RBC warns of widening trade deficit

RBC assistant chief economist Nathan Janzen said in an Oct. 7 report that Canada’s international trade deficit widened sharply in August as new U.S. tariffs took effect, underscoring ongoing volatility in cross-border flows and persistent weakness in exports.

The goods trade deficit rose to $6.3-billion — the second largest on record, following April’s $7.6-billion shortfall that came immediately after the U.S. administration’s global “reciprocal tariff” announcement.

“Trade in specific products impacted by tariffs continues to be disrupted,” Janzen said, adding that the timing of U.S. tariff decisions has led importers and exporters to pull forward shipments, creating sharp month-to-month swings in the data.

Exports fell 3% in August, led by steep declines in copper ore and lumber as new U.S. tariffs were implemented. Copper exports plunged 27% following a 35% jump in July, while lumber exports dropped 25% after a 19% rise in the prior month and were down 17% year-over-year. Exports of motor vehicles and parts also slipped 3.9% after a strong July. Overall, exports to the U.S. fell 3.4% in August and were down 8% from a year earlier, while shipments to non-U.S. destinations rose 1.8% year-over-year.

Imports, meanwhile, rose 0.9%, supported by stronger consumer goods shipments, a sign of continued household spending, which offset declines in energy and equipment imports. Energy imports dropped nearly 13% during the month.

“Part of the deterioration in net trade reflects resilient imports,” Janzen said, noting that this strength highlights ongoing domestic demand despite weak business investment.

Janzen said that while trade flows remain depressed, the third quarter is unlikely to repeat the sharp drag seen in the spring, when net trade subtracted 1.6 percentage points from GDP growth. Based on data for July and August, net trade volumes are tracking an addition of about one percentage point to GDP in the third quarter.

“But that really just means that net trade is not getting worse — not that it’s getting better,” he cautioned. “The Bank of Canada highlighted the evolution of exports as a key indicator guiding 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.”

He added that upcoming labour market and inflation data will play a critical role in shaping the Bank’s next policy decision, while noting that most CUSMA-compliant exports remain exempt from U.S. tariffs, allowing the majority of Canadian goods to continue crossing the border duty-free, even amid the trade disruptions.

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