Making matters worse, Statistics Canada revised June's deficit to $1.93 billion, even deeper than the $1.81 billion deficit originally reported last month.
Scotiabank's economists noted that the strong loonie — which rose to a 13-month high Tuesday — likely played a role. The drop in exports was most pronounced in the American market, where they fell by 5.5 per cent to their lowest level since October 2010.
"This is about as bad as it gets for Canadian exporters — at least so far," said Derek Holt, Scotiabank's vice-president of economics.
Overall, exports fell 3.4 per cent to $37.7 billion and imports declined 2.2 per cent to $40.1 billion. By volume of shipments, exports declined by two per cent and imports by 1.2 per cent, signalling that trade was again a drag on the economy at the start of the third quarter.
Holt said the performance further calls into question the Bank of Canada's continued hawkish stand on monetary policy — it signalled in its latest announcement that rates were likely to rise in the future — since any hike in interest rates at this point would likely lift the Canadian dollar higher and slow exports further.
In a statement, Trade Minister Ed Fast highlighted the importance of trade to Canada's economy, noting that one in five jobs are tied to exporting activities.
"That is why we continue to open new markets to increase Canadian exports as part of the most ambitious trade expansion plan in Canadian history," Fast said.
Canada and the European Union are currently negotiating towards a free-trade agreement, which the Harper government has said it would like to reach by the end of this year.
There are also negotiations at various stages with Japan and a group of countries known as the Trans-Pacific Partnership.
Trade agreements may be no substitute for sound global economic conditions, however.
In a noon speech in St. John's, Finance Minister Jim Flaherty said Canada's economic fundamentals remain strong, but the country is still somewhat at the mercy of international events.
"While we are not currently facing the depths of the downturn of a few years ago, the global economy remains stubbornly fragile. Any potential offshore setbacks could generate serious adverse impacts on Canada," he said in notes of the address released in Ottawa.
After a rebound year in 2011 and a good start to 2012, Canada has now posted four consecutive negative months of trade numbers, each progressively worse than the last. July's deficit edges out September 2010 for the worst on record in nominal terms.
Peter Hall of Export Development Canada said there was something different about the latest setback, however. In the previous months, there was always some special circumstance analysts could point to, but not in July.
"This is a broad-based drop. It doesn't matter whether you are going to machinery and equipment, or autos, or energy or the agriculture side for that matter, they are all down this month," he said.
"This is the blowback from the summer setback in the global economy. It started with the collapse of the Greek election and panic mode essentially set in ... and what that did was suppress consumer spending and business investment."
Hall said he was somewhat encouraged that U.S. consumer spending picked up in July, which is traditionally a strong indicator for Canadian exports.
Exports of energy products declined 8.5 per cent as crude petroleum shipments fell 9.6 per cent. Machinery and equipment fell 5.5 per cent, exports by 5.3 per cent, and agricultural and fishing products by 3.2 per cent.
Canada's trade surplus with the United States decreased to $2.1 billion in July from $3 billion in June, the smallest surplus since October 2010.
Imports from countries other than the United States decreased 2.4 per cent to $14.7 billion in July while exports rose 1.2 per cent to $10.3 billion leaving the trade deficit at $4.4 billion, down from $4.9 billion in June.