The Significance of Economic Size and Distance: Canada’s Trade Relationship with the United States

Given the current uncertainty in the Canada–United States relationship, Canada has doubled down on building new trade partnerships and expanding existing ones. From March 2025 to March 2026, Prime Minister Mark Carney has made 26 trips abroad and has secured four binding trade deals. While trade diversification is a strategic response to reduce Canada’s dependence on the U.S market, this article argues that the Canada and U.S. trade relationship is likely impossible to replicate based on two factors: economic size and geographic distance.  

Gravity Model of International Trade 

Canada and the United States have one of the world’s closest international relationships, one that has been historically built on trust, cooperation, and shared economic and security interests. The United States is Canada’s largest trading partner, Canada is the second largest trading partner to the United States. 

The bilateral relationship is special for many reasons. The United States has two factors that make its market more attractive than any other for Canadian exporters: its GDP and its proximity to Canada. Jan Tinbergen is generally credited as the first to apply the gravity model international trade equation to predict trade flows between two countries. In its basic form, the equation suggests that bilateral trade volume is correlated with GDP and inversely correlated with distance. Other relevant variables include a shared border, a free trade agreement, and a common language. According to the gravity model, these criteria significantly influence the bilateral trade relationship between Canada and the United States. 

Total Canadian Exports to Top 5 Export Markets in Millions of Canadian Dollars

Note: In 2025, the Netherlands and Germany were Canada’s 5^th and 6^th largest export markets, respectively, followed by Mexico. 

In 2025, exports to the United States were more than 12 times those to the United Kingdom, more than 16 times those to China, and more than 38 times those to Japan. The United States imports almost 80% of total Canadian merchandise exports. According to the gravity model, the United States’ GDP, which is the largest in the world, is a key determinant of the value of trade going to the United States. In 2025, the nominal GDP figures of Canada’s top export destinations were the United States at $30.77 USD trillion—1.6x larger than China ($19.63 USD trillion); 7 times larger than the United Kingdom ($4 USD trillion) and Japan ($4.44 USD trillion). The size of the United States’ economy naturally pulls Canadian exporters southward. 

Total Canadian Imports by Top 5 Countries of Origin in Millions of Canadian Dollars 

Similarly, the United States is Canada’s largest source of imports, suggesting that the relationship is not one sided. In 2024, Canada imported almost 4 times more from the United States than from China, 6.7 times more than from Mexico, and fourteen times more than from Germany. These ratios have remained fairly constant over time. Synoptically, Canada’s external trade remains deeply enmeshed with the US market. 

Geographic Distance 

The second factor that draws Canadian businesses to the United States’ market is relative distance – a factor determining the aggregate expense of moving a product across a border. Typically, shipping to a closer country is cheaper and faster than shipping to a country farther away. That is not to say, that geographic distance is the only determinant. Research shows transportation costs account for only about 10% of trade resistance, with additional obstacles making trade between relatively distant countries more difficult, such as those arising from differences in language, culture, legal systems, and regulation. Canada and the U.S. share few inherent obstacles to trade due to a common language (English), similar culture (Anglosphere), and similar legal system (English common law).

Overseas Distance from Canadian Port to International Ports 

Note:  Distance between the ports is approximate and varies dependent on shipping routes.  The table above provides a general overview.

Canada’s geoeconomic position at the top of North America and off of the Eurasian landmass produces a particularly stark difference in the distances involved in shipping overseas as opposed to overland compared to those of other major economies. Canada’s proximity to the United States—its only option for overland trade—has led to the development of an extensive, efficient, and low-cost transportation network. In 2024, $3.6 billion CAD in goods and services crossed the Canada and United States border every day. The table above illustrates the far greater maritime distances from Canada to other international ports. For example, shipping goods from Vancouver to Mumbai involves considerably longer distances and transit times than shipping to Los Angeles, whether by land or sea. These longer distances increase costs. 

Canadian businesses remain deeply integrated in the North American market, making it difficult to suddenly start selling products elsewhere. Take the auto parts industry, for example: car parts often cross the border from both sides several times before the final vehicle is assembled. Similarly, the aluminum sector benefits both countries; the American automotive industry has reason to prefer Canadian aluminum because the cost of producing aluminum is lower in Canada relative to that of alternative sources. Moreover, the factor of distance dictates that American automotive manufacturers benefit from lower freight costs when purchasing Canadian aluminum. In 2024, 91% of Canadian aluminum exports went to the United States. Since the 1980s, free trade has fostered deep economic integration among Canada, the United States, and Mexico. Severing this arrangement would carry significant adjustment costs for all parties involved. 

Looking Ahead

What does this mean for the future of Canada’s trade relations with the United States? In the long term, trade diversification will help by reducing Canada’s reliance on the United States by reducing the extent to which Canadian manufacturers rely on U.S. customers. That being said, the gravity model dictates that there are limits to the extent to which Canada will be able to diversify from the U.S. market. For Canadian exporters, the U.S. market remains highly attractive because of its size and geographic proximity.

Photo: Peace Arch, US – Canada Border (2007) via Wikipedia Commons Licensed Under Public Domain 

Disclaimer: Any views or opinions expressed in articles are solely those of the authors and do not necessarily represent the views of the NATO Association of Canada.