Canada's primary strategy for addressing trade uncertainties, including the volatility stemming from the United States administration's shifting policies, has been to pursue trade diversification, said CIBC.
The aspiration to reduce economic reliance on the United States isn't new, as it goes back decades. Currently, Canada has 15 active Free Trade Agreements (FTA) with 51 countries, granting Canadian businesses preferential access to more than 1.5 billion consumers.
The countries in those agreements collectively cover over 61% of global gross domestic product and more than one third of the world's economy outside the U.S. Notably, Canada stands out as the only G7 nation with FTAs covering all six of its fellow G7 members, writes the bank in a note to clients.
As a consequence, considerable groundwork for inducing trade with non-U.S. countries has already been laid. Despite this, however, the tangible impact of trade diversification has been "modest," stated CIBC. The Herfindahl-Hirschman Index (HHI) of trade diversification by export markets was basically flat until last year, when it started to trend upward thanks to diversification efforts in response to President Donald Trump's protectionist trade policies.
The share of Canadian exports destined for the United States has declined from 76% in 2024 to 69% over the past 12 months, replaced largely by demand from China and European countries, when looking at exports excluding gold.
The only sector facing the U.S. tariffs that has meaningfully been able to diversify is aluminum, suggesting that the shift away from the U.S. is occurring more broadly amongst Canadian exporters, as the other sectors hit by tariffs either don't have immediately viable intercontinental markets or are diverting goods to the domestic market, pointed out the bank.
While that progress is noteworthy, it falls short of transformative change, added CIBC. The reasons are clear: as Professor Paul Krugman put it, Canada is closer to the U.S. than to itself, while the sheer scale of the American market is difficult to resist.
While the initial diversification efforts have addressed the low hanging fruit, maintaining this pace will become increasingly challenging, noted CIBC. To provide context, Canada is currently navigating a global trade war.
Much like during the Cold War, countries such as Canada will ultimately be compelled to align with one of the major powers. Despite recent developments, it is clear that Canada's alignment will remain with the United States, according to CIBC.