go to China for refining.

This gives China enormous leverage. They've already used it by blocking rare earth exports to Japan in 2010, threatening to cut off supplies to the U.S. during trade disputes.

Why Canada matters
Canada has significant deposits of many critical minerals. We're one of the few Western countries that could build a supply chain outside Chinese control. However it's currently hindered by high capital costs for junior miners, long approval timelines, and China’s ability to manipulate global prices to make new, non-Chinese projects financially unviable.

That's why you see Canada signing critical minerals agreements with Australia (they have them too), EU (they need them), U.S. (they need them), and Chile (they have lithium).

For your business
If you're in manufacturing, construction, or technology, critical minerals affect your input costs and supply chain security. Diversification away from China-dependent supply chains is happening slowly ... but it's starting to happen.

In my mind, you should ask yourself three questions around risk management and risk diversity specifically customer concentration, supplier concentration, and geographic concentration.

1. What percentage of my revenue comes from U.S. customers? If it's more than 50%, you're exposed.
2. What percentage of my critical supplies comes from U.S. sources? If you have only one or two suppliers for key inputs, you're vulnerable.
3. Are my customers and suppliers mostly in one region or country? Diversification reduces risk.

What should you do?

• Track your U.S. revenue separately in your bookkeeping (use a separate income account or tag)
• List your critical suppliers and note where they're located.
• Identify alternatives NOW, even if you don't switch immediately.
• Build relationships with Canadian or other suppliers so you're not starting from zero if something changes.

This isn't about abandoning the U.S. market. It's about knowing your options so you're not scrambling if tariffs hit or supply chains freeze ... or the renewed CUSMA includes non-zero tariffs.

Should I stop doing business with the U.S.? 

No. But you should consider if you need to reduce your dependence on the U.S..

This is basic business risk management. You wouldn't want 80% of your revenue coming from one or two customers, right? Same principle applies to geographic concentration.

What do you instead?
You need to choose your path. You have four options - exit the market, pass costs onto customers, absorb costs, become CUSMA compliant if you aren't already.

Keep your U.S. customers and suppliers (they're valuable!) if it's possible. But start building relationships elsewhere. Look possibly at 'Buy Canadian' customers, other export markets, alternative suppliers. Think in terms of diversification, not abandonment (if your path is to not exit the market).

The goal?
Make sure that if U.S. trade gets disrupted (tariffs, border delays, regulatory changes), you have options. You don't need to replace all your U.S. business. You just need to reduce single-point failure risk.

It's my opinion you should not be worried as much as being aware.

How trade tensions affect the dollar
When there's uncertainty about Canada-U.S. trade investors get nervous, money flows out of Canadian assets, and the Canadian dollar weakens.

A weaker dollar means
✅ Your exports to the U.S. become cheaper (good if you sell there).
❌ Your imports from the U.S. become more expensive (bad if you buy from there).
❌ Your purchasing power drops (travel, equipment, anything priced in USD).

What to do

1. If you sell to the U.S., a weak CAD is actually helpful. Your products are more competitive. But don't assume it lasts ... currency swings both ways.
2. If you buy from the U.S., budget for currency fluctuation (assume 5-10% swings), consider hedging if you have large purchases coming (talk to your bank) to proactively protect your finances against market fluctuations, or look at Canadian suppliers as a natural hedge.

If you invoice in USD

• Track exchange gains and losses (CRA requires this).
• Decide whether to pass currency changes to customers or absorb them.
• Consider a USD bank account to reduce conversion frequency.

Bottom line
Currency risk is part of doing cross-border business. You can't eliminate it, but you can manage it.

What's 'CUSMA compliance' and do I need to worry about it?

CUSMA (Canada-United States-Mexico Agreement) replaced NAFTA in 2020. It sets the rules for tariff-free trade between the three countries.

The key concept: Rules of Origin

Just because you're in Canada doesn't mean your product automatically qualifies for tariff-free treatment. The product has to meet "rules of origin" meaning enough of it was made in North America.

You need to worry about this when you manufacture products and export them to the U.S. or Mexico and if you import inputs from outside North America, process them, then re-export

When you don't need to worry if you only sell domestically, you provide services (CUSMA mostly covers goods), you import finished goods for resale (you pay the tariff once, that's it).

What does CUSMA compliance mean?
You need to document that your product meets the rules of origin requirements. This usually means: tracking where your inputs come from calculating the North American content percentage, keeping records in case of audit.

If you're affected, talk to a customs broker. They can help you determine if your products qualify and what documentation you need.

Most small businesses don't need to worry about this unless they're manufacturing and exporting. If you are, get professional help ... the savings are worth it.

And if you're importing or exporting, here's how to know if a tariff applies ...

Every product has an HS code (Harmonized System code). This is a standardized international number that determines what tariffs apply.

There are a number of ways to find your HS code:

1. Canada Border Services Agency website - They have a searchable database.
2. Your supplier - If you're importing, ask your supplier—they should know.
3. Customs broker - They can classify products for you (worth it for complex items).

Once you have the HS code:

• Check the current tariff rate on the CBSA website.
• See if your product qualifies for CUSMA or other trade agreement benefits.
• Understand if any special rules apply (quotas, permits, restrictions).

Keep in mind:
HS codes can be specific. 'Steel pipe' might have different codes (and different tariffs) depending on diameter, wall thickness, coating, or end use.

Here's when might need to get help:

• If your product is complex or could fit multiple categories.
• If you're importing large volumes.
• If you're not sure whether CUSMA applies.

Bottom line:
Tariffs are product-specific, not industry-specific. You need to know your exact HS code to know what applies to you.

Maybe ... but don't panic.

First, understand your exposure:

• What percentage of your costs are affected by tariffs or trade uncertainty?
• Can you absorb it, or do you need to pass it on?
• What are your competitors doing?

You have four options that I discuss in detail in 'U.S. De Minimis Exemption Has Ended'.

1. Absorb the cost (short term) or split the difference.
2. Pass it on to customers.
3. Exit the market.
4. Become CUSMA compliant.

Track three things:

1. Track U.S. revenue separately.
   Use a separate income account for U.S. sales, or tag them in your accounting software. This lets you see at a glance what percentage of your income is exposed to U.S. trade risk.
2. Track exchange rate gains and losses.
   If you bill or get paid in U.S. dollars, CRA requires you to track realized exchange gains and losses for your tax return. Trade tensions often move the CAD-USD rate, so this becomes more important.
3. Track Tariff and duty costs.
   If you import from the U.S. (or export to the U.S.), track any tariff or duty costs separately. Don't just lump them under 'materials' or 'shipping. You need to know exactly how much tariffs are costing you so you can decide whether to pass costs on to customers or find alternative suppliers.

Why does this matters?
You can't manage what you don't measure. These three data points tell you how exposed you are and help you make informed decisions.

If you are behind in your bookkeeping, or feel you aren't organized enough with your paperwork, or you just want a reset because tariffs have thrown you for a loop, my article on a '30 Day Admin Reset' might help you exhale.