The Canadian government's efforts to revive its economy and diversify its trade and security ties away from the United States will likely make some headway in the coming years, but results will be slow and could invite U.S. retaliation, while deficit spending to fuel Ottawa's strategy may also open the door to longer-term fiscal pressure. On Nov. 17, Canada's House of Commons narrowly passed the first full budget under Liberal Party Prime Minister Mark Carney's minority government, staving off fresh elections as budget votes are confidence votes in the Canadian political system. Carney framed the fiscal year 2025-2026 budget as making "generational investments" to resuscitate a stagnant economy weighed down by many factors, including low productivity, weak business investment, domestic trade barriers and, more recently, U.S. tariffs. To this end, Carney has pledged that the budget, which relies heavily on deficit spending to finance large public investments in infrastructure, defense and targeted measures for both households and industries, will begin to help diversify the Canadian economy's reliance on trade with the United States. The budget is the second pillar of Carney's twin priorities since taking office following elections in April. The first was the passage in June of the One Canadian Economy Act, designed to break down provincial trade barriers and accelerate investment in cross-provincial infrastructure, mining, energy and related so-called "nation-building" projects. Since then, Carney has announced two tranches of 11 total priority projects that his government hopes to fast-track through regulatory approval, which include projects that are already underway and those awaiting public and/or private sector support.

• Canada held early general elections on April 28 after former Liberal Prime Minister Justin Trudeau announced on Jan. 6 that he would step down. At the time, the Liberals faced more than a 20-point deficit against the Conservatives. But Carney ultimately led the party to an unprecedented electoral comeback by jettisoning many of the leftist policies the Liberals had championed under Trudeau and effectively portraying himself as the best candidate to handle U.S. President Donald Trump after he imposed tariffs on Canadian goods and repeatedly belittled Canada's sovereignty. Though the Liberals fell three seats short of an outright parliamentary majority, this deficit was reduced to two on Nov. 4 when a Conservative lawmaker defected to join the Liberals.
• The Trump administration has placed 35% tariffs on Canadian goods and, on Oct. 25, threatened to add another 10% levy, in addition to sectoral tariffs on autos, aluminum and steel that in some cases reach 50%. While Canadian exports to the United States that comply with the rules of origin requirements of the U.S.-Mexico-Canada Agreement (USMCA) are exempt from some tariffs, thereby softening the economic blow, Trump's levies have nonetheless weighed on the Canadian economy, which has been flirting with a technical recession.

Trump's aggressive rhetoric and policymaking toward Canada have generated deep animosity across the border and exposed major vulnerabilities in Canada's economic and security dependence on the United States, prompting the Carney government to begin pivoting away from Washington. Since Trump returned to office, he has repeatedly lampooned Canada, mused about incorporating the country as the 51st U.S. state and adopted a hard-line stance on trade. At a grassroots level, these and other moves have led to a steep drop in Canadian travel to the United States (the top source of U.S. foreign arrivals), boycotts of U.S. goods and surveys showing Canadians' opinions of the United States at historic lows, with some indicating more Canadians see the United States as a threat than an ally. Meanwhile, in Ottawa, the Trump administration's harsh rhetoric and aggressive actions have put Canadian dependencies on the United States into stark relief. Canada sends approximately three-quarters of its exports to the United States, equivalent to about one-fifth of Canada's GDP. The United States is also the largest source of foreign direct investment in Canada, accounting for about half of the total stock. Moreover, U.S. firms are among the most important suppliers to the Canadian armed forces, and Canada's national security apparatus relies heavily on cooperation with U.S. law enforcement and intelligence agency partners. These and other dependencies have led Carney's administration to begin shifting away from what Canadian officials view as a U.S. neighbor that is no longer reliable — and potentially even threatening. At home, Carney's government has made moves to decrease reliance on U.S. export markets and power Canadian economic growth. This has involved promoting measures to increase intra-provincial trade, as well as greenlighting infrastructure development to facilitate exports to new markets (namely, Europe and Asia) by ramping up construction on projects to bring goods to Canada's eastern and western coasts, thereby supplementing trade corridors that have traditionally flowed south to the United States. Complementing these efforts, Carney has made bilateral visits and attended various summits in various countries, including multiple in Asia and Europe, where he has sought to deepen trade and, in some cases, security ties.

In the coming years, Ottawa will make some progress in diversifying its trade and security relations, but geographic realities, legacy supply chains, infrastructure timelines and foreign countries' divergent interests will all slow the process. As part of its goal to double Canada's non-U.S. exports to C$300 billion ($214 billion) by 2035, the Carney administration has been working on securing and deepening trade and investment deals globally, particularly in Europe, Southeast Asia and South America. In the coming years, these efforts will likely yield a new free trade agreement with the Association of Southeast Asian Nations (ASEAN) and the South American trading bloc Mercosur, as well as an expansion of Canada's existing trade deals with the European Union and the United Kingdom. In the security space, Canada will probably also integrate in some way into the European Union's rearmament initiative and separately pursue new cooperation agreements with countries like Australia, Japan and South Korea. Still, there will be significant checks on the scale and scope of transformation Canada can achieve in the years ahead. First and foremost, Canada's massive land border with the world's largest economy means there will always be a strong pull toward the United States, despite diplomatic tensions. To this end, any attempt to significantly unwind highly integrated cross-border supply chains would be economically detrimental for Canada, especially as it will take years and substantial financing for many Canadian "nation-building" infrastructure projects to come online. Canadian firms in certain key industries, such as oil and gas, will also continue to attract more market interest in the United States than elsewhere. Moreover, should a Democrat or a more traditional Republican win the 2028 U.S. presidential election, it could easily slow Canada's push to diversify away from the United States, despite the current general consensus in Ottawa on the need to do so. Furthermore, there are real limits on how much other countries can displace the United States as key trade and security partners, at least for the foreseeable future. Even with greater market access, the growth of Canadian exports to other countries will be constrained by factors such as non-tariff barriers, competition from other exporters and a mismatch between Canadian supply and foreign demand. Canadian firms will likely also play second fiddle to European ones in EU defense initiatives. And despite Carney's pledged increase in defense spending, Canada will face significant fiscal and political constraints to hit NATO's new 5% defense and related security spending target by 2035. This is a particular concern for Canada, whose vast Arctic territory is poorly defended amid China and Russia's growing activities in the region.

• Since taking office in the spring, Carney has enjoyed a relative honeymoon period that has enabled him to pass major legislation. However, he will become more politically vulnerable as time passes, especially if the Canadian economy does not improve. With the Liberals two votes shy of a parliamentary majority, this will expose his government to greater demands by opposition parties for concessions and pressures to water down certain initiatives, likely weakening his government's ability over time to deliver on pledged transformational change. Even within Carney's own party, some constituencies — such as leftist Indigenous and environmentalist groups that have traditionally backed the Liberals — will likely become increasingly vocal as Carney's government continues to tack to the center on issues like oil and gas drilling and infrastructure development.
• In September, Canada signed a comprehensive economic partnership with Indonesia, which is set to enter into force in 2026 and eliminate tariffs on most Canadian exports. Additionally, Ottawa is negotiating a free trade agreement with ASEAN. In August, Canada and Mercosur announced they would revive their talks on a stalled free trade deal.
• Carney has also conducted outreach to Chinese President Xi Jinping, seeking to persuade Beijing to drop its tariffs on Canadian canola and pork exports. However, these tariffs remain in force, as China complains about Canada's tariffs on Chinese electric vehicles. Even if Beijing and Ottawa reach a detente on the measures, bilateral tensions over other issues related to trade, military and technology are set to persist in the coming years as Western countries increasingly view China as a threat.
• Canada has long lagged behind NATO's historical target for members to spend 2% of their GDP on defense, spending just 1.4% in 2024. Carney's fiscal year 2025-2026 budget increased the defense budget by C$9 billion, putting Ottawa on track to meet the prior target, and set aside tens of billions more in the coming years. However, many observers have warned that future spending pledges are very vague and would likely still fail to meet NATO's recently revised 5% target that includes 3.5% on explicit military spending and another 1.5% percent on related security spending — especially as Ottawa will face significant pressure in the coming years to spend more money on non-military priorities like infrastructure and social spending.

Canada's diversification efforts will also risk triggering U.S. retaliation, especially surrounding what are likely to be contentious USMCA review talks in 2026, adding long-term pressure to pivot away from the United States but at greater economic cost in the interim. The Trump administration's imposition of tariffs on Canada highlights its willingness to use coercive measures against even extremely interconnected trading partners. This is true even when the claims used to justify the actions lack evidence; for example, the 35% headline tariff rate on Canada was ostensibly due to the country being a major source of illegal fentanyl shipments into the United States, despite a lack of proof. Any Canadian moves to pivot away from the United States will thus risk retaliation, especially if the action in any way disadvantages U.S. firms. For instance, with Carney's government seeking to make Canada more attractive for oil and gas firms, new Canadian exports that compete with U.S. supplies could easily trigger U.S. retaliation, such as by not exempting some Canadian exports that comply with the USMCA. To this end, the Trump administration will likely be aggressive in talks with Canada (and Mexico) in the coming months as the USMCA requires the three countries to conduct a review six years from the introduction of the deal, meaning they must all submit proposals for renegotiations ahead of the joint review due by July 1, 2026. Among other things, the White House will likely prioritize tightening rules of origin requirements, more strongly enforcing intellectual property protections, boosting enforcement mechanisms and opening protected markets (like Canada's dairy industry) to U.S. exporters. The Trump administration will probably also demand that Canada (and Mexico) make more efforts in non-trade areas, such as to combat drug trafficking. These and other demands, alongside U.S. tariff threats, will all risk diluting the USMCA and potentially even collapsing the deal entirely in favor of separate U.S. bilateral agreements with Canada and Mexico, or, possibly even deals at all, which would result in the USMCA's expiration in 2036. Any significant narrowing, let alone collapse, of the USMCA would severely damage Canada's economy by slowing growth, deterring foreign and domestic investment, and causing major harm to certain Canadian industries (like automotives, agriculture and manufacturing). These pressures would further motivate Ottawa to pivot away from the United States, but the interim period would see large economic harm, and even then, at least some Canadian firms would still find it uneconomical to disentangle their supply chain from the United States.

While Canada currently has fiscal space for deficit spending, this will decrease over time, potentially leaving the country's finances vulnerable in the event of a prolonged economic shock in the coming years. To finance higher spending, Canada's fiscal year 2025-2026 budget forecasts the federal deficit to more than double from an estimated C$36 billion in fiscal year 2024-2025 to C$78.3 billion — and then to stay at comparatively elevated albeit declining levels over the coming five years. Compared with the governments of many other advanced economies, the Canadian government has more fiscal space to borrow, with a federal debt-to-GDP ratio at about 42% and top-tier credit ratings from two of the three major agencies (and the second-best rating from the third). This means that, at least on current trends, Ottawa's budget for the next fiscal year and blueprint for the years thereafter could theoretically use significant deficit spending without a significant risk of spooking markets and overloading on debt that weighs on the economy. Nonetheless, Canada's independent interim Parliamentary Budget Officer, who has critiqued some of the government's budgetary accounting methods, has warned that there is less than a 10% chance the government will stay within its deficit targets, and an even lower chance that the deficit-to-GDP ratio will decline every year as the government forecasts. This is particularly because the government's GDP growth forecasts rely in part on new infrastructure initiatives that may not materialize on the projected timeline and/or have the projected impact. Any new trade tensions with the United States could also pour more cold water on the government's outlook. Furthermore, future credit rating downgrades would make it more expensive for Ottawa to borrow, potentially diverting funds from other government spending priorities. Even if the projected deficit spending is sustainable in the abstract, it could still reduce Ottawa's fiscal capacity to respond to a major, prolonged crisis in the future. This is particularly true in the event of a global economic slowdown, especially one that affects prices for commodities key to the Canadian economy, such as oil and gas.