A Tariff Hangover Hits Canada’s Trade Balance
Canada’s trade deficit swelled to $6.3 billion in August, marking the second-largest shortfall on record—a symptom of the aftershocks from the U.S. administration’s “reciprocal tariff” policy that continues to reverberate through cross-border supply chains. According to Nathan Janzen, Assistant Chief Economist at RBC Economics 1, “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 data reveal a pattern of volatility driven by policy timing. As Janzen notes, “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.” This front-loading effect—rushing goods across borders before tariff deadlines—has led to unpredictable swings in exports and imports.
Copper, Lumber, and Cars: Collateral Damage of Policy Volatility
Among the hardest hit were copper and lumber, two emblematic Canadian exports that have long been tied to U.S. industrial demand. “Exports of copper ore and lumber both plunged in August as new U.S. tariffs took effect,” Janzen says, pointing to a 27% fall in copper exports and a 25% decline in lumber shipments following strong gains just a month prior.
The automotive sector also stumbled, with vehicle and parts exports down 3.9% after a sharp 6.4% July increase. Year-over-year, vehicle exports were off 5.3%. Exports to the U.S.—Canada’s largest trading partner—fell 3.4% in August and are now 8% lower than a year ago, a sign of the cumulative strain tariffs are imposing.
Still, Janzen highlights that this isn’t a universal story of weakness. “Exports to non-U.S. destinations were up 1.8% from a year ago,” he noted, though even there, the August monthly figures slipped 2%. The global rebalancing of Canadian exports underscores the country’s vulnerability to U.S. trade policy—but also hints at diversification in progress.
Resilient Imports Signal Strong Consumers, Soft Business Investment
While exports stumbled, imports remained resilient, rising 0.9% in August despite a 13% plunge in energy imports. Janzen interprets this as a split economic signal: “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).”
Consumer goods imports climbed 2.3%, a bright spot reflecting steady household demand despite higher borrowing costs and inflation pressures. In contrast, falling equipment imports point to business caution—likely reflecting both tariff uncertainty and lingering concerns over demand growth.
GDP Outlook: Less Negative, But Not Yet Positive
Despite the deficit widening, the overall macro picture is less dire than it appears at first glance. “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 explains. “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.”
In other words, the trade sector may finally be stabilizing, even if not yet recovering. But Janzen adds a dose of realism: “That really just means that net trade is not getting worse, not that it's getting better.”
What It Means for the Bank of Canada
The Bank of Canada has flagged exports as a key input to its rate-cut calculus following a September reduction. August’s 3% drop in export volumes will not offer much comfort. As Janzen puts it, “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.”
However, the central bank will weigh this data alongside the upcoming labour market and inflation reports, both due before the next policy meeting. The outlook for rates remains balanced between a fragile recovery and persistent trade drag.
Missing Data, Hidden Clarity
Adding to the uncertainty, the U.S. government shutdown has temporarily stalled access to detailed tariff data from U.S. statistical agencies. “Important details on the impact of U.S. tariff policy in August are (for now) unavailable,” Janzen says. Nevertheless, exemptions under CUSMA (Canada–U.S.–Mexico Agreement) continue to shield most cross-border trade: “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.”
This nuance matters: while headline trade numbers look grim, the structure of trade agreements remains a key stabilizer—keeping vital sectors flowing even amid policy turbulence.
The Bottom Line
Canada’s widening trade deficit underscores a moment of transition rather than collapse. The immediate tariff pain is real—especially in resource and manufacturing exports—but beneath the noise, net trade appears to be finding a floor. Consumers remain resilient, and CUSMA protections continue to blunt the full force of tariff shocks.
Still, as Janzen cautions, the story isn’t about improvement yet—it’s about endurance: “Net trade is not getting worse, not that it's getting better.” With the Bank of Canada watching closely, the next few data points—on jobs, inflation, and exports—will determine whether policy makers can hold their nerve in the face of fragile stability.
Key Takeaways
- Tariff Volatility = Market Noise: Expect continued swings in trade data as firms adjust shipment timing to avoid tariffs.
- Consumer Strength vs. Business Weakness: Strong consumer imports mask weak capital spending—watch for divergence in Q4 data.
- Exports Stabilizing, Not Recovering: Q3 GDP impact looks modestly positive, but August’s drop signals fragile momentum.
- BoC’s Next Move Depends on Data: Labour and inflation prints will determine if September’s rate cut was a pause or the start of a cycle.
Footnote:
1 Janzen, Nathan. RBC Economics. "Canadian trade deficit widened in August as new tariffs took effect." RBC Economics, 7 Oct. 2025.
