Canada's Trade Deal with China, how this will impact Indian market?

Canada's potential trade agreement with China, announced on January 16, 2026, reduces tariffs on Chinese EVs entering Canada (to 6.1% for up to 49,000 units) and Canadian canola (to 15% from 84%), with the goal of rebuilding strained ties dating back to 2018. This triggered an immediate response from US President Donald Trump, who threatened 100% tariffs on all Canadian exports on January 24, accusing Canada of serving as a "drop-off port" for Chinese products entering the US market. For India, the agreement adds to the existing global trade instability caused by US protectionism, but it also has neutral-to-positive indirect implications due to probable supply chain adjustments and commodity dynamics.

Deal Overview

Canadian Prime Minister Mark Carney's visit to Beijing resulted in a "strategic partnership" that reestablished economic relations, with China lowering agri-tariffs (canola, peas, seafood), releasing $3-7 billion in Canadian exports, while Canada opens up to Chinese EVs and seeks green energy collaboration. There is no formal FTA yet, but agreements to conversation on investment, LNG, and clean technology indicate a thaw following previous canola restrictions and EV tariffs. Trump sees it as weakening US attempts to counter Chinese dominance, heightening North American tensions.

US Backlash and Escalation

Trump's Truth Social post threatened "immediate" 100% tariffs if Canada proceeded, describing China as a threat to Canada's economy and sovereignty. This reignites trade war fears between the United States and Canada (for example, former steel/aluminum levies), with Canada previously postponing some US tariffs but now putting them in danger. In a broader context, the United States is pushing partners away from China while imposing its own 20-25% tariffs on China and threats on India over Russian oil.

Direct Impact on India

Canada is India's 19th trading partner (~$10B bilateral), with a focus on pharmaceuticals, energy, and services. There is no overlap in canola or electric vehicles. India competes with Canada for agri-exports to China (pulses, not canola), so lower Chinese tariffs may marginally impact Indian farm prices, but volumes remain tiny. EV angle: Strengthens Chinese dominance in Canada, thereby affecting India's embryonic exports, although India's Tata concentration remains domestic.

Indirect Market Effects

Increased Volatility: Deal encourages US-led trade fragmentation, echoing January 2026. Tariff fears cause the Nifty to fall (3% year to date); short-term FII outflows are expected if tensions between the US and Canada worsen. The rupee may decline further against the US dollar as global risk-off sentiment grows.

Commodity Plays: Cheaper canola from Canada could stabilize global vegetable oil prices, benefiting Indian edible oil importers/consumers and improving FMCG margins.

Sector Opportunities

• Auto/EV: Chinese EV surge in Canada highlights competition; Indian firms like Tata/Mahindra gain if US firms diversify from China to India.​

• Manufacturing/IT: Trade wars accelerate "China+1" shifts; India's PLI schemes attract FDI fleeing tariffs.​​

• Energy/Agri: Stable oil/food prices aid inflation control; RBI's optimistic FY26 outlook intact.

​Broder Indian Resilience

India is considering its own deals (for example, FTAs with Australia and Bahrain, with India-Canada discussions on agriculture and energy restarting in February 2026). Amid global dangers, domestic demand (70% GDP) and 7.3% growth cushion markets; analysts expect the Nifty to reach 27,500-29,000 by mid-2026, assuming there is no severe escalation. Trump's pressure may even push Canada toward India for diversification, according to the Davos talks. Overall, expect Q1 volatility, while long-term bulls see declines as buying opportunities.