Canadian Prime Minister Mark Carney said he and US President Donald Trump have agreed to “intensify” trade negotiations, but the détente followed one of the more jarring tariff threats of the year: a plan for 50% tariffs on a wide range of Canadian imports, framed by Washington as retaliation over the treatment of US-made cars, alcohol, and dairy, according to Al Jazeera’s coverage.

The dependency Carney can’t diversify away quickly

The core problem is arithmetic, not politics. Canada still sends close to 70% of its exports south of the border, compared with roughly 20% of EU exports going to the US, according to Reuters reporting via AOL. To cut merchandise exports to the US by just 10%, Export Development Canada estimates Canada would need to roughly double its exports to China, Germany, France, Mexico, Italy, and India combined — or find markets of similar scale elsewhere.

Carney has nonetheless pushed further than most G7 peers on diversification, becoming the first Canadian prime minister to visit China since 2017 and signing a trade deal with Beijing in January, even as Ottawa shelved earlier ambitions for a comprehensive free trade agreement with China, according to reporting from Automotive News and a separate account of the shelved FTA.

The data is starting to show it — barely

Statistics Canada data shows early, if modest, evidence of the pivot working: exports to the US fell again in May even as businesses sought alternative partners, with the Canadian Chamber of Commerce noting “encouraging gains in other markets,” according to Global News. Carney has also moved to de-escalate on the margins, removing retaliatory tariffs on US goods compliant with CUSMA rules of origin even as broader trade tensions persist.

A domestic political fight over the same question

The diversification strategy is also a live domestic debate. Conservative leader Pierre Poilievre has argued for staying more closely tethered to the US relationship rather than pursuing what critics characterize as an unproven pivot, per the Automotive News analysis. Meanwhile, sector-specific damage from the trade war continues to surface — Algoma Steel laid off roughly 1,000 workers amid the tariff dispute, and food bank usage in Ontario has risen sharply, underscoring the near-term costs of the standoff regardless of its long-term strategic logic.

Why this connects to the broader trade map

Carney’s pivot toward China arrives as the EU pursues its own diversification — striking a Mercosur deal after 25 years of talks, concluding an agreement with Indonesia, and reopening talks with Malaysia, the Philippines, the UAE, and India, according to the same Reuters analysis. Canada’s experiment is effectively a stress test other US-dependent economies are watching closely, including several in the Gulf and Southeast Asia weighing their own exposure to Washington’s tariff unpredictability.

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