Mark Carney’s quick trip to London and Paris this week—just 48 hours after being sworn in as prime minister—was, in part, a symbolic gesture meant to signal a pivot toward more reliable allies.
It was a message to the Trump administration—and to Canadians—demonstrating that Canada has options in the face of American hostility. And for Carney, it had the added advantage of projecting a proactive stance for the new prime minister as he seeks to brandish his reputation as an alliance builder.
But Canadians should keep their expectations tempered, and politicians should play down the prospects of Europe solving our near-term trade problems. Diversification is a slog—and evidence suggests there is no short-term fix. For one, Canada has had free trade agreements with the European Union and the U.K. since 2017 that have produced underwhelming results.
Graphic credit: Janice Nelson.
As the chart shows, the share of total Canadian exports of goods and services shipped to the European Union averaged just under 6 percent in 2024—little changed from nine years ago, before the trade pact was in place. The share of exports going to the U.K., at 4 percent, has also shown little movement.
To be sure, in nominal terms, exports to Europe have increased by 60 percent since 2016. But about two-thirds of those gains reflect higher prices (i.e., inflation), not actual volume growth.
It’s as if the free trade agreement has had no impact whatsoever. Why is that?
Primarily geography. Living next to the world’s largest economy has made it easy for Canadian companies to focus south of the border. Diversifying trade to countries across an ocean will require overcoming significant inertia.
Another factor: lagging investment between Canada and Europe. Trade and investment are closely linked. For example, much of the trade we see between Canada and the U.S. is intra-firm, following decades of large cross-border investment flows between the two countries. Since the EU free trade agreement came into effect in 2017, however, Europe’s share of Canada’s total stock of inward and outward foreign direct investment has actually declined. Finding ways to promote investment between the two regions should be a priority for policy makers serious about diversification.
There are also other potential costs associated with shifting more trade to Europe that need to be factored into any decision to increase our reliance on the continent.
At his London press conference, Carney reiterated that the EU is moving ahead with carbon tariffs on imports from high-emitting producers. He warned that Canada must maintain an ambitious climate transition agenda—complete with its own pricing regime on industrial emitters—if it wants to remain competitive in the European market.
The EU’s carbon border tax system kicks in next year (the U.K. follows in 2027). And Canada’s existing industrial carbon pricing mechanism, which Conservative leader Pierre Poilievre has promised to cancel, will allow Canadian exporters to receive credits from the EU, helping to offset most—but not all—of these new tariffs.
“Guess what one of the requirements is to diversify trade with the EU?” Carney said. “A form of carbon pricing.”
Which is true. Yet, this is only a partial analysis.
If the U.S. continues without its own carbon pricing, Canada’s system will impose a competitive disadvantage on domestic industry compared to American firms. In essence, the same carbon pricing that makes Canada more competitive in Europe makes it less competitive in the U.S.—a reality worth pondering at a time when Canadian businesses are already grappling with a trade war and rising costs of doing business with their largest trading partner.
Theo Argitis is The Hub's Editor-at-Large for economics and business. Theo has been a journalist for the better part of three decades, spending much of his…
