Is Canada on a forked road away from North America?

Carney’s failure to win a clear majority was not unusual. Since 2004, Canada has elected only two majority governments.¹¹ The minority context was therefore a governing constraint. Carney needed a posture toward Washington that satisfied Canadians’ demand for firmness while remaining credible to markets and investors that require predictability.

Carney took office with a plan to improve relations with the United States by negotiating a new Security and Economic Agreement (SEA) that would involve new Canadian commitments addressing longstanding U.S. security concerns in exchange for relief from tariffs imposed on Canadian exports.¹² In effect, Carney sought a “reset” that would sit alongside the USMCA: Not a substitute for North American rules, but a political bargain intended to stabilize the environment as the USMCA moved toward its review. To demonstrate good faith, Carney committed unconditionally to meet NATO’s 2% of GDP defense target in the current fiscal year and announced new investments in border security.¹³ These moves broke the pattern of previous governments that delayed security investments while hoping for inducements from Washington.

Carney also intervened to suspend implementation of a Digital Services Tax (DST) scheduled for June 30, 2025, which applied retroactively and would have imposed immediate costs on U.S. firms.¹⁴ The DST was controversial because it departed from an OECD consensus intended to prevent damaging tax competition among advanced economies. Former Finance Minister Chrystia Freeland championed the tax over objections from Biden administration officials. Carney replaced Freeland following the election and, responding to complaints from the Trump administration, halted implementation of the DST.

After the DST dispute was resolved, Carney proposed SEA talks at the Group of 7 leaders’ summit in Kananaskis, Alberta in June, and Trump agreed to begin talks over the summer.¹⁵

From Carney’s perspective, the logic was straightforward: Address U.S. complaints that are politically salient in Washington—defense spending, border enforcement, fentanyl—and convert these into the basis for a durable economic understanding. But the bilateral environment in 2026 differs from earlier eras. During the Cold War, defense cooperation and economic integration were mutually reinforcing parts of a strategic project. In the Trump era, the political logic is closer to transactionalism: Partners are expected to deliver concessions, while economic “relief” is contingent and reversible, often framed as a discretionary favor rather than the product of negotiated reciprocity.

Potholes and road rage

In this context, it is not surprising that Carney’s effort to negotiate an SEA ultimately failed. The trade war the United States launched against Canada relied on tariffs applied under different statutory authorities—most controversially, the International Economic Emergency Powers Act of 1977 (IEEPA), which is subject to ongoing litigation, including review by the U.S. Supreme Court over whether the statute can be used to impose tariffs, with the decision reached on February 20, 2026 that this statutory authority does not give the president power to impose tariffs.¹⁶ IEEPA tariffs do not require the kind of injury investigation and remedy process that typically frames trade disputes and supports legal challenges.

Other tariffs, by contrast—including those imposed under Section 232 of the 1962 Trade Expansion Act—require notice of an investigation, a determination of injury (or threat), and the setting of a tariff level intended to correct rather than overcorrect the injury.¹⁷ These procedures take time and offer affected firms opportunities to comment and to seek review. Similar procedural safeguards exist for tariffs imposed under Sections 201 and 301 of the 1974 Trade Act.¹⁸ The sudden imposition of IEEPA tariffs, and the practical difficulty of challenging them in real time, has rattled firms and trade partners and made Trump tariff threats more grave than in his first term.

The bright spot has been the USMCA: The exemption of products that qualified under USMCA rules of origin limited damage to the Canadian economy and reinforced the value of the agreement for Canada and Mexico, despite the sacrifices each made to secure it during Trump’s first term.¹⁹ For Mexico, the same episode reinforces that USMCA preferences are most valuable when accompanied by predictable U.S. use of trade authorities—an issue that will sit at the center of the upcoming review. Both Canada and Mexico view the USMCA as more than market liberalization; the USMCA is important to preserving a rules-based baseline when political conditions in Washington become unpredictable.

Security tensions were similarly difficult to manage. Carney’s actions to meet Canadian security commitments were treated by Washington as overdue remedial measures rather than bargaining concessions. They did not alter U.S. thinking about resetting economic relationships to address perceived exploitation of the United States by trade partners that hollowed out manufacturing and undermined the workers and communities that manufacturing had supported. Bilateral talks continued but made little progress.

Tariff politics in the United States have also become structurally resilient. Even outside the Trump coalition, skepticism toward free trade has grown across both U.S. parties, shaped by deindustrialization narratives, strategic competition with China, and regional inequality. Tariffs function as a political symbol—evidence that Washington is “doing something” for workers—even when economists dispute their long-term efficacy. For Canadian and Mexican strategy, this implies that waiting out Trump may not be sufficient. A post-Trump administration could reduce rhetoric and rebuild diplomatic process, but tariff tools may still be retained for leverage or domestic signaling, particularly as the USMCA review invites political posturing.

By late September, Carney sought a second meeting with Trump in Washington to re-energize talks. At an October 7 meeting in the Oval Office, Trump and Carney appeared to get along well. Trump characterized the relationship with Canada as a “natural conflict” over jobs and investment and said this “natural business conflict” was holding up progress. Carney responded,

“If I may, let us be clear about the relationship as it stands. we are the second largest trading partner of the United States, and we do a lot of trade going up across the border where we are cooperating. We are the largest foreign investor in the United States. Half a trillion dollars in the last five years and $8 trillion in the next five years if we get the agreement we expect to get. Thirdly, there are areas where I would not say conflict, but we compete. They are areas where we compete, and it is and though its areas where we have to come to an agreement that works. but there are more areas where we are stronger together and that is what we are focused on, and we will get the right deal for America and for Canada.”²⁰

This exchange reflected Carney’s effort to replace Trump’s language of “conflict” with a framework of competition within a broader partnership. Following the meeting, the United States and Canada began sector-by-sector talks starting with energy, aluminum, and steel.²¹ That momentum proved short-lived after a viral video advertisement produced by the Ontario provincial government.²²

The video drew on a radio address by former U.S. President Ronald Reagan warning that tariffs can damage growth and prosperity more than they help workers. Trump’s name was not mentioned, but Trump was outraged by the implied criticism from a president still revered by many Republicans and ordinary citizens.²³ Trump cancelled talks with Canada, and they remained suspended even after Ontario cancelled future airing of the video. Trump also announced he had no plans to meet Carney at the Asia Pacific Economic Cooperation summit in South Korea in November.²⁴

At APEC, however, Carney secured a meeting with Chinese President Xi Jinping.²⁵ In Beijing on January 16, Canada agreed to allow 49,000 Chinese-made electric vehicles to enter the Canadian market at a 6% tariff rate, and China lifted restrictions on Canadian agricultural products. The two countries also agreed to begin talks on Chinese purchases of Canadian energy.²⁶ In rapid succession, Canada announced the launch of talks on investment, technology, and trade with Qatar²⁷ and negotiations with India that could lead to Canadian oil, LNG, and uranium shipments by March.²⁸

Carney’s remarks at the World Economic Forum in Davos, Switzerland then drew renewed attention. As he had declared during the 2025 campaign, Carney argued in Davos that the U.S.-Canada relationship that evolved in the postwar period was over. He called on middle powers to work together in support of rule of law, human rights, and open trade, and urged countries to become more self-reliant on domestic markets for growth and on their own militaries for national security. Like the Ontario advertisement that angered Trump, Carney did not mention Trump by name.²⁹

Another forked road?

In his own speech in Davos, Trump lashed out at Carney by name, warning that Canada’s existence was dependent on the United States and that Carney should show more gratitude.³⁰ Trump later threatened a 100% tariff on Canadian exports if Canada negotiated a free trade agreement with China³¹ —a signal that USMCA Section 32.10 on engagement with nonmarket economies could become a flashpoint in the USMCA review. Canadian officials quickly reaffirmed that talks with China were intended to address trade irritants rather than foreshadow a free trade agreement.³² For Mexican readers, the episode is also instructive: The same review dynamics and the same leverage tools can be applied across North America, even when a specific dispute begins with one partner.

Carney’s strategy seeks to avoid Creighton’s metaphoric fork in the road by advancing Canadian autonomy and North American integration simultaneously. In October, Carney told an audience at the University of Ottawa that he wanted to see Canada’s exports to countries other than the United States grow by an additional $300 billion—a “U.S. plus” approach that Pierre Trudeau did not fully consider. And although Carney’s proposed SEA failed, he remains committed to retaining the USMCA and preserving as much trade and investment with the United States as possible.³³

This is an ambitious strategy because it requires Canada to do several difficult things at once. First, it must preserve enough stability in North American trade and investment to keep integrated supply chains viable—particularly in autos, aerospace, machinery, and processed foods. That is a shared Canada–Mexico interest under the USMCA, and it is precisely why the review matters: Uncertainty can chill investment even before any formal changes are adopted. Second, Canada must develop new export pathways for energy and commodities, constrained by infrastructure, permitting, indigenous consultation, environmental politics, and capital costs. Third, it must manage the geopolitical implications of deeper engagement with non-U.S. partners, especially China, in a world where economic relations are increasingly securitized.

To accomplish this, Canada must export more of its energy and natural resource products, including agrifood. Commodities are fungible: A bushel of wheat, a plank of softwood lumber, or a steel girder is largely the same whether produced in Canada or elsewhere. U.S. tariffs that price Canada out of the U.S. market can redirect Canadian supply toward buyers not applying comparable barriers.

That logic is persuasive but encounters practical limits. Access to buyers is mediated by logistics. Canada’s trade infrastructure has historically been built to serve the U.S. market—pipelines south, rail and truck corridors south, integrated electricity grids, and business networks concentrated in border regions. Shifting volumes to Asia or Europe requires port capacity, shipping arrangements, and often additional processing. It also requires the political capacity to approve and build projects at a pace Canada has not consistently demonstrated.

For this reason, the Carney government has established a federal Major Projects Office to expedite permitting and construction of new infrastructure.³⁴ In effect, the office treats infrastructure as strategy: Canada’s ability to diversify is less a diplomatic challenge than a state capacity challenge.

Unlike commodities, manufactured goods—from automobiles and parts to processed foods—are embedded in supply chains closely tied to the United States and, in many sectors, to Mexico as well. That is why Canada remains committed to the USMCA. For manufacturers, switching to new supply chain networks in Asia, Europe, or Latin America would require time and would be achieved at a high cost.

Avoiding a fork in the road that would lead Canada away from the United States and Mexico is the aim of what Carney called “principled pragmatism” in his World Economic Forum remarks, saying:

“[W]e aim to be both principled and pragmatic—principled in our commitment to fundamental values, sovereignty, territorial integrity, the prohibition of the use of force, except when consistent with the UN Charter, and respect for human rights, and pragmatic and recognizing that progress is often incremental, that interests diverge, that not every partner will share all of our values. . . . [D]iversification internationally is not just economic prudence; it’s a material foundation for honest foreign policy, because countries earn the right to principled stands by reducing their vulnerability to retaliation.”³⁵

Carney’s framing is designed to avoid a false binary. In the classic nationalist story, Canada must choose between economic prosperity tied to the United States and political autonomy. In Carney’s view, autonomy is better defended by building options—diversifying enough to reduce vulnerability—while maintaining the economic base that funds defense, diplomacy, and domestic cohesion.

Yet a fork in the road remains, and it lies less in Canada’s intentions than in the interaction between Canadian strategy and U.S. domestic politics. If Washington continues to treat tariffs as normal tools of alliance management, Canada will struggle to sustain the investor confidence required for large-scale industrial projects. If, however, Canada and Mexico can help create a more durable political constituency in the United States for stable North American trade—based on investment, energy security, and manufacturing cooperation—then the “high road” remains open, and the USMCA review may become an occasion to reaffirm predictability rather than to intensify leverage.

For U.S. policymakers, the implication is straightforward. The United States benefits materially from North American integration: reliable energy supplies, critical mineral potential, trusted investment, and secure borders with both Canada and Mexico. If U.S. policy treats its USMCA partners primarily as trade adversaries, it encourages both governments—regardless of party—to invest politically and economically in diversification away from the United States. That diversification will be incremental, but over time it can erode the mutual advantages of North American integration.

Canada is not on a road away from North America so much as on a road toward a more conditional North America—one in which integration remains valuable but no longer fully secure. The policy task for Ottawa, Washington, and Mexico City is to determine whether North American integration will be governed principally by rules and mutual benefit, or by episodic coercion and political spectacle. That decision—more than any single tariff—will determine whether Canada’s road continues through North America or bends away from it.