Rise of the Canadian Dollar - Case Study Example

TOPIC: THE RISE OF THE CANADIAN DOLLAR (Name) (Institution) (Grade Course) (Tutor’s Name) 22/2/2008 Introduction Canada’s Currency has sustained its rise by more than 30 percent against the US dollar. In this period the Canadian dollar has risen against the US dollar than any other currency of major US trading partners such as the Chinese Yuan and Mexican peso which have retained their value against the US dollar. Current appreciation is the second time in the history of postwar that the dollar ha appreciated by over 15 percent against US counterparts. As from 1986-1991, the dollar rose from 72 cents to almost 90 cents which is a cumulative rise of 23 percent. Currently the appreciation is faster and larger than the episode of 1986-1991. Due to this there have been negative impacts and inequality effects in various sectors of the economy and also in various provinces .Most affected are the exports especially the non-energy exports with the employment in the manufacturing sector being very severely affected than in earlier episodes. If the dollar then stays at over 85 cents, the prediction is that Canada’s share will fall from 12 percent currently to below 9 percent by the first three months of 2008. Question One: What is the role of the federal and the provincial governments in dealing with unequal effects brought by the rise of the Canadian Dollar? Unequal effects brought by the rise in Canadian dollar Unequal effects have been felt by both importers and exporters in all sectors of the economy. Exporters who seem to be more affected by the rise in Canadian Dollar are quickly curtailing any shipments of their goods to the United States markets and potentially opting to seek other markets for their products unlike the importing companies who are happy with the rise in the Canadian dollar since they are able to purchase the US made commodities at reduced prices thus reducing their costs of carrying out their businesses. The importers profits and sales have both high chances of rising owing to the appreciation of the currency. Exporters are enduring low profits rates due to the appreciation of the currency since most of the exports are notably commodities such as electronic products and automotive which are always priced in US dollars. As a result rise in Canadian dollar has not changed the selling prices, that is, the prices that are paid by the buyers. What has changed is the price that the exporters in the country (Canada) will receive when the US dollar revenue from exports are converted into the Canadian dollar at a higher rate of exchange. These conversions from the US dollar to Canadian dollar in financial statements translate into low profits. Effects across the industrial sectors have been reported to be unequal. Focusing largely on the manufacturing sector the appreciation of the currency depends on exports, that is, the ratio accruing between production to exports and also the content of import. The variable to be put into consideration is the level of dependence on exports. According to TD bank there are five industries that account for up to 50% of exports, that is ,the forest industries, computer and electronic, transportation and equipments ,electrical equipments and components. Companies have felt the unequal effects of currency appreciation as a result of import content variation. Those that have high foreign content exports have felt least effects than those with low foreign content in their exports. (Wesson, 2007) Sectors such as the textiles and textile mills, clothing and leather production and computer and electronics which have high levels of import content have felt least effects of rise in Canadian dollar as opposed to wood and paper industries ,beverages and tobacco industries, food and also non-metallic minerals which have low foreign content in their imports. Service industries as compared to goods industries have been greatly affected by the appreciation of the currency but the effects are again unequal with that of goods industries. This is because most of the service industries have higher Canadian contents that the content in the goods industries, for example, the tourism as stated earlier is greatly affected because it has higher Canadian content. Effects of rise in Canadian dollar are unequal in different provinces across the country. This depends also on the relative intensities of different provinces and also their structure of industries. Ontario and Quebec are reported to be adversely affected without forgetting the British- Columbia owing to the forest industries that dominate it. (Wesson, 2007) Role to Be Played By the Federal and Provincial Governments It is with no doubt that the federal government and the provincial governments have a high role to play in order to deal with these unequal effects that arise due to the appreciation of the Canadian dollar. Firstly, the federal government has to ensure that there is a balance of payment, that is, net exports equal net imports. This can be done only when the currency is devalued slightly such that it becomes favorable for the exporters. This will enable the exporters to make profits from selling the manufactured products. Secondly, the federal government has to play the role of subsidizing production activities especially to the manufacturers whose products are for export purposes. This will ensure that the cost of production go down hence allowing them to break-even and continue with production. Thirdly, provincial governments have also to play the role of instilling confidence in the investors in their respective regions by presenting their grievances to the federal government about the effects brought by dollar appreciation. Fourthly, since the tourism industries have been affected the federal government has to play the role of reviving and maintaining the number of tourists in the country lest the industry collapses. (Maude, 2006) This will in turn balance between the amounts of foreign currency flowing into the country as compared with the amount of Canadian dollars flowing out of the country. Fifthly, the federal government has the key role of ensuring that domestic tourism is also fully exploited before the citizens go else where for tourism purposes. This is because with a strong dollar the Canadians are in a strong position of traveling to other parts of the world than in their own country. (Maude, 2006) Question Two: What were the causes and effects of the rising Canadian dollar on Canadian economy? Causes Three factors have been associated with the rise in the Canadian dollar. First is the rise in the prices of commodities, secondly the fluctuations in the rate of interests and thirdly the international speculations and factors. The effects of the appreciating dollar have been widely and unequally felt by all players ranging from product sectors to service sectors. (www.heraldnet.com) Effects The increased prices of the products have made it impossible for the visitors to come to Canada and this has greatly affected the tourism industry. The net result has been the loss of employment opportunities. This scenario is still experienced in the manufacturing sector where quite a number of jobs have been lost and others still at risk of being lost if there is a continued appreciation of the dollar. This is especially true with those industries that manufacture goods for export because they have continued to make losses. An estimated 64,000 people have lost their jobs in various sectors of the economy in Canada due to increased value of the dollar by the end of December 2007.(Maude, 2006) Impacts There are both positive and negative impacts that have risen as a result of the dollar appreciation in Canada. Positive impacts First, the Canadians are more empowered to travel abroad because their currency is more powerful that many other currencies in the world. Second, the importers have a greater advantage that their counterparts and they can now import goods cheaply than before. (Wilson, 2007) Negative impacts The appreciation of the dollar has resulted into several negative effects such as losses in different sectors such as the manufacturing sector, forestry sector, clothing and textile mills agricultural sector to mention a few. Prices of goods have also increased rapidly thus eating into the disposable incomes of many Canadians. Jobs have also been lost due to continued losses made by different industries to mention a few. About 100,000 jobs in the manufacturing sector alone have already been lost with more than 17,000 being lost every month. Competitive Advantage With the rise in value of the currency the country has a stronger negotiating power especially in the world trade market because it is able to purchase commodities from other countries cheaply and sell its products expensively to them. This translates into making more profits and thus accelerated GDP growth rate. (Wilson, 2007) Government Intervention through Fiscal and Monetary Policies The fiscal policies are deliberate efforts by the government to either increase or reduce its expenditures. With the rise in commodity prices the government has to ensure that it reduces its budgetary expenditures in order to reduce the amount of money in the economy. This will in turn curb sharp increases in the prices of commodities and therefore contribute into encouraging visitors into Canada. Tourism will therefore regain its pace and job opportunities spared. The government has to adopt monetary policies in order to also regulate the amount of money supply and demand in the economy thus reducing the rate of inflation in the economy. (Wilson, 2007) Question Three: Which industrial sectors were most affected by the rise in Canadian dollar? Which interest groups are lobbying the government for relief for the sector? According to Wesson (2007) the manufacturing sector is the most affected by the rise in the dollar appreciation with little or no growth at all witnessed in the last three months. ICT output slumped with computers being very weak. The auto assembly industry saw limited growth over the last two months while the Aerospace continued to grow negatively. The non-durable goods were even worse with most cuts being witnessed in the tobacco and clothing industries. Reduction in goods production was clearly depicted in goods-handling industries where both the transportation and the wholesale trade did show consecutive declines. The export earnings also declined because the manufacturers anticipated zero or negative returns on their export products. The sharper pace of appreciation is expected to result into an even more painful result in manufacturing sectors than it has ever been experienced since 1990'. Canadian exports have performed weakly during the appreciation period than in the initial 2 years of 1986-1991 when there was appreciation and this is even worse especially with non-energy exports. Despite the fact that exports adjust to any appreciation with a substantial lag of time which reflects the duration of contracts on exports, investment decisions lag and many other factors. It should not be taken as a sign that appreciation will be painless. High value added merchandise which includes automotive products, machinery and equipments and also consumer goods have sharply declined by one-quarter which is almost 5%. The strong dollar has actually increased production costs in the manufacturing sector which has resulted into a reallocation of in vestments to other jurisdictions. Wesson (2007) asserts that the share of Canada’s continental manufacturing jobs has started to shrink when the dollar rose in 2003-2004 and this trend is expected to hike over the coming two years. The current environment balance of risks leans towards the possibility that economic activities in the manufacturing sectors will be undermined for the coming two years and thus the policy to be adopted by the bank of Canada will therefore be to forestall future interest rates. The 2003-2006 surveys reveal that manufacturing firms reporting adverse effects range from 75% to 85%. Several lobby and interest groups who are also players in influencing public policies have also come out strongly through direct and indirect approaches. Organizational representatives have met directly with the public officials in trying to asses the impacts of appreciation in the dollar. Such groups are, labor groups which are mainly concerned with job losses, voices, political parties and other public servants groups which are agitating for a reduction in inflation rates which have caused a hike in the prices of goods and services thus affecting the incomes of public servants. References Donald J, Canada’s Economy: Structure and Performance, New York: New York Press, 2007. Effects of a higher dollar available from www.dsp-psd.pw.gsc.gc.ca , (Retrieved on 21st February 2008) John, D. High cost of free trade, Ottawa: Canadian center for economic policy, 2003. Manufacturing sectors available from www.Cmte.parl.gc.ca (Retrieved on 21st February 2008) Maude B, Can Canada Survive Deep Integration? New York: New York Press 2006. Strong Canadian dollar available from www.heraldnet.com, (Retrieved on 21st February 2008) Wesson, T. Canada And The New World Economic Order. Concord: Captus Press, 2007. Wilson, H. The Quagmire of Industrial Policy, Ottawa: Press release, 2007. Read More