With our dollar weaker and the U.S. currency strong, one of the big questions for Canadians in the near future is whether our economy can take advantage of the difference.
"Over the past decade Canada's exports to the U.S. have flat-lined," says Danielle Goldfarb, associate director of the Global Commerce Centre at the Conference Board of Canada.
As the Canadian economy faces headwinds, especially from the plunge in energy prices, the Bank of Canada looks to strength in the U.S. economy for Canadian exports there to lift domestic growth.
But it has been a problem for Canadian exporters, Ms. Goldfarb said, that they "have traditionally focused mainly on the U.S., even though Canada is losing market share there, mainly to China and other emerging markets."
It's especially dicey for Canada's auto industry. Just recently, Toyota announced that it is moving production of its bestselling Corolla sedan from Cambridge, Ont., to Guanajuato, Mexico, investing $1-billion on a plant there to build 200,000 cars a year.
While auto exports rebounded in March, this was counteracted by a decrease in energy exports. But the currency difference was also a factor in a widening global trade deficit, as export prices declined and import prices increased.
In the late 1990s, when the Canadian dollar was also low, Canada's manufacturing sector tended to benefit and seemed to hold its own against lower-wage Mexico or the U.S. South. The currency difference and a strong pool of skilled labour made workers' rates more competitive.
But manufacturing in Canada has been on a long slide, with the auto sector, especially, slipping steadily. Canada produced nearly 2.4 million vehicles last year, nearly as much as pre-recession production. But this compares unfavourably with about three million in 1999, and Canada's share of North American vehicle production has fallen to 14 per cent, its lowest level since 1987, according Queen's University professor John Holmes.
"Between 1982 and 2006, Canada enjoyed a positive balance on its automotive trade with the rest of the world," Dr. Holmes said in a report last month for McMaster University's Automotive Policy Research Centre.
"By 2007, on the eve of the global financial crisis, the balance had turned negative. By 2014, the deficit stood at $10.3-billion. Over the seven years between 2008 and 2014 Canada registered an average annual automotive trade deficit of $9.5-billion."
In fact, "Over the last three years it has been the U.S. which has taken away [Canada's] share of auto production in North America, rather than Mexico or other low-cost areas," says Andrew Grantham, senior economist at CIBC World Markets.
"It suggests that when the U.S. dollar was very weak, when the [U.S.] Federal Reserve were doing QE [quantitative easing, or increasing the money supply], a lot of production in Canada wasn't actually being taken away by lower-cost countries, but by the U.S. Now that our dollar has weakened we could start to see some of that production coming back," Mr. Grantham explains.
"The hope is that we're going to see some manufacturing investment come back into Canada. This would mean our exports in general, not just those into the U.S., won't be so reliant on energy."
Bill Murnighan, research director with Unifor, Canada's largest private-sector union, says, "It's a given that the resource run-up had a devastating effect on our exports.
"Our view is that the dollar had been highly overvalued for a while – 80 to 85 cents [U.S.] is where it should be at." (Canada's dollar is currently moving around 80 cents U.S.) "We think that a return to normal with our largest partner is certainly going to help Canadian exporters of all kinds," Mr. Murnighan adds. The difficulty for workers is that "it doesn't happen very quickly" and it doesn't necessarily mean more jobs, as robotics continue to take over manufacturing in the auto and other sectors.
Mr. Grantham agrees that "there's a lag involved between a weaker currency and some of those investments in manufacturing coming back. Our research shows that the biggest impact comes in six to eight quarters – you're talking one to two years."
This is compounded by the fact that while the Canadian dollar is low compared with U.S. currency, it's holding its own in terms of world currencies.
"It hasn't changed that much compared with the Mexican peso," he says. It is also reasonably stable compared with the euro, which is struggling with issues such as Greece's financial crisis.
If manufacturing does grow, Canadians will first see production increases and only after that would this show up as a boost in exports and GDP, Mr. Grantham says. Canadian industry could benefit by bringing in what many policy makers say are long-overdue gains in productivity, but the CIBC economist says this is only one factor.
"What we've seen is that productivity growth in the U.S. was pretty strong before the recession. They were developing a lot of the progress that was made in information technology. It has slowed in the U.S. since the recession. We're not catching up in Canada but the gap isn't growing," he says.
The most significant issue is the currency difference, even if it will take time to work its way through the economy. "We've gone from about a 15-per-cent overvaluation when you look at the total manufacturing cost [of typical goods] in the U.S. and Canada to now where, if anything, it's slightly cheaper in Canada. In terms of bringing investment back into the country that's the key factor."