OTTAWA - Canada stands to face the biggest fallout of political turmoil in the United States in 2026, a new report by the Eurasia Group warned on Friday.

The risk management firm says the long-standing relationship between the two countries "is history" and ongoing trade uncertainty will have an impact on the Canadian economy.

"(U.S. President Donald) Trump’s systematic effort to dismantle checks on his power and weaponize the machinery of government against his political enemies will inevitably reshape not only Canada-U.S. relations, but the Canadian economy and Canadians’ engagement with the rest of the world," the report says.

"The challenge for Ottawa — and Canadian firms more broadly — will be to play defence and offence at the same time: managing an unpredictable and unreliable U.S. while carving out new roles in an increasingly unstable G-Zero world."

The report warns Canada’s efforts to diversify trade and international relationships will face "powerful headwinds" this year, and that it will need to manage its relations with the U.S. while building new ones with other countries.

The relationship between Canada and the U.S. soured in 2024 following President Donald Trump’s return to the White House and his threats to somehow make Canada a U.S. state.

Trump has imposed multiple tariffs on Canada in the months since, including devastating duties on the steel, aluminum, automotive and lumber sectors.

Citing the recent U.S. military operation in Venezuela to capture President Nicolas Maduro, the report says Trump’s desire to dominate the Western Hemisphere will "keep Canada on the defensive." It says Carney’s government will have to defend Canadian sovereignty while acknowledging the degree to which Canada depends on the U.S.

Eurasia Group’s report says Canada was "comfortable" with its deep ties to the U.S. for decades, but the relationship has changed and Washington’s actions could see Canadian companies and investors "become collateral damage."

Diana Fox Carney, wife of Prime Minister Mark Carney, is affiliated with the Eurasia Group and Artificial Intelligence Minister Evan Solomon used to work with the group before entering politics. Gerald Butts, the vice-chairman of Eurasia Group, has been an unofficial adviser to Carney.

The report says Trump’s actions in the U.S. could lead to domestic political revolution, which would put foreign trade and defence ties with Canada into question.

It warns of a "Zombie USMCA" trade deal between the U.S., Mexico and Canada that is up for review this year. The report predicts that deal won’t be formally renegotiated, extended or terminated, and will instead be a "zombie, neither fully dead nor alive."

Carney campaigned on reaching a new trade deal with the U.S. but has since said he won’t sign one unless it’s good for Canadians.

Washington ceased trade talks with Canada after the government of Ontario Premier Doug Ford released an anti-tariff ad in the U.S. quoting former president Ronald Reagan criticizing tariffs.

"The good news is that tariff exemptions for CUSMA-compliant goods will keep free trade on life support, leaving Canada (and Mexico) with lower average effective U.S. tariff rates than much of the world," the report says.

"The bad news is that Trump will use sectoral tariffs on goods such as autos, steel and aluminum — sectors he is bent on reshoring to the U.S. — as leverage in endless negotiations, where Washington will seek to divide and conquer Ottawa and Mexico City."

As Canada seeks to diversify its trading relationships, Eurasia Group is warning that European countries are divided and dealing with a changing political environment. It says the U.K., France and Germany "face paralysis at best and destabilization at worst."

It also warns of Russian "hybrid attacks" on Canadian Forces to punish Canada for its staunch support for Ukraine.

"While Europe’s rearmament will create opportunities for Canada and Canadian firms to deepen strategic and commercial ties with the continent, pressure on NATO states to respond to (Russian President Vladimir) Putin’s provocations risk pulling Canada into a NATO-Russia crisis this year," it says.

The report also says China’s weakened economy is producing cheap products that, if accessed by Canada, could ruin the automotive sector and risk further rifts with the U.S.

Carney will meet with President Xi Jinping in Beijing next week as he makes the first official trip to China by a Canadian prime minister in more than eight years.

The China visit is part of Ottawa’s efforts to restore ties with Beijing after years of trade and political tensions.

The diplomatic relationship between Canada and China nearly disintegrated in 2018 following Canada’s arrest of a Chinese telecom executive at the request of the United States. Beijing subsequently jailed two Canadians who had been working in China — acts which Canada called arbitrary.

Trade relations have also suffered. Canada has imposed a 100 per cent tariff on Chinese electric vehicles and a 25 per cent import tax on steel and aluminum over the last two years.

China responded by hitting Canada with a 100 per cent tariff on various agricultural products last March, including canola and peas, plus a 25 per cent levy on pork and seafood products.

The report also warns any efforts by Canada to regulate artificial intelligence may be met with pushback from the U.S. and the American companies largely leading the development of these products.

It points to the digital services tax Canada rescinded and legislation on online streaming and news content that has angered the U.S.

"Yet much of AI’s potential will come from smaller, leaner, purpose-built models — exactly the niche where Canada’s AI ecosystem is positioned to thrive," the report says.

"If Canada can withstand U.S. pressure and sustain the funding necessary to develop and retain AI talent, there is no ceiling on the future growth of the Canadian sector."

This report by The Canadian Press was first published Jan. 9, 2026.

— With files from David Baxter and Dylan Robertson

The Canadian Press. All rights reserved.