Shutterstock

By The Expert Group on Canada-US Relations

The following is a Policy summary piece on the report Between the Eagle and the Dragon: Managing Canada-China Relations in a Shifting Geopolitical Reality, authored by Expert Group members Perrin Beatty, Fen Osler Hampson, Thomas d’Aquino, Heather Exner-Pirot, Martha Hall-Findlay, Jonathan Fried, Lawrence Herman, Meredith Lilly, Admiral (ret’d) Mark Norman, Vincent Rigby, Colin Robertson, Tim Sargent, John M. Weekes.

August 25, 2025

Canada stands at a challenging crossroads in its relationship with China, given shifting geopolitical dynamics, particularly under the second Trump administration in the United States. After decades of disappointment, the traditional approach—rooted in the belief that engagement and trade would lead China toward political liberalization—has not worked. It needs to be replaced with a new strategy marked by realism, maturity, and an unapologetic focus on Canada’s national interest.

Engagement is essential, but we need to see it as a tool to advance Canadian priorities rather than expecting that China will transform into a liberal democracy or pursue other than its own interests.

The intensification of the U.S.-China rivalry and President Donald Trump’s protectionist trade agenda have irreversibly altered the conditions in which Canada must operate. Canada responded to U.S. pressure and Chinese practices by imposing 100 percent tariffs on Chinese electric vehicles and 25 percent tariffs on Chinese steel and aluminum. China retaliated with sweeping tariffs on Canadian canola, pork, and seafood exports. These actions have created significant market disruption, aggravated vulnerabilities and required financial interventions to support affected industries.

The Canada-China bilateral trading environment was fraught before Trump’s tariffs, reflecting China’s willingness to weaponize trade as part of a broader strategy to influence Canadian policy and punish diplomatic confrontation.

Despite this turbulence, we have notable opportunities. Canada’s crude oil exports to China have surged, reaching a record 7.3 million barrels in March 2025, driven by the expanded Trans Mountain Pipeline and China’s growing energy demand. In this context, Canada has a chance to use its strengths in energy, agriculture, and other commodities to diversify away from excessive reliance on U.S. markets, especially as trade relations with the U.S. become increasingly unpredictable.

Maintaining a rules-based international trading system is a priority for Canada, particularly as the World Trade Organization is undermined by noncompliance on the part of both China and the United States.

Importantly, these commodity exports are globally traded and less vulnerable to the kinds of value-chain disruptions and political retaliation that imperil the high-tech and manufacturing sectors. Nevertheless, sectoral risks remain acute, and we need to carefully manage our exposure to mitigate the threat of arbitrary bans or the repercussions of broader geopolitical disputes.

Complete disengagement from China is neither practical nor desirable given China’s status as an economic heavyweight, both as Canada’s third-largest trading partner and as a key investor. Instead, a sustainable Canada-China strategy needs to be based on selective engagement. Selective engagement involves pragmatic cooperation in areas of mutual benefit, such as climate change, global health, and specific sectors of trade while setting boundaries where Canadian and Chinese interests conflict.

On issues of human rights, security, and democratic governance, we will need to be both vigilant and flexible, recognizing that deep-rooted conflicts will not be resolved but must be continually managed. Only through an interest-based approach—one that promotes autonomy and avoids automatic alignment with American strategy—can Canada protect its sovereignty and avoid becoming collateral damage in larger U.S.-China confrontations.

This approach is consistent with the early actions of the Carney government, which has taken part in recent bilateral meetings aimed at increased dialogue.

As it moves to reengage, the government needs to be aware of the risks of using China as a bargaining chip in negotiations with Washington; any attempt to manipulate tariff policy or market access for strategic advantage would likely provoke a serious backlash from the U.S., which remains Canada’s most important security and economic partner.

Report authors Meredith Lilly, Jonathan Fried, and Thomas d’Aquino on Colin Robertson’s Global Exchange podcast/CGAI

The more prudent path is a balanced approach that emphasizes multilateral and trilateral mechanisms, particularly in collaboration with the U.S. and Mexico, to monitor dumping, combat the circumvention of tariffs through transshipment, and ensure fair market practices. This strategy aligns with European Union models and will help shield Canadian firms from becoming embroiled in global trade wars.

Maintaining a rules-based international trading system is a priority for Canada, particularly as the World Trade Organization is undermined by noncompliance on the part of both China and the United States. Canada’s leadership within coalitions like the Ottawa Group of 14 WTO member countries working together to support the global trading system underscores its commitment to open, predictable, and sustainable trade practices, which contrasts sharply with great-power unilateralism.

What we need now is further collaboration with like-minded countries, including undertaking a strategic roundtable with European Union and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) partners to support the WTO and develop a collective response to economic coercion.

Investment policy is equally crucial. Canada’s regime has evolved to scrutinize not only direct foreign equity transactions but also complex arrangements involving loans, intellectual property agreements, and long-term sales commitments. Recent amendments to the Investment Canada Act have updated national security criteria, but Canada’s approach remains reactive.

Selective engagement involves pragmatic cooperation in areas of mutual benefit, such as climate change, global health, and specific sectors of trade while setting boundaries where Canadian and Chinese interests conflict.

We need a comprehensive, anticipatory framework—informing proactive sectoral assessments—to guide both inbound and outbound investment. This approach would clarify risk tiers across diverse sectors and transaction types, ensuring transparency and predictability while protecting strategic assets.

We also need to deal with serious national security concerns, including Chinese government interference in Canadian society, especially through acts of intimidation against Chinese Canadians, political manipulation, and espionage. Our response must be unequivocal: Canada will enforce its laws and ensure international condemnation of such activities, bolstered by an improved ability to investigate abuses and coordinate action with other democracies. And we also need other defensive measures to counter cyber threats and the militarization of the Arctic, particularly where China collaborates with Russia, challenging Canadian sovereignty and security.

Finally, Canada should do more to safeguard intellectual property and academic integrity. Canadian institutions must have limits on foreign partnerships in sensitive research fields, provide full disclosure of funding sources, and prosecute violations energetically. While academic collaboration with Chinese researchers can be beneficial, it must be strictly conditional and transparent to protect Canada’s interests.

Canada’s goal should be to chart a pragmatically sovereign path—advancing dialogue, defending interests, and reinforcing partnerships with allies. The goal is not confrontation, but strategic calibration and sectoral prudence, ensuring that engagement with China reflects Canada’s clarity of purpose and seriousness about protecting its values and future.

The age of illusion is over. What remains is the need for maturity, realism, and selective engagement anchored firmly in Canadian national interest.

The work of the Expert Group on Canada-US Relations is supported by: The Norman Paterson School of International Affairs, Carleton University; The School of Public Policy at the University of Clagary; and the Canadian Global Affairs Institute. It is featured in our Policy Series: The Expert Group on Canada-US Relations on Navigating Trump II.