Canada’s Trade Surplus with US Widens Ahead of Trump’s Return

The trade surplus between Canada and its southern neighbor, the United States, has grown significantly in recent months. This development underscores the crucial role that the U.S. plays in Canada’s economy.

A Growing Dependence on U.S. Trade

Canada’s reliance on trade with the U.S. is not new. However, the country’s trade deficit with other nations has been widening, indicating a significant imbalance in international trade. This situation has raised concerns among economists and policymakers about the impact of potential tariffs imposed by the U.S.

Statistics Canada Reports Narrowing Trade Deficit

In November, Statistics Canada reported that the country’s overall trade deficit narrowed to $323 million from $544 million in October. This decrease was largely due to a significant increase in exports to the U.S., which rose 6.8% in November. Imports from other countries excluding the U.S. declined by 1.9%.

Exports and Imports: A Mixed Bag

While Canada’s merchandise exports increased in November, driven by higher prices and a weaker Canadian dollar, import volumes rose at a faster pace. Exports in volume terms increased by 0.5%, while imports rose by 1.4%. The depreciation of the Canadian dollar since October has impacted import and export statistics.

A Weaker Dollar: A Double-Edged Sword

Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, noted that Canada’s merchandise exports have increased due to higher prices and a weaker dollar. However, he also pointed out that it is challenging to pinpoint clear trends for the last few months of 2024 due to changes in how data is collected by the Canada Border Services Agency (CBSA).

The Impact of Tariffs: A Growing Concern

Benjamin Reitzes, rates and macro strategist at Bank of Montreal, stated that tariffs continue to be a dark cloud hanging over Canada and trade. During his first term, former U.S. President Donald Trump used tariffs as a tool to redirect trade flows. His renegotiation of the North American trade pact was aimed at rebalancing trade with Canada and Mexico.

A Growing Concern for Canadian Exporters

Canada’s export volumes have increased in recent months, providing evidence that the economy was gaining momentum at the end of last year. However, the threat of U.S. tariffs could cause the recovery to go into reverse this year. Stephen Brown of Capital Economics noted that if U.S. importers try to front-run the tariffs, it might provide some further support in the near term.

The Bank of Canada’s Next Move

In January, the Bank of Canada cut interest rates. However, things could get murky after that with the Canadian dollar already much weaker. The bank has indicated that it will continue to monitor the situation closely and make adjustments as necessary.

As trade tensions between Canada and the U.S. continue to escalate, exporters are growing increasingly concerned about the potential impact of tariffs on their businesses. While a weaker Canadian dollar may provide some benefits for exporters, the threat of tariffs remains a significant concern for the Canadian economy.