Trade Balance Narrows, and the Outlook for Trade is Uncertain

  • Canada’s merchandise exports decreased by 2.4 per cent (month-on-month) in February. Imports faced a similar fate, falling by 1.3 per cent. Canada’s merchandise trade surplus with the world narrowed from $1.2 billion in January to $422 million in February.
  • Total exports fell by 2.4 per cent to $65.0 billion. Exports in all product sections decreased except farm, fishing, and intermediate food products. After increasing in January, exports of motor vehicles and parts fell 4.4 per cent to $7.9 billion in February. Further, exports of metal and non-metallic mineral products declined by 5.4 per cent in February.
  • Total imports decreased by 1.3 per cent to $64.6 billion. After reaching a record high in January, imports of machinery, equipment and parts declined 8.7 per cent in February. In addition, imports of motor vehicles and parts fell 5.3 per cent in February—mainly because of a decline in imports of engines and parts, as well as a fall in passenger cars and light trucks. On the other hand, imports of consumer goods rose 6.9 per cent in February.
  • Exports to the United States decreased by 0.9 per cent, while imports fell by 2.8 per cent. As a result, the merchandise trade surplus with the United States widened for a third consecutive month, moving from $8.6 billion in January to $9.3 billion in February.

Key Insights

There is room for improvement when it comes to Canada’s global competitiveness. The federal budget 2023 touches on improving supply chain resiliency and reducing dependencies on China and other authoritarian regimes. Canada would benefit from friendshoring, but moving supply chains may become costly. Canada also falls behind many developed countries in attracting private investment, but the federal budget doesn’t do much to address this issue. We call for weaker investment in machinery and equipment in the first half of this year, which could hurt Canadian imports. Canada is in a unique position due to its abundant resources; by improving global competitiveness and attracting private investment, Canada could capitalize on its advantages—which would bode well for trade.

The outlook for trade is uncertain. The federal reserve’s recent rate hike will widen the interest rate differential, causing demand for Canadian goods to rise—essentially increasing exports; on the other hand, with the Canadian and U.S. economies expected to lose steam in the second half of 2023, Canada’s trade balance with the U.S. could narrow. Moreover, we have yet to see the full impact of the recent interest rate hikes—consumer spending will wane, likely hurting Canadian imports. On a global scale, ongoing geopolitical tensions and uncertainty around oil prices could also stunt Canadian trade through the demand channel.