The Economy: Free Trade, Recessions and Globalization

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Pick up your phone, your shoes and your breakfast cereal. Where were they made? Chances are your phone was assembled in Asia, your shoes in another country, and your cereal may contain grain from the Prairies processed in the United States. That web of trade is globalization, and Canada's economy since 1982 can't be understood without it.

In this lesson you will follow the big economic stories: recessions, the free trade debate, the decline of factory jobs, the rise of services and online shopping, and the trade war with the United States that began in 2025.

A rough start: the 1981–1982 recession

To fight high inflation, central banks raised interest rates sharply. In August 1981, the Bank of Canada's rate reached about 21%. Mortgages, car loans and business loans became extremely expensive. Many farmers and homeowners lost property, businesses failed, and unemployment rose above 12%.

Another recession hit in 1990–1992, and governments faced large deficits. In 1991, Brian Mulroney's government replaced a hidden tax on manufacturers with the Goods and Services Tax (GST) of 7%, which was very unpopular. In 1995, Finance Minister Paul Martin made deep spending cuts, and by 1997–1998 the federal government had its first balanced budget in almost 30 years. Ontario later combined its sales tax with the GST into the Harmonized Sales Tax (HST) in 2010.

The free trade debate

Canada had debated free trade with the United States since the 1800s. In 1985, a royal commission recommended it, and Mulroney's government negotiated the Canada–U.S. Free Trade Agreement (FTA).

Supporters (many businesses, the Progressive Conservatives, Alberta and Quebec governments) argued:

• Canadian companies would gain secure access to a market about ten times larger;
• prices for consumers would fall;
• Canadian businesses would become more efficient and competitive.

Opponents (the Liberals, the NDP, many unions, cultural groups and the Council of Canadians) argued:

• factories would move to the U.S., where costs were lower;
• Canada would lose control over its energy, water and culture;
• Canada would be pressured to match U.S. social policies and could lose its independence.

The November 1988 election was fought mostly on free trade. The Progressive Conservatives won a majority of seats, and the FTA took effect on January 1, 1989. The North American Free Trade Agreement (NAFTA) added Mexico on January 1, 1994. After U.S. President Donald Trump demanded a new deal, the Canada–United States–Mexico Agreement (CUSMA) replaced NAFTA on July 1, 2020.

Globalization and the changing workplace

Since the 1980s, manufacturing has employed a smaller share of Canadians, while service jobs (health care, education, finance, technology, retail, tourism) have grown. Causes include free trade, automation, competition from lower-cost countries (especially after China joined the World Trade Organization in 2001), and periods when a high Canadian dollar made exports more expensive. Many towns that depended on one factory or mill were hit hard.

Other key trends:

• The tech bubble (2000–2001): prices of internet and technology stocks collapsed. Nortel, whose shares once made up about a third of the value of the Toronto Stock Exchange, lost most of its value and went bankrupt in 2009.
• The global financial crisis and recession (2008–2009): Canada's banks came through better than many others, but the auto industry was hit hard. The Canadian and Ontario governments joined the U.S. in rescuing General Motors and Chrysler.
• Resource booms: rising oil prices in the 2000s brought rapid growth to Alberta, Saskatchewan and Newfoundland and Labrador, and mining grew in the North. When oil prices crashed in 2014, Alberta's economy suffered.
• Consumerism and online shopping: big-box stores, then e-commerce, changed how Canadians shop. The COVID-19 pandemic (2020) sped up online shopping.
• The pandemic economy: in 2020, governments paid emergency benefits to millions of Canadians who lost work. Afterwards, inflation rose to 8.1% (June 2022), and higher interest rates followed. Housing affordability became a major issue, especially for young Canadians.
• Other trade deals: to reduce dependence on the U.S., Canada signed agreements with the European Union (CETA, 2017) and Pacific countries (CPTPP, 2018).

The 2025–2026 trade conflict with the United States

About three-quarters of Canada's exports go to the United States, so U.S. trade policy matters enormously.

• March 4, 2025: the U.S. imposed 25% tariffs on Canadian goods (10% on energy), citing the border and fentanyl. Canada responded with counter-tariffs on U.S. goods. Days later, the U.S. exempted goods that qualify under CUSMA, which covered most Canadian exports.
• 2025: separate U.S. tariffs hit steel and aluminum (raised to 50% in June), autos, and later softwood lumber. The rate on non-CUSMA goods rose to 35% in August. Canada removed most of its counter-tariffs on September 1, 2025, but kept them on U.S. steel, aluminum and autos.
• Many Canadians responded with a "Buy Canadian" movement and by travelling less to the U.S. U.S. comments about making Canada the "51st state" angered many Canadians and boosted national pride (Lesson 14). Prime Minister Mark Carney said in March 2025 that the old relationship of ever-deeper integration with the U.S. was over.
• Governments moved to remove barriers to trade between provinces and to seek new markets.
• February 20, 2026: the U.S. Supreme Court ruled that the tariffs imposed under an emergency economic powers law were invalid. Tariffs under other U.S. laws, on steel, aluminum, autos, lumber and copper, remained.
• July 1, 2026: at CUSMA's first formal joint review, the U.S. did not confirm renewal of the agreement. CUSMA stays in force (until at least 2036), but now faces annual reviews.

These events are recent. Facts may change quickly, so always check the date of your sources.