About two in three Canadians live within 100 kilometres of the American border. Canadian outbound foreign direct investment in the U.S. reached $1.3 trillion by the end of 2024—more than half of everything Canadian companies have invested abroad. The sailing distance from Vancouver to Los Angeles is 1,246 nautical miles. To Shanghai, it is 5,151. To Mumbai, 10,000.
Numbers like those don’t emerge from policy choices. They reflect geography, economic mass, and generations of accumulated commercial ties—and they go a long way toward explaining why every Canadian government’s attempt to reduce trade dependence on the U.S. has fallen short.
A new paper from the Fraser Institute by economists Jock Finlayson and Steven Globerman now provides a formal analytical basis for understanding just how stubborn that dependence is, and what it would actually take to change it.
The framework at the centre of their analysis is the gravity model of trade—among the most consistently validated tools in international economics. Its core insight is that commerce between any two countries tends to expand in proportion to their combined economic weight and contract in proportion to the costs, visible and hidden, of doing business across their shared border.
Applied to Canada and the U.S., the model produces a straightforward verdict: the pull is immense, and the friction is low, and that combination is not easily replicated with any other partner.
Logistics can’t be ignored
The U.S. economy stood at $23.8 trillion USD in 2024, about 27 percent larger than China’s, itself the world’s second-largest.
More than 100 million Americans live within a day’s drive of the Canadian border, and roughly 70 percent of Canadians are clustered within a maximum of a couple of hours’ drive to our southern neighbour.
Cross-border shipments can move by truck or rail in hours. Meanwhile, reaching customers in Asia or Europe generally means container vessels and weeks at sea—options that carry costs no amount of port investment can bring fully into line with the economics of north-south trade.
Prime Minister Mark Carney has staked considerable political capital on changing that equation. The government’s $5 billion Trade Diversification Corridor Fund, announced in the 2025 budget, is intended to build out rail links and port capacity and sharpen the efficiency of Canadian supply chains as a means of opening new export markets.
Finlayson, a Fraser Institute senior fellow and one of the paper’s authors, told The Hub the initiative has genuine merit. “The Fund, if well managed and focused on the right kinds of investments and projects, should enhance the competitiveness of Canadian-produced traded goods regardless of the markets we are doing business with—the U.S. itself, Asia, Europe,” he explained.
Where the paper complicates the government’s case is on the question of what actually drives trade resistance.
Freight costs are the intuitive culprit, but academic research cited by the authors suggests they account for only about 10 percent of the drag that physical distance imposes on trade flows. The larger share comes from what trade economists call “dark costs”—an umbrella term for the trust deficits, informational gaps, unfamiliar legal environments, and absent commercial networks that make doing business with a new partner inherently more expensive and uncertain than continuing with an established one. Canada and the U.S. have spent decades bringing those costs down. With most prospective diversification partners, they remain largely intact.
“Physical distance still matters in explaining international trade flows,” Finlayson told The Hub, echoing the paper’s conclusion. Better infrastructure helps, Finlayson added, but it is not a substitute for the kind of deep commercial familiarity that develops only over time.
Deep trade ties create path of least resistance
The research paper also found another obstacle in the way of the Carney government’s strategy. Drawing on a comprehensive review of six decades of trade agreement research, the authors note that regional trade deals have shown no statistically meaningful positive effect on bilateral flows in energy and mining—sectors that together account for roughly 40 percent of Canada’s merchandise exports.
Canada has held Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) membership since 2018, yet the data show scant evidence that other signatories have meaningfully increased their appetite for Canadian resources as a result.
“Given the outsized role of energy and mining goods in Canada’s overall export portfolio, it does give one pause in thinking about the extent to which current and future trade agreements with non-U.S. countries are likely to affect foreign demand for Canadian goods,” Finlayson wrote.
The more binding constraints, according to the economist, are domestic: bottlenecks in how Canada moves and prices its resources, rather than tariffs or market access terms abroad. “The challenges of exporting increased volumes of energy and mining goods from Canada have more to do with infrastructure constraints within Canada and the cost of producing and shipping goods from Canada than they do with foreign trade barriers,” he said.
Finlayson described the government’s pledge to double non-U.S. exports within a decade as an ambitious but useful target. He noted that global economic growth alone—concentrated increasingly outside North America—would lift Canadian export volumes even without any active diversification effort. Ramping up output of LNG, critical minerals, potash, and grains would likely generate the most visible gains, given where world demand for those commodities is heading.
But the paper’s concluding section points to something harder to engineer around, which the authors describe as trade hysteresis. The term, borrowed from physics, refers to the tendency of systems to resist change even after the conditions that produced them have shifted. In trade, it captures the reality that Canadian and American producers are bound together not merely by price signals or policy choices but by structural interdependencies—shared production platforms in auto manufacturing, chemicals, and industrial machinery—that took decades to construct and would take decades more to meaningfully unwind.
Finlayson and his co-author conclude that the gravitational, economical logic tying Canada to the U.S. reflects forces no single policy instrument can override. Ambitions from the Carney government to reorient the country’s trade geography should be informed by what that reality actually permits.
Graeme Gordon is The Hub’s Senior Editor and Podcast Producer. He has worked as a journalist contributing to a variety of publications, including CBC,…
A new study from the Fraser Institute reveals the challenges Canada faces in reducing its trade dependence on the U.S., which is deeply rooted in geography and established commercial ties. Despite efforts to diversify trade through initiatives like the $5 billion Trade Diversification Corridor Fund, the study highlights that ‘dark costs’ and structural interdependencies create significant barriers. The gravity model of trade illustrates that the economic weight of Canada and the U.S. fosters strong trade ties that are difficult to replicate with other partners. The findings suggest that domestic infrastructure and production constraints are more critical than foreign trade barriers.
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