Canadian exports rise in July, helping to narrow trade deficit

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Canadian exports rose for the third consecutive month in July, narrowing the country’s trade deficit with the world and increasing its trade surplus with the United States.

Statistics Canada reported on Thursday that exports rose 0.9 per cent, while imports fell by 0.7 per cent, reducing Canada’s trade deficit to $4.9-billion from $6-billion.

Exports have been modestly rising over the past three months after taking a major hit in April as tariffs came into effect. As a result, economists expect net trade to boost economic growth in the third quarter, despite the impact of U.S. tariffs on strategic sectors.

“Canadian exports and the goods trade deficit began to stabilize in July, albeit at weaker levels than prevailed before U.S. tariffs and related uncertainty took hold,” wrote CIBC senior economist Andrew Grantham in a client note.

After falling by 11.2 per cent in April, exports have increased by 3 per cent since then, leaving export levels still significantly lower than before the trade war.

A rebound in growth in the third quarter would mean Canada avoids two consecutive quarterly contractions, or what some economists call a technical recession. Statscan reported Friday that the economy shrank by an annualized rate of 1.6 per cent in the second quarter.

“U.S. trade policy will remain a significant source of uncertainty, but we do not expect the Q2 GDP decline in Canada to be repeated,” wrote RBC assistant chief economist Nathan Janzen in a client note.

Energy exports rose by 4.2 per cent in July, after five consecutive monthly declines. Exports of motor vehicles and parts also saw a sizable bump, rising by 6.6 per cent.

The increase in overall exports was partly offset by a decline in unwrought gold exports, which fell by 12.2 per cent.

Aluminum and aluminum alloy exports fell by 31 per cent, marking the fourth consecutive decline as the U.S. continues to impose steep tariffs. It was also the lowest level since May, 2019, the same month the U.S. and Canada reached an agreement to lift tariffs on steel and aluminum imposed during President Donald Trump’s first term.

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Meanwhile, Statscan said a decline in machinery imports was the largest contributor to the overall decrease in imports in July.

Imports from the United States also fell while exports rose, widening Canada’s trade surplus with the U.S. to $6.7-billion in July from $3.7-billion in June. This marks the largest trade surplus with the U.S. since March.

Most Canadian goods continue to cross the U.S. border tariff-free, because of an exemption on products that are compliant with the United States-Mexico-Canada agreement. However, the steel and aluminum sectors continue to face 50-per-cent tariffs.

The automotive sector also faces 25-per-cent tariffs on the non-U.S. content in USMCA-compliant vehicles, while vehicles that do not meet the rules of origin under the trade deal face an outright 25-per-cent tariff.

Prime Minister Mark Carney said on Wednesday that he’s expecting to reach agreements with the U.S. on some strategic sectors affected by tariffs, though he tempered expectations on when that might happen.

Mr. Carney dropped many of Canada’s retaliatory tariffs against the U.S. recently in hopes of furthering trade talks with Mr. Trump.

In the meantime, Industry Minister Mélanie Joly said on Thursday that the government is focused on helping businesses affected by sectoral tariffs pivot away from the U.S. by retooling their operations.

“We know that the type of steel, for example, that was developed in Canada is mainly steel that is for the U.S. automakers. And that has been the business model for decades,” Ms. Joly told reporters during Mr. Carney’s cabinet meeting in Toronto.

“We need to help them pivot,” she added, suggesting that steelmakers need to retool to produce the kind of steel that can be used in home construction, infrastructure and defence.