Amid rising protectionism under a second Trump administration, calls for trade diversification by middle powers like Canada are gaining traction. Yet without deep domestic reform and multilateral coordination, such strategies risk substituting one vulnerability for another.
The recent joint statement by Canada’s First Ministers advocating trade diversification and renewed engagement with China represents an understandable, however, fundamentally flawed response to mounting tariff pressures from the second Trump administration. While the desire to reduce economic vulnerability is rational, the notion that Canada—or any middle power—can meaningfully diversify away from the United States in the near or long term reflects a dangerous misdiagnosis of both the problem and potential solutions.
Canada’s economic integration with the United States is not merely a policy choice but a geographic destiny. With 77 percent of Canadian exports flowing to American markets and deeply integrated cross-border supply chains spanning virtually every major industry, the US$2.5 trillion relationship represents an economic reality that cannot be significantly altered in the timeframe of any single administration. The thousands of cross-border business relationships, family connections, and institutional linkages create a profound interdependence that defies quick recalibration.
This reality extends to other middle powers. Australia, Japan, and South Korea all confront similar challenges of geographic and economic proximity to major powers—whether the United States or China—that create unavoidable dependencies. Japan sends approximately 20 percent of its exports to the United States and South Korea sends 18.8 percent of its exports, while Australia sends 36 percent of its exports to China. These patterns reflect economic gravity that transcends political preference.
Middle powers like Canada find themselves in what international relations theorists increasingly describe as a “middle power prisoner’s dilemma”—caught between competing great powers with limited ability to chart truly independent courses. When great powers like the United States and China adopt confrontational postures, middle powers face impossible choices: maintain allegiance to traditional security partners at economic cost or pursue economic opportunities with revisionist powers at the risk of undermining security relationships. This dilemma has intensified for all middle powers in the Indo-Pacific region, who must navigate between American security guarantees and a comprehensive and constructive relationship with serious issues—as we are witnessing under the second Trump presidency and amid Chinese economic opportunities.
The fundamental mistake in Canada’s approach is treating Donald Trump’s protectionism as an external shock rather than recognising it as a symptom of deeper economic challenges that long predate his second administration. Canada’s productivity growth has lagged international peers for decades, with labour productivity growing at just 0.5 percent annually between 2016-2022, less than half the OECD average. This productivity crisis, combined with declining business investment, regulatory barriers, and housing affordability challenges has created structural vulnerabilities that Trump’s policies merely exploit rather than create.
These domestic economic weaknesses—not merely trade concentration—represent the true source of Canada’s vulnerability. Any meaningful response must therefore begin with internal economic reforms: streamlining regulatory approval processes, increasing infrastructure investment, addressing housing affordability, and fostering innovation ecosystems that can drive productivity growth. Trade diversification without addressing these fundamentals merely exports existing weaknesses to new markets.
The specific emphasis on China as a diversification strategy represents a particularly problematic misreading of recent history. China has demonstrated a clear pattern of economic coercion toward Canada, most notably during the Meng Wanzhou affair when it arbitrarily detained Michael Kovrig and Michael Spavor for 1,020 days—a textbook case of hostage diplomacy. Simultaneously, China suspended canola imports from major Canadian producers, citing dubious “pest concerns” that emerged only after Meng’s detention, costing Canadian farmers approximately US$2 billion. Similar restrictions on pork and beef imports followed.
More recently, China’s documented interference in Canada’s democratic processes and the execution of Canadian citizens despite diplomatic appeals further illustrates Beijing’s willingness to disregard Canadian interests when convenient. Trading dependency on the United States for dependency on China merely substitutes one vulnerability for another, with the critical difference that China lacks the institutional constraints, shared values, and rule-of-law frameworks that still govern American behavior despite Trump’s unilateralism.
Australia’s experience illustrates the middle power prisoner’s dilemma perfectly. When Australia called for an independent investigation into COVID-19’s origins, China responded with punitive tariffs on Australian barley, wine, beef, and coal—effectively holding Australia’s economy hostage for its political positions. Like Canada, Australia found itself caught between its security relationship with the United States and its economic relationship with China, with limited leverage to resolve the situation unilaterally. Japan and South Korea face similar constraints, with their economies deeply integrated with China while their security architectures remain anchored to the United States.
The middle power prisoner’s dilemma has no easy solutions, but collective approaches offer more promise than individual diversification strategies. When Australia faced Chinese economic coercion—losing approximately 40 percent of its exports to China in targeted sectors between 2020-2021—its successful response centered not on capitulation but on market adaptation, domestic resilience-building, and coordination with like-minded partners. Japanese and South Korean approaches to managing economic vulnerability similarly emphasise supply chain resilience, strategic sectors protection, and alliance coordination rather than naive market diversification.
The most promising pathway for middle powers lies not in individual diversification strategies but in collective approaches to economic resilience. This includes coordinated investment screening mechanisms that prevent critical infrastructure and technologies from falling under foreign control while avoiding protectionist overreach; joint critical supply chain initiatives that reduce concentrated dependencies in essential sectors like pharmaceuticals, semiconductors, and rare earth elements; common approaches to economic coercion that increase the costs to states employing such tactics through coordinated counter-measures and dispute resolution; and shared technological development in strategic sectors that distributes innovation capabilities across trusted partners.
While Canada cannot meaningfully reduce its overall economic dependence on the United States, targeted diversification in specific sectors and through established frameworks offers more realistic opportunities. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership, Canada-EU Comprehensive Economic and Trade Agreement, and potential arrangements with emerging economies in Southeast Asia and Latin America provide institutional frameworks for incremental diversification based on shared rules rather than political contingency.
However, these agreements must be coupled with domestic reforms that enhance Canadian competitiveness. Without addressing underlying productivity challenges, regulatory inefficiencies, and innovation deficits, Canadian businesses will struggle to capitalise on new market access regardless of the number of trade agreements signed.
The challenges posed by Trump’s protectionism demand strategic patience rather than reactive pivots. The deep institutional, economic, and social connections between Canada and the United States will endure beyond any single administration, providing resilience that no alternative relationship can match. Rather than pursuing illusory diversification through renewed engagement with problematic partners like China, Canada should focus on domestic economic renewal through productivity-enhancing reforms, infrastructure investment, and innovation policy; targeted sectoral resilience in areas most vulnerable to protectionist measures; multilateral coordination with like-minded middle powers facing similar challenges; and strategic engagement with the US beyond federal channels, leveraging state-level and institutional relationships.
For Canada and other middle powers, the central lesson of the Trump era is not that economic geography can be overcome through diversification, but that domestic economic strength and collective resilience represent the only sustainable responses to great power pressure. The solution to Trump’s tariffs begins at home, not in Beijing.
Dr Stephen Nagy is Professor of Politics and International Studies at the International Christian University, specializing in Indo-Pacific geopolitics and great power competition. He is serving as a Visiting Fellow for the Hungarian Institute for International Affairs (HIIA) June 13th, -August 30th, 2025.
This article is published under a Creative Commons License and may be republished with attribution.
