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Competitiveness and the exchange rate

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Over the past 40 years, the value of the Canadian dollar, or loonie, against the U.S. dollar has ranged from a high of US$1.04 in October 1959 to a low of US$0.62 in January 2002. In December 2006, CAN$1.00 was worth US$0.90. What do these exchange rate fluctuations mean for Canadian manufacturers?

We export 43% of the machinery, autos and consumer goods we manufacture. Thus, the ups and downs of the loonie can strongly influence how competitive our products are on the global market.

In the mid-1990s, a low loonie boosted demand for Canadian-made goods in other countries. Since 2002, however, the loonie—and thus the prices of Canadian-made goods—has been rising, making other countries’ products more competitive against ours.

Two other factors that affect Canadian competitiveness are productivity growth and production costs, such as labour, energy and materials. When productivity is growing faster in Canada than in the United States, our goods are generally cheaper, giving Canadian manufacturers an edge selling their products in the global marketplace.

But when production costs are higher in Canada than in the United States, our products are more expensive than American ones, and so Canadian manufacturers have a tougher time competing. However, the exchange rate can also affect these factors.

Many export-oriented industries—such as motor vehicles, machinery, pulp, paper and wood products—have been able to adjust their profit margins rapidly, reducing the effects of exchange rate fluctuations.