As US tariffs strain CUSMA, Canada is striking deals with China, Indonesia and the UAE. Here’s how Ottawa’s pivot away from the US is actually unfolding.

Every Canadian trade story in 2026 tends to lead with the same character: Washington. But the more consequential story may be what Ottawa is doing everywhere else. Facing sustained US tariff pressure and uncertainty over the CUSMA review, the Carney government has initiated a strategy to diversify Canada’s international trade, with a specific target of doubling exports to non-US markets by 2035.

Canada’s trade diversification strategy aims to double exports to non-US markets by 2035. In 2025–26 it produced a stabilisation deal with China on EVs and canola, a new trade agreement with Indonesia, a Foreign Investment Promotion and Protection Agreement with the UAE, and consultations with India, Thailand and Mercosur.

The deals nobody outside trade-law circles is tracking

Three moves stand out as substantively new rather than aspirational:

• China: during a visit to Beijing, Canada’s prime minister struck a deal establishing a tariff-rate quota for a set number of Chinese EVs — reverting to pre-2024 tariff levels — in exchange for reduced Chinese tariffs on Canadian canola, lobster and peas. This is a live trade-off between EV protectionism and agricultural market access.
• Indonesia: Canada signed a new trade agreement with Indonesia in 2025, opening a Southeast Asian market largely absent from Canadian export strategy until now.
• UAE: Ottawa launched trade-agreement negotiations and signed a new Foreign Investment Promotion and Protection Agreement with the United Arab Emirates, positioning the Gulf as a capital and market-access partner rather than just an energy counterpart.

Meanwhile, exporter confidence has ticked up but remains below its historical average, and diversification remains concentrated in a narrow set of commodities rather than being broad-based.

Why the gravity model is the real obstacle

Trade economists point to the Gravity Model of trade to explain why diversification is structurally hard: the US economy’s size, physical proximity, regulatory similarity and deeply integrated supply chains with Canada make full substitution unrealistic in the near term, even as China and India are flagged as the two most promising long-term markets given they will account for roughly 45% of global economic growth.

The underserved angle

Most coverage treats “Canada diversifying away from the US” as a single narrative. It is actually three distinct, sometimes contradictory tracks: a commodity-for-EV-tariff trade with China, a market-opening play in Southeast Asia via Indonesia, and a capital-and-investment play with the Gulf via the UAE. Each carries different risk profiles — geopolitical risk with China, execution risk with a new Indonesian relationship, and Gulf capital that is itself increasingly redirected toward domestic reconstruction needs amid regional conflict.

Introduction

July 1, 2026 was supposed to be a milestone for North American trade certainty. Instead, the mandatory review deadline for the Canada-United States-Mexico Agreement (CUSMA) passed with U.S. tariffs still firmly in place and no new framework agreed, leaving Canada’s trade-exposed sectors in what Deloitte has bluntly called an economy “on pause” (Global News/Deloitte). For a G7 economy where trade with the United States touches nearly every major industry, that pause carries a real and measurable cost.

What Actually Happened at the Deadline

CUSMA’s built-in review mechanism gave the three signatories three broad paths: renew for another 16 years under current terms, extend for 10 years with annual reviews, or negotiate an entirely new framework (Global News/Deloitte). Canada and Mexico both pushed for the longer 16-year extension to lock in certainty for investors, while reporting around the deadline indicated the U.S. side was, at best, ambivalent about the agreement’s future — with commentary suggesting an openness to seeing it terminated rather than renewed (Global News/Deloitte). No resolution was reached, meaning the review process could now stretch out for years, and existing U.S. tariffs on Canadian steel, aluminum and automobiles remain in effect even as Canada removed most of its own counter-tariffs on U.S. goods back in September 2025 in a goodwill gesture (Canada.ca).

The Economic Cost, in Numbers

The damage is already visible in the trade data. Canada’s exports to the United States fell roughly 10% over the past year, and the Bank of Canada projects national GDP will finish 2026 approximately 1.5% below its pre-tariff trajectory, with roughly half of that shortfall attributable to reduced potential output rather than a temporary demand shock (The Hub). Statistics Canada’s own spring 2026 review found nominal exports to the U.S. were 11.1% lower than March 2025 levels and 16.7% lower than December 2024 levels by year-end 2025, with imports from the U.S. also down roughly 9.8% over the same window (Statistics Canada).

Forecasts for the year diverge depending on how quickly the trade relationship stabilizes. Deloitte projects just 0.7% GDP growth for 2026, down from 1.7% in 2025, citing low business confidence tied directly to CUSMA uncertainty (Global News/Deloitte). Signal49 Research is somewhat more optimistic at 0.5%, but explicitly frames 2026 as “the storm before the calm,” projecting a rebound to 2.1% growth in 2027 if tariff relief materializes as expected (Newswire.ca/Signal49 Research).

Not All Bad News: Diversification and a Recovering Export Sector

The picture is not uniformly negative. Export volumes have shown signs of recovery, moving back above pre-tariff levels in March and April 2026, supported by rising energy production and higher commodity prices (Business Council of Canada). More structurally significant, Canada’s exports to non-U.S. markets have surged, pushing the non-U.S. share of Canadian exports to its highest level in more than four decades, driven largely by gold and energy shipments (Global Affairs Canada, State of Trade 2026). That diversification push has been assisted by an unlikely source: an October 2024–January 2026 Canada-China trade dispute, sparked by Canadian pushback on Chinese EV and steel subsidies, was resolved via a preliminary agreement in January 2026 under Prime Minister Mark Carney, reopening a market Canadian exporters had leaned into as U.S. access tightened (Wikipedia/Canada–China trade war).

Public Opinion Points Toward a Deal — On Both Sides of the Border

Perhaps the most underreported data point in this story is the polling. A spring 2026 University of Calgary survey conducted by Ipsos Public Affairs and Nanos Research found 73% of Canadians and 58% of Americans support deeper bilateral economic cooperation, while support for a trilateral free trade deal reaches 88% in Canada and 56% in the U.S. (The Hub). Just 8% of Americans surveyed describe Canada as a major economic challenge — the lowest of any country tested, far below the 49% who named China, suggesting the political appetite for a renewed deal exists even if the negotiating timeline has stalled (The Hub).

The Bank of Canada’s Response

With growth soft and inflationary pressure contained, the Bank of Canada is expected to hold its policy rate steady at 2.25% throughout the forecast period, as sluggish domestic growth and an elevated unemployment rate keep broader price pressures in check — a marked contrast to the U.S. Federal Reserve, which faces stickier inflation closer to 3.6% and correspondingly less room to cut (Newswire.ca/Signal49 Research).

Labour Market: Steady on the Surface, Strained Underneath

Headline employment indicators have held up reasonably well through mid-2026, with full-time job creation surging in April and wages remaining firm. But the Business Council of Canada cautions that youth unemployment remains elevated, tariff-exposed sectors continue to struggle, and hiring overall stays subdued as firms wait for clarity on the trade file before committing to expansion (Business Council of Canada).

Key Takeaways

1. The CUSMA review deadline passed July 1, 2026 without a new agreement, leaving U.S. tariffs on steel, aluminum and autos in place indefinitely.
2. Canadian GDP is projected to land between 0.5% and 0.7% growth for 2026 — well below 2025’s 1.7% — with the Bank of Canada estimating a 1.5-point permanent hit to output.
3. Non-U.S. export diversification, aided by a resolved Canada-China trade dispute, has pushed non-U.S. export share to a four-decade high.
4. Cross-border polling shows strong majority support for renewed cooperation on both sides, suggesting political space for a deal despite the stalled timeline.
5. The Bank of Canada is expected to hold rates at 2.25%, diverging from a more inflation-constrained U.S. Federal Reserve.

Sources: The Hub, Global News/Deloitte, Statistics Canada, Global Affairs Canada, State of Trade 2026, Business Council of Canada, Newswire.ca/Signal49 Research, Canada.ca, Wikipedia/Canada–China trade war

Every headline about the Canadian economy in July 2026 leads with the same frame: a stalled CUSMA review, punishing sectoral tariffs on steel and autos, and a technical recession. What almost none of them mention is the number that matters more for Canada’s next decade — a near-50% increase in non-US export value since 2024.

The CUSMA deadline that came and went

The Canada-US-Mexico Agreement’s mandatory review was due July 1, 2026. It could have renewed the deal for another 16 years, extended it for 10 years with annual reviews, or replaced it entirely — but the deadline passed with no resolution, according to TD Economics’ Weekly Bottom Line. The process now shifts to annual reviews, which TD Economics notes “will keep the cloud of uncertainty hanging” even though “parties can strike a deal at any time.”

Deloitte’s assessment, reported by Global News, is blunt: Canada’s economy is “on pause” amid the negotiations, with 2026 GDP growth forecast at just 0.7%, down from 1.7% in 2025. Business investment has now declined for five consecutive quarters through Q1 2026, and the country met the technical definition of recession over the six months from October 2025 through March 2026 — though several officials, including the Bank of Canada, have resisted that label given the data isn’t uniformly weak.

The diversification story underneath the headlines

Here’s what’s being underreported: Sébastien McMahon, chief economist at iA Financial Group, told BNN Bloomberg that Canada’s next phase of growth depends on expanding trade with markets beyond the US — and that exports to non-US destinations have already increased by nearly 50% in value since 2024. That’s a structural shift happening in real time, largely obscured by the tariff-headline cycle.

Energy has been doing the heavy lifting in the meantime. Statistics Canada reported GDP expanded 0.5% in April 2026 — the strongest monthly growth since July 2025 — driven substantially by energy: conventional and non-conventional oil and gas extraction, pipeline transportation, and refined petroleum manufacturing all contributed, according to Dominique Lapointe of Manulife Investment Management, per BNN Bloomberg. Western Canadian Select crude was trading around US$56 a barrel — more than 30% higher than at the start of the year — even as global benchmark prices had declined, partly because energy revenue is dollar-denominated and a weaker loonie makes production more lucrative.

The China trade angle nobody expected

In a move that received surprisingly little attention outside Canadian outlets, Canada cut its 100% tariff on Chinese electric vehicles to 6.1% for an initial quota of 49,000 units, in exchange for China reducing tariffs on Canadian canola seed (from roughly 85% to about 15%) and suspending tariffs on canola meal, peas, lobster, and crab through the end of 2026, according to Oye! Times. Canada is opening its market to up to 278,989 Chinese EVs over five years — a trade-off that Canadian auto manufacturers argue creates both competitive and data-security risk, given concerns about connected vehicles.

What this means for businesses and investors

The federal government’s Major Projects Office, created to streamline approvals for nation-building infrastructure, and continued provincial investment plans suggest Ottawa is betting on this diversification thesis rather than waiting out the US relationship. For Pakistani and other emerging-market exporters watching global trade realignment, Canada’s playbook — opening EV market access in exchange for agricultural tariff relief, while building alternative energy export capacity — is a template worth studying: reduce single-partner concentration risk without abandoning your largest existing trade relationship.

The risk, as TD Economics notes, is that “another setback in negotiations, or new tariffs, could unwind the recent progress” — meaning the diversification trend, while real, remains vulnerable to a single adverse CUSMA outcome.

FAQ

Is Canada in a recession in 2026? Canada met the technical definition of recession over October 2025–March 2026 (two consecutive quarterly GDP declines), though officials including the Bank of Canada have disputed whether this reflects a genuine broad-based downturn.

What happened with the CUSMA review deadline? The July 1, 2026 mandatory review deadline passed without a resolution; the process now moves to annual reviews while current tariff terms remain in place.

How is Canada reducing its reliance on US trade? Non-US export value has grown nearly 50% since 2024, according to iA Financial Group, alongside new agreements such as reduced EV tariffs with China in exchange for Chinese tariff relief on Canadian agricultural exports.