Trade diversification—Canada’s strengths, weaknesses and challenges

Prime Minister Carney has pledged to double Canada’s exports by 2035 and diversify the country’s foreign trade to reduce Canada’s reliance on the United States as a trading partner and destination for exports. There’s broad support for both of these goals across the country and within the commentariat.

If the global economy grows at a decent pace in the coming years, Canada’s non-U.S. exports can be expected to rise in tandem, regardless of whether there’s a significant lessening of dependence on the U.S. as an export market—owing either to Canadian government initiatives or to new protectionist actions by the Trump administration. America accounts for about 22 per cent of global economic output, meaning almost four-fifths of worldwide economic activity occurs elsewhere. And the fastest-growing large and mid-sized economies are mostly in Asia. These facts suggest Canadian policymakers are right to emphasize the importance of expanding trade with non-U.S. markets.

Most trade policy discussions focus on cross-border shipments of physical goods—such as energy, agricultural products, minerals and other industrial raw materials, and a wide assortment of manufactured items including both consumer products and intermediate parts and components. Trade in goods makes up about three-quarters of total global commerce. The remainder consists of trade in various types of services.

Services trade has been growing considerably faster than trade in physical goods. Canada is no exception to the pattern. In 2024, direct Canadian exports of services reached a record $220 billion, amounting to more than one-fifth of the country’s exports of goods and services combined (~$1 trillion). Statistics Canada breaks services trade into three main categories:

Travel: Spending that arises when residents of one country visit another, for any reason. Spending by foreign tourists in Canada is a Canadian service export. Of particular relevance to Canada is that this category includes spending by international students temporarily resident in Canada.

Transportation and related services: Payments associated with moving goods and people from one country to another. So, for example, if a domestic Canadian airline transports commercial goods from Canada to the U.S., the transaction would be counted as a Canadian export of services.

Commercial services: A broad category that captures all other internationally traded services including management consulting, engineering expertise, etc.

In 2024, commercial services constituted about 60 per cent ($125 billion) of Canada’s overall services exports; they also comprised a similar share of Canadian services imports. The principal commercial services exported from Canada are financial services, computer and information services, telecommunications, royalties and licence fees, scientific and technical services, and engineering, architecture and other professional services. Canada also generates “export” earnings through the enrollment of and spending undertaken by foreign students in Canadian education institutions and programs, with most of these payments included under the heading of travel-related service exports.

Some analysts see potential for Canada to significantly expand exports of “digital services” at a time when advances in artificial intelligence (AI), machine learning and related technologies are reshaping industries across the economy. Digital trade has grown faster than global merchandise trade over the last decade. One recent study estimates that digital services currently make up three-fifths of Canada’s exports of commercial services. Computer services—including software, data processing and IT consulting—represent the largest portion of Canada’s digital services exports.

While the digital revolution is a major development for the global economy, we see little evidence that Canada possesses an international comparative advantage in digital products and services. Canada’s share of worldwide digital exports continues to hover just above 2 per cent, having scarcely budged in two decades. Several European countries of similar size to Canada, along with India, are bigger digital service exporters than Canada. Canada does have strong capabilities in AI research and a handful of related fields. And it’s also home to a growing number of AI startups. However, Canada is not a “frontier” producer of AI platforms. And Canadian firms lag behind peers in China, the U.S. and some other advanced-economy jurisdictions in implementing AI into their day-to-day business operations.

As the scale and scope of cross-border digital trade increase, Canada should strive to expand exports of digital services—including to markets outside North America—which can help advance the Carney government’s trade policy goals. But over the medium-term, at least, the biggest opportunities to boost Canadian exports are likely found in sectors where Canada already enjoys a comparative advantage, notably energy, mining, other industrial raw materials, forest products and some segments of agri-food.