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The Bottom Line:

The Canadian goods trade deficit narrowed in May after spiking to a record high in April. Exports had risen substantially earlier in the year as businesses stocked up on inventories, but plunged 11% in April when broad based U.S. tariffs kicked in before edging up 1.1% in May.

The monthly international trade data is being heavily distorted as exporters and importers adjust the timing of trade around U.S. tariff announcements (both threatened and actually imposed.)  

The better news in the May data is reporting from the U.S. Census Bureau, shows that about 91% of Canadian exports to the U.S. crossed the border duty-free, consistent with the view that the exemption for CUSMA/USMCA-compliant trade from blanket U.S. tariffs imposed in March is working effectively. While certain products like Canadian steel, aluminum, and non-U.S. content in finished motor vehicles still face specific tariffs, most Canadian exports appeared to continue to benefit from duty-free access in May.

Total U.S. tariff revenues collected continued to rise in May — but largely, reportedly, from regions outside of Canada.  The average effective U.S. tariff rate on imports from all regions rose to 8.7% from 7% in April, but the rate on imports from Canada actually edged lower to 1.9% from 2.3% in April — and remains among the lowest of U.S. trading partners. Larger tariff hike increases were reported on imports from Korea (14.1%), Japan (14%), and China (45.6%) in May.

We continue to expect that current rules, if maintained as currently in place, would leave Canada with the lowest tariff rate of any major U.S. trade partner — putting Canadian exporters in a stronger relative   position to compete for U.S. import market share than other countries.  The concern remains, though, that US tariff hikes have been so large —and uncertainty so high surrounding their announcements—that US economic growth will slow with negative implications for close U.S. trade partners like Canada. Separately reported U.S. employment data this morning was mixed, but with further signs of softening in the heavily trade-exposed manufacturing sector where ties with the Canadian economy are closest.

The Details:

• The Canadian goods trade deficit narrowed to $5.9 billion in May from a revised record $7.6 billion shortfall in April (previously -$7.1 billion).

• Exports rose 1.1%, stabilizing after an 11% plunge in April when U.S. imports broadly pulled back (from all trade partners) on a reversal of pre-tariff inventory building earlier in the year.

• Bilateral trade with the United States continued to edge lower — exports to the U.S. fell another 0.9% after plunging 16% in April.

• But exports to non-U.S. regions continued to rise – increasing another 5.7% in May to almost 42% above year-ago levels.  The share of exports going to non-U.S. destinations climbed to 31.7% in May — its highest share outside of the 2020 pandemic lockdowns since the 1980s by our count.

• Statistics Canada reported that much of the increase in exports overall came from a rise in gold exports to the U.K. Still, industrial equipment and electronic equipment exports also rose to partially retrace large earlier declines.

• Canadian imports declined another 1.6% to add to 3.2% and 1.4% drops in April and March, respectively – led by an 18.7% pullback in metal ore imports after a 52% surge the prior month.

• Imports of consumer goods bounced back 4.3% in May, consistent with what has been a relatively resilient domestic Canadian consumer spending backdrop despite tariff uncertainty.

• The volume of imports of industrial and electrical equipment (a key indicator of Canadian domestic business investment) also edged higher but still only partially retraced a large drop in April.