A truck carries a container near a cargo ship bound for Japan at the Centerm container ship terminal at the Port of Vancouver in Vancouver, British Columbia, Canada August 3, 2025. REUTERS/Chris Helgren/File Photo

By Promit Mukherjee

OTTAWA (Reuters) -Canada's trade deficit narrowed in July as overall exports rose, especially driven by outbound shipments of crude oil and passenger cars to its biggest trading partner the United States, Statistics Canada said on Thursday.

Its merchandise trade deficit, or deficit from trading in goods, in July was at C$4.94 billion ($3.57 billion), smaller than last month's C$5.98 billion, but much higher than the same period last year, according to Statistics Canada's data.

Analysts polled by Reuters had forecast the trade deficit for July at C$4.75 billion.

This was the sixth consecutive trade deficit since U.S. President Donald Trump imposed tariffs on Canada, but it has been improving from an all-time record deficit of C$7.6 billion observed in April.

Exports to the U.S., which was the destination for 76% of Canada's total goods exports last year, have been on an upswing for the last three months on a monthly basis.

Canada exported more crude oil and passenger cars to the U.S. in July, pushing its exports up 5%. But on a year-on-year basis, exports south of the border were still down over 10%.

However, imports from the U.S. continued to fall and dropped 2.2% in July. Canada's trade surplus with the U.S. jumped by over 80% to C$6.7 billion in July, its highest since March.

In July, exports to the U.S. rose to almost 73% from 68% seen in May, StatsCan data showed.

However, economists cautioned that exports hadn't fully recovered.

"We haven't completely reversed the trend yet," Ross Prusakowski, deputy chief economist at EDC said, adding that the bounce in energy and autos was due to the significant lows seen in the previous months.

Exports to the U.S. are down 2.9% in the first seven months of this year compared with the same period in 2024. And exports to rest of the world are up 14%, he said.

Prusakowski said the knock on effects of tariffs are still playing out and will be seen in economic data in the coming months.

Large Canadian companies have enjoyed exemptions from tariffs under the USMCA free trade deal which has helped over 90% of Canadian exports to bypass tariffs but smaller companies have struggled.

The Canadian dollar was trading down 0.21% to 1.3823 to the U.S. dollar, or 72.34 U.S. cents, after the trade data was released. Bond yields on the government's two-year bonds improved and were down 0.1 basis point at 2.61%.

The recent GDP data, which showed that the economy contracted by 1.6%, has led money markets to bet an almost 70% chance of a rate cut on Sept. 17.

Overall exports rose by 0.9% to C$61.86 billion in July while imports slowed 0.7% to C$66.80 billion, StatsCan said.

Exports of energy products posted the biggest increase in July of 4.2% and exports of motor vehicles and parts increased 6.6%, it said. Shipments of aluminum dropped over 8% and steel exports were down over 25% year-to-date as they faced 50% tariffs.

Exports to countries other than the United States were down 8.6% in July, a second consecutive monthly decline and imports from countries excluding the U.S. increased 1.3%.

(Reporting by Promit Mukherjee; Editing by Dale Smith and Philippa Fletcher)