Confronting the Elephant in the Room: The Reality of Canada-U.S. Trade Dependence

With the world’s longest undefended border between them, Canada and the United States should really be the best of friends. Thanks to the highly lopsided size of both countries' population and economy, Pierre Trudeau once remarked about the United States that “living next to you is in some ways like sleeping with an elephant.” The sheer population difference causes even a small move by the U.S. to be a powerful shock to Canada.

Recent actions by President Trump have created tensions that Prime Minister Mark Carney has been dealing – or not dealing – with since coming to power just over a year ago. There has been a popular call in Canada to boycott the U.S. since Trump enacted tariffs on many Canadian products not covered by CUSMA, and a quick pivot to trade with Europe and Asia to replace trade with America. It takes a deep dive into the long history with our southern neighbour, one that goes beyond the sound bites and headlines free from historical context to best assess what is Canada's best path forward.

Following Confederation in 1867, Canada’s first Prime Minister, Sir John A. Macdonald instituted a highly protectionist trade policy, the National Policy, which remained the trade framework Canada mainly operated under until World War II. Following the war, many countries worldwide recognized that excessive protectionism was a major contributing factor to the length and severity of the Great Depression, some also drawing links between the Depression and the rise of authoritarian regimes around the world. As a response, a number of countries including both Canada and the USA created the General Agreement on Tariffs and Trade (GATT), which began the process of dismantling trade barriers worldwide.

In the 1960s, Canada’s automotive sector was in crisis, largely due to increasing inefficiency of production, rising costs, and slowing sales. As the sector represented a large number of jobs, it was imperative for the government of the day to respond. In order to save the industry, the Johnson administration in the U.S. and the Pearson administration in Canada negotiated the Auto Pact, allowing for tariff-free exchange of completed automobiles and their parts, including autos not completely assembled. This resulted in a sea change in the North American automotive industry as autos began to be assembled on both sides of the border – it is reported that many vehicle parts will cross the border multiple times as a car is being assembled.

This tight integration has been a boon to both countries – but has also made it impossible for Canada to extricate itself from U.S. production of automobiles.

From that point on, Canada-US trade barriers continued to drop, with the US-Canada Free Trade Agreement (CFTA) in 1988 followed by the North American Free Trade Agreement (NAFTA) in 1994, and then the Canada-US-Mexico Agreement (CUSMA) in 2020. This has had the effect of keeping the share of total Canadian exports going to the US at between 70 and 80 per cent for the last several decades. Between the amount of trade going to the U.S. and the integration of many industries, is it any wonder why Canada is so dependent on the U.S. market?

The question remains: is this level of dependency on the U.S. a sustainable path forward for Canada? Stay tuned for our next part in this four-part series, where we continue to break it down.