The timing of US tariff announcements has led to erratic monthly trade flows, with businesses rushing to ship goods ahead of new levies
Canada’s international trade deficit swelled to $6.3 billion in August, its second-largest shortfall on record, as new United States tariffs took a heavy toll on key exports and injected fresh volatility into cross-border flows.
The latest figures, released by Statistics Canada, show how US trade policy continues to affect Canadian exporters and make the Bank of Canada’s next interest rate decision more complicated.
Exports in August fell 3% by value and 3.2% in volume, led by sharp declines in copper ore and lumber shipments, both of which were hit by new US tariffs.
“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,” said Nathan Janzen, assistant chief economist at RBC.
Imports, meanwhile, rose 0.9%, buoyed by higher consumer goods, a sign of resilient household demand, even as business investment remained soft.
“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,” Janzen said.
Exports to the US, Canada’s largest trading partner, fell 3.4% in August after three consecutive monthly gains, and were down 8% year-over-year. Exports to non-US destinations edged up 1.8% from a year ago but slipped 2% from July.
“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,” Janzen said. Copper exports plunged 27% in August, while lumber exports dropped 25%, both reversing strong gains in July.
Trade volatility clouds outlook
The US government shutdown has further muddied the picture, with some detailed tariff data unavailable for now. However, exemptions for Canada-United States-Mexico Agreement (CUSMA)-compliant trade have allowed most Canadian exports to the US to remain duty-free.
Despite the August setback, net trade volumes over July and August are still tracking to add about one percentage point to Q3 GDP growth.
“Looking through that volatility, net trade is still unlikely to repeat the record subtraction that pushed overall GDP down 1.6% (annualized) in Q2,” Janzen said.
“But that really just means that net trade is not getting worse, not that it’s getting better.”
Bank of Canada faces tough choices
The Bank of Canada has highlighted exports as a key indicator for future rate decisions, following its rate cut in September. The 3% drop in export volumes in August is unlikely to reassure policymakers.
If exports are weak and the trade deficit is growing, it’s a sign that the economy may need support. This increases the chances that the BoC will cut rates or keep them low to stimulate growth and help exporters by making the Canadian dollar cheaper.
“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,” Janzen said.
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