UPDATE 3-Canada's August trade deficit widens more than forecast as exports drop

* August merchandise trade deficit widened to C$6.32 billion * Total exports dropped by 3% while imports increased 0.9% * Trade surplus with the U.S. falls to C$6.43 bln in Aug (Adds context in paragraphs 2, 3, economist's comments in paragraphs 8, 9) By Promit Mukherjee OTTAWA, Oct 7 (Reuters) – Canada's merchandise trade deficit widened in August to C$6.32 billion ($4.53 billion), its second highest on record, as exports both to the U.S. and the rest of the world fell, data showed on Tuesday. The August data had been expected to show a more permanent impact of U.S. President Donald Trump's tariffs on Canada , after exports increased earlier in the year to beat the tariffs and then dropped off sharply. Total exports dropped by 3% in August from July while imports increased 0.9%, Statistics Canada said. It was the first decrease in total exports since April. In volume terms exports fell 2.8% in August. "This was not a good report. It was a pretty rough month," said Stuart Bergman, chief economist at Export Development Canada. "What we are starting to see is the impact of tariffs coming into full view," he said, adding that as the volatility of the fist few months have passed, the more normalized impact on trade was visible. Analysts polled by Reuters had forecast the August trade deficit at C$5.55 billion, up from a upwardly revised C$3.82 billion in the prior month. Trump imposed sectoral tariffs on Canada early this year, forcing businesses to reorient supply chain from its biggest trading partner. But the shift has been volatile, erratic and difficult. Overall, exports dropped in eight of the 11 product sections in August with forestry, industrial machinery and metals leading the charge. Exports to the U.S. were at C$44.18 billion, down 3.4% from July, StatsCan said, adding it was primarily led by unwrought gold exports. But other product categories contributed to the decline, including lumber, machinery and equipment. Canada's share of exports to the U.S. fell below 70% a few months ago before recovering to 73% in August, compared with 75% during the same period last year. Prime Minister Mark Carney will be meeting with Trump on Tuesday as he comes under pressure to address the impacts of U.S. tariffs on critical sectors such as steel, cars and lumber. Imports from the U.S. were down 1.4% in August on a monthly basis, shrinking the total trade surplus with its southern neighbor to C$6.43 billion from C$7.42 billion in July. Exports to countries other than the United States were down 2% in August, a third consecutive monthly decline, Statscan said. Lower exports of crude oil and nuclear fuel contributed the most to the monthly decrease. However, Canada's imports from the rest of the world barring the U.S. rose 4.2%, reaching a record in August, StatsCan's data showed, pushing Canada's trade deficit with countries other than the United States to a record high of C$12.8 billion in August from C$11.2 billion in July, StatsCan said. The Canadian dollar was slightly weaker after the trade data, down 0.13% to 1.3960 to the U.S. dollar, or 71.63 U.S. cents. Yields on the two-year government bonds were up 0.2 basis points to 2.469%. ($1 = 1.3958 Canadian dollars) (Reporting by Promit Mukherjee; Editing by Dale Smith and Nick Zieminski)

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