Skip to main content
RBC Thought Leadership Archives for daneilkwan Page 2

Trade Zone: Canada needs to put its “sales hat” on

Author: daneilkwan

Also in this edition: Breaking down six under-the-radar trade themes and a deep dive on four strategically significant industries that could drive U.S.-Canada relationship going forward

Overheard

With the CUSMA deadline looming and rhetoric heating up (“We don’t need anything Canada has,” President Donald Trump told reporters earlier this week) more than 300 senior business and government leaders from both sides of the border gathered in Toronto for the RBC and Eurasia Group’s US-Canada Summit.

Here are some highlights:

  • Robert Lighthizer, the 18th United States Trade Representative, argued why 50 years of trade deficits left the U.S. no choice but to impose tariffs. And why, despite not being the worst offender, Canada was a target. In a democratic political system, a government doesn’t have years to address an issue, he said. It needs to act quickly. As for where things go with tariffs from here, Lighthizer didn’t mince words: “Nobody here has a grandchild in whose lifetime America is going to be free trade.”

  • Regardless, it’s up to Canada to put on its “sales hat” said Pete Hoekstra. Though the U.S. Ambassador to Canada said potash is about the only thing the U.S. needs from Canada, the U.S. is open to offers. Hoekstra pointed to autos and oil, and even offered some points to help make Canada’s case: the countries have similar pay scales, labour standards, and a thoroughly integrated ecosystem.

  • “America First doesn’t mean America Alone,” said Mark Wiseman, Canada’s Ambassador to the U.S., who added that Canadians are not always good at reminding Americans about the importance of Canada. Remind them of what exactly? For starters: Canada is the largest buyer of U.S. cars, outside the U.S. The No. 1 export market for 30 states. And in the top 3 for almost every state. And Canadians, on per capita basis, buy 40x more American goods than the EU, China and India.

  • Dominic LeBlanc, Minister for Canada-U.S. Trade, noted that the Canadian government has put some proposals forward to the Trump administration—but is also building a Canadian economy that is strong and resilient. Canada is not an “idle spectator.”

  • Wiseman, along with Michael Sabia, the Clerk of the Privy Council and Secretary to the Cabinet, were clear that the government’s diversification efforts do not equate to decoupling from its largest trade partner. It’s ‘and’ not ‘or’. A stronger Canada, they both noted, is a stronger partner for the U.S.

  • Hoekstra didn’t disagree, noting that if Canada is a rich country, maybe a few of those dollars could flow south—maybe to Michigan (“in the summer”), Florida and Arizona. He also joked about Kentucky bourbon, which has been removed by several provinces amid the trade war: “If you need some, I’ll see that you get some.”

A new nexus

After decades of economic co-operation comes a trade shock from the U.S. side. In a report in the runup to the U.S.-Canada Summit, Frances Donald, Senior Vice President and Chief Economist at RBC Economics, notes that the bruised U.S.-Canada ties have uncovered several under-the-radar trade themes. Here are a few worth highlighting:

  • Global trade growth rate doubled without the U.S. Rather than break the global economy, the rest of the world is re-orienting around the U.S. market.

  • The year of Canada’s trade divergence. Higher gold prices helped Canada boost exports to other markets, even as shipments to the U.S. fell 6% in 2025.

  • Canadians have taken economic protection into their own hands. Cutting U.S. travel, boycotting American-made liquor, and seeking out domestic products showed Canadian resolve.

  • Canada added more jobs than the U.S. in 2025. While 68% of Canadian exports are headed for the U.S., only 12% of jobs are dependent on U.S. demand.

Canadian employment rose in 2025 despite trade shock. Annual percent change.

Read Frances Donald’s full briefing here.

Aligning the stars

It’s the world’s largest bilateral trade relationship—but it’s now under strain. Jordan Brennan, RBC Thought Leadership’s Managing Director, identified four strategically significant industries, which could drive U.S.-Canada relationship going forward.

Auto Manufacturing: Build on the already-integrated nature of the industry by harnessing Canadian clean power, aluminum, and critical minerals with American capital markets, OEM headquarters, and consumer demand.

Critical Minerals: Tie Canadian geology and mining with American financing and manufacturing demand, to deepen supply chain resilience and dependence on China-controlled minerals.

China has a tight grip on minerals, but Canada offers and alternative. The U.S. demand for minerals is projected to grow significantly into 2035.

Oil and Gas: Match Canada’s significant oil and gas resources, pipeline infrastructure, and tidewater access with U.S. refining capacity and capital markets to deliver affordable energy domestically—and to the world.

Defence: Combine American capital depth, technological sophistication, and R&D expenditure, with Canada’s geographic depth and world-class capabilities in sensors, avionics, satellite technology, and training and simulation to surveil and defend the continent.

Read Jordan Brennan’s full briefing here.

It’s more than a year into the historic U.S.-Canada trade shock, and the two economies suddenly find themselves at another nexus—the future of CUSMA, and a next chapter where precedents don’t necessarily hold. 

In some ways, it’s a moment of relief. What initially seemed like a monumental disruptive trade shock became a watered-down version of threats, and a growing list of exemptions for traded goods for many trading partners. Canada’s list has been the largest, thanks mostly to CUSMA, which makes about 90% of exports to the U.S. tariff-free. As a result, the trade schism between the two countries has been quite narrow, albeit deep.  

But there’s also hesitation. The U.S.-Canada ties seem to be bruised, not broken, but the outcome of the trade negotiations remains far from certain, and adjustments to this new relationship are still in play. Trade-related jobs have still bled on both sides of the border, and Americans are beginning to see the rise in tariff-related inflation. 

The trade war has turned out to be a slow leak—a disruption and transformation in slow motion. Slow leaks buy time to maneuver, but they can also produce some complacency. And they have a way of revealing cracks in the foundation that had been papered over before. This trade shock has uncovered under-the-radar stories about global trade, and the U.S.-Canada trade relationship. Here are six worth highlighting:  

  1. Global trade growth doubled without the U.S. 

    A big Liberation Day concern was that mass tariffs would spark a global recession, given the U.S.’s importance in the world economy. Instead, global trade, excluding the U.S., doubled, growing 4.4% year-over-year.

    A North American centric view of the world would, perhaps, have missed that outside of Mexico and Canada, American trade partners are far less exposed to the U.S. consumer market. Prior to 2025 tariffs, exports to the U.S. ranged from 30% in Vietnam to 15% in China, and 9% for the Euro area.

    Indeed, rather than break the global economy, the rest of the world is adapting to re-orient around the U.S. market. In a world focused on trade leverage, the jump in trade amongst global partners would suggest the U.S., perhaps, has less than initially appears. 

  2. The year of Canada’s trade divergence 

    Canada also re-oriented trade away from the U.S. in 2025—the U.S. share of total Canadian exports went from 76% in the fourth quarter of 2024 to 68% in the same period in 2025. While exports to the U.S. fell 6% year-over-year, or by about $35 billion, this was offset by a hefty $29 billion increase in exports to the rest of the world.

    Diversification didn’t come from finding new buyers for tariffed products. The increase, instead, came thanks to a surge in gold prices, which rose more than 60% in 2025. The result: gold exports to the U.K. alone spiked by $17 billion, or 76%, last year, making gold Canada’s second-largest export after crude oil. This significantly cushioned declines in other goods. 

    Gold also provided a big lift to the Canadian stock market, boosting Canadians’ financial wealth. The gold rally accounted for an estimated third of the TSX’s 28% gain and was the biggest driver behind the index outperforming the S&P 500 last year.  

  3. The U.S.-Canada trade war has been more narrowly impactful 

    Coupled with the energy shock, the trade shock is creating more distinct regionalization across Canada with some provinces and local economies disproportionately bearing the brunt of the breakdown. Though, none have been entirely immune.   

    Thanks to CUSMA, a narrower subset of industries, and therefore geographies, experienced the bulk of the trade shock. While the trade war became a national fixation, it hit manufacturing-heavy provinces of Quebec and Ontario the hardest. Steel, motor vehicles and parts saw the largest export losses, creating particularly acute challenges for regions like southwestern Ontario. Cities like Windsor, Ont., saw unemployment rates rise as high as 11.1%, while the national average peaked at 7.1%.  

    Outside of Ontario and parts of Quebec, the rest of Canada—particularly energy and agricultural-producing provinces—felt minimal direct impacts from the trade war. They benefitted from having very little trade being exposed to U.S. tariffs, and greater overall trade diversification. B.C., for instance, didn’t find itself at the heart of the conversation in 2025, but is likely to feel some pain in 2026 from the knock-on effects of lumber duties, which jumped in October 2025.  

    Coupled with the energy shock, the trade shock is creating broader economic divergence across the country, with several implications worth exploring for policymakers at all levels of government.   

  4. The U.S. trade deficit was redistributed 

    Tariffs were justified by the U.S. administration, in part, as a method to reduce the U.S. trade deficit. One year on, however, the deficit has moved in the wrong direction. Overall, the goods and services deficit widened by US$47 billion in 2025 compared to 2024. The goods trade deficit alone hit a record US$1.26 trillion in 2025.  

    Beneath the surface lies a clear trade policy shift: While the total deficit grew, its mix changed meaningfully. Tariffs successfully reduced imports from primary targets (especially China), while ramping up from other Asian countries, including Vietnam, Taiwan, India, Thailand, and Malaysia. 

    Some other targets, including Mexico, saw exports to the U.S. rise. The U.S. deficit with Mexico grew significantly by US$25 billion despite being subject to 25-35% tariffs at various points in 2025, but with significant exemptions. Some trade goals are a poor match for deeply integrated manufacturing supply chains. 

    Ultimately, the geography shifted substantially, but the aggregate scale of trade did not.  

  5. Canadians have taken economic protection, and damage, into their own hands

    Retaliatory measures were put in place by governments, but Canadians took the trade war personally, particularly with travel. And, it had an impact on Canada, and a key sector in the U.S. 

    Limited retaliatory measures from the Canadian government minimized the impact of the trade war on consumer prices at home, but consumer behaviour, especially in travel, still changed. 

    The federal government’s initial tariff retaliation only covered about a third of U.S. imports before being repealed by September, except those on steel, aluminum, and autos. This kept consumer prices down and gave the Bank of Canada flexibility to further lower interest rates. Meanwhile, provincial governments have exercised product boycotts, notably around American-made liquor, while federal and provincial governments now have “Buy Canada” procurement policies. 

    Still, the country responded in less official, more targeted ways. Travel is the most notable example. Canadian returns from the U.S. shrank 25% year-over-year in 2025.

    Instead, travel to the rest of the world was up 9.2% compared to 2024. And Canadians spent more at home with a 2.7% bump in domestic tourism, raising spending to 11% above its pre-pandemic average. This has been a positive driver for increased domestic consumption. 

  6. Canada added more jobs than the U.S. in 2025 as both sides suffered from the shock 

    Jobs data tells a surprising story. Canada’s Labour Force Survey showed 211,000 jobs were added in 2025, up 1%. Meanwhile, the American Nonfarm Payroll survey showed a 116,000 increase, a 0.07% bump to the employed number. 

    What’s even more interesting is what happened beneath the surface. In the U.S., about 275,000 jobs were lost last year in trade-exposed sectors, including manufacturing, wholesale, retail, transportation and warehousing, and temporary help services. Out of all trade-exposed sectors, transportation and warehousing were hit the hardest with the magnitude of job losses reminiscent of COVID era cuts. Nearly 430,000 jobs were added on net in all other sectors combined.  

    In Canada, jobs dependent on U.S. demand fell by 2%. The silver lining, at least for Canada, is that while the country’s exports (~68%) are heavily dependent on the U.S., only ~12% of jobs are dependent on U.S. demand, helping to stem the bleeding from the trade shock.  

    The bottom line: Workers in both economies have suffered and would benefit from improving trade relations over deterioration.  

Frances Donald is Senior Vice President & Chief Economist, RBC Economics

Canada and the United States are bound by the world’s largest bilateral trade relationship—one now under unprecedented strain. In what follows, we focus on four strategically significant industries: critical minerals, energy, automotive, and defence, which sit at the intersection of that relationship. We explore how deepened strategic alignment can enhance North American security, competitiveness, and resilience—and how that could be achieved.

Auto Manufacturing

The Challenge: The Canada-U.S. auto trade is under pressure on several fronts

  • U.S. Section 232 tariffs introduced friction at precisely the moment the industry needed continental coordination.

  • The deep structural threat to the US$100-billion Canada-U.S. auto trade is China, which produced 33 million vehicles in 2025—more than a third of the global total. China’s rising dominance is underwritten by scale, superior technology, development speed, and vehicle affordability. 

  • Four other mega forces compound that challenge:

    • Electrification is stalling in North America, even as Chinese-led propulsion electrification is accelerating everywhere else;

    • Vehicles are becoming software-defined platforms, with value increasingly concentrated in chips, sensors, and software rather than mechanical hardware;

    • Industry 4.0 is transforming manufacturing operations and reducing labour demand;

    • Market maturity, as slowing population dynamics and the rise of shared mobility platforms are changing ownership patterns among urban consumers.1

Collective Strengths

  • The U.S. brings the scale, capital, and market demand. American manufacturing expertise, R&D infrastructure, and domestic policy levers shape where investment flows across the North American system.

  • Canada brings complementary assets: award-winning assembly plants, global calibre parts-makers (e.g., Magna, Linamar), and a tech cluster with capabilities in sensors, AI, lightweight materials, and autonomy. BlackBerry QNX software, for instance, is already embedded in more than 250 million vehicles worldwide.2

    The US$100-billion North American auto trade. Trade balance as share of two-way trade, Average 2023-2025.

  • Both countries have strengths in AI and autonomy, but trail China in battery chemistry, primary extraction and refinement of battery elements, and the manufacturing scale that drives efficiency.

  • Canada’s power grid is clean and more competitively priced than comparable auto jurisdictions like Michigan and Ohio. This is becoming more strategically significant as electrification, onboard computing, and autonomous systems raise the power load per vehicle.

  • Canada’s critical minerals are a hedge against dependence on China. The mining and refining of copper, cobalt, lithium, and graphite would strengthen integrated battery, EV, and smart car supply chains. From mine to finished vehicle, the entire value chain can be completed within North America—much of it within a day’s drive to assembly plants.

  • Batteries are expensive and dangerous to transport (owing to their chemical composition), which makes Canada’s rail, Great Lakes shipping, and cross-border trucking a competitive advantage.

The Obstacles

  • Tariff uncertainty is the most immediate obstacle to growth and innovation. For Canada, the threat is existential. More than 90% of Canadian vehicles are shipped to the U.S. Even with a relatively low effective tariff rate, plant margins would be compressed, changing the calculus for investment committees in Detroit and Tokyo.

  • For the U.S., retaliatory tariffs are damaging but not fatal. Canada’s consumer market is large and lucrative—on a per capita basis, Canadians buy more vehicles than any other country. save the U.S. Canada is not only the largest export market for U.S. vehicles—it’s larger than the next 10 countries combined.

  • Relocating assembly within the U.S. would make vehicles more expensive for American consumers. Canadian aluminum is produced using clean, low-cost hydro and nuclear power and is a critical input for lightweighting vehicles. The Ford F-Series is North America’s top selling vehicle and contains some 850 pounds of aluminum. Canada supplies more than half of the total U.S. aluminum consumption. Reshoring production with tariffed aluminum could cost U.S. auto consumers US$1 to US$2 billion.3 Vehicle affordability has already deteriorated on both sides of the border. The average transaction price for a new vehicle now exceeds $50,000 in the U.S. and $60,000 in Canada, putting new vehicles out of reach for many consumers.4 The result is an aging vehicle fleet, as households stretch replacement cycles or exit the market entirely. Tariffs, onshoring mandates, and the cost premium associated with electrification threaten to compound the affordability challenge.

  • The EV retreat is stranding capital without solving the competitiveness problem. Detroit automakers US$53 billion in write-downs reflects a genuine misread of consumer behaviour and policy stability.5 Industry forecasters project North American vehicle production will remain below the 2016 record of 18 million light vehicles through the end of the decade.6 The pivot back to ICE and hybrid platforms buys time, but Chinese OEMs continue to build technological and scale advantages on the platforms—electrified, software-defined—that will dominate the coming decades.

The Path Forward

  • Trade Policy Reforms. Washington’s goal—repatriating manufacturing—reflects a legitimate industrial concern, but the production the U.S. seeks to recover did not migrate to Canada. Since 2000, both Canada (-1.7 million units) and the U.S. (-2.6M units) saw assembly volumes shrink as the continental assembly footprint migrated to Mexico (+2.2M units). Canada, the U.S., and Mexico could align and strengthen the Rules of Origin and reform Most Favoured National tariff policy, which would incent global OEMs to locate production within the bloc, while jointly levying tariffs on EVs, parts, steel and aluminum from outside the bloc—hedging Chinese dumping. Reforms to the Labour Value Content provisions such as raising the content share and the wage rate would help rebalance investment and production within the bloc, which has long been biased toward Mexico.7

  • Critical Minerals Auto Pact. Cooperation on an end-to-end supply chain would tie Canada’s world-class geology and mining expertise with American capital markets industrial demand. In exchange for duty-free access to the U.S. market, Ottawa and the provinces could formalize free trade for steel, aluminum, and copper, and off-take agreements, stockpiling arrangements, and price floors for cobalt, lithium, graphite, and rare earths—commercially de-risking private investment and converting Canada’s processing infrastructure into implicit U.S. supply chain security with no net new capital cost to either government. Extraction and refinement could utilize Canada’s vast capabilities in clean power.

  • Cooperation in Skills and Research. North American OEMs are pivoting toward extended-range electric vehicles (EREVs) and hybrids as the bridge between ICE and full electrification. Co-investment in testing facilities, SR&ED reform to cover autonomy, connectivity, and cybersecurity mandates, and immigration reform to attract engineering and AI talent would deepen the skills density needed to compete with China.

The Potential Outcome: Canada and the U.S. could be better prepared for an electrified, autonomous, and increasingly software-defined auto future by building on a bilateral partnership that ties Canadian aluminum, clean power, critical minerals, and advanced manufacturing capability to American capital markets, OEM headquarters, and consumer demand. Preserving market access for both parties could help keep vehicle prices competitive for consumers while excluding Chinese content from continental supply chains.

Critical Minerals

The Challenge: China’s Structural Dominance

  • Chinese dominance in the refining and manufacture of critical minerals is the most direct threat to industrial sovereignty in North America. China dominates processing for 19 of the 20 most critical minerals, commanding, on average, 70% of market share. For tech and battery materials like gallium, graphite, and rare earths, its share exceeds 90%.8

  • Questions about the weaponization of supply chain dependence are no longer theoretical. China imposed export controls on gallium, germanium, rare earths, and battery chain technologies during the height of trade tensions with the U.S. In 2025, Ford shut down its Chicago assembly plant for one week following China’s rare earth export restrictions. The U.S. Geological Survey estimates that a 30% supply disruption of gallium could reduce U.S. output by US$600 billion—2% of U.S. GDP.9

Collective Strengths

  • The continental response—who mines, who refines, and who captures the downstream value—will shape North American industrial and defence competitiveness through 2040.

  • Canada and the U.S. are already each other’s largest minerals trading partner—approximately $150 billion in bilateral minerals trade annually.10 Canada is the top source for U.S. critical mineral imports, supplying 20%.11 But the current system is fractured: Canada mines, China refines, and the U.S. manufactures. Closing the gap is the defining industrial policy challenge of the coming decade.

  • Canada has world-class geology across cobalt, copper, gallium, germanium, graphite, lithium, nickel, tungsten and rare earths, with a seven-fold supply potential by 2040.12 Canada also has mature or developing refining infrastructure, including Anglo Teck’s Trail Operation (germanium), Neo Performance Materials’ Rare Earth Metals Facility (gallium), the Sudbury corridor (copper, nickel, cobalt), and the Bécancour mineral processing ecosystem, which connects Quebec’s mines with processing plants and downstream battery manufacturing.

    China has a tight grip on minerals, but Canada offers an alternative. The U.S. demand for minerals is projected to grow significantly into 2035.

  • Canada has clean, affordable power and abundant water. The U.S. has manufacturing scale, dominant capital markets, and the political will to strengthen supply chains.

The Obstacles

  • China has access to nearly unlimited, state-subsidized capital to finance mines and processing plants.

  • The talent and R&D gap with China has widened. China has 39 university degree programs to train engineers and technologists in critical minerals—Canada has none.13

  • For many critical minerals, North American demand is too thin to anchor the market. In 2024, the U.S. accounted for less than 2% of rare earth consumption—far below the threshold needed to make offtake agreements commercially viable.

  • Investment cycles in mining are long. In a world where capital is flowing into short-cycle AI, attracting investment into the refining of low-volume minerals is economically challenging.

  • High labour and environmental standards are strategic advantages in the long run, but they generate permitting timelines that extend well beyond those in China. Processing facilities face additional environmental impact assessments.

  • Supply chains will form around demand, not supply, but most demand will come from renewables and EVs, not defence. Battery chemistry is evolving rapidly, and with it, mineral intensity. Until recently, cobalt was considered essential. Lithium iron phosphate chemistry has since displaced it as the dominant cell technology. Sodium-ion and solid-state could similarly disrupt lithium demand.

  • Canada cannot pursue a strategy across all 34 critical minerals simultaneously. Capital, talent, permitting bandwidth, and infrastructure are finite. A more credible strategy would concentrate investment in minerals where Canada has refining infrastructure already in place and where Canada’s clean power advantage is most decisive. The strategy could also be geared toward minerals with demand that is technology-path-independent and is supported by multiple end uses beyond EV batteries.

  • While states have a role to play in creating and supporting markets, regulatory capture by a few anchor firms is a threat to the public good.

The Path Forward

  • Canada’s supply infrastructure and U.S. demand architecture are symbiotic. A formal Critical Minerals Partnership would tie Canadian geology, clean power, and mining expertise with American capital markets and North American manufacturing demand in a pairing that no other allied combination could match.

  • Long-term demand for critical minerals is expected to be strong. The IEA projects demand growth to 2040 for copper (30%), cobalt (50%), graphite (130%), lithium (350%), nickel (70%), and magnet rare earth elements (65%), driven by renewable energy, EV adoption, grid battery storage, and electricity network expansion. Defence layers on top of these, reinforcing the strategic case to build these supply chains now. Demand aggregation across the U.S., Canada, the European Union, the U.K., Australia, India, Japan and Korea could expand the market beyond 2.5 billion people.14

  • Project Vault works better with Canada. Canada’s federal strategy targets the same six minerals—lithium, graphite, nickel, cobalt, copper, and rare earths—mirroring Project Vault’s key focus areas. Ontario’s $500 million Critical Minerals Processing Fund is building the midstream refining capacity that U.S. OEMs need as a Vault counterparty. Explicit Canadian rules-of-origin eligibility under Vault—so that minerals refined at these facilities qualify as U.S. domestic supply—would convert existing Canadian processing facilities into implicit U.S. industrial capability with no net new capital cost to either government.

  • Allied demand aggregation works better if the U.S.-Canada bilateral partnership is the foundation. The Forum on Resource Geostrategic Engagement (FORGE) could be recast along NATO-like lines, wherein allies commit to procuring refined minerals from other allies as part of their NATO spending targets.15

  • China’s price manipulation is the shared threat that makes bilateral price stabilization essential. Use of a contract-for-difference (CFD), price floors, and volume guarantees could be applied bilaterally to Canadian processors, which would insulate North America’s supply chains against Chinese price manipulation.

  • Sustained investments in R&D, processing chemistry, and engineering talent are needed. Joint investment, shared technical training programs, and co-location of processing and end-use manufacturing could help build the skills density that neither country could develop on its own.16

The Potential Outcome: A North American supply chain could lead to reduced dependence on Chinese refining, tying Canadian geology and mining with American financing and manufacturing demand, deepening supply chain resilience and strategic capabilities simultaneously.

Oil and Gas

The Challenge: Security, Affordability, and Optionality

  • In 2024, Canada exported $170 billion worth of hydrocarbons to the U.S.—crude oil, natural gas, natural gas liquids, and refined products—accounting for 22% of Canadian exports. Canada supplies more than 60% of U.S. crude oil imports and virtually all natural gas imports. Two-way energy trade sits at $215 billion, underpinned by over 100 transboundary pipelines and transmission lines.17

  • Three imperatives define the relationship:

    • Energy security and sovereignty: Canada’s export dependence on a single buyer exposes both countries to disruption risk—political, logistical, or geopolitical. For oil, future demand growth is in Asia. For natural gas, demand growth is both Asian and North American.

    • Consumer affordability: Energy price volatility, whether caused by conflict in the Persian Gulf, tariff friction, or infrastructure constraints, passes through to households and industry on both sides of the border.

    • Value Maximization: The WCS-WTI price differential—historically US$10-25 per barrel—represents a structural transfer of value from Canadian producers to American refiners, driven by Alberta’s landlocked geography and insufficient export optionality.18

  • The crisis in the Persian Gulf has tightened heavy crude markets, elevated prices, and sharply illustrated the vulnerability of relying on politically unstable supply. The U.S. and Asian allies are assessing alternatives. Canada is the obvious answer.

Collective Strengths

  • Canada is the world’s fourth-largest oil producer, pumping 5.8 million barrels per day. The oilsands are a distinctive asset: long-lived, capital-intensive, and—unlike U.S. shale—resilient to short-cycle price volatility. U.S. crude production is plateauing: the EIA’s long-run reference case projects peak production in 2030, followed by decline in the 2030s. As the shale boom recedes, Canadian imports become more strategically important.19

  • North American heavy crude demand is structural. U.S. Midwest and Gulf Coast refineries are configured to process heavy, sour Canadian bitumen—the same configuration increasingly common in India and China. U.S. refineries with heavy conversion capacity will require a replacement source. Venezuelan production remains constrained by security, risk, and infrastructure. Canada is the only proximate heavy supplier at scale.20

  • The Trans Mountain Expansion (TMX) has begun to transform Canada’s strategic position. Since it came online in 2024, TMX has tripled capacity to 890,000 bpd to tidewater. The WCS-WTI discount narrowed and stabilized from nearly US$30 per barrel in 2022 to approximately US$10 by 2025. Each additional barrel shipped to Asia rather than into the continental market compresses the differential, improving producer netbacks.21

    Canada's customer base for crude expands helping narrow the spread and volatility. Canada's crude oil exports and price.

  • On natural gas, Canada’s Montney formation in northeastern British Columbia is one of the largest natural gas resource plays in the world, and LNG Canada’s Kitimat facility, which shipped its first cargo on in June 2025, has opened Canada’s first large-scale Pacific LNG export route.

The Obstacles

  • Oil prices: low and volatile prices challenge greenfield expansion and pipeline infrastructure; high prices trigger demand destruction and accelerate the energy transition. Sustained greenfield expansion will require policy stability and expanded export infrastructure.

  • Greenfield investment in the oilsands is limited. Growth from existing facilities is achievable but requires a policy environment that fosters growth and does not disadvantage Canada relative to other jurisdictions. A resolution of the Gulf crisis—returning Saudi, Iraqi, and potentially Iranian heavy sour supply to the market—would loosen the premium that currently benefits Canadian barrels in Asia. Venezuelan production, if rehabilitated under a U.S. policy shift, would compete more directly with Canadian heavy than U.S. shale.22

  • On gas, substitution is a constraint that does not apply to oil. Asian buyers can switch from LNG to coal, nuclear, or renewables. LNG Canada’s competitive position in Asia depends on carbon policy coherence, shipping costs relative to Qatari and Australian exporters, and whether Canadian gas can price below coal.

  • The Pathways Alliance—Canada’s five largest oilsands producers—has committed $16.5 billion for carbon capture and sequestration through 2030. The tension between energy security and climate policy has led to policy volatility on emission management, which compounds the technical and financial challenges associated with CCS projects.

The Path Forward

  • Optionality benefits both countries. The strategic logic for oil and gas runs in opposite directions, and both countries’ energy policy could reflect that asymmetry. For Canadian oil, diversification into Asia is the value-maximizing move: every additional barrel shipped via TMX to Asian buyers narrows the WCS-WTI discount and increases netbacks for Canadian producers. Pushing more heavy oil into the continental U.S. market has the opposite effect. For natural gas, the calculus is reversed: AI-driven electricity demand has elevated Henry Hub pricing, making the U.S. a premium gas market. LNG Canada’s Pacific route remains strategically important for Canada’s long-run diversification. The U.S., likewise, could continue to seek optionality for its refineries, securing Canadian supply while finding new import sources.

  • A formal Energy Security Partnership. One with harmonized pipeline permitting and regulatory timelines, joint strategic reserve coordination, bilateral CCS and methane abatement collaboration, and a common framework for infrastructure investment that treats Canadian production as implicit U.S. supply security without requiring government capital from either side. This could be expanded to include the G7 and NATO allies.

  • Oil is a market that works. The continental oil and gas system—hundreds of pipelines, integrated refining, established commercial flows—functions efficiently when policy does not distort it. Tariffs on Canadian energy raise prices for U.S. consumers, widen the WCS discount, and reduce producer revenue without repatriating any production. The U.S. refining system—particularly the heavy conversion capacity—was built for Canadian oil. Disrupting that relationship would require billions in retooling at U.S. refineries or sourcing heavier barrels from less stable suppliers.

  • Gas is complementary, not competing. Henry Hub natural gas prices have spiked with AI-driven electricity consumption in the U.S., making gas sales to the U.S. market economically attractive for Canadian producers. The Montney gas basin and U.S. demand growth reinforce each other. Investment in Montney production infrastructure by U.S. and Canadian investors alike expands the continental gas supply that both countries need for power generation, industrial use, and LNG export.  

The Potential Outcome: A bilateral energy partnership could link Canada’s world-class oil and gas resources, pipeline infrastructure, and Pacific tidewater access with U.S. refining capacity, capital markets, and continental demand to deliver affordable, secure energy to consumers while expanding strategic optionality in global markets for both.

Defence

The Challenge: Heightened threat environment, fraying alliances

  • World military expenditure reached US$2.9 trillion in 2025—the ninth consecutive annual increase. The U.S., China and Russia accounted for roughly half of that—unchanged from 2000. However, the relative share changed dramatically: in 2000, Russia and China combined to spend a tenth of U.S. expenditure; today, they spend more than half that of the U.S.23

  • Russia’s invasion of Ukraine broke the security calculus for Europe. NATO responded with a historic commitment: at the 2025 Hague Summit, all 32 allies met the 2% GDP target for the first time since the 2014 Wales pledge. And NATO Allies agreed to a new benchmark of 5% of GDP by 2035.24

  • Russian and Chinese exercises and probes around the Arctic illustrate the rising threat level for North America.25 The Canada–U.S. defence partnership faces four frictions:

    • Defence Expenditure: Canada increased its military spending by nearly 70% from 2022 to 2025—hitting the 2% NATO target for the first time since the 1980s.26 Despite pledging to reach 5% of GDP by 2035, Canada has yet to produce a roadmap Washington finds convincing, prompting the U.S. to suspend the Permanent Joint Board on Defence.27

    • F-35 Procurement: Canada’s review of the program comes amid deepening trade tensions. The U.S. frames the delay not merely as a procurement decision but as a test of whether Canada intends to remain operationally relevant in an era of fifth-generation air and missile defence. The trade tensions also call into question whether Canada will continue to buy the most sophisticated U.S. hardware. 

    • The Golden Dome: Designed to provide continental defence, the Congressional Budget Office has pegged the cost at US$1.2 trillion over 20 years.28 Canada’s role remains undetermined.

      NATO defence spending trails Russia's as a share of GDP. Military expenditure as a share of gross domestic product.

Collective Strengths

  • In addition to unmatched platform scale, capital depth, and technological sophistication, the U.S. possesses a dynamic defence innovation economy, R&D density, and an advanced defence industrial base.

  • Canada brings world-class capabilities in domains critical to modern defence, including avionics, aircraft maintenance repair and overhaul, marine sensors, electronic warfare, UAV’s, and training and simulation—all of which are designated as priority sovereign capabilities in Ottawa’s Defence Industrial Strategy (DIS).29 In space, Canada has a six-decade legacy spanning Earth observation, satellite communications, and positioning-navigation-and-timing systems. Canada contributes heavily to the early-warning capabilities via the northern radar networks and operates a portion of the North Warning System (NWS), and maintains Forward Operating Locations in the Arctic.30 Nearly half of Canadian defence output is exported, with 70% to U.S. and Five Eyes partners, underscoring deep interconnection into global markets.31

The Obstacles

  • Over 90% of Canadian defence firms are SMEs. The absence of large defence primes depresses capital formation, posing challenges to the ambition to scale up Canada’s industrial base. Canada’s venture capital pool—roughly $12 billion—is less than 5% of the U.S. equivalent. Collateral assets in defence (specialized facilities, restricted IP) are often illiquid, with persistent mismatch between up-front investment requirements and revenue timing.32

  • Protectionist procurement policies: Both Canada and the U.S. are pushing to buy domestically, increasing trade frictions. For Canada, directing contracts to domestic firms where industrial capacity does not yet exist at scale could increase costs and extend timelines. Outside of space, ocean, and some aircraft, the target of 70% Canadian content in defence acquisitions by 2035 (up from ~40% today) requires building industrial infrastructure that cannot be created quickly.

  • Arctic sovereignty is another tension. Russia and China pose threats to the Arctic, and despite American pressure to invest in Arctic defence, the region remains exposed (current investments in Arctic defence notwithstanding).

  • The U.S.’s defence industrial base is production-constrained, not merely capital-constrained. The conflict in Ukraine and Iran have exposed munitions stockpile gaps while ‘Buy American’ provisions and export controls have restricted supply chain integration with allies.33

The Path Forward

  • Develop distinct but interoperable industrial bases. Canada has set itself on a clear, distinct path to diversify its defence industry from the U.S. and develop its own sovereign manufacturing capacity. This will create divergent capabilities and more Canadian autonomy. However, it will be important for key capabilities, particularly those important to joint commands, to maintain technological and operational interoperability for the long-term functioning of North America’s defence framework.

  • Deepen in areas of mutual operational necessity. NORAD modernization is foundational. Canada’s ~$40 billion, 20-year investment—over-the-horizon radar (including the $6.5 billion Arctic system being co-developed with Australia), space-based surveillance, command and control, and northern infrastructure—signals deep commitment to the partnership. Canada could negotiate its participation in a future Golden Dome: Canadian sensors, Arctic radar infrastructure, and airspace access are genuine contributions that warrant cost-sharing terms, Canadian IP rights over jointly developed systems, and a defined Canadian role in intercept decision-making.34

  • Explore cooperation on space and drone technology. Recent conflicts demonstrate that uncrewed systems are redefining warfare. At the same time, space is a strategic domain that’s increasingly contested. Ukraine has become the “Silicon Valley” of defence innovation and recent NATO exercises have shown the effectiveness of these capabilities against outdated militaries. This phase of rearmament will not take the same form as previous ones. Canada must update its military equipment and infrastructure writ large, and the U.S. is facing depleted stockpiles and asymmetric threats. Therefore, both must re-prioritize what defence technology they need to develop and procure, creating opportunities for collaboration to avoid duplication in areas of shared security interests.

  • Deepen partnership on critical minerals. Canada’s geology, if twinned with refining capacity, could hedge reliance on adversarial powers. Formalizing supply agreements for NATO’s defence-critical minerals—with off-take arrangements, price stabilization mechanisms, and Rules of Origin eligibility that treat Canadian-refined inputs as U.S. domestic supply—would strengthen both countries’ industrial resilience.

  • Diversify on platforms and partnerships. Canada’s $530 million European Space Agency investment, its participation in the European Union’s SAFE initiative, and its emerging bilateral arrangement with Australia reflects Ottawa’s efforts to diversify its defence industrial base. European partners will expect access to Canadian procurement as the price of access to European markets.

The Potential Outcome: The Canada–U.S. defence relationship has historically rested on an implicit bargain: Canada provides geographic depth, on the ground, under the ocean, on the ocean, in the air and in space; the U.S. provides an umbrella of security and protection, reinforced by unmatched platform scale, capital depth, technological sophistication, and R&D expenditure. Ensuring that bargain holds requires Canada to close the gap between financial commitment and operational credibility—delivering on NORAD modernization, resolving the F-35 decision , and building a genuinely capable domestic industrial base. For the U.S., a more reliable long-term partner will be secured by respecting Canadian sovereignty.

Acknowledgments

The authors would like to thank the external experts consulted for this report, some of whom are listed below.

Peter Dawe, BDC

Steve Carlisle, General Motors (Retired)

Robert Johnston, University of Calgary

Frank McKenna, TD Securities and former Canadian Ambassador to the United States

Michael Robinet, S&P Global Mobility

[1] Brennan, J. 2026. Steering Through Uncertainty: Four Future Paths for Canada’s Auto Industry. Toronto: RBC Thought Leadership.

[2] Brennan (2026), Steering Through Uncertainty.

[3] Canada exports ~US$11 billion in aluminum to the U.S., with more than one-third demanded by the transportation sector. At tariff rate at 50%, the impact on auto assembly alone could exceed $1 billion. When auto parts are layered in, the tariff cost moves higher. For economic analysis of tariffed Canadian aluminium, see Aluminum Association. 2025. Powering Up American Aluminum: A Roadmap for Next Generation Supply Chain Resilience. Arlington, VA: The Aluminum Association; Business Data Lab. 2025. How to Undermine U.S. Manufacturing: Debunking Aluminum Tariff Myths. Ottawa: Business Data Lab.; and Livingston, Brian. 2025. Canada’s Aluminum Production and US Tariffs. Intelligence Memos. Toronto: C.D. Howe Institute. September 2.

[4] Brennan (2006). Steering Through Uncertainty.

[5] Markman, J. 2026. ‘How Legacy Automakers Torched $53 Billion on EVs They’ll Never Sell’, Forbes, February 9.

[6] Robinet, M. 2026. New Automotive Geo-economics. S&P Global Mobility. Presented at PMA, May 2026.

[7] See Helper, S. and T. Tucker. 2026. ‘Challenges and Opportunities for the North American Auto Industry in the 2026 USMCA Renegotiation’, March 4. Washington: Brookings Institution; U.S. International Trade Commission. 2025. USMCA Automotive Rules of Origin: Economic Impact and Operation, 2025 Report. Publication no. 5642. Washington: USITC.

[8] IEA. 2025. Global Critical Minerals Outlook. Paris: International Energy Agency.

[9] Baskaran includes this claim in her testimony to the House Natural Resources Subcommittee—a claim we have not been able to independently verify. See: Baskaran, G. 2026. ‘Unleashing America’s Mineral Potential: The Critical Minerals Commodity Supply Chain’, Testimony before the House of Natural Resources Subcommittee on Oversight and Investigations. Washington: Centre for Strategic & International Studies.   

[10] Natural Resources Canada. 2025. Canada-U.S. Minerals Data Dashboard.

[11] Baskaran, G. 2025. ‘Canadian Tariffs Will Undermine U.S. Minerals Security’, Center for Strategic & International Studies, January 29.

[12] Merwat, S. 2026. Mine & Refine: Bridging Canada’s Critical Minerals Capital Gap. Toronto: RBC Thought Leadership.

[13] Merwat, S. 2025. The New Great Game: How the face for critical minerals is shaping tech supremacy. Toronto: RBC Thought Leadership.

[14] See Baskaran (2026).

[15] See Baskaran (2026) for a suite of policy recommendations which integrate extraction, processing, refining, and manufacturing with demand anchors.

[16] Merwat, S. 2026. Critical Minerals Processing: The West’s refining challenge and the technologies closing the gap. Toronto: RBC Thought Leadership.

[17] Canada Energy Regulator. 2025. Market Snapshot: Overview of 2024 Canada-US Energy Trade. Available online at: https://www.cer-rec.gc.ca/en/data-analysis/energy-markets/market-snapshots/2025/market-snapshot-overview-of-2024-canada-us-energy-trade.html. 

[18] Part of the differential reflects quality and transportation cost, but another part is derived from insufficient export diversification. See Alberta Energy Regulator. 2025. Alberta Energy Outlook ST98. Calgary: Government of Alberta.

[19] Energy Information Administration. 2026. Annual Energy Outlook. Washington: U.S. Department of Energy.

[20] Merwat, S. 2026. Six charts that analyze Canadian-U.S. oil ties amid new geopolitical developments in oil markets. Toronto: RBC Thought Leadership.

[21] Johnston, R. 2026. ‘Asia’s Oil Demand Outlook and Geopolitics’, Presented to PwC Canada/School of Public Policy Asia Oil Outlook, May 7.

[22] See the Oil Sands Alliance’s explainer on the Pathways Project: https://oilsandsalliance.ca/pathways-project/.

[23] Author’s calculations based on data from SIPRI Military Expenditures Database (constant 2024 $USD). 

[24] NATO. 2025. Defence Expenditures and NATO’s 5% Commitment. Brussels: North Atlantic Treaty Organization. Available at: https://www.nato.int/en/what-we-do/introduction-to-nato/defence-expenditures-and-natos-5-commitment.

[25] Bingen, K.A. 2026. ‘Orbits of Influence: Emerging Threats to U.S. Space Security and Foreign Policy Implications’. Statement before the House Foreign Affairs Subcommittee on Europe. Washington: Center for Strategic and International Studies, April 29.

[26] NATO data indicates that Canadian defence spending rose from US$26 billion in 2022 to US$44 billion in 2025—an increase of 69% (using current prices and exchange rates). SIRPI data indicates that Canada spent 2.06% of GDP on defence in 1987. 

[27] Some interpret the suspension of the PJBD as a response to Canada’s decision to review the F-35 program (and not as a response to Canada’s planned military expenditures, despite advertisements to the contrary).

[28] May 2026 report from the Congressional Budget Office: https://www.cbo.gov/system/files/2026-05/62379-golden-dome.pdf.

[29] Department of National Defence. 2026. Canada’s Defence Industrial Strategy: Security, Sovereignty and Prosperity. Ottawa: Government of Canada.

[30] See NORAD Backgrounder: https://www.canada.ca/en/department-national-defence/news/2022/06/north-american-aerospace-defense-command-norad.html

[31] See Canada’s (2026) Defence Industrial Strategy.

[32] Ashcroft, T. 2026. Frontline Investments: How to Advance Defence Finance in Canada. Toronto: RBC Thought Leadership.

[33] See reporting from the Associated Press, ‘US Will Need Years to Replenish Stockpiles of Advanced Weapons Used in Iran War, New Analysis Finds’, May 27. Available online at: https://www.usnews.com/news/business/articles/2026-05-27/us-will-need-years-to-replenish-stockpiles-of-advanced-weapons-used-in-iran-war-new-analysis-finds

[34] Department of National Defence. 2025. Fact Sheet: Funding for Continental Defence and NORAD Modernization. Ottawa: Government of Canada. Available at: https://www.canada.ca/en/department-national-defence/services/operations/allies-partners/norad/facesheet-funding-norad-modernization.html.

American excellence in artificial intelligence has had an unintended side-effect: a hyper concentration in computing software and hardware. Three U.S. tech firms account for around 85% of Canada’s cloud infrastructure spending, while another three account for roughly 88% of enterprise foundation model usage. Meanwhile, NVIDIA makes up about 80-90% of the advanced AI chip market.

Canadian firms and governments do not play a meaningful role in the global AI supply chain. But there is both a commercial and national demand to exert more control over our digital infrastructure to ensure deep AI capability as a country. The issue of “sovereign AI” has emerged as a critical issue as the world is swept up by the new technology. At the same time, choosing to build sovereign infrastructure and sovereign AI systems, or creating sovereign requirements for existing cloud infrastructure could involve a cost premium and could reduce technological competitiveness. Canadian businesses pursuing sovereign AI initiatives should consider which workloads to keep on existing cloud infrastructure, and which may require new architecture.

Canada is not alone in its pursuit of sovereign AI. More than 70% of global executives, investors and government consider sovereign AI as an “existential concern” or strategic imperative” to their goals, according to McKinsey & Co., which projects global sovereign AI to become a US$600- billion market by 2030.

For several years, the Canadian government has pursued new legislation to strengthen privacy protections and modernize its digital regulation. At the same time, a more assertive posture from Washington heading into the forthcoming Canada-U.S.-Mexico Agreement (CUSMA) review has cast some of Canada’s digital regulatory efforts as potential trade irritants. The result is a live debate—on both sides of the border—over how Canadian businesses can continue to access the latest AI innovations while maintaining robust safeguards and protections.

Canadian firms have found themselves making infrastructure, data, and vendor decisions in an environment that has materially changed in the last 18 months. The AI stack—cloud, compute, foundation models, and the data those systems run on—has simultaneously become a top subject of trade negotiations, regulatory design, procurement strategy, and operational risk management. The choices being made now at the negotiating table and in Canadian boardrooms will set the conditions for the next decade of the digital economy.

For a start, the U.S. is now more aggressively pushing for its interests and tech sector dominance, with an immediate challenge being CUSMA’s digital trade chapter, with a July 1, 2026, being the milestone for the six-year joint review.

Unlike several other trade agreements, on data localization specifically, CUSMA goes further than comparable agreements: unlike the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, its rule against requiring domestic computing facilities (Article 19.12) contains no “legitimate public policy objective” exception, narrowing the space Canada would otherwise have to mandate local data storage for public services or citizen data.

Four provisions matter most for AI and data sovereignty: 1) limits on less-favourable treatment of foreign digital products, 2) restrictions on blocking cross-border data flows for business conduct, 3) prohibitions on requiring domestic computing facilities as a condition of operating, and 4) limits on source-code disclosure requirements. There is still room to move, but in narrower channels: the federal government’s national security exception, the federal procurement exclusion, and prudential carve-outs in financial services to preserve system stability. The federal government is also working on over a dozen targeted exceptions for defence.

Through a series of executive orders and policy shifts, the U.S. has hardened its position on digital trade. Washington is increasingly treating digital and AI regulation, including rules adopted outside its borders, as a trade irritant and barrier to market access. In March 2026 the United States Trade Representative (USTR) named Canada’s sovereign computing initiative, digital rules, and proposed regulations as trade barriers in its National Trade Estimate report. U.S. Trade Representative Jamieson Greer has noted that all options are on the table regarding the future of CUSMA. A U.S. executive order in 2025 creating a federal AI Litigation Task Force, while a White House recommendation calling for a “minimally burdensome national standard,” point in the same direction: AI regulation is being framed as commercial friction. In a CUSMA submission, the American industry-led Computer & Communications Industry Association (CCIA) labelled Canada’s Online News Act and Online Streaming Act as discriminatory, suggesting major headwinds ahead for the Canadian government and businesses to protect their interests.

Ottawa moved on June 4, 2026, releasing AI for All, its national AI strategy, organized around trust, opportunity, and sovereignty. Two of its six pillars target exactly these dependencies—a “sovereign AI foundation” in compute, data, and talent, and scaling Canadian champions—under a “build-partner-buy” approach. The headline commitments are concrete: infrastructure “operated under Canadian control and Canadian law,” sovereign-compute partnerships of 850 megawatts by 2030 scaling toward 2.3 gigawatts, a public supercomputer by 2031, and $700 million in affordable compute for smaller firms. Depending on execution, this may help address some of the gaps.

For Canadian leaders, sovereignty in the AI era should not mean isolation. It means freedom from coercion: the ability to choose which AI models to use, whose hardware runs AI inference, which jurisdiction governs data, and which providers can be substituted under pressure. Notably, Canada’s domestic stack for infrastructure is developing faster than the prevailing narrative suggests, including Cohere’s CoreWeave build out, Bell AI Fabric, TELUS AI data centres, the ThinkOn– Hypertec–Aptum–eStruxture consortium, and a new Canadian supercomputer are all building domestic AI and data infrastructure. Furthermore, Canada has many successful, global enterprise technology companies across AI models, financial services, healthcare technology, knowledge management and data storage, and beyond.

Canadian AI Sovereignty Risk Heat Map

In Sovereign by Design (Mullin & Khan, 2026) the above heat map rates “the severity of risk to Canadian AI sovereignty” at each layer/dimension, where sovereignty means freedom from coercion, and the ability to structure dependencies so they can’t be used as leverage. The four tiers map to how concentrated the dependency is and whether Canada has a viable substitute:

Reading the heat map. Each cell rates the severity of sovereignty risk where a layer of the AI stack (rows) meets a dimension of digital sovereignty (columns). Severity reflects the degree of foreign dependency, supplier concentration, and substitutability—and how much leverage a disruption would hand to an outside actor.

  • Low—Minimal exposure. Canada has domestic capacity, diversified supply, or ready substitutes; the dependency creates little room for foreign leverage.

  • Moderate—A real but manageable dependency. Concentration or foreign exposure exists, but allied alternatives, partial domestic capacity, or workarounds limit the leverage it confers.

  • High—A significant vulnerability. Heavy reliance on a small number of foreign providers or jurisdictions with few near-term substitutes; a disruption or coercive act would impose serious costs and be slow to route around.

  • Critical—A severe chokepoint in Canada’s supply chain. Dependence on a single (or a few) foreign-owned sources with few viable domestic or allied substitutes. Loss of access could halt or severely degrade AI capability and cascade through the stack.

Key considerations for firms

Four questions sit on the table for any Canadian firm of meaningful scale considering measures to increase its AI sovereignty. The stakes vary by sector—financial services, healthcare, and defence and critical infrastructure face the sharpest versions—but the underlying architectural choices are increasingly shared.

  1. Plan for three regulatory scenarios, not one

    The CUSMA review could produce continuity on digital trade (status quo), modest tightening of restrictions, or material renegotiation on digital trade. Firms could build their AI and digital strategies with each of these futures in mind. Domestic regulatory uncertainty compounds the trade variable. Canada’s patchwork of AI and data laws could get clearer—or more tangled—as the federal government reforms the Privacy Act, PIPEDA, and other digital rules all likely at the same time. The Connected Care for Canadians Act (now Bill S-5, reintroduced in the Senate in February 2026) intersects health data interoperability with AI training in ways the legislation leaves largely undefined; and Bill C-8 is poised to extend supervisory expectations to telecommunications and adjacent critical infrastructure operators. The April 2026 Canadian Financial Sector Resiliency Group (CFRG) convening on Mythos signalled that frontier AI is now treated as a financial stability and cybersecurity concern, not simply a technology one. This is a shift that companies in energy, telecom, transportation, and water should expect on their desks next, likely ahead of a finalized supervisory framework for dealing with super powerful AI.

  2. Treat sovereign AI as an opportunity, not just compliance

    Canada’s strengths in energy, expanding data-centre capacity, and emerging AI champions could form the basis of a sovereign stack that did not exist a few years ago. Firms in adjacent sectors—such as legal, professional services, and insurance—that adopt sovereign infrastructure could build a stronger position for future Canadian regulatory shifts or trade developments. Whether that stack reaches commercial scale will depend on procurement decisions by large anchor buyers. With bank AI adoption rising from about 30% in 2019 to 50% in 2023, and projected to reach 70% by 2026, the choices the Big Six and other major financial firms in the near future could determine whether a Canadian sovereign cloud ecosystem becomes truly viable. Canada’s Defence Industrial Strategy and new NATO commitments also create a parallel growth path for dual-use firms serving Canadian, Five Eyes, and allied demand.

  3. Get the talent and IP question right

    Many technology-focused STEM graduates leave Canada, particularly top university software engineering graduates. But without people who have deep AI capability within government, Canadian companies and institutions will struggle to realize their potential. Beyond source code, the IP, model weights, fine-tuning datasets, and prompt instructions accumulated in production deployments are increasingly proprietary and valuable. Companies could also treat top AI graduates and people with significant AI skills even as strategic assets. The point lands hardest in healthcare, where procurement cycles for AI scribing, triage support, and administrative automation are top use cases.

  4. Act collectively

    No Canadian firm acting alone can move these questions. Industry associations—the Canadian Bankers Association, the Canadian Marketing Association, the Canadian Council of Innovators, and sector-specific bodies—are natural vehicles for some of the conversations now needed with government. The Business Council of Canada has made CUSMA review a central advocacy priority. Firms and industries that have not yet defined what they want from those conversations should do so now. 

Implications for finance, healthcare, and national security

Financial services, healthcare, and defence and critical infrastructure are the Canadian sectors that face the highest stakes in the convergence of AI and digital sovereignty. Executives in these sectors are likely considering some of the same architectural decisions in the coming years. What follows is a frame of some of the major policy and technology choices in front of them.

Financial services

Canadian banks have moved past the question of whether to deploy AI at scale, with AI adoption moving from approximately 30% in 2019 to 50% in 2023, with 70% expected by the end of 2026, according to joint Office of the Superintendent of Financial Institutions (OSFI) and the Financial Consumer Agency of Canada (FCAC) data. In April 2026, the Canadian Financial Sector Resiliency Group (CFRG), a public-private partnership led by the Bank of Canada, convened on Mythos, signalling that frontier AI is now treated as a financial stability and cybersecurity concern, rather than simply a technology one The practical consequences are concrete. First, model risk management built for credit and market models is the floor for AI governance, not the ceiling. Second, risk frameworks need to consider the whole pathway for inference data (where and what data queries are being processed by AI models) not simply training. And third, AI-enabled cyber scenarios are among the top threats for financial stability at a systemic level.

What the Big Six and other major financial service firms procure in the next 24 months may determine whether the Canadian sovereign cloud ecosystem reaches meaningful commercial scale. Financial services are not only a subject for Canadian AI policy, but they are also among the largest forces shaping it.

Healthcare

The Pan-Canadian Health Data Strategy continues to advance through Health Canada and the Canadian Institute for Health Information, but the infrastructure for moving health data across provincial boundaries remains underdeveloped. Quebec constrains cross-border health data transfers as a matter of binding provincial law, while Alberta, Ontario and British Columbia have parallel systems that overlap unevenly. The Connected Care for Canadians Act (Bill S-5), advancing through Parliament in 2026, includes provisions on health data interoperability that intersect with AI training data in ways the legislation leaves largely undefined.

Canada has a patchwork of laws on AI and data, which could get clearer, or even more tangled as the federal government reforms the Privacy Act, PIPEDA, and other digital rules. Further, the current provincial patchwork of laws is unlikely to be resolved anytime soon. Meanwhile, procurement cycles for AI scribing, triage support, and administrative automation are already moving without clear sovereign requirements to procure against.

Healthcare leaders and hospital executives likely have options when it comes to digital sovereignty and protecting Canadians’ data—that might include federated learning, workload partitioning, deliberate data-flow design—but future leaders may want to invest in solutions that can ensure the data sovereignty of Canadians’ health data. Either choice is defensible. But it is crucial to determine the choices through governance and technology architecture decisions, rather than leaving them up to international vendors.

Defence and critical infrastructure

Canada’s Defence Industrial Strategy and new NATO commitments create growth opportunities for dual-use firms. Cloud infrastructure for defence presents three options: build within the U.S. ITAR compliance, build outside it for Canadian/allied demand, or build both. Canadian-classified data may require sovereign, separately operated infrastructure, while Five Eyes data likely needs more interoperable infrastructure. For critical infrastructure operators in energy, telecommunications, transportation, and water, the AI policy questions that financial services firms are working through are relevant. It will also be important to monitor the supervisory framework being considered in Bill C-8, an act respecting cyber security, amending the Telecommunications Act and making consequential amendments to other acts. The operators must decide whether to adopt AI risk management proactively or defer implementation until regulatory requirements are finalized.

Scaling Canadian AI champions

The Canadian entities below are operating, contracted, or rapidly building, and are among the major domestic firms currently available for sovereign AI procurement and partnership. 

Cohere — frontier model capability

The Toronto-based company was founded in 2019. Cohere is the only Canadian-headquartered company building frontier-class language models with enterprise traction in regulated sectors, and recently reaching a combined ~US$20 billion valuation through its merger with Germany’s Aleph Alpha. A federal MoU recognizes Cohere as a strategically important Large Language Model (LLM) provider, with $240 million in committed federal funding, and it is the anchor tenant of a new Cambridge, Ontario, AI compute facility operated by U.S.-based CoreWeave under the Sovereign AI Compute Strategy. Cohere’s enterprise positioning includes sovereign deployment options for customer Virtual Private Clouds (VPC) and on-premises environments. The recent merger with Aleph Alpha extends reach into regulated European markets. The CoreWeave operating relationship has prompted reasonable questions in the ecosystem about how much Canadian ownership across the stack is required, achievable, or desirable; on balance, strengthening Cohere’s competitive position by available means likely improves Canada’s overall AI standing. RBC is a national partner and user of Cohere’s North platform.

Bell AI Fabric—sovereign cloud and AI compute

Bell’s $2 billion+ investment in Canadian AI compute, announced in 2024 and expanded in 2025, is anchored by NVIDIA infrastructure. It’s positioned as Canadian-jurisdiction sovereign capacity for enterprise customers, with initial capacity targeted at federal, provincial, financial services, and health customers. The U.K., Germany, and France have adopted the telco-anchored sovereign cloud model, and Bell’s scale makes it the largest single domestically controlled compute investment outside the federal program.

TELUS Sovereign AI Factory—carrier grade reliability

Announced in 2024, the second major Canadian telco offering domestic AI infrastructure began operations in 2025, in Rimouski, Quebec. The facility targets customers that require Canadian-resident, Canadian-operated AI compute with carrier-grade reliability. Two telco-anchored options mean meaningful procurement competition for Canadian sovereign cloud.

Sovereign Cloud Consortium—attaining critical mass

It’s a coalition of mid-sized Canadian-owned data centre and cloud operators—ThinkOn, Hypertec, Aptum, eStruxture—offering sovereign cloud services for federal and regulated workloads. ThinkOn describes itself as the only Canadian-owned cloud service provider approved under the Shared Services Canada Framework Agreement for Secure Workloads at Protected B. The consortium could be an answer to the public-sector buyer’s problem of needing scale without single-vendor lock-in.

Vector, Mila, AMII—research and talent

The three CIFAR-funded Pan-Canadian AI Strategy institutes—Vector (Toronto), Mila (Montreal), AMII (Edmonton)—generated much of the research base that produced Cohere, Element AI (now part of ServiceNow), and a deep bench of senior AI talent.

Other Canadian-owned providers, universities, and consortia currently operate at smaller scale, including in research compute and specialized regulated-sector hosting. Notably, Queens University and Simon Fraser University have signed a partnership on AI compute.

Download the Report

Linked sources are publicly available. Government documents, regulatory guidelines, and major reports cited in the brief are listed by topic. Disclaimer: not all sources may be precisely accurate nor are former legal opinions or forward guidance.

Trade and U.S. policy

AI sovereignty and Canadian capacity

Financial regulation and AI risk

Defence and dual use

Privacy, data governance, and provincial frameworks

  • Quebec Law 25 (Loi modernisant des dispositions législatives en matière de protection des renseignements personnels). Commission d’accès à l’information du Québec — cai.gouv.qc.ca.

  • PIPEDA Personal Information Protection and Electronic Documents Act. Office of the Privacy Commissioner of Canada

  • EU Adequacy Decision for Canada (2024 renewal) European Commission Justice and Consumers

Cyber threat and critical infrastructure

The Strait of Hormuz blockade has exposed two chokepoints amid the Middle East conflict: one for fossil fuels, and another for Western decarbonization policies. In many respects, it is China that’s leading the global energy transition. Emerging trade data highlights China’s often-underappreciated position in global clean energy supply chains, which has only accelerated with the Hormuz crisis.

A sea of Red on the clean-tech scoreboard. Top clean energy exporters by product and global share (2025)

China is the largest exporter of almost every major clean technology, often by a significant margin. Non-Chinese leaders—the E.U. for wind towers and turbines, and South Korea for battery components—either source from, or invest alongside, China. In North America, geopolitical sensitivities (to date) have outweighed benefitting from China’s structural advantage.

State capital underpins a Chinese clean manufacturing machine. Weighted average cost of capital
Global overcapacity across major clean technologies. Many clean-tech segments face a supply glut

Chinese producers carry a structurally lower cost of capital than peers—state backing and preferential financing, which in turn often generates and perpetuates overcapacity at a scale private markets cannot, and would not, sanction. This creates a self-reinforcing cycle of fierce domestic competition where only the fittest survive, resulting in a cost floor that continues to fall. If and when demand responds, China is best suited to gain incremental market share given the overcapacity. China has since tried to slow this competition through self-discipline agreements among manufacturers, but thus far has been unsuccessful.

China's unrivalled cost base - $ per kilowatt-hour

Chinese cell materials and manufacturing account for less than US$50 of an US$84 per kilowatt-hour (kWh) delivered cost for battery cells sold into the U.S. The import tariff adds US$27/kWh—more than China’s entire manufacturing cost. Still, Chinese exporters earn a 2.7% margin.

By comparison, S&P Global estimates North American NCM811 (nickel-cobalt-manganese) battery cells cost roughly US$95/kWh, around 90% more expensive than Chinese battery cost. To put this into context, a Tesla Model Y Standard Range carries a 60 kWh LFP (Lithium Iron Phosphate) battery pack. At median Chinese LFP pack prices of US$81/kWh (as per Bloomberg NEF data), a similar sized battery would cost roughly US$4,900 ($6,500), or about 13% of the Model Y’s Canadian sticker price.

Chinese clean-tech set to dominate fastest-growing markets. Share of China clean-tech exports by destination country income group

While the West is often fixated with the higher cost of clean technologies, roughly 40% of China’s EV exports and over 90% of solar cell exports went to lower-income countries in 2025. China’s cost base has unlocked a category of clean buyer no Western producer will likely ever reach—fast-growing markets, concentrated in Asia, where clean energy adoption is accelerating rapidly.

Pakistan added 18.3 GW of solar in 2025 alone—75% of Canada’s entire installed solar and wind capacity to date—mostly imported from China. Adoption of EVs in Vietnam and Thailand—countries where nominal GDP per capita is less than $10,000—run north of 40% and 20%, respectively (Canada’s EV adoption in 2025 stands at 11%). Vietnam and Thailand do not provide fiscal incentives for the purchase of electric vehicles.

The electrification trend is in overdrive as Hormuz flows dry up. Solar module and cell exports from China by importing region, by value. Lithium-ion battery exports from China by importing region, by value

The Middle East conflict that choked the Strait of Hormuz brought the electrification trend into focus, with fossil-fuel importing countries accelerating their clean energy procurement.

As a result, Chinese battery exports reached nearly US$10 billion in March of 2026 alone, with Europe, Southeast Asia and the Middle East absorbing the volume. U.S. demand was just 8% of March exports.

The transition is happening on Chinese terms. South Korea and Europe have treated that as a sourcing and partnership question, rather than a binary one, and have advanced as a result. North America must also pursue strategies that find a balance between utilizing Chinese content but also building a domestic base that can compete and scale up to meet the opportunity offered by the global energy transition.

Shaz Merwat is Energy Policy Lead at the RBC Climate Action Institute

AI is no longer a future technology. It is already changing how work gets done, how companies make decisions and how economies compete.

This special edition of Disruptors was recorded at the Creative Destruction Lab’s Super Session during Toronto Tech Week. Host John Stackhouse is joined by Fabien Curto Millet, Chief Economist at Google and Sonia Sennik, CEO of Creative Destruction Lab, to explore AI adoption, productivity, jobs and Canada’s competitiveness.

Fabien brings a global view of AI adoption: where the data is showing productivity gains, why the jobs conversation is more nuanced than the headlines suggest, and why simple interventions like training, guidelines and encouragement can unlock experimentation. Sonia brings the founder and commercialization lens from CDL, where hundreds of science-based startups are working across AI, health, energy, agriculture, manufacturing and more.

Together, they explore why AI is moving fast but unevenly, why some sectors and workers are pulling ahead while others remain cautious, and what leaders need to do to move from pilots to scaled workflow redesign. For Canada, the test is clear: the country has deep AI talent, strong institutions, and a global reputation in modern AI. The gains will depend on adoption – especially among SMEs, public institutions and the sectors that make up the bulk of the economy.

Think of it as an AI adoption blueprint for you and your organization.

Listen on Apple Podcasts, Spotify or Simplecast

FAQs

This episode examines AI adoption as Canada’s next productivity test. John Stackhouse speaks with Sonia Sennik of Creative Destruction Lab and Fabien Curto Millet, Chief Economist at Google, about jobs, productivity, business adoption and competitiveness.

The conversation was recorded at the Creative Destruction Lab Super Session on the University of Toronto campus.

Canada has deep AI talent and strong institutions, but the economic gains from AI depend on whether companies, SMEs, governments and workers can put the technology into production and redesign workflows around it.

The conversation argues for a more nuanced jobs discussion. AI will affect tasks inside jobs and change workflows, but current labour-market data does not support the simplest version of mass job-loss panic.

The leadership challenge is moving from experimentation to scale: giving workers permission and training, setting guidelines, choosing high-value workflows and redesigning operating systems rather than treating AI as a side tool.

Start with practical experimentation, train teams, create clear guidelines, identify lighthouse workflows and focus on AI to increase capacity, quality and speed – not just as a cost-cutting tool.