In a surprising twist, Canada’s trade deficit has shrunk significantly in May, updating a concerning trend marked by record-high figures just a month prior. This positive shift comes amid ongoing challenges posed by U.S. tariffs that have been particularly punishing for Canadian exports.

According to Statistics Canada, the trade deficit fell to $5.9 billion from $7.6 billion, providing a glimmer of hope even as exports to the United States experienced yet another decline, lowering by 0.9% for the fourth consecutive month. Tariffs imposed by Washington are clearly taking a toll on Canada’s economy.

The U.S. has specifically targeted key sectors such as steel, aluminum, and automobiles, alongside applying stringent rules on goods in line with the continental free-trade agreement. Notably, President Trump has doubled the tariffs on steel and aluminum, now soaring to a staggering 50%.

As a result of these tariffs, many economists predict that Canada’s economy may have contracted during the second quarter, raising alarms for traders and policymakers alike. In May, only 68.3% of Canadian exports were shipped to the U.S., marking one of the lowest levels ever recorded, especially when compared to a monthly average of 75.9% in 2024.

The automotive industry has been hit particularly hard, with tariffs stifling trade in both directions. Imports of motor vehicles and parts plummeted by 5.3%, following a sharp decline in April, while imports of passenger vehicles and light trucks dropped to their lowest in two years, plunging by 9.7%.

On a brighter note, exports to other nations surged by 5.7%, reaching record highs largely fueled by a remarkable increase in gold exports, lifting total exports by 1.1%. Conversely, imports fell by 1.6%, marking three successive months of decline.

In the midst of these challenges, Prime Minister Mark Carney is actively pursuing an economic and security agreement with the U.S., aiming for a resolution by July 21. This could potentially relieve Canadian businesses from the heavy burden of ongoing tariffs.