Global relationships are in upheaval as the United States is now engaging in coercive diplomacy with former allies. In short, the US is directly using its economic and military power to force changes in the behaviour of others. Few countries face the implications of this change more acutely than Canada, but we are not alone in the world. The U.S.’s new foreign policy means Canada must expand our relationships with other countries and seek new ways to engage with the world.
For much of our history, Canada has been deeply connected with the global superpower of the day, from our birth as country up until the early 20th century it was initially the United Kingdom, and then subsequently the United States since then. That dynamic is set to change. While geography dictates that our relationship with the U.S. will always be important, Canada must embrace its role as a global middle power to forge new opportunities.
Canada has a lot to offer as a partner and can demand a lot back. A partial list of our assets includes:
- We are the world’s 10th largest economy and are growing faster than many other advanced economies.
- We have immense natural resource wealth, including the world’s third largest oil reserves, major agricultural capacity, large reserves of many minerals, vast forests, and significant water resources.
- We have significant energy potential beyond oil and gas, including one of the cleanest electricity grids in the world.
- We have a strong and internationally growing services sector, with particular strengths in financial and information services.
- We are among the most educated countries and are highly attractive for skilled immigrants.
In short, Canada is a country that most countries should be happy to be friends with: A highly educated, self-sufficient, democratic middle power with an enviable abundance of natural resources and access to three oceans.
Understanding these strengths is critical in developing a new “elbows up” foreign policy. We need to be laser focused on addressing our own interests as we engage with the world. Partners should be nourished based on three criteria:
- Building economic resilience through diversified, reliable and like-minded trading and investment partners.
- Maintaining security through building our military capacity and alliances.
- Addressing domestic needs through reliable imports.
Canada must maintain a balance between these three needs. Not all partners need to meet all three criteria, but those who meet none should be deprioritized. This will be a major shift, as the U.S. has historically been the major partner for all three of these needs. No country can reliably do that today, so instead we must build a web of new and expanded relationships. To do this, Canada will ultimately need to join, or lead, a group of middle powers centered in Europe and extending into Asia.
There are four main categories of partners that Canada needs to strengthen relationships:
- The first are developed democracies, like the U.K., Europe, Japan and South Korea where security relationships are established and where economic opportunities exist.
- The second are emerging countries, in Asia, Africa and Latin America. In these cases, economic opportunities are clear, but security co-operation is likely to be more limited.
- The third are China and India, which are large and growing economies, with strong trade opportunities but a challenging security and diplomatic environment.
- And the last is the United States, with which we will always feel a gravitational pull.
This report is part of our Canada in a Changing World series. In upcoming research we will delve into different issues about how Canada can adapt to a changing world. Here we provide a summary of our current relationship with key countries and regions, and how our relationships can evolve to help meet our needs.
Developed democracies: We have lots of opportunities with our traditional allies
European Union
The European Union is well positioned to play a much larger role in Canada’s economic and foreign policy moving forward. Canada shares a long-standing economic and defense relationship, we have a free trade agreement in place, and ideologically we are well aligned, as demonstrated by measures of geopolitical distance¹ and democratic freedoms.²
There is lots of room for the relationship to grow as both Canada and the E.U. recognize the severity of the crisis. Europe is quickly increasing defense spending and sees Canada as a possible partner in the endeavor. While procurement is currently limited to European nations, Canada has been signalled as a preferred partner who could be part of the rearmament program.³ This could allow Canada to engage with Europe’s industrial-military complex in new ways and could boost our own military production capabilities. Things are moving quickly, with Canada already re-opening discussions around the next generation fighter program and being asked by Norway and Germany to join their submarine program. Given the need for Canada to build its own military capacity, look for new export opportunities, and re-enforce the existing defense relationship, Canada should do everything it can to take part in the rebuilding of Europe’s militaries.
As highlighted in our trade partner series⁴ , Canada and the E.U. make for natural trade partners. Europe has a shortage of resources, something Canada has in abundance. Meanwhile, Europe is a leader in manufacturing machinery, something Canada mostly buys from the U.S. The Canada-European Union Comprehensive Economic and Trade agreement (CETA) is a starting point to boost trade, but the relationship can be expanded.
Canada, for its part, could position itself as a major source for European energy. Environmental concerns have long held back the relationship, given Canada’s high emissions to GDP ratio, but several European leaders have specifically asked Canada to increase its LNG exports to Europe. Canada could try to position itself as a reliable energy partner and seek exemptions from Europe’s carbon border adjustment policy in exchange for building incentives for European investment into Canada’s energy sector, as well and Atlantic-oriented infrastructure to get it to market.
United Kingdom
Canada has a long-standing relationship with the United Kingdom (U.K.), as evidenced by the Monarch continuing to be our head of state. Prime Minister Carney made his first foreign visit to London, highlighting the importance of the relationship going forward. Prime Minister Starmer of the U.K., meanwhile, hosted a “coalition of the willing” meeting on Ukraine, in which Canada was the only non-European country attending.
Both countries have a strong history of security alignment, including NATO membership and intelligence sharing through the “five eyes” agreement, but there is room to grow. The U.K. is boosting its defense spending to 2.5 per cent of GDP by 2027. Canada, for its part, provides a potential market for the U.K defense companies. Currently, only 0.3 per cent of Canada’s military equipment imports come from the U.K, but as Canada increases its military spending, there is opportunity to deepen this relationship.
Despite the diplomatic and military relationship, the trading relationship is small. The U.K. is Canada’s fifth largest trading partner, accounting for only 3.6 per cent of exports and 1.3 per cent of imports. Gold makes up the bulk of exports, though export growth over the past decade has also included mineral fuels, aerospace products, agricultural products and uranium. Canada, meanwhile, imports mostly advanced machinery and pharmaceutical products from the U.K. The two countries have a trade agreement that is an extension of CETA that makes trade mostly free outside of agricultural products. Room for growth exists for Canadian resource exports, while Canada could import more transportation equipment parts (both for aircraft and motor vehicles) and medicine.
Overall, the U.K. has been and will continue to be a reliable partner for Canada. The two countries could play a bigger role globally if both increase the size of their military, and given alignment on most issues, could present a unified front on global issues. For now, the relationship needs to be nourished by seeking trade, investment, diplomatic and military alignment across the frameworks that are already in place.
Asia Pacific
Canada maintains a strong relationship with many countries in the Asia-Pacific region. Countries with the strongest opportunities to expand trading and security relationships are the large, developed democracies, namely Japan, South Korea, Australia, and New Zealand. Canada has a free trade agreement in place with all of these countries, either through the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CTPP), or bilaterally in the case of South Korea.
There’s more room to grow the relationship in light of threats the Asia-Pacific faces with China. Canada has defense arrangements with all four countries and maintains close collaboration with Australia and New Zealand through the Five Eyes partnership. Canada could look to procure more military goods from the four countries, as it did with the radar system recently purchased from Australia.⁵ South Korea and Japan have both been ramping up their production of military equipment of late⁶ , and Canada could help build economies of scale by joining in on purchasing some of these capabilities.
Beyond that, more trade opportunities exist, as the four are only modest trading partners with Canada, despite their large economies. The opportunities for trade are more obvious for South Korea and Japan, who typically produce things we need (high tech product and machinery) and import things we produce (natural resources). Both countries could also further invest in Canada, with Japanese investments into Canada’s automotive industries potentially offering it access to Canadian consumers.
Other developed democracies
Outside of the European Union, the United Kingdom and the large Asian and Oceanic democracies, there are other smaller partners that Canada could also work with. Notably, European countries such as Norway, Iceland and Switzerland are all among the richest countries in the world, who are bigger players in foreign direct investment than their size would suggest. In the case of Norway, especially, the countries could find common ground in arctic security and combine funding for the purchase of arctic-oriented defense equipment. Meanwhile, high wealth levels in Switzerland and Iceland could provide export opportunities for Canadian-made luxury goods and through tourism promotion.
Emerging markets: Driving export diversification for the future
Canada has long built trading relationships with emerging markets. Through the CTPP, Canada has a free trade agreement with large growing economies like Chile, Peru, Vietnam and Malaysia. These trade agreements are on top of others Canada shares with countries in Latin America, such as Honduras, Panama, Columbia and Costa Rica.
The value of these trade agreements is clear for improving bilateral trade and investment flows. Canada should continue to seek out even more agreements with emerging markets given the opportunities they provide through their well-above average economic growth. There is already momentum in Indonesia and the Philippines, among the fastest growing economies in the world, but Canada should cast a wide net.
Many of the world’s fastest growing economies are in Africa and Asia, and underlying growth trends, notably productivity improvements and population growth, suggest that many of these countries are becoming more important to the global economy. For example, the IMF projects that emerging markets in Asia will grow at an average annual rate of 5.8 per cent between 2024 and 2029, while emerging markets in Latin America and the Caribbean (2.6 per cent), and those in sub-Saharan Africa (4.2 per cent) will outpace growth of just 1.6 per cent growth in G7 economies. that the region that accounts for most of Canada’s current exports.
That means that as the world changes, building trading relationships with emerging markets will be a key growth catalyst. Canada already has success in this regard, particularly through its mining and banking sectors, and should build upon those industries to expand investment and trading relationships with emerging markets across all regions through foreign direct investment in resources, the export of services, particularly financial services, and building infrastructure.
Now is a key time for Canada to seize these opportunities and build relationships. The retaliatory tariffs imposed by the U.S. administration hit many of these countries hard and they are likely to be seeking more reliable partners. This is despite the success many have had in building their manufacturing sectors, with Vietnam being among the hardest hit by tariffs but also among the fastest growing economies in the World. Canada should seek to find new opportunities that have emerged with the change in U.S. behavior to build long-term trading relationships. For example, negotiations with the ASEAN block is a positive development, as are negotiations with MERCOSUR (South American nations), and opportunities should be expanded into Africa as well.
China and India: Big markets fraught with risk
Canada’s relationships with both China and India have been strained in recent years by various allegations. These include the intimidation of expatriate communities and election interference⁷ by both countries, the murder of a Sikh activist on Canadian soil by Indian agents⁸, and China’s use of hostage diplomacy.⁹ Given these concerns, it’s unlikely that Canada will find itself aligned diplomatically or militarily with either country.
Trade is another area of tension between Canada and China. In the past, China has used access to its economy as a weapon to achieve political goals,¹⁰ while Canada has used tariffs to protect certain industries, such as electric vehicles¹¹ , and bans on Chinese companies over security concerns.¹² Trade relationships between Canada and India have been less fraught, but high barriers and the lack of a formal trade agreement mean that trade between the two countries remains well below what it could potentially be. The end result is neither country has seen a notable increase in its share of Canadian trade over the past decade.
The size of Canada’s (10th largest), China’s (2nd largest), and India’s (5th largest) economies suggest that there is opportunity to expand our trading relationships with both countries. For example, India has begun purchasing oil from Canada with the completion of the Transmountain pipeline and could be a destination for LNG exports. As well, China has indicated a desire to buy more from Canada rather than less, and it’s possible Canada could seek a purely economic relationship with China to boost the economy at a time of need.¹³
However, given the political tensions, their reliability as trade partners is limited. This means that Canada will need to be opportunistic, aiming to increase trade in products where there are alternative markets, while limiting dependence on these markets for either imports or exports of products where the ability to substitute is limited. This would limit their ability to damage the Canadian economy during any periods of strife, but still allow us to benefit from trading with them.
United States: The gravitational pull
Canada’s now unpredictable relationship with the U.S. will be its biggest challenge. What’s clear with the new Trump presidency is that Canada is in the crosshairs, and that means how we engage with the U.S. will need to change. What won’t change is that the world’s largest economy and military are right next door.
To deal with a less reliable America we need to embrace our role as a middle power. This means engaging with the U.S. in a transactional way with clear goals about what we want from the relationship, weighed against how our actions with the U.S. will influence our relationships with other countries. Adoption of U.S. policies or positions that damage other relationships should only occur if there is a clear benefit for Canada. For example, Canada could revisit its tariffs on Chinese electric vehicles, which were enacted in parallel with similar U.S. tariffs, if Canada were to get something in return, such as the removal of Chinese tariffs on Canadian canola. Canada needs to put its own interests first, pursing policies on climate change, Ukraine, and other foreign policy questions that align with our own priorities.
When it comes to trade, Canada can no longer take access to the U.S. market for granted. This means seeking to minimize the imposition of tariffs on the Canadian economy in the short-run while we develop the physical and political infrastructure, as well as the business linkages, required to reduce our dependence on the U.S.
In practical terms, minimizing the imposition of tariffs requires more of what we are already doing, including:
- Information campaigns on the important role that Canadian products, energy and resources play in the U.S. economy
- Measured responses to apply pressure to have tariffs removed when applied
- De-escalation when the U.S. behaves in a way that is in our interest
- Reacting when and how we choose, taking away the initiative from the U.S.
When it comes to defense, Canada needs to be pragmatic about its relationship with the U.S. North American security from Russia and China remains a bilateral issue that won’t disappear. Canada should move to exceed its NATO and NORAD commitments as soon as possible. However, Canada can use this new spending, which will be billions, as a negotiating tool. From an economic perspective, Canada should seek to leverage its need to buy defense goods to build relationships with countries other than the U.S.
We have already begun to partially do this, including the decision to re-think F35 purchases from the U.S.¹⁴ However, we also need to think about how we leverage these purchases beyond fulfilling a military requirement. For example, do we impose Canadian content requirements to stimulate the steel and aluminum industry at a time of need? Do we impose technology sharing requirements to fill critical knowledge gaps in our defense capabilities? Or do we link military purchases to broader bilateral goals with a particular country?
It’s time to act like a middle power
Canada has long been a global middle power, that seemed relegated to a smaller position because of its reliance on the U.S. Trump’s aggressive stance towards Canada provides the opportunity for Canada to re-emerge, like it did post World War 2, as a strong voice in the world. Canada has built up goodwill among many of the globe’s other middle powers, including those in Europe and in Asia.
We now need to use the soft power we have accumulated for our own benefit. We need a renewed focus in several areas including:
- Diversifying who we trade with by building resource based and services exports, and sourcing our imports with friendly countries
- repurposing economic capacity made redundant by U.S. tariffs for domestic needs
- identifying and investing in strategic industries, and
- boosting military spending.
If done well, Canada could come out of this crisis better than ever. With a more self-assured position on the global stage, and a more resilient economy.
As the Canada–U.S. relationship is being reset, we’re examining what Canada must do to thrive in this changing world. Get the latest research.
