Canada Strengthens Ties with EU and China While Reducing U.S. Dependence

Executive Summary

The Canada-U.S. trade conflict culminated in the breakdown of negotiations on August 21, as the Trump administration continuously expanded its justifications for tariffs from fentanyl and immigration to steel, automobiles, wildfires, and forced labor. On the same day the retaliatory tariffs took effect, Prime Minister Carney announced the commencement of economic and security negotiations with the EU. On September 8, Canada imposed retaliatory tariffs on the U.S. worth $20-28 billion. Around the same time, defense talks with China resumed for the first time in eight years, indicating that Canada is materializing a diversification strategy to move beyond its U.S.-centric structure by concurrently utilizing European and Chinese channels. The East Asia Institute (EAI) suggests that the most likely path forward is a prolonged state of limbo, rather than a complete breakdown or a comprehensive deal. EAI also notes the possibility that EU-Canada relations could move beyond a symbolic level to a stage of institutionalization during this process. South Korean companies should not mistake announcements of tariff relief as a resolution of risk but should maintain their North American supply chain monitoring systems. Furthermore, rather than simply replicating Canada’s diversification model, they should first assess their own time constraints and the limitations of alternative markets.

I. Situational Analysis

Canada Strengthens Ties with EU and China While Reducing U.S. Dependence

1. Background and Developments

Trade friction between Canada and the United States is the result of a phased accumulation of issues since the beginning of the second Trump administration [6][9]. Immediately after his inauguration, President Trump imposed tariffs on Canadian products under the pretext of blocking fentanyl and combating illegal immigration [6][8][9]. The rationale for the tariffs later expanded to individual industrial sectors such as steel, aluminum, and automobiles [6][9]. Even the smoke from Canadian wildfires that blanketed the U.S. Northeast was used as a basis for tariff threats [6][9]. A 10% tariff based on a Section 301 investigation related to forced labor was also implemented during the same period [6][9].

The Peterson Institute for International Economics commented that this tariff imposition "set a new record for lack of justification," pointing out that the U.S. had invoked outdated legal grounds that had already lost their effectiveness [8]. In July, a high tariff rate of 50% was announced on all Canadian imports, and negotiations ultimately broke down on August 21 [6][9]. Consequently, a 50% U.S. tariff on approximately $20 billion of Canadian products took effect, and Canada announced it would impose retaliatory tariffs of the same magnitude effective September 8 [9].

On the day the negotiations broke down, Prime Minister Carney announced the start of economic and security negotiations with the EU, shifting his focus toward Europe-centered multilateral diplomacy [3]. Canadian public opinion also overwhelmingly supports reducing dependence on the U.S. (64%) and halting negotiations (76%) [3]. This has provided a backdrop of political legitimacy for the government's hardline stance [3].

2. Current Situation

Canada's retaliatory tariffs against the U.S. took effect just after midnight on September 8 [13][16][17]. The Canadian federal government imposed tariffs of the same value as the U.S. on items including apparel, cheese, metal parts, and wood products [16]. The Globe and Mail reported the value at $28 billion [17], while an Al Jazeera affiliate reported it as $20 billion [1][16]. The discrepancy in the figures appears to stem from differences in the timing of data collection and the scope of items covered by each media outlet.

Coinciding with the tariff implementation, Prime Minister Carney stated, "We will lower our economic dependence on the United States and deepen our relationship with Europe more swiftly" [1][10]. France 24 reported this as Canada accelerating its move away from U.S. dependence [10]. Sweden's Dagens Industri reported that the EU and Canada are pursuing the establishment of an all-encompassing alliance ranging from trade to security, and that EU Commission President von der Leyen is scheduled to announce the related plans at the European Parliament in Strasbourg on September 16 [7].

Around the same time, military authorities from China and Canada resumed their first defense talks in eight years [4]. China's Ministry of National Defense stated that during the dialogue, there was a "frank and in-depth exchange of views on international and regional issues of common concern" [4]. The South China Morning Post analyzed that the resumption of these talks was a result of Ottawa reaching out to Beijing after successive frictions with the Trump administration [4]. In an editorial, the Global Times asserted that "Normal defense dialogue between China and Canada does not require the approval of any third party," and dismissed interpretations of a "military alliance" as "absurd speculation" [15]. The Global Times pointed out that the root of this controversy lies not at the negotiating tables in Beijing or Ottawa but in the "deep cracks in U.S.-Canada relations" [15].

Separate from his hardline stance toward the U.S., Prime Minister Carney has not completely closed the door to negotiations. In early September, Ottawa stated it was ready to sign a "sustainable trade agreement that benefits both countries" and reaffirmed its position of seeking a long-term agreement rather than a quick political announcement [11][18]. Mexico's El Financiero reported Prime Minister Carney's comment that while defending the retaliatory tariffs, he "does not believe in escalating conflict," highlighting the logic that the tariffs are aimed at protecting Canadian workers, not at escalation [14].

3. Key Actors and Positions

Prime Minister Carney and the Canadian federal government are maintaining their position of rejecting a limited agreement confined to sector-specific concessions in negotiations with the U.S. [6]. Overwhelming domestic public support is the political foundation for this hardline stance [3]. At the same time, they are also sending signals that they do not want a complete breakdown with the U.S. [11][14][18]. This illustrates Canada's dual position, where it cannot completely close the door to negotiations due to the structural constraint of its economic dependence on the U.S. [6].

The Trump administration has continuously expanded its justifications for tariffs from fentanyl and immigration to steel, automobiles, wildfires, and forced labor [6][9]. The Peterson Institute for International Economics assesses that this pattern of expanding justifications is highly likely to be repeated in the future [8]. To borrow a Honduran expression, the United States is positioning itself as an actor that continuously uses tariffs as leverage for negotiation pressure.

The EU is proactive about deepening its relationship with Canada [1][7]. The fact that Commission President von der Leyen herself is scheduled to unveil an alliance concept that encompasses security beyond trade [7] suggests that the EU perceives this situation as an opportunity to secure a transatlantic partner.

Regarding the resumption of defense talks with Canada, China is taking a cautious stance against third-party intervention or interpretation [15]. The tone of the Global Times editorial shows Beijing's intention to frame these talks as a restoration of "normal" bilateral relations, rather than a strategic move to capitalize on U.S.-Canada friction [15]. However, the South China Morning Post clearly pointed out that the timing of the resumption of these talks is intertwined with Ottawa's conflict with the U.S. [4].

4. Key Issues

The first issue is whether Canada's diversification attempts will remain symbolic gestures or enter a phase of institutionalization. An EAI analysis assessed that "Canada's European channel and its concept of a middle-power coalition have the potential to move beyond a symbolic level and enter a stage of institutionalization" [3].

The second issue is the practical implication of resuming defense talks with China. While the Global Times frames it as a normal bilateral relationship [15], Western media focus on its nature as a countermeasure against the United States [4].

The third issue is the long-term trajectory of the negotiations. EAI projected that "a prolonged state of limbo, rather than a complete breakdown or a comprehensive deal, is the most likely outcome" [6][9]. Prime Minister Carney's expression of willingness to resume negotiations [11][18] is interpreted as a signal consistent with this middle-ground scenario.

The fourth issue is whether deepening ties with the EU can be a viable alternative. EAI noted that "considering the Trump administration's pattern of expanding tariff justifications and Europe's own interests, it will be difficult for Canada's diversification to establish itself as a practical alternative in the short term" [3]. The Bruegel institute is also currently discussing the very feasibility of a European trade policy that excludes the U.S. and China [REDACTED SOURCE].

II. In-Depth Analysis

Canada Strengthens Ties with EU and China While Reducing U.S. Dependence

1. Analysis of Root Causes

The origin of this situation is not the tariffs themselves. The more fundamental issue is the fact that the justifications for the tariffs have constantly changed. Early in its term, the Trump administration imposed tariffs on Canada, citing the need to block fentanyl and combat illegal immigration [6][8][9]. The rationale later expanded to the steel, aluminum, and automotive sectors [6][9]. Even smoke from Canadian wildfires was used as a basis for tariff threats [6][9]. The Peterson Institute for International Economics pointed out that in this process, the U.S. invoked "legal provisions that have already become dead letters" [8]. This implies that the objective of pressuring Canada was predetermined, with legal justifications found afterward.

This pattern has solidified one judgment within the Canadian government: that negotiations with the United States will not reach a conclusion even with repeated sector-specific concessions [6]. An EAI report analyzed that Prime Minister Carney "shifted his focus toward Europe-centered multilateral diplomacy by announcing the start of economic and security negotiations with the EU on the very day the retaliatory tariffs took effect" [3]. The fact that the breakdown of negotiations and the announcement of a pivot to Europe occurred on the same day suggests this decision was not an impromptu response but a pre-planned move.

The public opinion landscape is another fundamental cause. According to an EAI survey, 64% of Canadians support reducing dependence on the U.S., and 76% support halting negotiations [3]. These figures show that the Carney government's hardline stance is not a choice made at a political cost but is, in fact, closer to a political asset. As a result of President Trump's continued pressure with ever-changing justifications, a public consensus has formed within Canada that reframes the relationship with the U.S. not as a manageable risk but as a structural vulnerability.

2. Structural Context

In terms of economic structure, Canada's fundamental constraint is its trade dependence on the United States itself. EAI diagnosed that Canada has "little justification for pursuing a comprehensive agreement amid domestic political pressure and the structural constraint of its economic dependence on the U.S." [6]. The auto industry is a prime example. In October 2025, Honda indefinitely suspended operations at its SUV plant in Mexico due to parts shortages and halved its Civic production in Canada [2]. The automotive supply chains of the three North American countries are structured around parts procurement that crosses the Canada-U.S.-Mexico borders, so a single tariff can simultaneously shock production lines in all three countries [2][5]. This structure itself both constrains Canada's negotiating power with the U.S. and, paradoxically, increases the urgency for diversification.

In the political structure, Prime Minister Carney's negotiating posture is noteworthy. In an interview with an Omani media outlet, he stated that he wants a "sustainable trade agreement that benefits both countries," but drew a line, saying he seeks a "long-term agreement rather than a quick political announcement" [11]. In an interview with the Mexican outlet El Financiero, he also said, "I do not believe in escalating conflict," but added, "Our tariffs are necessary to protect Canadian workers" [14]. This shows that the Carney government is not pursuing a complete break with the U.S. but is employing a strategy of concurrently using its European and Chinese cards to secure leverage at the negotiating table.

In the security structure, a trend of seeking minilateral cooperation outside the U.S.-centric alliance system is detectable. The EU, through Commission President von der Leyen, is scheduled to announce a plan to strengthen relations with Canada at the European Parliament in Strasbourg on September 16, a plan that encompasses an "all-encompassing alliance from trade to security" [7]. At the same time, the resumption of China-Canada defense talks after an eight-year hiatus is a symbolic event showing that cracks are emerging in the U.S.-centric security structure [4]. However, the Chinese state-run media outlet Global Times drew a line, calling interpretations of a military alliance "absurd speculation" [15]. This reveals that while Beijing is framing the resumption of talks as a normalization of relations with Canada, it is wary of expanded interpretations that could provoke the United States.

3. Historical Precedents and Comparative Cases

This is not the first time Canada has publicly declared its intention to reduce dependence on the United States. However, a comparison with past cases reveals the distinct features of the current situation. Typically, given the high degree of border integration, conflicts in Canada-U.S. relations have been contained at a manageable level. The differentiating factor this time is that the justifications for tariffs have continuously expanded from fentanyl and immigration to steel, automobiles, wildfires, and forced labor [6][9]. The fact that justifications were not exhausted but were continually discovered anew is the decisive factor that made the Canadian government perceive this conflict not as temporary friction but as structural pressure.

There is also room for comparison with European countries' attempts to normalize relations with China. Over the past few years, while aligning with the U.S. line of pressuring China, individual European nations have simultaneously managed their relations with China based on their own economic interests. Canada's resumption of defense talks with China follows a similar logic. By restoring a channel with China at a time of escalating conflict with the U.S., it can be interpreted as an attempt to establish an alternative axis to its U.S.-centric diplomacy [4][15]. However, the fact that Canada resumed dialogue in the defense sector is a step further than Europe's economically focused normalization of relations.

The question raised by the Bruegel institute—"What can European trade policy do without the U.S. and China?"—is directly relevant to Canada's current moves [REDACTED SOURCE]. Europe itself has experience in seeking alternatives to the U.S.-centric trade order, and this experience may function as a common language in negotiations to deepen its relationship with Canada.

4. Key Variables Shaping Future Developments

The first variable is the intensity of the Trump administration's response. Whether Washington will retaliate further after Canada's retaliatory tariffs take effect will shape the future course of events [1][10][17]. A Cypriot media outlet reported that Canadian officials warned, "if Washington raises tariffs, further retaliation could follow" [16]. The probability distribution between the prolonged limbo scenario and the full-blown breakdown scenario will change depending on the level of the U.S. response.

The second variable is the speed at which negotiations with the EU enter a substantive institutionalization phase. The key is whether Commission President von der Leyen's announcement on September 16 remains symbolic rhetoric or leads to a concrete agreement framework [7]. EAI assessed that Canada's European channel "has the potential to move beyond a symbolic level and enter a stage of institutionalization" [3], but the realization of this institutionalization also depends on the coordination of interests within Europe.

The third variable is the pace of expansion in China-Canada relations and the U.S. reaction. The crucial point is whether the resumption of defense talks will lead to an expansion of economic exchanges or remain a symbolic gesture. The tone of the Global Times suggests that Beijing intends to manage this relationship cautiously [15], but Canada's room for maneuver could change depending on how the U.S. perceives it. As Prime Minister Carney still states that he wants a U.S. agreement that is "beneficial to both countries" [11], it is not yet certain whether strengthening ties with Europe and China is leverage for U.S. negotiations or a fundamental policy shift.