State of Trade 2026: The rise of services in Canada’s trade landscape

Table of contents

• Message from the Minister
• Executive summary
• 1. Part 1: 2025 in review
  • 1.0. Key messages
  • 1.1. Introduction
  • 1.2. Global context
  • 1.3. Canadian economic performance
  • 1.4. Highlights of Canada’s international trade performance
  • 1.5. Canadian foreign direct investment performance
• 2. Part 2: The rise of services in Canada’s trade landscape
  • 2.0. Key messages
  • 2.1. Importance of services in Canada’s international landscape
  • 2.2. Canada’s international services performance
  • 2.3. Drivers of success and barriers to Canada’s international services expansion
• Use of artificial intelligence
• Annex
  • Conceptual framework
  • Classification and calculation methodology
  • Data sources
  • Revealed Comparative Advantage calculation
• Bibliography

Message from the Minister

I am pleased to present Canada’s 2026 State of Trade Report, which offers a comprehensive snapshot of Canada’s international trade and economic performance in 2025.

Trade in goods and services is an integral part of the Canadian economy, representing approximately two-thirds of Canada’s GDP. Exports alone support nearly 1 in 5 Canadian jobs.

So, in this era of uncertainty, Canada’s 2025 trade and investment performance has proven to be resilient and adaptable:

• In the face of global shocks and trade tensions, exports to the U.S. dropped 3.7% last year. But this was offset by an 11.1% increase in exports to non-U.S. markets, which now account for 32.8% – almost a third – of total Canadian exports, the highest amount in four decades.
• Last year was also the first year since 2013 that Foreign Direct Investments into Canada – valued at $93.0 billion – exceeded our Canadian investments abroad; and
• As a sign of the changing times, Canada’s service exports – especially digitally enabled services – have proven to be even more diversified and resilient than merchandise exports.

These numbers show that the world continues to value Canada as a strong, fair, predictable and dependable trade and investment partner.

Because Canada has what the world wants: cutting-edge technical expertise, stable political and business environments, world-class education, research and development, a highly skilled, educated, and versatile workforce, robust, advanced infrastructure, and vast reserves of critical minerals, natural resources, and energy to power it all.

Canadians know that responsible trade and investment at the global level leads to strong economies and supply chains at home. So, while we are deepening existing partnerships that serve us, we are also pursuing new opportunities in new markets.

In other words, we are adapting our trade to meet the moment through:

• Our new Trade Diversification Strategy, which aims to double non-U.S. exports by 2035 while significantly increasing exports to China, India, and other countries; and
• Several new high-value commercial agreements – and negotiations for more that are underway – to expand our network of trade agreements.

We are doing this while promoting free and fair trade and steady economic growth, creating good jobs from coast to coast to coast, protecting our resources for future generations, and helping more Canadian producers and service providers bring their innovation to the world.

In an increasingly fragmented and uncertain world, Canada is building partnerships that work. I hope Canadians are as proud as I am of Canada’s 2025 trade performance and our enviable position as a great place to invest and do business.

The Honourable Maninder Sidhu
Minister of International Trade

Executive summary

The year 2025 was marked by heightened global uncertainty yet notable economic resilience as international trade expanded robustly even while trade barriers intensified. Escalating tariff actions—most prominently by the United States (U.S.)—pushed trade policy uncertainty to historic highs. Despite these headwinds, the global economy grew at a steady 3.4%, matching its pace in 2024, while global merchandise trade volumes strengthened, supported by surging trade early in the year in anticipation of upcoming tariffs, and by robust investment linked to artificial intelligence (AI).

Global trade growth in 2025, while strong overall, was uneven and fragmented. Asian economies accounted for the majority of global merchandise trade growth, reflecting their central role in the expansion of AI‑related goods such as computer components. At the same time, bilateral trade between the U.S. and China weakened further as tensions reached levels well above those affecting other partners, leading the U.S. and China to reorientate toward other countries. These dynamics reinforced longer and broader trends toward geopolitical trade fragmentation, with trade growth within blocs aligned with either the U.S. or China growing faster than trade between blocs.

Against this challenging backdrop, Canada’s economic growth slowed but remained resilient. Real GDP expanded by 1.9%, its weakest performance since the pandemic, as exports were weighed down by U.S. tariff actions and elevated uncertainty. On the other hand, steady household consumption, supported by easing monetary conditions, and a notable rise in government investment, particularly in infrastructure and defence‑related spending, were positive drivers of economic growth in 2025. However, the effects of trade tensions were uneven across industries: trade‑exposed sectors underperformed, while less exposed ones provided stability.

Canada’s international trade performance in 2025 reflected a sharp contrast between performance in the U.S. market and performance with the rest of the world. Overall, the value of goods and services exports edged up 0.7%, while imports rose 3.0%, resulting in a widening trade deficit. However, the growth was driven by prices, as export volumes detracted from economic growth for the first time since the global financial crisis (excluding the pandemic), underscoring the weight of external headwinds. While services exports to the U.S. were robust, the value of goods exports fell for a third consecutive year, driven by weakness in energy products and motor vehicles and parts, as well as the direct and indirect effects of U.S. tariffs.

At the same time, diversification toward non‑U.S. markets accelerated. The value of exports to countries other than the U.S. surged by 11.1%, while exports to the U.S. fell 3.7%, pushing the non‑U.S. share of Canadian exports to its highest level in over 4 decades (32.8%). Non-U.S. growth was led by an exceptional increase in gold exports—reflecting heightened global uncertainty—as well as higher crude oil shipments to Europe and the Indo‑Pacific, with the latter supported by new export capacity.

Canadian foreign direct investment patterns shifted in 2025, reflecting both uncertainty and Canada’s continued attractiveness for global investors. Canadian direct investment abroad declined sharply, largely due to the sale of Canadian-owned assets abroad. In contrast, foreign direct investment flows into Canada rose to their highest level in a decade, supported by strong reinvested earnings. As a result, foreign direct investment inflows exceeded outward investment flows for the first time since 2013.

The outlook for 2026 is shaped by elevated downside risks. Ongoing geopolitical tensions—especially in the Middle East—and persistent trade fragmentation, along with slower expected global growth are likely to weigh on low-income and energy import dependent economies. While continued AI‑related investment and services‑led activity offer potential sources of resilience, Canada’s near‑term prospects will remain closely tied to the evolution of U.S. trade policy and the effectiveness of ongoing efforts to diversify trade and investment partnerships.

As digital trade expands globally, Canada’s services sector has become a central pillar of the country’s trade performance, now accounting for nearly one-quarter of total exports. As such, the theme of this year’s report is focused on the growing role of services in Canada’s international picture. Services exports have been the sole driver of Canada’s $50 billion in export gains since 2022, having tripled in value since 2010 and significantly outpacing goods exports.

Services exports are notably less dependent on the U.S. market than goods, with just over half of Canada’s services exports destined for the U.S. compared to more than 70% of goods exports. While traditional partners such as the United Kingdom, France and Germany remain important, much of the growth has been driven by emerging markets, helping diversify Canada’s trade relationships amid global political instability and trade disruptions.

Services trade also directly contributes to the resilience of the Canadian economy. In recent years, Canada’s trade has faced significant headwinds, including wars, commodity price volatility, and protectionist measures such as tariffs. Yet, services trade has continued to grow, consistently outperforming other sectors. Commercial services—such as computer, information, and financial services—in particular have proven  resilient in spite of downturns, as they mostly face fewer tariffs and border-related frictions than goods trade, and are typically less affected by price swings than commodities.

That said, understanding the role of services in the global economy requires moving beyond aggregate measures to examining how services are actually being delivered across borders. Canada’s services exports can broadly be divided into four delivery channels: digitally enabled services, non-digitally enabled services involving the movement of people, services value-added embodied in goods, and services delivered through commercial presence abroad.

First and foremost, digitalization has expanded the range of services Canadian firms can deliver across borders—including software, financial, professional, creative, and data-driven services—by reducing the relevance of geographic distance. These services can be highly scalable, with often instantaneous delivery, and characterized by low marginal delivery costs. Canada is well positioned to benefit from this shift, as digitally enabled services represent a significant share of Canada’s exports (13% in 2025) and have grown at more than twice the pace of goods exports (200% versus 92% since 2010).

Imports of digitally enabled services also play a critical role in the transmission of knowledge and innovation, bolstering firm productivity and operational efficiency. Canada’s imports of digitally enabled services increased nearly 185% since 2010, with gains concentrated in research and development, consulting services and telecommunications.

Non-digitally enabled services, on the other hand, remain anchored in the physical movement of people and goods, with travel and transportation services at its core. These sectors continue to support global integration through education services, tourism, and freight logistics, among other activities. Even in a digital economy, trade still largely hinges on physical mobility and supply chains. Although they make up a smaller share of services exports than digitally enabled services, non-digitally enabled services exports have grown by 192% since 2010.

Behind many goods exports also lies an often-invisible layer of services. Research, design, engineering, software and other professional services are embodied in goods before they cross borders. Nonetheless, they are economically significant: domestic services value-added accounted for over 17% of Canada’s goods exports value in 2024, playing a key role in Canada’s trade performance by raising firms’ productivity, reducing costs and enabling product differentiation.

Despite a broad shift toward digital delivery, commercial presence abroad remains the dominant channel for selling Canada’s services, with sales by Canadian foreign affiliates operating in services industries reaching $1.0 trillion in 2024. Indeed, services sold through foreign affiliates increased nearly fivefold between 2011 and 2024, with the services sector accounting for more than 80% of Canadian direct investment abroad in 2024. This underscores the continued importance of establishing a local presence in key foreign markets, even as remote delivery expands.

Sustaining this growth momentum in services trade across all delivery channels will depend on strengthening the foundations of international competitiveness while addressing challenges. Three fundamental pillars underpin the successful expansion of services trade: human capital, digital integration, and a strong and stable institutional and regulatory environment.

Human capital remains one of Canada’s core advantages, supported by a highly educated workforce and continued attraction of international talent. At the same time, digital infrastructure—including connectivity, cloud capacity, and data centres—is increasingly essential to delivering services across borders. Canada benefits from a relatively open digital trade environment, supported by strong intellectual property protections and e-commerce frameworks.

Institutional quality and regulatory credibility also play a central role in shaping services sector outcomes. Trade agreements, investment protections, and transparent regulatory frameworks help firms scale internationally by reducing uncertainty and improving market access. Each services delivery channel also has its own distinct regulatory frameworks, cost structures and policy constraints. For instance, digitally enabled services are often shaped by data governance and digital infrastructure; non-digitally enabled services (including those requiring the movement of people) depend on mobility and transport agreements; services embodied in goods are driven by supply chain and tariff dynamics; finally, foreign affiliate sales are influenced by investment and ownership regulations.

As services become increasingly central to global commerce, Canada’s ability to foster an open, innovative, and internationally competitive services economy will be critical for securing long-term economic prosperity.

1. Part 1: 2025 in review

1.0. Key messages

• Global growth proved resilient in 2025 despite record trade policy uncertainty.
  • The global economy expanded at the same steady pace as in 2024 even as tariff actions—particularly by the United States—and geopolitical tensions drove economic policy uncertainty to historic highs, underscoring economic resiliency.
• Trade flows strengthened globally but growth became increasingly uneven and fragmented.
  • Global merchandise trade growth accelerated in 2025, led predominantly by Asian economies and by AI‑enabling goods. At the same time, the deepening fracture in U.S.–China trade continued to reshape global trade patterns.
• Canada’s economic growth slowed amid trade headwinds, but household demand, government investment and diversification provided support.
  • The Canadian economy expanded at its slowest pace since the pandemic, reflecting weakness in exports linked to U.S. trade actions and uncertainty. This was offset by resilient household consumption, rising government investment, and a notable shift in trade toward non‑U.S. markets, underscoring the importance of diversification. Foreign direct investment provided another source of resilience, with inflow into Canada exceeding outflows of Canadian investment abroad for the first time since 2013.
• Canada’s trade with the United States struggled in 2025, but diversification toward non‑U.S. markets continued.
  • Canadian goods trade with the United States declined in 2025 on the back of U.S. tariffs and trade policy uncertainty. At the same time, exports to non‑U.S. markets surged—supported mainly by gold and energy—pushing the non‑U.S. share of Canadian exports to its highest level in over four decades.
• The outlook for 2026 is increasingly shaped by geopolitical shocks and downside risks.
  • Looking ahead, the global outlook is shaped by renewed geopolitical shocks—most notably the conflict in the Middle East—alongside persistent trade fragmentation and uncertainty. While continued AI‑related investment and services‑led activity offer potential sources of resilience, slower expected global economic growth and deceleration in merchandise trade pose meaningful challenges for open, trade‑dependent economies such as Canada.

1.1. Introduction

The year 2025 unfolded against a complex and volatile global backdrop, shaped by elevated geopolitical tensions, renewed trade frictions, and shifting patterns of economic activity. While the global economy ultimately proved more resilient than many forecasters had anticipated, this resilience masked substantial volatility throughout the year and across countries and industries. Trade policy uncertainty—driven in large part by the re‑emergence of broad‑based tariff actions—interacted with emerging forces, most notably the increasing sophistication of artificial intelligence (AI), and ongoing geopolitical realignment to reshape international trade flows.

Internationally, despite the introduction of sweeping tariff measures by the United States and the backdrop of military conflicts in Eastern Europe and the Middle East, global trade growth rebounded, supported by AI‑related investment, and front‑loading trade flows. However, the bilateral relationship between the United States and China continued its fragmentation in 2025.

For Canada, these developments translated into a challenging economic environment. The introduction of U.S. tariffs and the accompanying uncertainty weighed heavily on trade‑exposed sectors, contributing to uneven growth across industries. At the same time, steady household demand, rising government investment, and continued diversification of trade toward non‑U.S. markets contributed to the resilience of the Canadian economy.

Part 1 of the State of Trade 2026 report reviews the key economic, trade, and investment developments of 2025. Section 1.2 examines the global context, focusing on the interaction between trade policy uncertainty, geopolitical tensions, and emerging growth drivers. Section 1.3 assesses Canada’s macroeconomic performance in 2025. Section 1.4 provides a detailed overview of Canada’s international trade performance by sector and partner, while Section 1.5 reviews trends in foreign direct investment, highlighting shifts in capital flows amid the changing global environment.

1.2. Global context

The global economic and trade environment in 2025 was defined by a sharp rise in policy-driven uncertainty. Despite these developments, growth and trade flows proved more resilient than many observers had anticipated. This section reviews key global economic and trade developments in 2025, with a focus on the interaction between trade policy uncertainty, shifting global trade patterns, and emerging growth drivers such as artificial Intelligence (AI). It also outlines the risks and the near‑term outlook for the global economy, setting the stage for assessing Canada’s economic and trade performance within this evolving international context.

The year 2025 was marked by a sharp escalation in U.S. tariff actions, and in some instances, retaliatory measures taken by trading partners, resulting in heightened trade policy uncertainty. As a share of goods import value, U.S. tariff revenues rose rapidly to 7.7% in 2025, up from 2.4% in 2024 (figure 1.2.1.), a far steeper increase than that observed during the 2018–2020 period, the last episode of widespread U.S. tariff imposition. Globally, the scope of trade affected by tariff measures also expanded significantly. Applying the tariffs in force at the end of February 2026 to 2024 trade data, the World Trade Organization (2026) estimates that roughly 11% of global merchandise imports were traded under tariffs, up from just 2% in 2022. Reflecting these developments, measures of global economic policy uncertainty surged, with the global economic policy uncertainty index reaching its highest level on record in April 2025 (figure 1.2.2.), coinciding with “Liberation Day,” when the United States implemented sweeping tariffs on imported goods.

Figure 1.2.1.: United States tariff revenues as a share of goods imports value

Figure 1.2.2.: World Economic Policy Uncertainty Index and United States Trade Policy Uncertainty Index

Despite elevated tariffs and pervasive trade policy uncertainty, the global economy proved resilient and international trade expanded robustly in 2025. Global economic growth in 2025 is estimated at 3.4%—unchanged from 2024—while merchandise export and import volumes increased by 4.7% and 4.4%, respectively, outpacing significantly the growth rates recorded for the previous year (Figure 1.2.3.). According to the International Monetary Fund (2026), several factors underpinned this resilience. They included:

• weaker than anticipated tariff impacts, reflecting both front‑loading trade flows and lower tariff rates than initially announced;
• accommodative financial conditions supported by rising equity markets and a weaker U.S. dollar, which tends to be associated with stronger growth in emerging market economies;
• continued fiscal support, notably through measures such as the U.S. One Big Beautiful Bill Act; and,
• strong investment momentum in artificial intelligence (AI).

Several of these forces—notably AI‑related investment and the muted realized impact of tariffs—also contributed directly to the strength of global trade growth in 2025.

Figure 1.2.3.: World economic growth and merchandise trade volume growth (%)

AI-related investment emerged as a key driver of economic growth in the United States in 2025, with private investment in information‑processing equipment and software increasing by 15.7%. Given the highly import‑intensive nature of this investment, the robust expansion generated significant spillovers to global trade. Indeed, U.S. imports of AI‑enabling goods increased across all 4 quarters of 2025, counterbalancing declines of imports of other goods during the final 3 quarters of the year (World Trade Organization, 2026).

At a global level, AI‑enabling goods accounted for a growing share of merchandise trade, rising to 16.8% of total world trade value in the fourth quarter of 2025, up from 13.0% in the first quarter of 2024 (World Trade Organization, 2026). This expansion was driven primarily by increased trade in AI‑related products from Asian economies and North America. Notably, the International Monetary Fund (2026) highlighted strong growth in “technology exports” from Asia (excluding China) to both the United States and other global markets, while China’s technology exports to the United States declined throughout 2025. In contrast, China’s technology exports to the rest of the world continued to expand over the year.

Figure 1.2.4.: AI-enabling goods’ contribution to global merchandise trade value growth

In 2025, growth in global merchandise trade volumes was driven overwhelmingly by Asian economies, which accounted for roughly 71% of total global trade growth (World Trade Organization, 2026). This strong performance reflected, in part, Asia’s central role in the expansion of trade in AI‑enabling goods, as illustrated in Figure 1.2.4.

China’s experience, however, diverged from that of other Asian economies. While Chinese export volumes expanded robustly, imports remained largely flat. Export growth was supported by stronger demand from Asia, Europe, and a range of emerging markets, more than offsetting weaker demand from the United States. Although this pattern reflects some redirection of trade away from the United States toward alternative destinations, the scale of export growth to other markets—nearly three times larger than the decline toward the United States (World Trade Organization, 2026)—suggests that trade diversion alone does not fully explain the expansion. Elevated excess capacity in several sectors appears to have encouraged Chinese firms to boost exports, often at lower prices, in order to sustain production amid subdued domestic demand (World Trade Organization, 2026). Consistent with this interpretation, China’s merchandise export volumes rose by 9.2% in 2025, while export prices declined by 3.4%, extending a downward price trend that has been in place since 2022.

Despite the imposition of tariffs and heightened trade tensions with many trading partners, U.S. merchandise trade volumes also expanded in 2025, with export volumes increasing by 3.1% and import volumes by 4.4%. Part of this growth reflects front‑loading behaviour as firms adjusted inventories ahead of anticipated tariff changes. Import volumes provide clear evidence of front‑loading: imports surged in the first quarter of 2025 ahead of “Liberation Day” in April, before weakening thereafter, with import volumes over the final 5 months of the year falling below their 2024 levels. Front-loading is not as clear on the exports side, U.S. merchandise export volumes increased in 9 of the 12 months of 2025 when compared to the same period in 2024, with particularly pronounced gains observed in April and October.

Figure 1.2.5.: Merchandise trade volume growth, by key regions, 2025 (%)

While the global economy and overall trade flows remained resilient in the face of tariff headwinds, the bilateral trade relationship between the United States and China continued to fracture in 2025. Escalating tariff actions between the 2 countries culminated in peak rates of roughly 125% for U.S. imports from China and 150% on Chinese imports from the United States in May 2025, before a temporary truce was reached. Although tariff rates had declined substantially by the end of the year, U.S. and Chinese tariffs on each other remained significantly higher than those applied to other trading partners (Bown, 2025). In volume terms, U.S. merchandise imports from China fell by 28.0% in 2025 and were 41.5% lower than in 2018, when the first U.S.-China trade war began. In contrast, U.S. merchandise import volumes from the rest of the world increased by 9.4% in 2025 (Bown, 2026). The contraction in U.S. imports from China in 2025 coincided with sizable gains from other suppliers, notably Taiwan (AI computing products), Vietnam (laptops, monitors, video‑game consoles, and AI‑related products), and Mexico (AI computing products), underscoring a significant reorientation of U.S. import sourcing (Bown, 2026).

U.S. merchandise export values to China declined sharply in 2025, falling by 25.8%, while exports to other destinations increased by 8.0%. However, export gains elsewhere did not fully offset losses in the Chinese market. Exports losses (at the HS4 level) to China sum up to around $US45 billion. Although exports of the same products to other markets increased by about US$42 billion, the growth was insufficient to fully offset the decline. A key example is soybeans, with U.S. exports to China falling $US9.6 billion while only growing $US1.5 billion elsewhere.

Figure 1.2.6.: Growth in the value of U.S. and China merchandise trade, 2025 (%)

With U.S.–China trade continuing to weaken while trade with other partners expanded, an important question is whether bilateral trade is increasingly being re‑routed through so‑called “connecting economies,” such as Mexico and Vietnam. Analyses using data through 2024 suggest that although indirect trade linkages via third economies have strengthened, they account for only a relatively small share of the overall decline in direct trade between the United States and China (World Trade Organization, 2026; University of International Business and Economics et al., 2025). A related and broader concern is the potential fragmentation of global trade into loosely defined western and eastern blocs, anchored by the United States and China and shaped by countries’ geopolitical alignments with each. Research by the World Trade Organization (2026) and Blanga‑Gubbay and Rubínová (2024) find that, since Russia’s invasion of Ukraine in 2022, trade growth between blocs has lagged behind trade growth within blocs, with data for 2025 pointing to a renewed acceleration of this fragmentation trend. Complementary analysis by the International Monetary Fund (2026) using a gravity‑model framework similarly indicates that geopolitical distance has become a more binding constraint on international goods trade in the post‑2022 period.

Looking ahead

After demonstrating resilience in the face of tariffs and trade tensions, the global economy is now confronting a new source of uncertainty stemming from the military conflict in the Middle East. In its April 2026 forecast, the IMF projected that global economic growth will moderate to 3.1% in 2026 and 3.2% in 2027, down from an estimated 3.4% in 2025 (International Monetary Fund, 2026). These forecasts assume that the conflict will be relatively short‑lived and that disruptions to energy markets and transport routes will be contained. However, beneath the headline projections, impacts vary considerably across countries. Lower‑income, energy‑importing economies are facing disproportionate pressures from higher energy and food prices, compounded by currency depreciation. Growth forecasts have also been revised downward for emerging markets and advanced economies that are net energy importers, though to a lesser extent than for lower-income energy importers. By contrast, the growth implications for energy exporters differ by income group, with modest downward revisions for advanced economies, broadly neutral effects for low‑income countries, and upward revisions for emerging market exporters.

Should the conflict become prolonged, and the resumption of production and transport activities take longer than anticipated, the impact on global economic activity would be significantly more severe. To illustrate this risk, the IMF presents 2 alternative scenarios. In the adverse scenario, oil prices are assumed to rise by 80% in the second quarter of 2026 relative to January expectations, lowering global growth to 2.5% in 2026 and 3.0% in 2027. In the severe scenario, oil prices are assumed to increase by 100% over the same period, with global economic growth slowing further to 2.0% in 2026 and 2.2% in 2027.

Following robust growth of 4.6% in 2025, global merchandise trade volumes are expected to decelerate sharply, gaining only 1.9% in 2026 before recovering modestly to 2.6% in 2027. According to the World Trade Organization (2026), a prolonged oil price shock associated with the conflict in a “high oil price scenario” could further dampen trade growth, potentially limiting expansion to 1.4% in 2026 before a stronger rebound in 2027. Conversely, if the conflict proves short‑lived and investment in artificial intelligence remains strong over the next 2 years, global merchandise trade volumes could grow more rapidly, reaching 2.4% in 2026 and 2.7% in 2027 in this “strong AI scenario”.

Figure 1.2.7.: World economic and trade growth forecast (%)

1.3. Canadian economic performance

U.S. tariffs, whether threatened or implemented, created uncertainty and had major impacts on the Canadian economy in 2025, but the effects were not felt evenly. Canadian economic activity grew 1.9% in 2025, the weakest rate since the Covid-19 pandemic, as net exports detracted from growth. On the other hand, stable expansion in household consumption and rising government investment were positive drivers of economic growth.

Fluctuating trade volumes (trade value excluding prices) had a large impact on the Canadian economy, with significant quarterly variations. In the first quarter of 2025, as Canadian firms front-loaded inventories to avoid tariffs, inventory accumulation became the main contributor to Canada’s economic growth. Inventory accumulation also lead Canadian and U.S. firms to import from each other, causing a surge in the volume of exports and imports; with exports slightly outpacing imports, which meant that net exports (i.e. exports minus imports) contributed positively to economic growth. In the second quarter, import volumes maintained their level but export volumes plunged, resulting in net exports having a negative impact on economic growth. However, inventory accumulation remained a key driver of economic growth.

Figure 1.3.1.: Quarterly contribution of net exports and inventories to economic growth

As export volumes rebounded moderately in the third and fourth quarters, import volumes declined from the first half of 2025, causing net exports to contribute positively to economic growth in the later half of the year. However, inventory depletion acted as a drag on economic growth in the second half. On an annual basis, Canadian goods and services export volume subtracted from GDP growth in 2025 for the first time since the global financial crisis (excluding the Covid-19 pandemic). For the first time since 2022, inventory accumulation contributed positively to economic growth in 2025, but the net contribution was small as the accumulation in the first half was almost offset by inventory drawdown in the second half.

Figure 1.3.2.: Canada’s annual GDP growth (%) and contribution to growth (percentage points) from net trade and inventory accumulation

Despite tariff challenges and recessionary fears, Canadian households maintained their pace of consumption in 2025. Household consumption grew by 2.4% and was the main contributor to economic growth in 2025, supported by the Bank of Canada’s interest rate cuts throughout 2024 and 2025, which helped reduced the debt service ratio (debt re-payment as a share of disposable income) compared to previous years and freed up income for spending or saving. Robust gains in equity markets also boosted the wealth of Canadian households, providing more spending capacity. While the rise in the unemployment rate—from 6.3% in 2024 to 6.8% in 2025—weighed on household consumption, the impact was partially offset by the fact that most of the increase was concentrated among youth (15–24 years). Unemployment among prime‑age workers (25–54 years), who account for a larger share of consumer spending, rose more modestly.

Overall, investment in the Canadian economy grew 1.6% in 2025 as government investment made up for non-residential business investment difficulties. On one hand, business investment remained weak, with investment in non-residential structures, machinery and equipment edging up by 0.2%, and investment in intellectual property adding only 0.4%, the weakest growth since the pandemic. On the other hand, residential investment grew 0.5%, the first expansion since 2021, while government investment advanced 7.2%, the fastest rise since 2010. Government investment was supported by the shift toward infrastructure-led growth and by weapons systems expenditures toward meeting defense spending targets.

Industry performance

From a sectoral perspective, both goods and services industries grew at a similar pace in 2025. However, beneath the surface, US tariffs had diverging impacts on Canadian industries, with those exposed or heavily exposed (exposed, thereafter) to trade expanding only 1.1%, their weakest growth since 2015 if we exclude the Covid-19 pandemic. Industries not exposed to trade (or trade-sheltered) grew 2.0%, almost double the rate of industries exposed to trade. This splintered pattern can also be seen in employment growth, with employment in trade-exposed industries decreasing 0.2%, while trade-sheltered industries saw employment expanding by 0.6% in 2025.

Within trade-exposed goods industries, economic growth diverged between natural resources and manufacturing industries. Natural resources-related industries (agriculture, forestry, fishing and hunting; mining, quarrying, and oil and gas extraction) grew while most manufacturing sub-sectors declined. Natural resources-related industries benefited from several factors, including larger crop production due to higher yields, increased crude oil production to support overseas demand, and elevated prices for several metal and mineral commodities, all of which contributed to offset any uncertainty that might have come from U.S. trade tensions.

In the manufacturing sector, some industries were targeted by U.S. Section 232 tariffs, in addition to experiencing the general uncertainty from U.S. trade tensions. In particular, motor vehicles and parts manufacturing GDP fell 1.4% in 2025, after decreasing 10.7% in 2024, as automakers scaled back production due to U.S. Section 232 tariffs on passenger vehicles, trucks and auto parts. While there are some tariff exemptions for passenger vehicles, trucks and auto parts, the uncertainty and complexity of these exemptions weighed on economic activity. Employment in motor vehicles and parts manufacturing receded 3.4% in 2025 after declining 2.7% the previous year.

Another sub-sector heavily exposed to trade is primary metal manufacturing, which includes iron, steel and aluminum production. Economic activity in primary metal manufacturing dropped 6.4%, the third consecutive decline and the largest since the global financial crisis if we exclude the Covid-19 pandemic. Employment in primary metal manufacturing fell 2.1%, the fourth consecutive annual decline.

Of note, computer and electronic products manufacturing was one of the few manufacturing sub-sectors to defy the trend as it grew 2.1% in 2025, despite being one of the most trade-exposed industries. The growth in computer and electronic products manufacturing coincides with the expansion in global trade of AI-related products in 2025, as noted by the World Trade Organization (2026). Employment in computer and electronic products manufacturing grew 1.0% in 2025.

Figure 1.3.3.: Canada’s GDP growth and employment growth in 2025, by industry

1.4. Highlights of Canada’s international trade performance

In 2025, Canadian goods and services trade expanded at its slowest pace in several years as global uncertainty and trade-related tensions weighed on international commerce. Goods and services exports edged up 0.7%, the weakest performance since 2016 (excluding the Covid‑19 pandemic), while imports increased 3.0%. With imports outpacing exports, Canada’s combined goods and services trade deficit widened to $29.0 billion, its highest level in the post‑pandemic period. Higher prices were the reason why Canada’s trade of goods and services grew in 2025. Removing the effect of prices and just looking at volumes, goods and services export volumes declined 1.4%, marking the first annual decrease since 2009 (excluding the pandemic). Goods and services import volumes also fell slightly, by 0.3%.

The trade landscape in 2025 was marked by a stark divergence between weakening trade activity with the United States and strong growth in trade with the rest of the world. While services exports to the U.S. held up as they were spared from direct U.S. tariffs, goods exports to that country fell sharply, led by weaknesses in crude oil, and motor vehicles and parts, and amplified by a range of U.S. tariff actions. In contrast, exports to non‑U.S. markets surged, driven by exceptional growth in gold exports to the United Kingdom, a rising volume of crude oil exports to the European Union and the Indo‑Pacific region, and some potential tariff diversion. This shift in momentum pushed the share of Canadian exports to non-U.S.-destinations to its highest level since the early 1980s.

Figure 1.4.1.: Canada’s goods and services trade

Performance by product categories

While 3 of 4 major services categories registered exports gains, only 4 of 11 major goods export categories made gains in 2025, reflecting broad‑based weakness on the goods side. Leading the decline were energy products, Canada’s largest goods export category, which fell 6.9% (‑$12.0 billion), In contrast to the general export trend where growth was driven by prices in 2025, energy products export prices declined 8.1% despite a 1.3% increase in export volumes. Within the energy category, lower crude oil exports were partly offset by higher natural gas exports. While the decrease in Canada’s crude oil export prices was broad-based, the change in export volumes points to a story of export diversification as volumes to the United States declined while volumes to other destinations increased enough to more than offset the drop. Crude oil export volumes to Europe from Newfoundland and Labrador increased and, at the same time, the completion of the Trans Mountain pipeline expansion provided export capacity to Asia from western Canada. On the other hand, the growth in natural gas exports was mainly due to higher export volumes and prices to the United States.

Offsetting some of the weaknesses in other goods export categories was the $16.8 billion increase in exports of metals and non‑metallic minerals products, Canada’s second largest goods export category. It was the second year in a row that metals and non‑metallic minerals products were the main contributors to overall export gains. Growth was overwhelmingly supported by gold prices, which were pushed higher by elevated levels of global economic uncertainty. In fact, if exports of unwrought gold, silver and platinum‑group metals and their alloys are excluded, exports of metals and non‑metallic minerals products would have declined by $3.5 billion as many products in this category were affected by U.S. Section 232 tariffs on aluminum, and iron and steel products.

Exports of motor vehicles and parts, Canada’s third‑largest goods export category, continued to struggle in the face of U.S. trade policy uncertainty and tariffs. Exports value fell 3.0% (‑$2.8 billion) following a 7.0% (‑$7.1 billion) decline in 2024. This export category, which was already struggling in 2024 due to lower Canadian production stemming from several Ontario assembly plants being temporarily idled or operating under capacity as a result of shifting production decisions, faced major headwinds from U.S. Section 232 tariffs in 2025. Within motor vehicles and parts, declines in passenger cars and light trucks exports were the main driver of the overall decline observed over the last 2 years.

Services exports, by contrast, experienced broad growth, rising 3.8% (+$8.8 billion) in 2025. Commercial services led the expansion, increasing 4.0% (+$5.5 billion), with the largest contributors being maintenance and repair services (+$2.0 billion), personal, cultural and recreational services (+$1.2 billion), and telecommunications, computer and information services (+$1.2 billion).

Transportation services exports increased 8.2% (+$1.7 billion) with gains across both air and marine modes of transportation (freight and passenger fares). Travel services exports rose 2.3% (+$1.6 billion) despite fewer international students and non‑resident visitors entering Canada. 2025 data indicate that although the number of inbound international trips declined, expenditures per trip increased, resulting in a net rise in overall travel services export value.

Imports of goods and services increased more broadly than exports, with 8 of 11 major goods categories and 3 of 4 services categories recording growth. The largest contributor on the goods side was consumer goods, which rose by 4.6% (+$7.2 billion) driven by higher imports of other food products (+10.1%, or $2.0 billion), clothing, footwear and accessories (9.0%, or $1.9 billion), and miscellaneous goods and supplies (6.0%, or $1.5 billion).

Imports of metal ores and non‑metallic minerals increased 33.3% (+$6.8 billion), the strongest annual percentage gain since 2010, on the back of higher import volumes, as import prices decreased 4.6%. Within this category, growth was primarily driven by higher imports of “other metal ores and concentrates,” a grouping that includes ores and concentrates of gold, silver, bauxite and aluminum oxide, lead, zinc, and others.

Imports of electronic and electrical equipment and parts also expanded strongly, rising 6.4% (+$5.7 billion). Within this category, the growth of computers and computer peripherals—up 12.9%—was especially notable, representing the largest percentage increase since the 1990s. This aligns with the World Trade Organization’s (2026) observation that artificial‑intelligence‑related goods were a key driver of global trade growth in 2025, suggesting that Canada’s import patterns followed this broader international trend.

Commercial services increased by 3.1% (+$4.1 billion) as imports of technical and trade‑related services rose sharply. Transportation services imports advanced by 5.6% (+$2.1 billion), driven primarily by higher water transport services. Despite having fewer Canadian residents traveling abroad in 2025, travel services imports rose by 2.4% (+$1.4 billion), suggesting that those who travelled spent more abroad. The 2025 rise in travel services imports was the weakest since the travel disruptions caused by the Covid-19 pandemic.

Table 1.4.1.: Canada’s goods and services trade by major product category, 2025

Performance by trade partners

Trade with the United States, Canada’s largest partner, weakened notably in 2025. Canadian goods and services exports to the U.S. declined 3.7%, or $26.3 billion. Weaknesses in exports of energy products and motor vehicles and parts as highlighted in Table 1.4.1. above─Canada’s top two goods export categories to the U.S.─weighed on goods export performance. Furthermore, Canadian goods exports to the U.S. faced various tariff headwinds in 2025. The decline in 2025 of Canadian goods exports to the U.S. is the third consecutive annual decrease, and the steepest drop since the 2008-09 global financial crisis (excluding the pandemic). There were also 542 fewer (-1.3%) enterprises exporting goods to the United States in 2025.

Services exports to the U.S., however, remained resilient. Growth in services exports to the U.S. increased 6.9% or by $8.3 billion in 2025, more than doubling its 2024 pace of 3.4%. The growth was mainly due to commercial services which grew by $6.2 billion, followed by travel services which grew $2.1 billion. Slightly offsetting these gains, exports of transportation services and government services to the U.S. declined marginally.

Beyond the U.S. market, Canadian exports performed strongly. Goods and services exports to countries other than the U.S. grew by 11.1% (+$33.3 billion) in 2025, almost entirely on the strength of goods exports which grew by $32.8 billion—the largest dollar‑value increase ever recorded, although a significant portion of that was due to gold exports as explained below. Given the weaknesses in Canadian exports to the U.S. and strengths in exports to other countries, the non-U.S.’s share of Canadian goods and services exports reached the highest level since 1981. The number of goods exporters to non-US destinations also increased by 292 (+1.8%) in 2025, the first increase since 2019.

Figure 1.4.2.: U.S.’s and other countries’ share of Canadian goods and services exports

By far, goods and services exports to the United Kingdom experienced the largest gains to non-U.S. destinations, increasing by 50.0% ($20.4 billion). Gold was the main driver, benefitting from higher prices and volumes. Merchandise trade data show that gold was responsible for almost all of the growth in merchandise exports to the United Kingdom in 2025. That country is a major financial hub and therefore it imports a lot of gold (see Box 1.4.1. below).

Exports to the European Union (+16.4%, or $9.5 billion), benefiting from higher volumes of crude oil and potential trade diversion, was another contributor to growth to non-U.S. destinations. Goods exports to the European Union grew 23.5% in 2025, the largest increase on record. Leading this growth were raw materials such as crude oil, aluminum and canola seeds. The gains in crude oil exports came from Newfoundland and Labrador and mainly headed toward the Netherlands, Germany, Italy and Spain on the strength of higher export volumes as export prices fell. Aluminum and canola seeds point to a potential trade diversion story, as U.S. tariffs on aluminum and China tariffs on canola seeds reduced exports of these products to the two markets, and coincided with expanded exports to the European Union.

Figure 1.4.3.: Top 2 or 3 merchandise export growth drivers to each key non-U.S. partners in 2025

Another region of importance is the Indo-Pacific, where Canadian goods and services exports grew 4.6% ($5.0 billion) in 2025,^{Footnote 1} supported mainly by crude oil exports which benefited from increased transportation capacity. 2025 is the first full calendar year during which the Trans Mountain pipeline expansion has been in operation, opening access to overseas markets in the Indo-Pacific region for western Canada crude oil. China was the main beneficiary of this new exporting capacity, with smaller shares heading toward Hong Kong, Singapore and South Korea. The growth in crude oil exports more than offset weaknesses in other major export commodities such as coal (lower export prices), gold (significant drop in export volumes to Hong Kong and Australia), and agricultural products that were subject to tariffs by China.

Table 1.4.2.: Canada’s exports with its main trading partners, 2025

Canadian imports of goods and services from the United States fell in 2025, with goods imports decreasing by 3.0% ($14.6 billion). The continuing struggles in the motor vehicles and parts sector contributed to this decline, weighed down by chip shortages, as well as U.S. tariffs and Canadian responsive tariffs. Services imports from the U.S. increased slightly by 0.2%, or 0.3 billion, as the gains in commercial services offset the losses from travel services imports.

Goods and services imports from countries other than the U.S. grew 11.2% ($44.5 billion) in 2025. A few key trends supported this growth, including Canadian residents seeking alternative to U.S. travel, higher gold prices and quantity, imports of computer processing units and other computer-related products, in line with the global trend of expanding AI-related trade, as well as higher imports of motor vehicles and parts.

Regionally, accounting for a sizeable chunk of this growth are goods and services imports from the Indo-Pacific (+8.3% or $11.6 billion), led by goods imports that were driven by advances for a diverse range of products, without any dominating a large share of the gains. On the services side, growth was led by imports from Japan (25.0%, or $1.0 billion), spurred by travel services imports, which grew 58.6%.

Canadian goods and services imports from the European Union grew 6.4%, or $6.7 billion. This expansion was led by computer processing units, turbojets and parts, passenger vehicles and travel services.

There was also notable growth in imports from Mexico (17.8%, or $6.2 billion), led by goods import growth that was supported by goods transporting motor vehicles, passenger vehicles and computer processing units. Goods and services imports from the rest of the world advanced 19.1%, or $18.4 billion. Gold imports from Switzerland, Peru and Brazil supported this growth.

Table 1.4.3.: Canada’s imports with main trading partners, 2025

Box 1.4.1.: Canada’s gold exports

Gold has become one of Canada’s most important export commodities, increasing sharply during periods of global uncertainty. Gold’s share of Canadian goods and services exports rose from 1.3% in 2007 to 6.8% in 2025, with sharp gains during periods of uncertainty such as the global financial crisis and its aftermath, the Covid-19 pandemic, and the recent period of U.S. trade tensions. The value of merchandise gold exports from Canada in 2025 reached $53.3 billion, the second largest commodity export from Canada behind crude oil.

As gold prices generally increase during periods of economic uncertainty, the growth in gold exports in 2025 was driven entirely by prices, which spiked 45.2% while volumes exported declined 6.3%. This is similar to other periods of economic uncertainty, such as the Covid-19 pandemic, where exported volumes decreased 21.2% while prices increased 30.7%, or during the global financial crisis of 2009 where volumes exported fell 15.4% but prices rose 21.1%.

Figure 1.4.4.: Gold’s share of Canada’s goods and services exports, and growth in Canadian gold exports by price vs. volume

Text version - Figure 1.4.4.

Year	Increase in gold export prices (%)	Growth in gold export volume (%)	Gold’s share of exports (%)
Data: Statistics Canada via Global Trade Atlas, and Statistics Canada, Table 12-10-0163-01 and Table 12-10-0144-01. Source: Office of the Chief Economist, Global Affairs Canada.
2007	6.9%	2.5%	1.3%
2008	25.1%	10.5%	1.6%
2009	21.1%	-15.4%	2.2%
2010	15.0%	43.8%	2.8%
2011	20.7%	0.7%	3.6%
2012	9.1%	-16.5%	3.3%
2013	-12.8%	21.2%	3.1%
2014	-3.5%	6.0%	2.9%
2015	4.4%	-8.2%	2.9%
2016	10.9%	-6.2%	3.0%
2017	-0.8%	4.7%	3.0%
2018	1.9%	-9.2%	2.7%
2019	10.0%	19.5%	3.3%
2020	30.7%	-21.2%	4.4%
2021	-4.1%	-7.2%	3.2%
2022	2.7%	22.6%	3.1%
2023	14.3%	6.0%	3.6%
2024	24.5%	7.8%	4.8%
2025	45.2%	-6.3%	6.8%

The destinations of Canada’s gold exports reflect the structure of the global gold market, with flows going to storage and investment hubs (London, New York), and refining centres (Switzerland, various U.S. states). During periods of economic uncertainty, gold exports tend to support mostly storage and investment activities. For example, in 2025, the growth in gold exports to the United Kingdom (+$17.4 billion) was larger than the growth of overall gold exports to the world (+$14.1 billion). The sizeable growth to the United Kingdom is due to London being one of the world’s largest over‑the‑counter gold trading centres (World Gold Council, n.d.), a major storage hub, and the second largest home of gold‑backed exchange‑traded funds (ETFs). An ETF is a type of investment fund that is traded on stock exchanges and can hold a collection of assets such as stocks, bonds, commodities, gold, or a mix of those. Therefore, a physically backed gold ETF would hold gold bullions stored in secure vaults. London vaults hold more than half of global ETF‑allocated gold (Gopaul, 2019). As global uncertainty rises, investment inflows into these physically backed ETFs increase, resulting in greater demand for vaulted gold—and therefore higher Canadian exports to the United Kingdom. Of note, the growth in gold exports to the United Kingdom in 2025 was supported by both higher prices and larger volumes, even though overall gold exports to the world witnessed a drop in volume.

1.5. Canadian foreign direct investment performance

In 2025, Canada's outflows of foreign direct investment decreased sharply, while inflows posted a slight increase. More specifically, after declining slightly by 1.6% in 2024, Canadian direct investment abroad (CDIA) flows plunged by 42.2% to $73.8 billion in 2025, the largest decrease in dollar terms since the start of this data series in 2007. Conversely, foreign direct investment (FDI) flows into Canada recorded a 1.6% increase in 2025 (following a robust gain of 40.4% in 2024) to reach $93.0 billion, the 2nd highest level on record after the $125.5 billion reached in 2007. CDIA’s level dropped below its ten-year average^{Footnote 2} in 2025, while FDI’s level remained above its ten-year average ($101.4 billion for CDIA and $57.8 billion for FDI).

The large decrease in CDIA outflows in 2025 was primarily driven by mergers and acquisitions (M&As), which fell $46.6 billion to -$4.1 billion.^{Footnote 3} This divestment implies the sale of Canadian assets abroad, most likely in the United States, where the level of M&As was down to -$11.1 billion. Reinvested earnings raised the total amount of CDIA outflows by $10.2 billion (+14.8%) to $79.5 billion, while other flows reduced it by $17.7 billion to - $1.6 billion.

The increase in FDI inflows in 2025 was mostly driven by a rise in (i) reinvested earnings of 20.0% ($5.5 billion), after a small decrease in 2024 (-$1.4 billion), and (ii) M&As of 4.2% ($1.8 billion) following a large increase in 2024 ($19.8 billion). These gains offset a decrease of 26.4% ($5.8 billion) in other flows.

As illustrated in Figure 1.5.1., FDI flows exceeded CDIA flows in 2025. This marks the first occurrence of this pattern since 2013.

Figure 1.5.1.: Canada’s flows of foreign direct investment ($ billion)

Sectoral composition

With respect to sectoral concentration, over four-fifths of CDIA flows in 2025 (83.2%) occurred in the following sectors: trade and transportation (32.6%), management of companies and enterprises (29.7%), and other industries (20.9%).^{Footnote 4}

In 2025, CDIA flows decreased sharply, by $54.0 billion, compared to 2024 (from $127.8 billion to $73.8 billion). This decline was largely driven by the finance and insurance sector (- $30.9 billion), which saw its second straight substantial retreat following a $35.8 billion decline in 2024. Decreases were also reported in the following sectors: energy and mining (-$11.3 billion), trade and transportation (-$9.3 billion), management of companies and enterprises (-$3.1 billion), and other industries (-$1.7 billion).

As for FDI, three sectors accounted for slightly over two-thirds of flows (67.7%) in 2025: other industries (25.9%), trade and transportation (25.2%), and management of companies and enterprises (16.6%).

Compared to 2024, FDI flows in 2025 were up slightly, by $1.5 billion (from $91.6 billion to $93.0 billion). The sectors that contributed the most to this increase were management of companies and enterprises, and trade and transportation. Specifically, FDI flows for the management of companies and enterprises sector reached $15.4 billion, from $0.5 billion in 2024, the highest level since 2022 ($14.4 billion). FDI flows for the trade and transportation sector more than doubled, rising from $11.5 billion in 2024 to $23.5 billion in 2025, its third consecutive annual increase.

Conversely, manufacturing (-$34.7 billion) and energy and mining (-$7.6 billion) saw their FDI flows decline compared to 2024 (Table 1.5.1.).

Table 1.5.1.: CDIA and FDI flows by industry, 2025

Geographic composition

The United States remained the top destination for CDIA, accounting for 34.4% ($25.4 billion) of total outflows in 2025. However, that market was also the main contributor to the overall decline for the second straight year. The $40.2 billion decline recorded in 2025 was the largest since 2018. The bulk of the decline occurred in the first quarter where CDIA flows were down to -$0.8 billion─the first divestment of Canadian firms to the United States since 2010. The 2025 decline in CDIA flows follows the substantial decrease of $37.0 billion seen in 2024, which followed a $51.8 billion increase in 2023.

The United Kingdom was the second largest destination of CDIA flows in 2025 with a 15.4% share of the total. Notably, the United Kingdom has been among the top five CDIA destinations for the last 13 years, except in 2020 (10th) and 2021 (9th). Other main recipient countries in 2025 were Mexico (10.0%), Germany (6.0%), and Switzerland (5.1%). CDIA flows to Mexico increased significantly in recent years, rising from $1.9 billion in 2021 to $7.4 billion in 2025. CDIA flows to Germany also increased from $1.4 billion to $4.4 billion over the same period.

Compared to 2024, the United States, the United Kingdom, Mexico and Germany remained in the top five, CDIA destinations in 2025, while Switzerland, the new country in the top five replaced the Cayman Islands (now in 14th place).

Figure 1.5.2.: Top five countries’ shares of total CDIA and FDI flows, 2025

The United States remained the largest investor in Canada in 2025, accounting for 56.9% of total FDI inflows, which is above the average for the last decade (2015‒2024: 50.4%). The United Kingdom (9.8%) entered the top five group as the second-largest investing country, exchanging its fifteenth place with Switzerland. The Netherlands (3rd) also entered the top five, replacing China (10th).  The Cayman Islands (4th) entered the top five replacing Japan (9th). Luxembourg retained its 5th place position.

Table 1.5.2.: CDIA and FDI flows, 2025 – Top five countries

It should be noted that both CDIA and FDI flow data reflect the immediate destination/investor information and refer to the last country through which the investment transited before reaching its destination. This is different from data based on the ultimate destination/investor, which are not available for flows. As a result, flow data may not fully reflect flows from countries that invest via intermediaries (e.g., China or Japan) or that act as intermediaries (e.g., the Netherlands, Luxembourg, or the Cayman Islands).

In conclusion, Canada's foreign direct investment outflows saw a substantial decrease in 2025, while inflows experienced minimal growth. FDI inflows remained above their ten-year average, while CDIA outflows fell below FDI inflows for the first time since 2007. In the context of current U.S. trade and industrial policies, these results highlight Canada’s continued attractiveness to foreign investors, as well as the uncertainty in which Canadian businesses continue to navigate. For 2026, global tensions such as the recent Middle East war and Canada’s ongoing volatile trade and tariff relations with the United States could negatively affect the Canadian economy, impacting both CDIA and FDI flows. Conversely, surging investment related to technology, including artificial intelligence (AI) and defence, may offset headwinds coming from shifting trade policies.

2. Part 2: The rise of services in Canada’s trade landscape

2.0. Key messages

• Services have become a central pillar of Canada’s trade performance, driving recent export growth.
  • Canada’s services exports have tripled over the past 15 years, reaching a record $240 billion in 2025. Services now account for nearly one-quarter of all Canadian exports and have been the sole driver of the country’s $50 billion export gains since 2022.
• Services trade has proven more diversified and resilient than goods trade in a context of global shocks and trade tensions.
  • Services exports typically face fewer tariffs and border-related frictions than goods exports, making them a stabilizing force that can be more resilient to global shocks and supply-chain disruptions. Furthermore, Canadian services reach a much wider array of global markets, with 47% of services exports destined for non-U.S. markets compared to just 28% for goods exports.
• The rapid expansion of digitally enabled services is transforming international trade patterns.
  • Many services can now be sold remotely, including computer and information, finance, research and many other professional services. They now represent over half of Canada’s services exports and are growing at more than twice the pace of goods exports. This reflects the increasing role of data, AI, and digital connectivity in global trade.
• Having a commercial presence abroad is the dominant channel for Canada’s services delivery to international markets.
  • Establishing a commercial presence through setting up regional offices and foreign affiliates is a key driver of Canadian firms’ international competitiveness. In 2024, sales by Canadian foreign affiliates operating in services industries reached $1.0 trillion, dwarfing traditional cross-border exports and reflecting the importance of global operations and investment as a channel for accessing foreign markets for services.
• A highly skilled workforce, digital infrastructure, and supportive regulations are the foundational drivers for selling services internationally.
  • The services sector expansion relies on 3 complementary pillars. First, international competitiveness is fundamentally dependent on a highly skilled and educated workforce. Second, robust digital infrastructure and connectivity act as the pathways for global reach and scalability. Finally, long-term engagement requires transparent regulations, strong intellectual property protections, and modern agreements to secure the cross-border flow of data, investment, and professionals.

2.1. Importance of services in Canada’s international landscape

In the national consciousness, Canada’s trade is often synonymous with industrial and resources-based strengths, from grain moving across the Prairies, to energy transported via pipelines, to motor vehicles and parts crossing back and forth across the southern border.

This focus on physical merchandise, however, only tells part of the story. The services sector has quietly become a critical driver of Canadian business expansion abroad, encompassing digital innovation, professional expertise, intellectual property, tourism and other intangible activity. Services trade now represents a sizeable and increasingly significant share of Canada’s total export activity; moreover, services have become critical factors in Canada’s international reach and competitiveness.

Canada’s services exports have frequently proven more resilient to global shocks and are more diversified across international markets than traditional goods. As global supply chains face volatility from geopolitical and trade policy shifts, climate change disruptions, and commodity price fluctuations, services have provided a stabilizing influence in many cases.

The following sections highlight this expanding segment of trade, providing the data and insights necessary to integrate services more fully into the broader narrative of Canada’s trade performance: Section 2.1 explores the importance of services in Canada’s international landscape, Section 2.2 spotlights Canada’s trade performance in services, and Section 2.3 examines the opportunities and challenges services producers face. As global competition increasingly centres on knowledge and connectivity, Canada’s competitive edge is no longer found solely in cargo containers or pipelines. Today, economic momentum is also driven by data flows, professional expertise, and the global reach of our education and tourism sectors.

Services are driving Canada’s export growth

Canada’s services exports have tripled over the past 15 years, reaching $240 billion in 2025, and now account for almost one‑quarter of all Canadian exports. In fact, services alone are behind all of Canada’s $50 billion export gains since 2022.

This growth, particularly in the post-pandemic period, has been driven by rapid expansion in commercial, digital, education and other knowledge‑intensive services. Services’ share of Canada’s exports has grown as rapidly in the last decade (6.5 percentage points over 2015−2025) as it did in the 30 years prior (6.4 percentage points over 1985-2015). Many services now rival some of Canada’s iconic goods exports in value.

Figure 2.1.1.: Canada’s services exports, 1985−2025

Commercial services are Canada’s largest services sector exports, with values on par with iconic merchandise sectors such as energy products, metals, and motor vehicles. The scope of this sector is broad, ranging from high-value technical services—including engineering and architectural design—to professional domains such as finance, management, and the rapidly growing fields of software and artificial intelligence.

Figure 2.1.2.: Canada’s top 15 export sectors, 2025 ($ billion)

Canada has global strength in commercial services; in 2024, Canadian providers accounted for 1.8% of global commercial services exports, ranking 13th internationally (UNCTAD, n.d.). While the U.S. remains the world’s largest exporter of commercial services with 12.8% of global value, Canada’s services exports represent a larger share of its economy (7.4%) compared to the U.S. (3.9%) in 2025. This performance is underpinned by a comparative advantage in specific high-knowledge subsectors, including audiovisual services, research and development, and financial services, all of which represent a higher proportion of Canada’s export mix than the global average.

Canada imported $135 billion in commercial services in 2025. These imports facilitate access to global expertise and specialized technologies, including proprietary software and international business services. The leading import categories were management services (which are frequently associated with the operations of foreign multinational operations), followed by charges for the use of intellectual property, financial and computer and information services.

Canada’s travel services exports, which reached $72 billion in 2025, reflect the country’s role as a destination for international tourism, business, and education. In 2024, education-related travel was the largest component, with foreign students contributing $36 billion through tuition, housing, and local living expenses while studying in Canada. Tourism spending in Canada accounted for one-third of travel services exports ($24 billion), while business travel made up the remainder ($10 billion). Conversely, tourism imports (i.e. Canadian travellers abroad) accounted for more than 80% of all travel imports, with the remainder split between international education and business travel.

Two-way trade in transportation services, totaling $63 billion in 2025, underpins the physical movement of freight and passengers via land, sea and air. Freight services accounted for approximately three-quarters of Canada’s $23 billion in transportation services exports, distributed relatively evenly across rail, trucking, marine and air transport. The remainder consisted of passenger fares paid to Canadian air and sea carriers. To facilitate broader trade and international travel, Canada imported $40 billion in transportation services in 2025.

Government services are the smallest services trade category, with exports and imports each amounting to less than $2 billion in 2025. This category primarily covers diplomatic and military-related services.

Services as drivers of diversification and resilience

The international markets where Canadians sell their services are much more diverse than for goods. The most immediate difference is the level of reliance on the U.S. While 72% of Canada’s goods exports are destined for the U.S., the services sector is significantly less concentrated, with the U.S. accounting for only half (53%) of the total.

The diversification story continues when looking beyond the U.S. In the goods sector, the next 4 largest markets account for the same export value as the rest of the world combined (both at 14% of goods exports). In contrast, services exports to non-U.S. countries are characterized by a "long tail" of diverse global partners. Services next 4 markets account for 18% of the total, while nearly one-third (29%) of services exports are distributed across the rest of the world—more than double the 14% share seen for goods. This suggests that while goods exports are tethered to a few hubs, Canadian services are reaching a much wider array of global markets.

Figure 2.1.3.: Canada’s export destinations in 2025

While Canadian trade as a whole has faced significant headwinds in recent years—ranging from wars, to fluctuating commodity prices, to harmful trade measures such as tariffs—the services sector has steadily outperformed other segments of the economy. Commercial services in particular have also proven more resilient and stable during recessionary periods. They typically face fewer to no tariff and border-related frictions compared to goods, and are less sensitive to supply-chain disruptions (However, they face unique challenges and barriers that are explored in Section 2.3.).

Figure 2.1.4.: Canadian exports during recessions

Canada’s resilient services experience is common around the world. During the 2008-2009 global financial crisis, U.S. services trade fell by less than 7% compared to goods trade, which declined 33% for imports and 21% for exports (Borchert & Mattoo, 2009). More recently, during the COVID-19 pandemic shock, researchers found that services trade was very negatively affected relative to goods; however, digging deeper, they revealed that travel services dominated this trend while cross-border services such as computer services experienced almost no significant effect (UNCTAD, 2021).

Digital transformation in services

The COVID-19 crisis accelerated the digital transformation and underscored its importance (OECD, 2020). The rise of digital trade is a global phenomenon and is now the fastest-growing segment of world trade and of most countries’ imports (Goldfarb & Suominen, 2025). Advances in technology and artificial intelligence (AI) have accelerated what Canadians can sell across borders, enabling firms of all sizes to deliver software, financial, professional, creative, and data‑driven services instantaneously to global clients, with high scalability and low marginal delivery costs.

Digitally enabled services, i.e. services that can be sold electronically from remote locations, now represent over half of Canada’s services exports and are growing at more than twice the pace of goods exports.

Figure 2.1.5.: Canadian exports growth

The rise of digital services is having a transformational impact on trade. A report by the World Trade Organization found that the share of services in global trade would rise to about 30% by 2040, driven by digital delivery (World Trade Organization, 2019). It argues that digital trade is also more “inclusive” in that it allows Small and Medium Enterprises (SMEs) to reach global markets with minimal upfront capital outlays. Indeed, GAC’s State of Trade 2025 found that smaller businesses were more likely to be services exporters (Global Affairs Canada, 2025b).

How services are traded internationally

Understanding the delivery mechanisms is essential for navigating the modern trade environment and tackling barriers and challenges standing in the way of growth. While the international delivery of goods is well understood to happen in containers, boxes or pipelines, selling services internationally is complex and multi-faceted, and can take many forms.

The discussion thus far has focused on services that are directly exported or imported. But there are two other types of international services activities that, while not considered to be exports, are nonetheless important elements in Canada’s international trade picture.

The first is the services value-added content in the production of goods and other services. For example, a Canadian mine relies on a variety of services, ranging from geological/scientific, to transportation and lodging, a Canadian aerospace manufacturer relies on research and design services, while a Canadian bank makes use of marketing and accounting services. These services inputs can be essential to making Canadian goods and services exports more competitive on international markets.

Secondly, many of Canada’s services are sold by establishing a local presence in a market (e.g. through direct investment abroad). For example, a Canadian bank may set up a branch in Latin America to serve that market, while a restaurant chain may set up an international location for the same reason. For necessity (e.g. regulations) or efficiency (e.g. travel), there are many reasons why a Canadian multinational would set up a foreign affiliate abroad to sell services to that market. These are not considered services exports, but they are important commercial avenues as they account for a larger value of sales than services exports.

Understanding how services are delivered is important, as the various modes are governed by different rules and complexities, and have different costs and success factors. While data limitations prevent perfect matching, the grouping for services delivery in this report loosely aligns with groupings used internationally, such as in the General Agreement on Trade in Services (GATS) established by the World Trade Organization. This report groups international services delivery into 4 different avenues, allowing for rich data analysis in Section 2.2:

1. Digitally enabled services and remote sales: These include supply of a service without the service provider being physically present. For example, digital downloads, email transmissions, videoconferencing, and (less commonly) services delivered via mail/courier (e.g. architectural blueprints). Canada sold $130 billion of digitally enabled services in 2025 (see Annex for calculations). This avenue roughly aligns with GATS mode 1 (cross-border supply).
2. Non digitally enabled services (e.g. movement of people): Services sold when someone physically travels to the location. Examples include when students study abroad, or when construction and engineering firms provide on-location services, among others. This category also includes transportation services that facilitate the movement of people and goods. Canada sold $111 billion of face-to-face services in 2025 (see Annex for calculations). This avenue combines GATS modes 2 (consumption abroad) and 4 (temporary movement of natural persons).
3. Services’ value-added content embodied in goods: The production of goods such as the iconic products Canada is known for ranging from grains to cars can require many services such as design, legal, research, or accounting services. The value of these services is not directly captured in trade data for those goods, because they are embodied in goods exports. The domestic services value-added content embodied in goods exports amounted to $111 billion in 2024, accounting for 17% of export value (Statistics Canada, Table 12-10-0100-01). This avenue is not covered by the GATS, but recent literature has unofficially referred to it as mode 5 (Cernat & Kutlina-Dimitrova, 2014).
4. Services sold via commercial presence abroad: Services sold by Canadian multinational enterprises (MNEs) via their foreign affiliates represent the largest channel for international services sales. While these transactions do not involve a service "crossing the border" in a traditional sense—and are therefore not classified as exports—their scale is significant. In 2024, the value of sales by Canadian foreign affiliates in services industries reached $1.0 trillion. This indicates that for many Canadian services providers, establishing a physical presence abroad is the primary mechanism for global expansion and the most common mode of international sale. (Statistics Canada, Table 36-10-0440-01). This avenue aligns perfectly with GATS mode 3 (commercial presence).

Figure 2.1.6.: Canada’s services global reach

2.2. Canada’s international services performance

Canada’s services have expanded internationally at a remarkable pace over the past several decades, becoming a central pillar of the country’s trade performance. As noted in Section 2.1, services exports have tripled over the past 15 years, reaching a record $240 billion in 2025. Over the same period, Canadian businesses and consumers have also expanded their use of services from abroad, with imports more than doubling to $237 billion. This parallel growth underscores the rising importance of services not only as an export engine, but also as a key input into Canada’s broader economic activity. Canada has been a net exporter of services since 2023; prior to that, Canada had a consistent services trade deficit.

Canada’s recent services performance stands out internationally, particularly in the post‑pandemic period. Between 2019 and 2025, Canada’s services exports grew by 49%, ranking second among G7 economies, behind the United Kingdom. Pandemic‑era disruptions accelerated the adoption of remote work and digital business models, while Canada’s post‑secondary education sector expanded its attraction of international students, further supporting services exports. Over the same period, services imports grew by 34%, below the G7 total of 44%. Services imports remain essential to domestic productivity, providing access to specialized expertise, advanced digital technologies and artificial intelligence (AI), intellectual property, and financial services that support firms’ global competitiveness.

Figure 2.2.1.: International expansion in services trade among G7 countries (2019−2025, % change)

Beyond aggregate growth, Canada’s services performance is characterized by a couple of features: a high degree of market diversification, and the increasing importance of non‑traditional channels of delivery. Together, these characteristics distinguish services trade from goods trade and help explain their growing contribution to Canada’s trade resilience.

Canadian services providers maintain a significant global presence, particularly in finance, transportation, and retail, where Canadian firms consistently rank among the world’s largest. This international footprint is reflected in Canada’s comparatively diversified services export markets. While the U.S. remains the largest destination, services exports are distributed across a wide range of markets, reducing reliance on any single destination and contributing to greater stability during periods of global disruption.

Over time, the geographic composition of Canada’s services export destinations has evolved alongside shifts in the global economy and digital innovation. European partners such as the United Kingdom, France and Germany remain important anchors, but longer‑term growth has increasingly been driven by emerging markets. The most notable change over the past 25 years has been Canada’s expanding engagement with the Indo‑Pacific region. In 2025, India surpassed the United Kingdom to become Canada’s second‑largest services export market, accounting for 6% of total exports. While commercial services exports to India and China are significant, much of this growth reflects travel related services, particularly education related exports generated when international students study at Canadian institutions, alongside tourism and business travel.

Figure 2.2.2.: Canada’s top services export destinations over 25 years

Taken together, these trends point to a services sector that has grown substantially and has become more diversified than Canada’s goods trade. Crucially, they also reflect a shift in how services are delivered internationally. The sections that follow examine Canada’s services performance through these different channels—beginning with digitally enabled services—before turning to non‑digitally enabled services, services embedded in goods exports, and services delivered through commercial presence abroad.

Digitally enabled sales

Rapid advances in digital technologies—including AI—have fundamentally reshaped how services are traded internationally. Today, much of international trade happens without anyone leaving their desk, with a growing share occurring entirely in the background, on servers operating at near-zero marginal cost. These technological shifts have expanded scale, reduced distance-related frictions, and altered long‑standing trade patterns.

Many digitally enabled services are uniquely scalable. For example, a digital fraud‑detection platform can screen transactions for thousands of clients simultaneously, continuously improving as more data are processed. Unlike in‑person services, the marginal cost of adding an additional client is minimal and declines further as scale increases. This combination of scalability and learning‑by‑doing has allowed digitally enabled services to expand far more rapidly than traditional forms of trade.

The rise of digital delivery has weakened the traditional “gravity” forces that have long shaped trade flows. As documented by the IMF, the sensitivity of services trade to geographic distance has declined significantly over time, while trade patterns for goods are comparatively more determined by distance. In the mid‑2000s, a 1% increase in distance was associated with a 0.63% reduction in bilateral services trade, similar to goods. By 2023, that relationship had weakened to a 0.52% decline for services, compared with 0.58% for goods (Li & Zymek, 2026). To illustrate, consider 2 otherwise similar trading partners where one is 10% further away than the other. In this case, there would be 5.8% less goods trade with the further away country compared to the closer country, but only 5.2% less services trade. Although this difference appears modest, it accumulates over large distances and contributes meaningfully to patterns of international trade, especially for a country like Canada which is geographically far from all countries outside the United States.

The declining importance of distance in services trade is driven largely by the growing share of services that can be delivered remotely, such as finance, telecommunications, and information services (Li & Zymek, 2026). Canada is well positioned to benefit from this trend, as digitally enabled services already comprise a significant and rapidly growing share of its trade portfolio.

Digitally enabled services are also less constrained by border logistics and mobility restrictions than services requiring in‑person delivery. Because they do not rely on physical transport, inventories, or cross‑border movement of workers or consumers, these services are more adaptable to shifting global conditions. This resilience was evident during the COVID‑19 pandemic. Between 2019 and 2021, services exports requiring physical presence declined by 35.9%, while digitally enabled services grew by 27.5%. But pandemics aside, when evaluating the general impact of digitalization on economic resiliency, Copestake et al. (2024) find that industries that are more digitalized—as measured through ICT input, robot usage, online sales, intangible assets, and digital skills—experienced lower revenue losses during recessions.

Since 2010, Canada’s two‑way trade in digitally enabled services has been anchored by several high‑value categories experiencing sustained growth. Research and development (R&D) services expanded most rapidly, growing at an average annual rate of 9.3%, followed closely by telecommunications, computer and information services (9.2%) and financial services (8.2%). In 2025, these categories together accounted for 22.6% of Canada’s total services trade. R&D services range from foreign-funded research projects at Canadian universities, to global pharmaceutical research hubs, to AI research and model architecture design, among other activities. The telecommunications, computer and information services category covers software and hardware system design and hosting, in addition to content services such as news and subscriptions.

Figure 2.2.3.: Canada’s two-way trade in digitally enabled services (% growth and share)

Although R&D services represent a smaller share of total trade, they have been one of the fastest growing exports over the past 15 years, rising by an average of over 9% each year. R&D services span a wide range of activities, from pharmaceutical research and clinical trials to machine learning model development and technological optimization. That said, more than 70% of this growth was directed toward North America, with Europe, and to a lesser extent, the Indo-Pacific region accounting for the remainder. Canada has emerged as an important location for multinational R&D activity, a pattern reflected in the fact that 91% of Canada’s R&D services exports was to “affiliated parties” in 2024, i.e. within multinational enterprises (Statistics Canada, 2025c). While some important concerns have been raised about whether innovations developed in Canada are commercially scaled domestically (C.D. Howe, 2025), other research has shown that inward foreign R&D investment can generate productivity spillovers and long‑term growth benefits for host economies regardless (Kim & Park, 2017).

Figure 2.2.4.: Canada’s R&D global export expansion, by destination region ($ billion)

Telecommunications, computer and information services recorded the second fastest expansion in two-way trade, and the largest increase in export value over the 2010–2025 period, driven primarily by growth in computer systems design, software publishing, and data and infrastructure-related services (Statistics Canada, Table 21-10-0209-01). These activities support the development, storage, and processing of data that underpin modern business operations and are increasingly central to the adoption of AI—which can also boost trade overall. The World Trade Organization (WTO) recently estimated that AI could raise global trade volumes by an estimated 34% to 37% by 2040, driven by a combination of lower trade costs, productivity gains, and the expansion of cross-border AI-enabled services (World Trade Organization, 2025).

Figure 2.2.5.: Level growth in digitally enabled services exports, 2010−2025 ($ billion)

Reflecting their commercial orientation, exports in this category are less tied to intra‑firm trade than in other services industries: only 31% of exports were destined for affiliated parties in 2024, indicating that Canadian firms primarily sell these services to independent foreign clients (Statistics Canada, 2025c).

Financial services are also among Canada’s largest and fastest‑growing digitally enabled exports, expanding by more than $16 billion since 2010 to reach $21.9 billion in 2025. In fact, 8 out of Canada’s 14 companies on the Fortune Global 500 list (which comprises the top 500 public and private companies in the world ranked by annual revenue) are in the banking, finance and insurance sector (Fortune Media, 2026). As discussed later in this section, a substantial share of these services is delivered through commercial presence abroad rather than through cross‑border exports.

Professional and management consulting services represented the largest digitally enabled category in terms of total trade in 2025. Management services, in particular, frequently involve intra‑firm transfers of expertise between multinational headquarters and foreign affiliates. In 2024, 77% of management services exports were destined for affiliated parties, reflecting internal corporate organization (Statistics Canada, 2025c). While this intra-firm dimension may reflect internal corporate accounting, it also signals the extensive global reach of Canadian operations.

On an internationally comparable basis, Canada ranks fourth among the G7 countries in digital services exports as a share of GDP, behind the United Kingdom, France and Germany, according to WTO estimates. This GDP‑based metric reflects how important digital services exports are relative to the size of each economy, rather than their absolute value. Canada scores relatively high on this measure because it is a smaller, trade‑oriented economy, while the much larger size of the U.S. economy lowers the GDP share of any individual export category—even when export values are very large.

When digital services exports are instead measured as a share of total exports, the U.S. (25%) and the United Kingdom (45%) rank well ahead of Canada (13%). This metric captures the role of globally dominant U.S. firms in the U.S. export mix. Canada’s lower share reflects the continued importance of energy and manufactured goods in its exports, rather than a lack of digital services exports. The WTO definition of digital services is somewhat narrower than that used in this report (see Annex).

Figure 2.2.6.: G7 digital services exports, 2025 (% share of GDP and of goods and services exports)

Digitally enabled services imports are a very important component of international trade—particularly for a small open economy like Canada. Canada’s imports of digitally enabled services increased nearly 185% since 2010, with gains concentrated in R&D, professional and management consulting services, and telecommunications, computer and information services.

Research has shown how imports of digital services such as software, ICT platforms, and scientific and technical research strengthen global interconnectivity and the transmission of knowledge and innovation (Ruta & Jakubik, 2023). In this way, importing digital services acts as a channel for productivity spillovers, enabling domestic firms to access and integrate cutting-edge foreign technologies and expertise into their production processes.

The adoption of digital technologies, supported by a competitive import market, has been shown to contribute meaningfully to productivity growth (Mollins & Taskin, 2023). Greater variety in available inputs (both goods and services) directly raises productive capacity across the economy. At its core, access to a wider range of inputs allows firms to enhance their operational efficiency, while increased import competition spurs innovation amongst international goods and service providers (Melitz & Trefler, 2012).

Looking ahead, Canada’s digitally enabled services export growth trajectory may be shaped by its competitive strengths. Revealed comparative advantage (RCA) metrics indicate that Canada holds a relative advantage in several digitally enabled industries, particularly audiovisual services, R&D, information services, and computer services (see Annex for calculations). These areas of strength position Canada to continue benefiting from the global shift toward remote delivery, even as competition intensifies.

Figure 2.2.7.: Canada’s revealed comparative advantage in digitally enabled services, 2024

Non-digitally enabled services (e.g. movement of people)

Despite major technological advances, not all services can be delivered digitally. People travel internationally to study abroad, to conduct business, or for tourism or other reasons. Meanwhile, many services facilitate the transportation of goods such as shipping, rail, trucking or air. These non-digitally enabled services exports (192%) haven’t grown quite as fast as digitally enabled services (200%), but they have significantly outpaced goods (92%) over 2010−2025.

The largest type of non-digitally enabled services that Canada exports (and imports) is travel services. Canada’s natural and cultural diversity, alongside its strong educational institutions and business opportunities, attract many non-residents every year.

Figure 2.2.8.: Breakdown of Canada’s trade in non-digitally enabled services, 2025 ($ billion)

Recent export growth in travel services has been driven primarily by education related services (i.e. foreign students studying in Canada), especially in the post-pandemic period. By 2024 (latest year available), education related exports had more than doubled from 2019 levels to reach $36.1 billion, accounting for roughly half of Canada’s total travel services exports. However, recent policy changes will affect this trend going forward. New foreign student arrivals are targeted at 155,000 in 2026, which is 49% fewer than in 2025 (Immigration, Refugees and Citizenship Canada, 2025). This, coupled with Canada’s introduction of a non-permanent resident cap of 5% of the population by the end of 2027, will mean that education related services will not be a major source of export growth in the coming years.

Figure 2.2.9.: Canada’s travel services exports ($ billion)

Other personal travel (e.g. tourism) exports were larger than education related exports in the pre-pandemic period and may regain their dominance in Canada’s travel exports. There were 29.6 million foreign visitors in Canada in 2025, the largest source countries being the United States (22.8 million), the United Kingdom (888,000), and France (664,000). A tourism export is when a foreign resident visits Canada, and includes their spending on things like lodging, food and entertainment.

More than 81% of the value of Canada’s travel imports in 2024 came from Canadian residents travelling abroad for tourism reasons ($48.4 billion), roughly evenly split between U.S. and non-U.S. international destinations.

Meanwhile, Canadian travels for business totalled $5.8 billion (10% of Canada’s travel imports). These include reasons such as attending trade shows or conferences, visiting a construction site, collaborating on research and engineering projects, negotiating with suppliers, professional sports, meeting with clients or prospective clients, or inspections. One international travel association found that in the United States, every $1 spent on business travel (including both domestic and international) returns about $1.15 in net new economic activity (Global Business Travel Association, 2024), underscoring the potential economic importance of these imports.

Transportation services imports and exports accounted for 28% of non-digitally enabled services trade in 2025, with a total value of $62.6 billion. These services are highly correlated with Canada’s goods and commercial services trade with the world, meaning they have near-parallel annual movements (average 94% correlation over the last 15 years), facilitating the transportation of goods and people by air, land and sea, to and from foreign markets. The federal government’s recently-announced Trade Diversification Strategy, and complementary Trade Diversification Corridors Fund in its 2025 Budget could mean an increase in demand for Canada’s transportation services trade with non-U.S. markets (Department of Finance, 2025).

The last 2 types of non-digitally enabled services include some commercial services that must be delivered in person (e.g. construction, maintenance and repair services), as well as government services (e.g. diplomacy and military). While smaller in absolute value, Canada’s maintenance and repair services exports have nearly tripled since 2010, reaching $5.5 billion in 2025. This trend reflects "servitization," where manufacturers increasingly bundle service contracts—such as technical support or maintenance—with physical products to provide integrated, high-value solutions to global clients.

Services value-added embodied in goods

Many services are closely tied to goods. These include "services value-added" embodied in goods—often referred to as "services in a box." The value of these contributions, ranging from R&D to computer services, is embodied in final goods that cross borders, making their contribution to trade largely invisible in standard international trade statistics.

The aerospace industry provides a clear illustration of how high-value services are 'embodied' in physical goods’ exports. When a Canadian-made business jet is exported, its market value is driven less by the raw materials of its fuselage and more by the complex services inputs integrated during its creation. This includes thousands of hours of aerospace engineering, millions of lines of flight-control software, and intensive R&D in materials science for lightweight composites. While these activities are technically services, their value is captured only as part of the final price of the manufactured good when it crosses the border, which, on paper, registers the entire export value as a good.

Around the world, services value-added embodied in goods exports has grown considerably as a share of total trade, underscoring the importance of intermediate services in global value chains (Kordalska & Olczyk, 2018). Services value-added embodied in goods strengthens the export performance of firms through several interconnected channels:

• Productivity – The performance of goods can at times hinge on the quality of the services embedded in their production. Exporters that incorporate more intermediate services into their goods exports tend to have higher export intensities and greater productivity overall (Cernat, 2024). OECD research reinforces this, finding a strong positive correlation between the productivity of business services and manufacturing labour productivity (Nordås & Kim, 2013).
• Cost savings – Services that support the efficient development, financing, and delivery of goods enhance the cost-effectiveness of production. Services inputs are often sourced externally by manufacturers, and their quality and cost can play a major role in where firms decide to locate their manufacturing activities (Nordås & Kim, 2013).
• Product differentiation – Innovation services strengthen exporters’ ability to differentiate their goods, capture greater market share and charge a premium (Nordås & Kim, 2013). Breaking into a new export market is no simple feat, but goods backed by stronger design, reliable delivery, and greater utility are better positioned to succeed.

For Canada, the share of domestic services value-added embodied in goods exports has stayed relatively stable, making up between 14-18% since 2010, though the composition varies by sub-sector. In 2024, the goods sub-sectors with the highest share of domestic services value-added in exports were forestry and logging (28%), and mining, quarrying, and oil and gas extraction (20%). In value terms, services value-added is greatest in the manufacturing sector, where it contributes over $68 billion to total exports (Statistics Canada, Table 12-10-0100-01, 2024).

Figure 2.2.10.: Domestic services value-added embodied in exports, by goods sub-sector, 2024 (% share)

Using an internationally-comparable dataset published by the OECD, Canada ranked last among G7 countries in 2022 for the share of its domestic services value-added embodied in manufacturing exports. This could mean that Canadian manufacturers aren’t making as much use of high value-added services that are important for competitiveness and productivity compared to their peers.

Figure 2.2.11.: Services value-added in G7 manufacturing exports, 2022 (% share of gross exports)

Canada has a different manufacturing industrial mix than its G7 peers, which is more heavily weighted towards resources. But even when looking at manufacturing sub-sectors, Canada’s ranking remains mostly consistent, suggesting the aggregate figure reflects a broader pattern in how services are integrated into Canadian production. Canada trails the average G7 share of services value-added in all manufacturing sub-sectors, with the largest gaps seen in machinery, motor vehicles and basic metals and metal products.

Figure 2.2.12.: Services value-added in manufacturing sub-sectors, 2022 (% of exports)

Complementary services are increasingly bundled with goods, such as maintenance contracts, technical support, or installation services, and play an important role in boosting the value and competitiveness of goods exports. The fastest export growth among Canadian small and medium enterprises (SMEs) was found in firms that sold both goods and services (Global Affairs Canada, 2025b). Similarly, Ariu et al. (2020) analyze Belgian export data and note that the most successful exporters provide both goods and services. They show that firms offering bundled services alongside goods are able to increase their goods prices without reducing their supply  (Ariu, et al., 2020). Overall, this bundling of goods and services has become increasingly essential for exporters to compete in new markets, serving as an indicator of product quality and sophistication.

Commercial presence of Canadian affiliates abroad

Commercial presence abroad is one of the most important yet least visible channels through which Canada sells its services. Instead of crossing borders through digital transmission or travel (i.e. exports and imports), these services are delivered directly in international markets by foreign affiliates that Canadian firms own and control. Canada’s services are increasingly sold through foreign affiliates rather than through cross-border flows via direct exports, making commercial presence abroad a key driver of competitiveness. Consistent with this trend, sales abroad by Canadian affiliates in the services industry increased nearly fivefold between 2011 and 2024, while direct services exports only tripled over a similar period (2010–2025).

Since 2000, the international presence of Canadian multinationals in services industries has expanded significantly, outpacing the growth of Canadian multinationals in goods producing sectors. As a result, the services’ share of total Canadian direct investment abroad (CDIA) increased from 54.7% in 2000 to 80.8% in 2024 (+26.1 percentage points over 25 years). Since many services cannot be exported directly, Canadian firms have been expanding their foreign operations to reach these markets. This is called “market-seeking CDIA” (or “horizontal CDIA”) and it is the dominant form of direct investment for services (François and Hoekman, 2010).

Canadian majority-owned foreign affiliates in services show notable levels of activity. In 2024, their sales, used as a measure of their commercial presence abroad, reached $1.0 trillion, nearly matching the $1.1 trillion in domestic revenues^{Footnote 5} generated in 2023 by Canadian multinationals in services industries. Through their foreign affiliates, Canadian multinationals have been able to sustain and accelerate their growth by entering and expanding in foreign markets. In fact, sales by Canadian foreign affiliates operating in services industries have grown at an average annual rate of 12.8% since 2011, almost twice the pace of domestic revenue growth among Canadian multinationals operating in services industries (6.7%).

The largest market for Canadian services affiliates is North America and the Caribbean. While Canadian affiliates operating in services industries generated $648 billion in sales within that region, their share decreased over the last decade from 71.7% in 2011 to 63.1% of total services sales in 2024 (Figure 2.2.13.). This underscored a shift towards other markets including Europe, which reached 20.6% (+7.1 percentage points), and the Indo-Pacific region (10.5%, +1.7 percentage points). By contrast, the shares of Canadian services affiliate sales in South and Central America (5.4%, -0.3 percentage point) and Africa (0.4%, +0.1 percentage point) remained broadly stable and comparatively small over the period.

Figure 2.2.13.: Canadian services affiliates sales abroad by region, 2011 and 2024 (%)

The finance and insurance industry has Canada’s largest services commercial presence abroad. In 2024, this sector accounted for 30.2% ($0.3 trillion) of sales by Canadian affiliates and nearly two-thirds ($6.1 trillion) of all assets held abroad. Wholesale trade ($215.1 billion) and retail trade ($136.8 billion) follow as the next largest services industries as measured by their sales abroad.

With respect to the finance and insurance industry, the needs and requirements for many banking and insurance services to be delivered locally can explain the strong local presence of this delivery channel. Canadian banks’ stability, capital strength and ability to navigate complex and heavily regulated environments confer a distinct competitive advantage to Canadian financial services abroad. Additionally, Canada’s relatively small and saturated domestic market may have encouraged large Canadian banks to expand abroad. Finally, Canadian banks have consistently capitalized on expansion opportunities during periods when banks in other countries withdrew from international markets (Friedrich, et al., 2025).

Figure 2.2.14.: Canadian affiliates sales abroad in services industries, 2024

WTO estimates indicate that Canada’s commercial presence abroad in services is broadly comparable to that of peer economies. Relative to economic size, France (23.3%) and Germany (19.8%) maintain a larger commercial presence abroad than Canada (18.0%), which ranks third and surpasses the rest of the G7 (Figure 2.2.15.).

Figure 2.2.15.: Services delivered through commercial presence abroad as a share of GDP, 2022 (%)

Summary of Canada’s services trade performance across markets and modes

Canada’s services sector has expanded remarkably over the past 2 decades, with particularly strong growth in the post‑pandemic period. In several areas, services trade growth has outpaced that of Canada’s G7 peers, reflecting competitive strengths in R&D, computer, and financial services, among others. As a result, services now represent a larger and more diversified component of Canada’s international commercial activity, both through direct exports and through sales by Canadian firms operating abroad.

This performance is underpinned by a shift in how services are delivered internationally. Digitally enabled services have supported market diversification and resilience, while non‑digitally enabled services—especially education related travel—have contributed significantly to recent export gains. Beyond recorded exports, services embedded in goods exports and sales through commercial presence abroad play an increasingly important role, with Canada’s foreign affiliate sales far exceeding cross‑border services exports.

Together, these trends underscore the growing centrality of services to Canada’s trade performance, while also highlighting areas—such as the integration of services value‑added into manufacturing—where Canada continues to lag its peers. Section 2.3 examines the drivers of this expansion and the challenges shaping its future sustainability.

2.3. Drivers of success and barriers to Canada’s international services expansion

The rapid expansion of Canada’s services trade, as documented in Section 2.2, reflects a combination of factors. On the demand side, rising incomes are associated with a shift in household spending toward services, which grow faster than goods consumption as living standards increase. Additionally, services are becoming increasingly tradeable and more integrated in commerce with advances in technology and digitization.

On the supply side, for Canada to find international success in services, the right mix of talent, technology, and supportive institutions and laws needs to be present, along with firm-specific advantages. Whether it is a software firm serving clients online, a university attracting international students, or a bank operating abroad, Canada’s services rely on 3 cross-cutting foundations:

1. Human capital
2. Digital integration
3. Institution, regulations, and agreement

Empirical research shows that services exporters perform best in environments harbouring strong skills, advanced digital integration, and enabling institutional and regulatory frameworks. International organizations such as the World Trade Organization (WTO) and the Organisation for Economic Co-operation and Development (OECD) highlight these same factors as key drivers of services trade growth (World Trade Organization, 2025; Geloso Grosso et al., 2015). More broadly, research underscores the role of institutions, human and physical capital, and digital connectivity in shaping international competitiveness and supporting the expansion of services exports (Chor, 2010; Imbruno et al., 2025).

Together, these drivers operate across all 4 avenues of services supply: digitally enabled services, non-digitally enabled services (including the movement of people), services embodied in goods, and services delivered through commercial presence abroad.

International trade is a difficult undertaking and only 15% of Canadian small and medium enterprises (SMEs) exported in 2023 (Global Affairs Canada, 2025b). More than half of these were services exporters, though they tended to be smaller in size than goods exporters. What they lack in headcount is made up for in skills, with research suggesting that services exporters are between 15% and 20% more skill-intensive than goods-only exporters (Breinlich and Criscuolo, 2011). This skill-intensity reflects selection: the high fixed costs of entering export markets are especially burdensome for smaller firms, leaving only the most productive and specialized able to compete internationally.

For policymakers seeking to support services exporters, understanding both the drivers of success and the unique barriers these firms face is essential. The sections that follow examine three conditions that are particularly important for services export performance: human capital, digital infrastructure, and the regulatory and institutional environment.

The human capital imperative: Education, skills and export readiness

Human capital─education, skills and specialized knowledge─is a key driver of international competitiveness in services (Newfarmer et al., 2009; Ariu and Hakkala, 2025). Compared to goods, services are more dependent on intangible inputs that scale primarily through workforce capability as opposed to physical capital. The ability to scale, deliver and adapt these intangibles is directly linked to educational attainment, ingenuity and skill composition.

Canada has the most educated population among wealthy OECD nations, with nearly 65% of Canadians aged 25-64 having completed post-secondary education (OECD, 2025b) Canada’s education spending reached 5.5% of GDP in 2024, exceeding the OECD average of 4.7% (OECD, 2025b). This investment supports a workforce well-suited to services sectors, particularly in knowledge-intensive fields. One in 4 Canadian graduates now completes a program in science, technology, engineering, mathematics or computer science (STEM), and graduation in these fields continues to grow.

Figure 2.3.1.: Number and annual growth rate of STEM graduates from Canadian universities, 2014-2023

Maintaining this advantage, however, requires not only domestic investment in education but also policies that attract and retain a highly skilled workforce. The Government of Canada’s new International Talent Attraction Strategy focuses immigration on high-skilled talent to strengthen in-demand sectors in communities across the country (Department of Finance, 2025). Canada’s immigration “points system” or Comprehensive Ranking System (CRS) is designed to attract highly skilled immigrants based on their education and work experience (Doyle, et al., 2025), while the Global Skills Strategy helps fast-track highly skilled workers needed by Canadian businesses. These approaches support access to a talent pool that is increasingly mobile and in high demand globally.

When choosing to emigrate, skilled individuals look toward countries with clear immigration pathways, economic opportunities, and limited administrative delays. Moreover, putting their skills to work is also important. Job or skills mismatch—when a worker’s skills, experience, education or other characteristics do not align with the tasks or requirements of their position—impacts workers, employers, and the overall economy (including productivity). A recent Statistics Canada (2026) study found that, between September 2024 and September 2025, among core-aged workers with a postsecondary diploma or degree, immigrants (25.2%) were more likely to report being overqualified for their job overall compared with workers born in Canada (19.1%). Ensuring newcomers can fully apply their skills is key to driving Canada’s services export growth.

Beyond the labour supply, immigration also supports services trade through less tangible channels. International networks, market knowledge, and cultural and linguistic familiarity reduce information barriers and facilitate access to foreign markets—a factor that appears particularly important for services, where trust and communication are central (Global Affairs Canada, 2025b). Consider advertising services for example: an effective marketing campaign in line with company branding and ideology cannot be unilaterally developed without a cultural understanding of the targeted market.

Digital integration and infrastructure

If human capital is the driver of services trade, digital infrastructure is its highway. Reliable digital networks reduce communication costs, facilitate coordination across borders, and allow firms to deliver services remotely—often with high scalability and low marginal costs. While digital infrastructure is essential for digitally enabled services, it also underpins many non digital activities, such as education, finance, and professional services that combine physical presence with digital technology.

Wireless networks, fiber infrastructure, and data centres are essential for services trade to thrive. According to Herman and Oliver (2023), internet connectivity is a key determinant of trade for both high- and low-income countries, increasing trade at both the intensive margin (increased trade volumes by existing firms) and the extensive margin (number of firms entering new export markets).

Canada ranks 7th globally in terms of world digital competitiveness, with strong performance in internet speed, broadband penetration, and mobile connectivity (IMD, 2025a). Most Canadian households report access to high speed or unlimited broadband, supporting widespread participation in digital trade. At the same time, access remains uneven across regions, reflecting Canada’s vast geography and highlighting ongoing challenges in rural and remote connectivity (ISED, 2023).

Figure 2.3.2.: Top 20 global IMD digital competitiveness scores, 2025

While a strong digital infrastructure underpins participation in online markets, supportive policies are also important for enabling digital trade. Canada maintains one of the most liberalized digital trade environments in the world. Canada ranks well on the OECD’s Digital Services Trade Restrictiveness Index (DSTRI), which assesses barriers to digitally enabled services trade on a scale from 0 (most open) to 1 (completely closed), across five areas: infrastructure and connectivity, electronic transactions, payment systems, intellectual property rights, and other barriers. Canada ranks 7th in the world and 2nd among G7 countries (after the United Kingdom). Canada’s strengths stem from affording equal treatment to international services providers on intellectual property protection, operating payment systems that align with international standards, and applying non-discriminatory licensing for e‑commerce transactions. These factors contribute to an enabling environment for services trade, helping Canadian firms integrate into global value chains and leverage foreign digital technologies in their production processes.

Figure 2.3.3.: Digital Services Trade Restrictiveness Index, 2025

E-commerce platforms further lower barriers to international participation by bundling discovery, contracting, payment and delivery into integrated digital systems. For example, a Canadian tourism operator can attract and book international visitors online; equally, a software firm can reach foreign subscribers without any physical presence abroad. Nearly 1/3rd of Canadian businesses received an e-commerce order in 2023, up from 1/4th in 2019, with adoption particularly important for smaller firms seeking international reach (Statistics Canada, 2024).

As digital services expand, continued investment in infrastructure, cybersecurity and digital skills remains critical. Canadian SMEs are actively investing in new technologies—particularly accounting software, cybersecurity, and IT infrastructure—and Canada’s small firms rank 3rd among G7 countries in AI adoption (OECD, 2025a). However, over half of Canadian SMEs report a lack of digital skills as a major obstacle to their digital transformation, and cybersecurity remains a persistent concern (Alegbeh and Cruz, 2025). These challenges are compounded by trade fragmentation and divergent technical standards which restrict the flow of data and disrupt cross-border digital services trade and investment (IMD, 2025b).

Access to advanced digital infrastructure is becoming a strategic determinant of international competitiveness, particularly as artificial intelligence grows in prominence. Recent research from the University of Toronto notes that countries able to combine open data flows with domestic capacity in AI, computing power, and trusted digital infrastructure will be better positioned to scale high value services internationally, reinforcing the linkage between digital sovereignty, investment policy, and services trade performance (Mullin & Khan, 2026). Authors argue that Canada has the needed AI capabilities to succeed, but has not yet converted this research excellence into industrial capacity and infrastructure, and warn that the window to do so is narrowing.

Institutions, regulations and agreements

Institutional quality and regulatory credibility play a central role in shaping services sector outcomes. Because services often involve long-term relationships, intangible assets, and regulatory oversight, exporters rely heavily on predictable legal frameworks, enforceable contracts, and trusted standards (Newfarmer et al., 2009). International agreements such as those for free trade and investment protection, and air transport agreements can open doors for services providers.

Intellectual property (IP) protection is particularly important for services trade, where value is often embedded in software, algorithms, creative content and proprietary processes rather than physical goods. For example, a software company licensing code across borders or a post-secondary institution protecting its curriculum and course materials abroad both depend on comprehensive IP frameworks to successfully commercialize their intangible assets. Given the territorial nature of IP rights, international commercialization requires protection across multiple jurisdictions. Canada’s IP framework provides a stable domestic foundation, enabling firms to secure ownership, enter into licencing agreements, and build the legal basis needed to obtain protection and ultimately commercialize these assets abroad.

Policy impacts vary considerably by mode of services delivery. Each avenue—digital supply, movement of people, services embodied in goods, and commercial presence—operates under distinct regulatory regimes, requiring differentiated analysis.

Digitally enabled services

The expansion of remotely delivered services depends on coherent digital governance frameworks covering data flows, e-commerce, and electronic transactions. Digital trade provisions have become increasingly prominent in trade agreements, reflecting the growing importance of digital services (Burri and Polanco, 2020; Monteiro and Teh, 2017). Limited global consensus on data governance, digital taxation and cybersecurity has produced a fragmented regulatory environment, which can add compliance costs for firms operating across multiple jurisdictions (Aaronson and Leblond, 2018; Spiezia and Tscheke, 2020). In this context, Canada has sought to provide greater predictability for its firms through trade agreements, with digital trade chapters embedded in 11 separate free trade agreements (Global Affairs Canada, 2025a). Agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Canada-United States-Mexico Agreement (CUSMA) include extensive digital chapters of roughly 3,000 words, about 3 times the length of earlier agreements, reflecting the growing importance of these issues (Peressotti, 2025). While these provisions help establish clearer rules in key markets, navigating differing commitments across agreements can still add complexity for firms operating internationally.

Beyond free trade agreements, international cooperation on digital trade increasingly takes place through a range of initiatives, forums, and non-binding instruments. Canada’s integration into these digital trade cooperation initiatives is reflected in its high rankings on the OECD’s indices of Digital Trade Integration and Openness (INDIGO) across 2 subcategories: Canada ranked first on the INDIGO-i in 2024, based on non-trade international instruments such as UN discussions on privacy, security and governance; and it ranked 5th on INDIGO-t, which is focused on trade-related instruments including bilateral and multilateral digital economy agreements (OECD, 2025c).

Figure 2.3.4.: INDIGO-i and INDIGO-t, by country

Non-digitally enabled services

Services that require physical proximity—such as education, tourism, transportation, and professional services delivered in person—depend on frameworks governing mobility, credential recognition, and transport logistics, particularly where services are delivered through the temporary movement of people across borders. Air and marine transportation services hinge on bilateral agreements and international conventions, while mutual recognition agreements facilitate professional mobility by reducing barriers to credential recognition.

Credential recognition processes are highly heterogeneous across countries, even within the European Union (Nordås, 2016). Using a gravity-model framework, Nordås finds that a higher number of recognized qualifications in a country is associated with more international trade (2016). This highlights the importance of mobility-related frameworks for services that depend on the cross-border movement of people, such as maintenance and repair services, where 90% of Canada's exports involved personnel traveling abroad in 2022 (World Trade Organization, 2024).

In addition to mobility and credential recognition, transportation systems underpin the movement of both services providers and goods. Canada's Blue-Sky Policy guides the negotiation of bilateral air transport agreements with over 125 countries that determine which carriers can operate and how many flights are permitted. For maritime trade, transportation services rely on cargo regulations, ship and port security, marine safety inspections, and the strength of the United Nations Convention on the Law of the Sea (UNCLOS). Together, these frameworks enable the physical movements on which non-digitally delivered services rely.

The combined effect of these frameworks is reflected in measures of overall services trade restrictiveness. According to these measures, Canada is broadly open relative to its peers. Like the DSTRI, the OECD has developed a Services Trade Restrictiveness Index (STRI) ranging from 0 (most open) to 1 (least open) based on the prominence of regulatory barriers to trade in services across various sectors and countries. The STRI provides a composite measure of these barriers, capturing how policy differences impact firms’ ability to enter and operate in foreign markets. According to the OECD’s STRI scores, Canada ranks first or is tied for first place among the G7, having the lowest restrictions in 12 sectors, and ranks in the top half in 17 sectors. However, higher restrictions persist in certain activities such as construction, accounting and water transport. These constraints function primarily as fixed entry costs, affecting smaller or less established services providers disproportionately as they face greater challenges in absorbing these fixed regulatory costs.

Figure 2.3.5.: Restrictions on the movement of people, Services Trade Restrictiveness Index score by sector, 2025

Services value-added embodied in goods

When services are embodied in goods, they effectively cross borders as part of the good itself, making them uniquely reliant on the policies and instruments that facilitate trade in goods. This complementarity means that countries benefit most when they open up both their goods and services markets to international trade together, rather than individually. To illustrate this concept, consider an aircraft manufacturer selling planes to a foreign airline. If there are fewer restrictions on engineering and technical services, it is easier for the firm to source global talent and ingenuity effectively, making the product more internationally competitive. Evidence from the European Union suggests that coordinated trade liberalization of goods and services trade raised welfare by 11% more than if the 2 had been pursued separately (Egger & Larch, 2012).

It is worth noting that services embodied in goods may themselves be digital—a cellphone receiving regular remote software updates, for example—in which case the institutional factors discussed previously remain relevant. Beyond these, however, several factors shape this category uniquely:

1. Tariffs (and non-tariff barriers to trade): Miroudot et al. (2013) find that 30% of total tariff incidence falls on services value-added, with the share higher in manufacturing sectors where services are incorporated early in the value chain, as intermediate goods may face tariffs multiple times when they cross borders. Non-tariff barriers such as import quotas or trade embargoes have a similar effect—any limit on the international exchange of goods necessarily limits the exchange of services embodied in them.
2. Product standards and technical regulations: Unlike other modes of services trade, services embodied in goods cannot reach foreign consumers unless the good itself meets the destination market's safety, content, and rules of origin requirements. These standards are often harmonized through trade agreements, making them critical for market access.
3. Trade agreements: For Canada, trade agreements like CETA, CPTPP, and CUSMA are meaningful facilitators of goods-embodied services trade. By securing preferential tariff rates, streamlining rules of origin, and reducing administrative and compliance burdens, these trade agreements improve market access for Canadian goods exporters—and by extension, the services embodied in them.

Commercial presence

Beyond cross-border trade, services can be supplied through commercial presence abroad, making foreign direct investment a central mechanism for international services delivery. For Canadian services firms, this implies that international market access is often achieved not through exporting, but through the establishment of foreign affiliates. Commercial presence abroad represents 56% of all services supplied globally (World Trade Organization, 2024) and accounts for the largest value of Canada’s international services sales. Yet, it faces the highest level of regulatory barriers globally among all services supply modes, accounting for close to 40% of all restrictions measured across all sectors and identified by the STRI index (OECD, 2024).^{Footnote 6} Unlike cross-border or digitally enabled services, commercial presence requires firms to commit capital, establish a local affiliate, and operate under host-country regulatory and supervisory frameworks.

The firm-level decisions to establish a commercial presence abroad can be understood through the Ownership–Location–Internalization (OLI) framework (Dunning, 1979), one of the commonly used approaches to analyzing foreign direct investment (Office of the Chief Economist, 2021). This framework explains the conditions under which international production becomes advantageous over arm’s-length trade. In the context of services, delivery often requires proximity, regulatory compliance, and control over intangible assets. While ownership and internalization advantages are largely firm-specific, location-specific advantages are often shaped by host-country policies and play a central role in determining where and whether firms establish operations abroad.

Commercial presence is preferred when host countries offer location specific advantages that make local production or service delivery necessary or more efficient. While some location characteristics ─ such as language, culture, or geography ─ are inherent to a country, others are shaped by public policy. Market access conditions, institutional quality and regulatory restrictions constitute the primary channels through which host-country policies influence firms’ decisions to establish a commercial presence abroad.

Market access conditions are particularly important in services. In general, establishing a foreign affiliate involves substantial fixed and sunk costs, making FDI a long-term and difficult to reverse investment relative to exporting (Brouthers & Brouthers, 2003). These considerations are especially salient in services, where firms often must internalize production through local affiliates to supply foreign markets (Brouthers & Brouthers, 2003). Transparent, predictable, and non-discriminatory market access rules governing establishment reduce uncertainty and make long-term commitments more viable (Barry & DiGiuseppe, 2019). In this context, regulatory cooperation, mutual recognition, and trade and investment agreements enhance predictability and help secure national treatment, thereby encouraging commercial presence.

The broader institutional quality in host countries is a critical determinant for the establishment of a foreign affiliate, particularly in the services sector (Ali et al., 2010). Strong rule of law, and transparent and stable governance frameworks reduce risks related to expropriation, regulatory arbitrariness, and contract enforcement. Together, these institutional features lower perceived investment risk and entry costs, reinforcing firms’ willingness to undertake long-term commitments (Jensen, 2008).

When Canadian firms seek to establish a commercial presence abroad, they encounter a range of regulatory restrictions that shape entry decisions across jurisdictions. Regulatory restrictions operate primarily as fixed entry costs. Limits on foreign equity ownership, restrictions on foreign staffing, sector-specific constraints, and complex approval procedures raise the minimum scale and capabilities required for entry. Evidence shows that more restrictive regulatory environments are associated with lower inward FDI (Ghosh, et al., 2012; Mistura & Roulet, 2019; Albori, et al., 2021; Yoon & Ko, 2025). Limitations on foreign equity ownership are widespread globally and increasingly used to steer investment toward or away from sensitive sectors (OECD, 2025d).

In parallel, the global expansion of investment screening mechanisms, often justified on national security grounds (Danzman & Meunier, 2023; Bencivelli, et al., 2023), adds uncertainty regarding approval timelines and conditions (UNCTAD, 2023; UNCTAD, 2025), shaping the environment in which Canadian services firms assess whether establishing a foreign affiliate abroad remains a viable alternative to cross-border supply.

Intermodal linkages: Complementarity among the different avenues of delivery

A nuanced understanding of Canada’s services performance internationally requires looking beyond individual avenues of supply to how they interact. Success in one mode often creates a path for another. An example of this is the relationship between digitally enabled services and commercial presence. For many high-value services, particularly in finance and insurance, domestic regulations in foreign markets may prohibit the sale of products remotely.

In such cases, establishing a commercial presence—for example, opening a bank branch or acquiring a local affiliate—becomes a strategic enabler. By setting up a local entity, Canadian firms can comply with foreign regulations, build local trust, and navigate "behind-the-border" barriers that would otherwise block their exports.

Once a physical presence is established, it can often serve as a bridge for other services exports. For instance, a Canadian bank’s office in Latin America might source specialized technical support, R&D, or management consulting services directly from its Canadian headquarters via the digital avenue. Economic research by the United States International Trade Commission (USITC) and others suggests that barriers to commercial presence actually have a negative impact on digitally enabled trade, confirming that the 2 modes are often complementary rather than substitutes (Khachaturian & Oliver, 2021).

Synthesis and future outlook

Canada’s growing footprint in international services markets reflects a set of reinforcing strengths: a highly educated and diverse workforce, deep integration into global digital networks, and institutional frameworks that support trust, transparency, and long-term commercial engagement. Together, these foundations have enabled Canadian firms to expand across multiple avenues of services delivery, from digitally enabled exports and education related travel to services embodied in goods and, most importantly, sales through commercial presence abroad.

At the same time, Section 2.3 highlights that the drivers of success in services trade differ fundamentally from those that shape goods trade. Services expansion depends less on physical infrastructure and more on intangible assets—skills, data, intellectual property, and regulatory certainty. As a result, services exporters are especially sensitive to labour market frictions, uneven digital access, and policy fragmentation across jurisdictions. While Canada performs well relative to peers on many international benchmarks, constraints such as skills mismatch, gaps in digital infrastructure in rural and remote areas, and rising regulatory complexity continue to shape firms’ international strategies.

Looking ahead, the outlook for Canada’s services trade will be shaped by how effectively these structural strengths are sustained and adapted in a rapidly evolving global environment. Advances in digital technologies, particularly AI, are accelerating the tradability of many services while simultaneously heightening the importance of secure data flows, robust digital infrastructure and trusted institutions. Global efforts to regulate digital activity—through data localization, investment screening and emerging standards—will play a growing role in determining where and how services are delivered internationally.

Canada enters this next phase with important advantages, including strong human capital, an extensive trade agreement network, and relatively open digital trade policies. Realizing the full potential of services trade growth, however, will require continued attention to the distinct needs of services exporters, whose success depends on policy coherence across education, immigration, digital infrastructure, trade, and investment. As services continue to account for a rising share of Canada’s international commercial activity, understanding and addressing these drivers and challenges will remain central to sustaining Canada’s competitiveness in the global economy.

Use of artificial intelligence

Artificial intelligence tools were used to support elements of drafting and editing this report. All data, sources, analysis and conclusions were developed and validated by the authors, who retain full responsibility for the report’s content.

Annex

Unlike goods, services can be delivered through multiple channels, including digital networks, cross-border travel, and the establishment of affiliates abroad. Standard trade statistics do not directly capture all of these delivery mechanisms in a unified framework.

The following Annex outlines the methodology used to categorize Canada’s international services activity into distinct channels of delivery. These categories are designed to provide a comprehensive and analytically useful picture of how Canadian firms and institutions engage in global services markets.

Conceptual framework

This report groups international services activity into 4 broad categories, reflecting different modes of delivery used in the General Agreement on Trade in Services (GATS) framework while adapting to available data and analytical needs.

Classification and calculation methodology

To distinguish between trade in digitally enabled and trade in non-digitally enabled services, individual services categories are grouped based on whether it is possible to deliver the services remotely using digital technologies. This classification follows the approach of the United Nations Conference on Trade and Development (UNCTAD) Task Group on Measuring Trade in Information and Communications Technologies (ICT) services and ICT-enabled services, which was adopted by Statistics Canada. Statistics Canada classifies services into 3 groups: ICT-enabled services, potentially ICT-enabled services, and non-ICT-enabled services, while grouping categories based on their dominant mode of delivery.

To provide a more detailed breakdown of digitally enabled versus non-digitally enabled services in this report, we manually categorized commercial services types into these groups. To align with Statistics Canada estimates for ICT-enabled and potentially ICT-enabled services breakdowns, we treated 65% of exports in technical, trade-related, and other business services as digitally enabled (and 35% as non-digitally enabled). For imports, 75% of this category was classified as digitally enabled.

The World Trade Organization also uses a similar definition for what it designates as “digital trade”. It includes an aggregation of the BPM6/EBOPS 2010 services categories (World Trade Organization, 2023):

• Insurance and pension services
• Financial services
• Charges for the use of intellectual property
• Telecommunications, computer and information services
• Other business services
• Audiovisual and related services

It is important to note that the WTO refers to services as “digital” based on whether they are potentially delivered digitally, and not whether they are actually sold digitally.

Data sources

The estimates presented in this report draw on the following primary sources:

• Statistics Canada:
  • International trade in services (Tables 12-10-0141-01 and 36-10-0021-01)
  • Value-added in exports (Table 12-10-0100-01)
  • Activities of multinational enterprises (Table 36-10-0440-01)
• Supplementary data from international organizations where relevant (e.g. OECD, WTO).

All figures are reported on a balance-of-payments basis and expressed in current Canadian dollars unless otherwise specified.

Revealed Comparative Advantage calculation

Using OECD Balanced Trade in Services (BaTIS) data, a Balassa Revealed Comparative Advantage (RCA) index is calculated for Canada across commercial services categories. BaTIS is used because it provides comprehensive coverage of bilateral services trade flows across a wide set of countries. For 2024, Canada’s exports in each services category are aggregated across all partner countries to obtain total Canadian exports by service and overall services exports. The same aggregation is applied globally to construct world exports by services category and total world services exports.

Formally, the Balassa RCA index is computed as:

Where RCA_x ≥ 1, Canada has a comparative strength in said services category.

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