This piece is part of our Forum of Federations Series on National Unity and Canadian Federalism.

By Rupak Chattopadhyay

August 25, 2026

The collapse of trade talks with the United States marks a turning point in a relationship that has underpinned the Canadian economy for generations.

Washington has demonstrated that access to the American market can be used as an instrument of economic coercion. Canadians are confronting something that seemed unthinkable only a few years ago: our most important economic relationship is no longer predictable. Even an agreement reached on paper may not be respected in practice.

The immediate response will focus on retaliation, diversification and leverage with Washington. All are necessary. But the crisis also forces a harder question: what our dependence on the United States reveals about the Canadian economy—and about the federation itself.

For decades, we integrated deeply with the American market while doing far less to integrate Canada. We built a highly successful north-south trading system and left the east-west economy underdeveloped. Canada ranks among the world’s most open economies, yet a Canadian firm can still face significant barriers simply for operating across provincial lines.

As Mark Carney has recognized since he became prime minister and as the country’s premiers have agreed, that is a structural weakness. It is also an opportunity. Our bilateral trade crisis has ended the comfortable assumption that access to the American market could be taken for granted. We should use the moment to rethink how Canada is connected — within the federation, to the United States, and, increasingly, to Asia.

Building a Canadian Market

There was a time when infrastructure was understood as part of the work of building Canada. The Canadian Pacific Railway linked the country from coast to coast. The Trans-Canada Highway created a national road network. The Trans-Canada natural gas pipeline, completed in 1958, connected Alberta’s gas fields to markets in Ontario and Quebec.

These projects were expensive and politically contentious. They were also nation-building in the most practical sense. They changed the economic geography of Canada by making regions with very different economies dependent on one another. We need some of that thinking again.

Alberta and Saskatchewan have abundant oil and natural gas. Ontario and Quebec have large industrial and consumer markets. Yet Eastern Canada can sometimes obtain American natural gas more easily than it can access Western Canadian gas. That is not necessarily because American gas is cheaper at the wellhead. It is partly the consequence of infrastructure built around north-south trade.

There is no case for forcing Ontario or Quebec to buy Canadian energy at a premium. Consumers and manufacturers respond to prices, not patriotic appeals. The more useful question is whether Canada has given them enough alternatives.

Canadian energy should be able to move east when domestic demand makes that worthwhile, west to tidewater when Asian markets offer better opportunities, and south when the United States offers the best return. The same principle applies to electricity, critical minerals, rail and other infrastructure. The point is not to tell businesses where to trade. It is to ensure that geography does not dictate that decision for them.

The Internal Market We Have Neglected

The economic case for addressing this is now difficult to ignore. The International Monetary Fund estimates that eliminating non-geographic barriers to trade within Canada could raise real GDP by roughly 7 per cent over the long run—about C$210 billion in 2025 dollars. This is a productivity gain, not a temporary stimulus: larger markets, greater competition and the freer movement of capital and labour would allow resources to move toward more productive uses.

Most of the potential gain is in services. About 90 per cent comes from sectors where licensing, professional qualifications, standards, procurement rules and other regulations can effectively divide Canada into separate markets. The IMF estimates that these non-geographic barriers amount to an average tariff equivalent of roughly 9½ per cent. In some services, the implied barriers are far higher.

That sounds technical until one considers what it means in practice. A professional may qualify in one province but face additional requirements in another. A company that has established itself successfully in one market may have to navigate a different regulatory regime to expand nationally. A procurement rule can exclude a Canadian supplier in favour of a local one even when the Canadian firm is otherwise competitive.

In 2025–26, governments made the strongest advances on interprovincial barriers in decades. Ottawa eliminated all federal Canadian Free Trade Agreement (CFTA) exceptions and passed the Free Trade and Labour Mobility Act. Ontario dropped every one of its exceptions. A pan-Canadian Mutual Recognition Agreement on the Sale of Goods now covers most goods, and several provinces streamlined labour mobility and direct-to-consumer alcohol sales.

Yet, progress remains incomplete. Food and alcohol still face major carve-outs. Mutual recognition for services has barely begun. Many professional credentials remain non-portable, trucking rules still conflict, and enforcement under the CFTA is weak. Announcements have outpaced full implementation, leaving Canadian firms navigating a patchwork rather than a single market.

The IMF’s modelling suggests that a 5 per cent reduction in internal trade costs could offset the impact of a 10 per cent increase in the trade costs created by U.S. tariffs. In other words, domestic integration could provide a meaningful buffer against external trade shocks.

Energy and the Pacific

Energy exposes the consequences of our economic geography particularly clearly. Canada has enormous supplies of oil and natural gas, along with uranium, hydroelectricity and critical minerals. Yet much of the infrastructure connecting these resources to markets points south.

The numbers are striking. In 2025, Canada exported about 4.3 million barrels of crude oil a day, roughly 90 per cent of it to the United States. Canada also exported 8.6 billion cubic feet of natural gas a day to the United States, worth C$12.5 billion, while importing 2.5 billion cubic feet a day from the U.S., worth C$3.6 billion. More than 92 per cent of those imports came from American sources.

There is a straightforward explanation. The shale revolution transformed North American gas markets. Pipeline connections at Niagara and Chippawa that once carried Canadian gas south were reversed, allowing American gas to flow into Ontario.

There is nothing inherently wrong with this. Ontario manufacturers and households should buy the most competitive, reliable energy available. But the numbers reveal something important: Canada has built an energy system in which Alberta is much more effectively connected to the U.S. market than to many Canadian markets.

That is an economic problem. It is also a federalism problem.

The answer is not to force energy east. It is to create options. The Trans Mountain expansion has opened another route for Canadian oil, while LNG Canada has begun sending Canadian natural gas directly to Asia. In 2025, LNG Canada exported an average of 295 million cubic feet a day, all to East Asia.

This should be the beginning of a broader strategy. If Asia is going to remain a major centre of economic growth and energy demand, Canada should be preparing now. Pipelines to tidewater, LNG facilities, ports, railways, electricity transmission and processing capacity take years to build. By the time demand becomes obvious, it may be too late.

And the investment serves two purposes. The same infrastructure that connects Alberta and Saskatchewan to global markets can connect them more effectively to other Canadian provinces.

The Federalism Problem

This is where the economics becomes political. Alberta produced 83.8 per cent of Canada’s crude oil in 2025, with Saskatchewan producing another 8.2 per cent. Yet most of that production remains dependent on export infrastructure oriented toward the United States.

It is not hard to understand the resulting frustration in the West. From Alberta’s perspective, Canada has been remarkably successful at connecting its resources to the American economy while repeatedly struggling to build east-west infrastructure. The perception that Alberta is economically indispensable to Canadian federalism but not always well served by its economic model is bound to take a political toll.

Ontario and Quebec see the issue differently, and their concerns are legitimate. Energy costs matter to households and manufacturers. Neither province can reasonably be expected to buy Canadian energy at an uneconomic price simply to demonstrate national solidarity.

That is precisely why this needs to be treated as a federal bargain rather than a regional scorecard. Alberta needs access to markets. Ontario and Quebec need competitive energy. The federal government needs to ensure that infrastructure and regulation do not unnecessarily force one interest into conflict with the other.

The same problem appears elsewhere. If an Alberta company can more easily sell into Texas than expand into Ontario, we should ask why. The same question applies to Quebec. If a firm finds it easier to source a service from Michigan than from British Columbia, we should not blame the firm for behaving rationally. We should ask why our own market makes the American option easier.

Federalism cannot eliminate differences between provinces. It can, however, determine whether those differences become sources of economic exchange or political grievance.

Turning the Shock into an Opportunity

The dispute with Washington has exposed a weakness that predates the current crisis. Canada became exceptionally good at trading north-south but never finished building the east-west economy. We connected ourselves to the American market faster than we interconnected the Canadian economy.

There is no reason to dismantle continental integration. The American market will remain indispensable. But dependence on a single market is a vulnerability, particularly when that market is controlled by a neighbour suddenly willing to exploit access as leverage.

Start with the irritants businesses encounter every day: licensing, procurement, professional credentials and incompatible provincial rules. Then tackle the larger infrastructure gaps in transport and electricity. These are not grand constitutional reforms. They are things governments can actually do right away.

Infrastructure requires a longer horizon. If Canada wants to become a significant supplier of LNG, oil, uranium and critical minerals to Asia, the ports, pipelines, railways, transmission lines and processing facilities have to be built before the opportunity arrives. Waiting for certainty is another way of ensuring that someone else captures the market.

This is where economic policy and federalism meet.

An Alberta producer should be able to look east, south and across the Pacific. A Quebec manufacturer should be able to source competitively from British Columbia without turning to Michigan the easier option. A skilled worker should be able to move from one province to another without unnecessary regulatory obstacles.

We sometimes talk about national unity as though it were sustained entirely by constitutional arrangements and political symbolism. It isn’t. Federations also survive because people have practical reasons to need one another.

We cannot decide what happens in Washington. We can decide whether Canada remains economically organized around a single external market. That means making it easier to trade within Canada, giving our energy and resources more than one route to the world, and making the economic interests of the provinces reinforce rather than undermine one another.

The trade shock is a warning. It is also an opportunity to finish a job Canada began generations ago: building a country whose regions are connected to one another as deliberately as they are connected to the world.

The choice is not between Canada and America. It is between a Canada that remains heavily dependent on an outdated trade map and one that is open to both itself and the world — from east to west at home, south to the United States, and across the Pacific to Asia.

Rupak Chattopadhyay is President and CEO of the Forum of Federations in Ottawa.