Dutch Disease, the Canada – US Exchange Rate and Trade With Asia

Today’s Globe editorial provides further evidence of distorted economic reasoning being rolled out to attack Thomas Mulcair.

“Mr. Mulcair seems to long for a golden age of manufacturing and a low dollar, but his longing won’t take Canada anywhere. Not only the dollar but Asian competition has inflicted damage on Canadian exporters.”

The implication seems to be that the over-valued Canada-US exchange rate has little or nothing to do with Canada’s huge and growing manufacturing trade deficit with Asia. But that ignores the fact that Canada’s Asian trade partners – most notably China – effectively manage their currencies against the US dollar  to maintain a competitive advantage.

Seen from this perspective, the over-valued exchange rate against the US dollar – which almost all economists see as driven in significant part by rising energy and mineral prices – has impacted not just on Canada-US two way trade, but has also contributed to rising Asian exports to Canada, and very limited growth of  non resource exports to Asia. The over-valued Canadian dollar has limited our ability to compensate for a depressed US market by levering off faster Asian growth.



  • Francis Fuller

    Andrew –

    I sent the following to my M.P. this morning. This is the core issue of concern in respect to the tar sands. I would suggest that other progressive readers of this blog forward it to their own M.P.

    Dear Mme Turmel, Mr Mulcair, Mr Dewar;

    I wish to bring the following the the attention of the NDP, and more specifically to the attention of Mr Mulcair.

    The Alberta tar sands are among the most expensive sources of hydrocarbons. The marginal cost of a barrel of tar sands crude is reported to be $80 per bbl.

    The current futures price of WTI is posted at $83.65.

    Tar sands crude sells at an average discount to WTI of $6 a bbl.

    With WTI at $83.65 less the $6 discount the market price is $77.65

    With the Canadian dollar at $0.964 to the US dollar the Alberta producers the realized revenue per bbl is $80.756

    Tar sands marginal revenue is approaching marginal cost per bbl. This implies there is negligible profit in tar sands extraction.

    I once worked in the offshore industry. I had a fantastic job that I loved and that permitted me to start a family. Three years later, subsequent to a global collapse in the oil industry, I was without a job and lost house, family and self respect. I had colleagues who committed suicide as they were unable to manage the transition from executive and family provider to being an economic nobody.

    The tar sands have been pushed by Harper has some form of salvation to Canada’s economic woes. They are not.

    Should the world economy continue to contract there will be continued drop in both energy demand and price. The consequence of this is that the booming job market in Alberta will turn to a job market bust. This will have significant negative implications for the Canadian economy and may provoke the long awaited downturn in the housing market.

    It is not sufficient to decry the tar sands on environmental criteria alone.

    The key issue with tar sands development as promoted by the Harper government is one of structuring the entire economy of the country around the extraction of a resource which every other OECD nation seeks to move away from and / or displace via technological substitutes. The Harper proposition for Canada’s economy is delusional and incredibly destructive.

    You need to bring these issues to the attention of the Canadian public.


    Francis Fuller

  • Excellent letter. Well argued with figures.

    Several questions;

    (a) how many billion dollars in subsidies in the form of tax credits, write-offs, grants, etc. are federal taxpayers giving to the oil industry (I have seen conflicing figures)?

    (b) how many per cent approx. of revenues is obtained through the royalties that these oil companies pay and does it go to both provincial (Alberta, in the case of the tar/oil sands) and federal coffers?

    I have read that Alberta has taken some 20 of these oil companies to court for failing to pay their share of royalties.


  • Even with crises looming, I’m not convinced that oil demand is going to contract faster than supply–or at least, faster than supply of readily extracted light crude. The only way to get that demand down enough in the medium term is to supply renewable energy instead. We need to be like Germany (and, oddly, China), pushing renewables hard.

  • Anon:
    You ask some great questions.

    When you pause to reflect on the fact that the incomes of the majority of Canadians are directly, or indirectly, impacted by the answers there is a glaring public policy vaccum. There are at least 2,000 workers today in Oshawa who deserve an answer. Given the economic multiplier associated with a high wage industrial workforce the full employment impact of the GM relocation is at least 3x times 2,000. Not sure how all 6,000 will squeeze into Fort Macmurray.

    Some detail may be found in Erin’s post here:

    Check out both Erin’s post and the comments.

    The Pembina Institute has a pubication which examines the economic impact of the tar sands (they are not oil sands. To be technically correct they are bituminious sands and bitumen is viscous tar like product which must be diluted with other higher grade hydrocarbons to make it possible to ship via pipeline. The industry sought a cosmetic do-over and has promoted the tar sands as “oil sands” for this reason. But I think reality is better served by a description of what they are rather than what they aspire to be.) and this may be found here:


    Your question A) is a critical one as there are both direct and indirect costs plus hidden costs. Indirect costs would include the Harper government’s ensuring that DFAIT acts to represent tar sands corporate interests to the detriment of other sectors and regions. Hidden costs would include the layoff, closure, downsizing, or voiding of Canadian environmental legislation, environmental research groups and statistical research to make it much harder, if not impossible, to determine accurate answers to your questions.

  • First off, no economist supporting Mulcair’s “Dutch Disease” thesis has yet to actually demonstrate that the Canadian dollar is over-valued against the US dollar.

    But it’s amazing that this author can bring themselves to poo-poo the logic of Mulcair’s critics in a four-paragraph “article” rebutting the Globe and Mail article in question, noting that the Chinese Yuan is also pegged against the US dollar, without ever mentioning what the US dollar-to-Chinese Yuan exchange rate is.

    For the record, it currently sits at approximately 6.4 Chinese Yuan to 1 US dollar.

    Precisely how much does the author of this article suggest that Canada should artificially de-value the Canadian dollar so as to overcome China’s competitive advantage in low-cost, labour-intensive manufacturing?

    Perhaps next time around you’d be better off putting the “economics” before the “progressive.” Maybe then the conclusions won’t be so incredibly backward.

  • Andrew Jackson

    Patrick – by at least two criteria the Canadian dollar is clearly overvalued – the exchange rate is well above estimates of purchasing power parity, and we have a large current account deficit with the rest of the world.

  • There is nothing “clear” about it. Anyone who claims that they can put a value on what the Canadian dollar should be, and declare it definitive, is simply out to lunch. That is not how a currency’s value is determined.

    As for the Chinese Yuan being pegged against the US dollar, the meaningfulness of this point is a little in question. Even if you were to accept the opinion of certain analysts who consider the “proper” value of the Canadian dollar to be between .80-.90, the exchange rate of the Chinese Yuan to the Canadian dollar would today be just on the underside of 6 Yuan-to-1 Canadian dollar.

    Just how do you imagine this would make Canadian manufactured goods competitive with Chinese manufactured goods, let alone in Asian markets? I’m not particularly sorry to say that there is just no way that tanking out the Canadian dollar in an attempt to compete with the Chinese Yuan will end well for anyone.

  • Canada isn’t in the position to absorb all the manufacturing we have lost to China over the decades, nor do we want it. We have moved on.

    However lowering the Canadian dollar could bring some manufacturing where we are would be competitive with China and other countries, like the US, if it wasn’t for the inflated dollar.

  • Ah Patrick do we need to get into being out to lunch cause you are definitely looking for something to eat as your analysis is quite starved.

    First off, who on this planet says that Canada is going to compete with China. Of course we are not, and that has never been a goal of manufacturing, hence the reason China has pegged its currency.

    The biggest strategy in the global right now is devaluation, and it is what drove the Canadian economy through the biggest manufacturing expansion in the 90’s that Canada witnessed since the post war era.

    So before you come into our space with you bull in a china shop thoughts, you may want to check your ideology at the door.

    The future of the world is building things and the skills and knowledge that go along with it, have you ever heard of high value adding knowledge based manufacturing??? You should look it up and have a read.

    I wonder how far the oil sector will get with $70 oil? Lets see tar sands from an upgrader would fetch about what, $48 in Texas. What is the cost? and that is without the carbon and pollution attached, I just do not see a bright future ahead in that area without a good lot of subsidy that Alberta tar sands have traditionally relied on from Ontario and Quebec manufacturing.

    Can the tar sands stand on its feet finally? Watch out $50 oil is coming as the world economy stumbles to a grind.


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