I have been meaning to write about this for a while but haven’t had the time to sit down and put the pen to paper. The issue is that of the sliding US dollar and the impact it has on the currency of its closest neighbor and trade partner, Canada. For a number of years now the Canadian economy has been ‘saved’ by the favorable exchange rate, one US dollar on average bought you almost 1.60 Canadian dollars, making it cheap for Americans to buy and produce in Canada and in turn giving the Canadian economy a solid influx of funds, contributing to healthy growth rates. The Liberal government in Canada benefited enormously from the rosy economic picture, but many critics pointed out that the US$/C$ exchange rate covered up some real problems. The problem is that on the face of it, Canada was competitive, but a closer examination revealed that it wasn’t really. What if the exchange rate had been 1:1 ? Would we still have seen US investors, business and tourists flocking to their Northern neighbor as they did in recent years? Probably not. The Canadian economy was competitive primarily by virtue of the exchange rate, not because it produced better and cheaper goods. That problem is now becoming more evident and in a way the rising value of the Canadian dollar is a blessing in disguise. Note that today one US dollar buys you only 1.38 Canadian dollars, the latter appreciating in value by about 14%. It will now force Canadian businesses to increase productivity and become more efficient in order to offset the reduction in profitability resulting from the change in exchange rates. That in turn means that many Canadian businesses will have to model themselves after their southern counterparts, which in practice will not be an easy process as many external factors such as government regulation, taxes and organized labor have had a value destroying impact on Canadian businesses. These external variables can not be turned around overnight, but the complacency prevalent in Canadian society at large will no doubt have to experience some form of shock therapy in order to maintain a position of relative competitiveness vis-à-vis the US.

There’s one other important effect which is the fact that the sliding Canadian dollar made imports into Canada fairly expensive. This is a much overlooked aspect but it shouldn’t be as it was slowly destroying Canadians’ buying power as phenomenal amount of goods and services from the US are imported into Canada. The Liberal government never paid much attention to this aspect either as their economic thinking to a large extent continues to be mired in the notion that consumers should be buying domestically, a flawed concept that predates the days of free-trade and globalization. You will not believe how many businesses continue to advertise their products as “Canadian” and how many people (although a minority) in Canada disapprove of buying at Wal-Mart. The rise in the value of the Canadian dollar now allows consumers in Canada to buy more imported products for their dollar and that is a move in the right direction as it ultimately creates wealth for consumers.

It is now up to the Canadian government and businesses to respond to the new realities by together working towards a framework in which Canada stays competitive. That means lower taxes, less rules and regulations and more flexibility with regards to labor. In the end this will benefit both Canada and the USA. A currency union with the US, favoured by many in Canada, has a long way to go. The current Canadian government has a hard time getting its head around joint security arrangements so the idea of one North American currency may be generations away, but it is a concept that will be discussed intensively over the next few years.