This article originally appeared in WGI.World.
By Stephen Nagy, July 2, 2025
Canada’s long standing post-WW2 foreign policy framework was designed for a world in which multilateralism was the common currency for international relations. The order is gone and Canada finds itself in the integrum between the post-WW2 international order and a new international order that is emerging.
This transformation in international order requires substantial recalibration to address the realities of renewed great power competition between the U.S., China and Russia today but likely to include India and other rising actors as Fareed Zakaria’s “rise of the rest” become a reality. Recent coercive economic pressures from both the U.S. and China demonstrate that traditional middle power strategies offer diminishing returns in an international system increasingly defined by highly asymmetric bilateral power dynamics, and economic statecraft.
The empirical evidence is compelling. Since January 2025, Canadian exports faced $12.7 billion in potential losses from proposed U.S. tariffs, while agricultural shipments to China remain 40% below pre-2019 levels due to ongoing trade restrictions. These concurrent pressures from our two largest trading partners illustrate the structural constraints facing Canadian policymakers.
When assessing economic vulnerabilities, i.e. economic security in today’s parlance, Canada’s trade architecture reveals profound concentration risks. U.S.-bound exports constituted 77.8% of total merchandise trade in 2024, worth $592 billion. By comparison, China accounted for 3.9%, the European Union 7.2%, and all other partners combined merely 11.1%. This distribution reflects not policy failure but economic geography. The reality that the tyranny of distance and the efficiency of integrated continental supply chains.
Financial markets provide additional evidence. The Toronto Stock Exchange’s correlation with U.S. markets exceeds 0.85, while correlation with Shanghai remains below 0.4. Canadian dollar movements track Federal Reserve policy more closely than Bank of Canada decisions, with 78% of variance explained by U.S. monetary conditions. These metrics underscore the depth of North American economic integration beyond simple trade figures.
The innovation ecosystem tells a similar story. Of Canada’s 4,800 technology startups tracked by the Canadian Venture Capital Association, 71% report U.S. customers as primary revenue sources, 62% have American investors, and 44% maintain U.S. operations. Only 11% report significant Chinese market presence, constrained by regulatory barriers, intellectual property concerns, and market access restrictions.
To understand Chinese economic statecraft, we need to focus on China’s approach to economic relationships which follows identifiable patterns that Canadian policymakers must factor into strategic calculations. According to the International Institute of Strategic Studies (IISS) China Programme’s research on export controls and economic statecraft (2010–2025), between 2010 and 2024, China enacted trade restrictions on at least 47 documented occasions targeting 23 countries, with nearly 9 out of 10 of these measures coinciding with political disputes or tensions. China’s tactics remain consistent with targeting politically sensitive sectors, using health and safety justifications, and maintaining plausible deniability. Targets include but are not limited to Australia, Canada, Taiwan, South Korea, Lithuanian and others.
Canada experienced this directly through three episodes. According to the University of Alberta’s China Institute, the 2019 canola restrictions affected $2.8 billion in annual exports, following Canada’s detention of Huawei executive Meng Wanzhou. Technical justifications cited pest concerns, yet restrictions lifted only after her release. Similarly, beef and pork inspections intensified 340% during the same period, though no safety violations were documented. As reported by the 2022/2023 Canada-China Business Survey conducted by the Canada China Business Council (CCBC)Most recently, Canadian exports to China faced increased scrutiny after Canada’s Indo-Pacific Strategy explicitly labeled China a “disruptive power.”
Quantitative analysis by the Mercator Institute documents that countries experiencing Chinese economic coercion suffer average GDP impacts of 0.3-0.5% annually, with targeted sectors seeing 25-60% export declines. Recovery periods average 3.7 years after political reconciliation, suggesting lasting market share losses.
These realities require Canada to evaluate diversification options. To start, the mathematics of trade diversification reveal sobering constraints. To reduce U.S. trade dependence by even 10 percentage points would require increasing non-U.S. exports by $77 billion annually, the equivalent to tripling current Chinese trade or doubling EU commerce.
Beyond logistics, regulatory harmonization presents barriers. Canada maintains mutual recognition agreements covering 67% of regulated products with the U.S. , versus 23% with the E.U. and 12% with Asian partners. Professional licensing reciprocity exists for 43 occupations with U.S. states but only 7 with EU members and 3 with Asian nations. These technical barriers reflect decades of continental integration not easily replicated elsewhere.
Market analysis by Export Development Canada identifies theoretical diversification opportunities worth $34 billion annually across Asia-Pacific markets. However, achieving this would require 8-12 years based on historical growth rates, assuming no retaliatory measures and continued market access are very optimistic assumptions given recent experiences and the broader trend led by the U.S. of trade protectionism.
Canada needs to construct strategic options rather than pursuing costly diversification with limited success probability, Canada could optimize its position within North American integration while building selective global partnerships. This approach recognizes structural realities while maximizing policy flexibility.
Defense procurement offers immediate opportunities. Canada’s planned $73 billion defense spending over five years could prioritize North American suppliers, strengthening continental defense industrial base while building Washington goodwill. The Canadian Surface Combatant program, F-35 acquisition, and NORAD modernization represent $45 billion in decisions directly affecting bilateral relations.
Critical minerals present another avenue. Canada possesses 14 of 31 minerals deemed critical by both Washington and Brussels, including 70% of global cesium reserves and significant lithium, cobalt, and graphite deposits. Rather than seeking separate deals with competing powers, Canada could position itself as the secure supplier for democratic allies, leveraging geography and governance advantages.
Technology policy coordination offers mutual benefits. Canada’s AI research community, ranked fourth globally by publication impact, could deepen integration with U.S. institutions while maintaining academic freedom. The Vector Institute’s partnership model, connecting Canadian researchers with global tech firms while retaining IP rights, suggests balanced approaches possible.
Managing great power relations requires effective Canadian strategy and requires clear-eyed assessment of both U.S. and Chinese behaviors. Washington’s recent unilateralism, exemplified by Inflation Reduction Act provisions that disadvantage Canadian manufacturers despite USMCA commitments, demonstrates that proximity doesn’t guarantee consideration. However, U.S. policy reversals typically follow allied lobbying and congressional intervention that our channels unavailable with Beijing.
China’s governance structure precludes similar influence mechanisms. The State Council’s decision-making remains opaque, with economic ministries subordinate to Party priorities under the parallel governance/ dual track governance system controlled by the Chinese Communist Party (CCP). Canada’s experience during the two Michaels detention illustrates this reality: despite 100+ diplomatic interventions and multilateral pressure, release came only after resolving the original political dispute.
Statistical analysis of dispute resolution reveals telling patterns. According to the Congressional Research Service (CRS) report on U.S.-Canada trade relations, of the 23 Canada-U.S. trade disputes since 2000, 19 reached negotiated solutions, with an average resolution time of 14 months. Canadian objectives were partially or fully achieved in 74% of cases. By contrast, Canada’s requests for WTO dispute consultations with China concerning additional import duties on Canadian agricultural and fishery products were lengthy WTO dispute processes known to be lengthy, often taking years to resolve.
As Canada celebrates its founding on July 1st, the following policy recommendations may contribute to Canada dealing with the “brave old world” of the old era of spheres of influence and great power strategic competition. In that process, Canada should pursue a three-track strategy recognizing contemporary realities.
First, Canada needs to deepen North American integration in sectors providing mutual benefit in the areas of defense production, critical minerals, and clean energy. This leverages existing advantages while building influence through indispensability rather than independence.
Second, maintain pragmatic economic relations with China while reducing vulnerabilities. This means avoiding critical dependencies, maintaining market access where possible, but preparing for periodic disruptions when political tensions arise. Clear communication about redlines and consistent policy application could minimize but not eliminate friction.
Third, strengthen partnerships with democratic allies sharing similar challenges. Japan, South Korea, Australia, and European nations face comparable dilemmas balancing U.S. relations with Chinese economic opportunities. Coordinated approaches to investment screening, technology transfer, and supply chain resilience offer mutual benefits without requiring choosing sides.
Canada’s middle power identity emerged from specific historical circumstances including a bipolar world with strong multilateral institutions and U.S. hegemonic stability. Today’s multipolar competition with weakened international organizations demands strategic adaptation. This doesn’t require abandoning Canadian values or interests but rather pursuing them through updated means.
The evidence suggests Canada’s optimal strategy involves embracing North American integration while maintaining selective global partnerships. Geography creates constraints but also opportunities. Rather than lamenting power asymmetries or pursuing unrealistic autonomy, Canadian policy should focus on maximizing influence within existing structures while building resilience against external pressures.
As Canadians mark Canada Day 2025, the challenge isn’t choosing between independence and alignment, but crafting strategies that serve Canadian interests in a fundamentally changed international environment. This requires moving beyond traditional middle power frameworks toward approaches recognizing that in strategic competition, geography and economics matter more than diplomatic posturing. Canada’s future prosperity depends on adapting inherited policies to contemporary realities, not defending outdated concepts against accumulating evidence.
Dr. Stephen R. Nagy is Professor of Politics and International Studies at the International Christian University, Tokyo and concurrently a Visiting fellow for the Hungarian Institute for International Affairs (HIIA,) a visiting fellow at the Japan Institute of International Affairs (JIIA,) and senior fellow at the Macdonald-Laurier Institute (MLI.)