Failing that, retaliation with strategically targeted tariffs could be on the table, followed by negotiations to settle the dispute down the road. Another possibility—albeit an undesirable one—is being dragged back to the negotiating table to reopen CUSMA (or NAFTA 2.0, as I stubbornly call it), which could result in even more concessions from Canada. Regardless of the road taken, Canada finds itself on the back foot with its largest trading partner, which buys nearly 80% of our exports. Whatever comes next, the one talking point we must abandon immediately is the notion that trade diversification is the solution.

To be clear, trade diversification isn’t bad, quite the opposite. Diversifying markets to mitigate risk is both practical and sound trade policy. Successive Canadian governments, from Pierre Trudeau’s "Third Option" to Stephen Harper successfully concluding countless trade agreements in every corner of the globe including with the European Union, South Korea, and the 11-member Trans-Pacific Partnership (which includes Japan—though I still can’t call it the CPTPP), have all aimed to reduce Canada’s reliance on the U.S. market. Expanding Canada’s export footprint beyond dependence on a single market is both smart and strategic.

Expanding to the European Union—the largest and most lucrative market in the world—and into the fast-growing, dynamic Asia-Pacific region gives Canada preferred access to two-thirds of the global economy. This is a competitive edge that few other countries enjoy.

Unfortunately, while trade volumes have increased under these agreements, the impact has been far from transformative. According to trade data from Carleton University, Canada’s two-way trade with the EU hit a record $100 billion in 2021. However, in the seven-plus years since the pact came into force, Canadian exports to the EU reached just over $30 billion in 2021.

Not bad numbers, but Canada exported $481-billion to the U.S. in the same year.

Similarly, Canada’s trade with Japan has grown steadily over the years. In 2010, Canadian exports were roughly $10 billion annually. By 2023, merchandise exports totaled just under $16 billion. For a country like Japan—the fourth-largest economy in the world with a nearly $6 trillion GDP—Canada’s performance leaves room for improvement, especially given the duty-free access provided by the CPTPP.

The reality for Canada is that trade with the U.S. is essentially turnkey. Beyond geographic proximity, our shared laws, cultural values, and business practices make trade seamless. In sectors such as automotive manufacturing, we even share harmonized emissions standards and regulations.

When you have it this good, it becomes difficult to replicate it elsewhere. That’s what makes the 25% tariff threat so worrisome. We don’t really have a Plan B. We can export a bit more to the rest of the world but nothing – even trading with the largest markets in the world where we have duty-free access – will move the needle in a major way that remotely resembles the volumes the Canada-U.S. trade relationship generates.

So, what can we do? Beyond hoping for a last-minute rethink before inauguration day, Canada must prepare retaliatory measures and begin the longer-term work of contemplating how to negotiate a deal. Unfortunately, our options are limited. The worst among them is allowing politicians to peddle the idea that trade diversification is the solution—a suggestion as futile as telling a 90-year-old to start saving for retirement through the magic of compound interest.

Adam Taylor is a partner at NorthStar Public Affairs, where he advises companies and governments around the world on complex trade and economic issues. As a senior advisor on international trade in the Conservative government of Stephen Harper, Adam helped Canada expand its access to global markets through various free trade and trade-related negotiations.