Trading with better neighbours in Europe

Hey there, time traveller!
This article was published 21/02/2025 (253 days ago), so information in it may no longer be current.

I was surprised to learn that Canada has a second land border. A treaty signed in 2022 with Denmark divided Hans Island between the two countries.

The idea of another land border must come with a significant asterisk, since it involves a very northern link between Ellesmere Island and Greenland, a self-governing country within Denmark. But it is theoretically possible, if ill-advised for all but the most adventurous, to walk across our border into Denmark and the European Union.

Denmark joined the European Community, which was to become the European Union, in 1973. When the EU created the Euro joint currency in 1999, Denmark retained an opt-out provision, as did the United Kingdom. Denmark has continued to use its own currency, the kroner, but is otherwise fully integrated into the customs union or free trade zone that is the EU.

The U.K. not only retained the British pound but also withdrew from the EU in 2020, although it quickly signed a free trade agreement with the EU the following year.

The land border with Denmark comes into focus as U.S. President Donald Trump eyes control of Greenland for its natural resources and strategic Arctic location. He also has his eye on Canada as a 51st state but, more credibly, is mounting a potentially damaging tariff war that violates our existing free trade agreement with the U.S. and Mexico and raises serious concern about Canada’s economic prospects.

Canada is a trading nation, with imports and exports (total trade) amounting to 72 per cent of Canadian gross domestic product in 2023. And 70 per cent of that trade (about $1.08 trillion) is along that long border with the U.S., justifying our current angst.

But what about our other options?

Although much is made of the problems of dependence on trade with China, our second-largest trading partner is Europe. Canada’s total trade with the EU and U.K. was $135 billion in 2023 compared to $120 billion with China. Our next biggest trading partner, Mexico, is far behind at $55 billion.

Although Trump’s attention tends to wander, he has often pointed to Canada’s trade surplus with the U.S. as a problem. Canadian exports of goods to the U.S. totalled $593 billion in 2023 compared to imports of only $484 billion, principally because of our massive exports of oil, natural gas and electricity. Canada exported $221 billion worth of energy to the U.S. but imported only $43 billion, a trade surplus of $178 billion that leaves Canada with a trade deficit in all other goods and services.

In contrast, our trade with Europe is evenly balanced, with total exports of $68 billion and imports of $67 billion. And our trade with China results in a significant deficit, as we import far more ($89 billion) than we export ($31 billion). Indeed, it is our trade deficits with China, Mexico, Japan, South Korea, Taiwan, Brazil and other countries around the world that brings Canadian trade into rough balance, with exports of $593 billion and imports of $601 billion in 2023, and stabilizes our freely floating currency.

On the other hand, the U.S. runs a significant trade deficit of $773 billion with the world in 2023. This is sustained by the unique position of the U.S. dollar as the global reserve currency, which allows it to issue debt to cover these deficits. Moreover, Canada’s trade deficit is hardly the main culprit as it falls well short of U.S. deficits with China, the EU, and Mexico and is smaller even than those with Japan and South Korea, deficits financed by borrowing from eager international investors.

The course of the impending tariff war remains to be seen but the lessons learned for future trading relationships cannot be underestimated. In that vein, the Canada-EU Comprehensive Economic and Trade Agreement (CETA) and Canada-UK Trade Continuity Agreement (C-UK TCA) provide strong incentives to expand trade with Europe as Trump’s tariffs, and our likely retaliation, make our goods less attractive to U.S. customers.

CETA aims to lower customs duties and other barriers to trade, facilitate investment, provide mutual recognition of regulated professions, and simplify staff transfers between businesses in the EU and Canada. Similarly, the C-UK TCA eliminates tariffs on almost all Canadian exports to the U.K. and preserves the main benefits of CETA. As U.S. tariffs disrupt, they would also make other markets more attractive, and Canadian governments should be alert to new trade opportunities with more reliable European partners and a population 50 per cent bigger than the U.S.

It is not as if Canada has not encountered such tariff intimidation from the U.S. before. Such actions in 1866 helped motivate Confederation within a year and similar measures in 1890 led to a fourfold expansion of Canada’s exports, primarily agricultural at the time, while strengthening Canadian resolve as an independent nation. And it might be a blessing in disguise to push Canada toward more trade with a forward-looking Europe and away from a U.S. reverting to a fading past.

Wayne Simpson is a former professor of economics at the University of Manitoba and a research fellow at the University of Calgary School of Public Policy.