Canadian Analysis

The Bottom Line:

Canada’s merchandise trade deficit widened to $3.6 billion in January from $1.3 billion in December, as exports and imports fell by 4.7% and 1.1%, respectively.

Monthly trade flows continue to show considerable volatility tied to swings in precious metals shipments and (non-tariff related) disruptions to motor vehicle trade. While the headline balance deteriorated in January, at least part of the decline will likely be retraced in February, and higher energy prices due to the conflict in the Middle East will add to Canadian net exports in March.

Trade activity early in 2026 is also unfolding against a relatively more stable trade policy backdrop. By our count, 89.5% of exports were duty-free to the U.S. in January, up slightly from 89.2% in December.

In February 2026, the Supreme Court ruling striking down IEEPA tariffs reinforces this dynamic. While the average effective rate for Canada shouldn’t change much given existing CUSMA exemptions, the average for all U.S. imports will likely be slightly lower. 

Net trade is currently tracking a subtraction from Q1 GDP growth, though monthly trade data remains heavily influenced by episodic shipments of products like gold, motor vehicles, and aircraft. Still, labour markets have shown signs of (per-person) improvement with the unemployment rate edging lower in recent months and domestic demand has continued to grow on balance. 

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The details:

• Exports fell by 4.7% m/m, retracing the 2.5% gain in the prior month. However, the drop was not broadly based. A sharp contraction in motor vehicle and parts shipments (-21.2%) tied reportedly to longer-than-usual shutdowns to switch production to new models accounted for about a third of the total volume decrease.

• The remainder of the shortfall came from metal and non-metallic mineral products (-8%), led by lower unwrought gold shipments to the U.K., and a retracement (-16%) of a large December jump (+19.3%) in aircraft and other transportation equipment and parts.

• Imports fell by 1.1% m/m, reflecting the lower motor vehicle production in Canada. Electronic and electrical equipment and parts also contributed to the weakness, dropping by 3.6% in a broad-based retreat across sub-categories.

• Canada’s trade surplus with the United States totaled $5.4 billion in January, down from $5.7 billion in December. In growth terms, exports to the U.S. were down by 3.8% month-over-month, and continued to trend lower (-25.3%) from year-ago levels. Imports from the U.S. echoed that trend, falling 3.4% from December and 14.1% year-over-year.

• Despite this softness, 89% of products continued to cross the border duty-free in December. The average effective U.S. tariff rate on Canadian goods stood at 3.1%, unchanged from December and still the lowest among major U.S. trading partners.

• Meanwhile, the trade deficit with countries outside the U.S. widened to $9 billion from $7 billion in the prior month, boosted by higher growth of imports (+2.1% m/m), while exports contracted by 6.5% m/m, reversing the 5.8% gain in December.

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About the Author

Abbey Xu is an economist at RBC. She is a member of the macroeconomic analysis group, focusing on macroeconomic forecasting models and providing timely analysis and updates on economic trends.

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