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Economy Lab

A higher dollar: No clear winners or losers Add to ...

Mike Moffatt is a chemical industry consultant and a Lecturer in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business.



In the recent Economy Lab piece 'Stunning loss' of Canadian market share in U.S.: report', Barrie McKenna discusses reasons why Canada is losing 'market share' of exports to the United States. Included was the explanation that, "[s]rvices, while more sheltered from global competition, are also inherently less exportable, [Mr. Rangasamy]pointed out."

More related to this story



However, there are a class of services which are exportable, such as graphics design, computer programming and management consulting. Should we expect to see a rise in exports to the United States in these areas as the U.S. economy improves?



The short answer: Not if the Canadian dollar continues to rise. Exportable services are far more sensitive to changes in the exchange rate than manufacturing is.



Here's why: When considering transactional currency exposure, we need to consider net exposure, which is determined by the currency of record for both revenues and expenses. A manufacturing exporter will have the majority of its revenues in U.S. dollars. However, it may have very little net exposure if it also has the majority of its expenses in U.S. dollars. The raw materials for a Canadian exporter are often paid for in U.S. dollars, either because they are purchased from an American supplier or they are items such as oil or copper, which are priced in greenbacks.



Now consider the business model for a Canadian service exporter, which can be distilled down to "open an office in Canada, hire a bunch of really talented people and let them do their jobs" (full disclosure: I am a part owner of such a firm). These firms have two big expenses: rent (including utilities) and salaries, both of which are priced in Canadian dollars. Unless a business owner can convince her staff to be paid in U.S. dollars, a service exporter will have a much larger net transactional exposure than a manufacturing exporter will.



If the service industry is to drive the economy into a boom, it will have to do so through domestic sales if the Canadian dollar continues to rise.

 

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