Explainer: Canada–U.S. relations at a crossroads, experts say Canada is more exposed than ever

Car., unidentified. Canadian Private Post Card. Knowles & Co. London Ont. Circa 1907/09 (Credit: An Encyclopedia of Canadian Animation, Cartooning and Illustration)

Canada is entering 2026 facing what global risk analysts describe as its most precarious relationship with the United States in decades, a moment that is forcing Ottawa to rethink long-standing assumptions about trade, security and economic dependence.

In its Top Risks 2026 report, political risk consultancy Eurasia Group warns that no country outside the United States will be more affected by Washington’s political upheaval than Canada. 

The firm points to Canada’s deep economic integration with the U.S., its reliance on the American market for exports and the increasingly unpredictable nature of U.S. trade and foreign policy under President Donald Trump.

Prime Minister Mark Carney has echoed that assessment, calling the current period a “hinge moment” for Canada and acknowledging that the foundation of the Canada–U.S. relationship has fundamentally changed.

A relationship built on integration 

For decades, Canada’s prosperity has been closely tied to the United States. Roughly three-quarters of Canada’s merchandise exports are destined for the U.S., making it by far Canada’s largest trading partner. 

Entire sectors, including autos, energy, forestry and agriculture are structured around integrated North American supply chains.

But recent trade data suggests that reliance is becoming a growing vulnerability.

According to Canada’s November 2025 monthly trade report, goods exports to the U.S. fell 1.8 per cent in the month, driven by lower shipments of motor vehicles and gold. Over the first 11 months of 2025, Canadian goods exports to the U.S. were down 4.9 per cent compared to the same period a year earlier.

At the same time, imports from the U.S. have remained relatively stable, reinforcing concerns that Canada’s trade balance and economic growth are increasingly exposed to political and policy shifts south of the border.

Eurasia Group says those risks are being amplified by what it calls the U.S. “political revolution.” This is Trump’s effort to consolidate power, weaken institutional checks and use trade and tariffs as tools of leverage.

A volatile and personalized U.S. approach

Eurasia Group’s report argues that Canada can no longer rely on the traditional playbook of cultivating allies across Congress, state governments and federal agencies. Instead, decisions in Washington are increasingly shaped by the preferences of a single leader and a small inner circle.

That personalization makes Canada vulnerable to sudden punitive measures, the report says, particularly if Ottawa is perceived as resisting U.S. demands on trade, defence spending or industrial policy.

One of the most immediate concerns is the future of the Canada–U.S.–Mexico Agreement (CUSMA). While CUSMA will not be formally renegotiated or terminated in 2026, Eurasia Group describes it as a “zombie” agreement technically in force, but subject to constant pressure through sector-specific tariffs on autos, steel and aluminum.

For Canadian firms built around continent-wide production, that uncertainty makes long-term planning difficult and discourages investment.

Playing defense and offence

Carney has said Canada must “play defense and offence at the same time,”  managing an unpredictable U.S. while accelerating efforts to diversify trade and investment.

That strategy was on full display earlier this month when Carney announced a new strategic partnership with China following a visit to Beijing, the first by a Canadian prime minister since 2017.

The agreement included cooperation on clean energy, climate technology and agri-food, as well as a controversial decision to allow a limited number of Chinese electric vehicles into the Canadian market at lower tariff rates. In exchange, China is expected to significantly reduce tariffs on Canadian agricultural exports, including canola.

Carney framed the deal as a pragmatic response to a changing world, saying Canada must “take the world as it is, not as we wish it to be.”

Diversification comes with risks

Eurasia Group cautioned that diversification will not be easy. Europe, another potential alternative to the U.S., is politically fragile and inward-focused. China’s economy is slowing and trade with Beijing carries both economic and geopolitical risks, including potential backlash from Washington.

The report also warned that Canada could face pressure from the U.S. over its approach to China, particularly in sensitive sectors such as electric vehicles, critical minerals and clean technology.

Still, experts said Ottawa has limited options.

“The calculation that ever-deeper integration with the U.S. would always pay off no longer holds,” Eurasia Group concluded.

A more exposed Canada

Taken together, analysts say Canada’s exposure stems from three realities: its unmatched dependence on the U.S. market, the erosion of predictability in U.S. policy and the difficulty of finding reliable alternatives in a fragmented global economy.

Carney’s moves, from trade diversification to renewed focus on domestic manufacturing and Arctic defence, suggest Ottawa is preparing for a future in which Canada must operate with less certainty, fewer guarantees and higher risk.

Whether those efforts will be enough to reduce Canada’s vulnerability remains an open question.