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The Bottom Line:

Canada’s international trade flows remain depressed in the wake of U.S. tariff hikes, although net trade is still showing signs of stabilizing to-date in Q3.

The goods trade deficit widened back to $6.3 billion in August, the second largest shortfall on record, behind only April’s $7.6 billion deficit in the immediate aftermath of the U.S. administration’s broad-based global ‘reciprocal tariff’ announcement. 

Trade in specific products impacted by tariffs continue to be disrupted, and the timing of U.S. tariff announcements is adding significant volatility to monthly trade flows as importers and exporters pulled forward shipments to get ahead of expected tariff hikes. Exports of copper ore and lumber both plunged in August as new U.S. tariffs took effect.   

And part of the deterioration in net trade reflects resilient imports — which increased 0.9% in August as higher consumer good imports (a sign of resilient consumer spending) offset weakness in equipment imports (a sign of continued softness in business investment.)  

Looking through that volatility net trade is still unlikely to repeat the record subtraction that pushed overall GDP down 1.6% (annualized) in Q2 — net trade volumes over July and August combined are still tracking an add of ~1 percentage point to GDP growth from net trade in Q3.

But that really just means that net trade is not getting worse, not that it’s getting better. The BoC highlighted the evolution of exports as a key indicator helping to guide whether to cut interest rates again after a reduction in September, and the 3% drop in export volumes in August won’t be reassuring for the central bank. Still other key economic reports including this Friday’s labour market data and the next round of inflation data will also be watched closely ahead of the next policy decision.

The August details:

• The Canadian goods trade deficit widened to $6.3 billion in August, led by a 3% pullback in exports and 0.9% rise in imports.

• In volume terms (chained), exports fell 3.2% from July with imports edging up 0.2%. 

• Trade flows remain highly volatile, particularly in sectors impacted directly by tariffs. Exports to the U.S. fell by 3.4% after three straight monthly increases, and were down 8% from a year ago.  Exports to non-U.S. destinations were up 1.8% from a year ago, but down 2% from July in August.

• Exports of motor vehicles and parts fell by 3.9%  after a 6.4% jump in July (and were down 5.3% from a year ago.)

• Copper exports plunged 27% in August following a 35% jump in July.  Lumber exports fell by 25% after rising 19% in July and were down 17% from a year ago.

• Unwrought gold shipments accounted for most of a 7.6% drop in metal and non-metallic mineral shipments — that decline was almost entirely accounted for by lower sales to the U.S. as U.S. imports of gold broadly remain highly volatile.

• Imports remained significantly more resilient, rising 0.9% despite an almost 13% drop in energy imports.  A jump in metal imports accounted for much of the (ex-energy) import increase, but consumer goods imports also rose by 2.3%, consistent with a relatively resilient consumer demand backdrop.

• The U.S. government shutdown means that important details on the impact of U.S. tariff policy in August are (for now) unavailable — detailed data on tariffs on U.S. imports by country and product are only available from U.S. statistics sources that are not providing data due to the shutdown. But to-date, an exemption from most tariffs for CUSMA compliant trade has allowed the majority of Canadian exports to the U.S. to cross the border duty free, and that likely continued in August.

About the Author

Nathan Janzen is an Assistant Chief Economist, leading the macroeconomic analysis group. His focus is on analysis and forecasting macroeconomic developments in Canada and the United States.