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Commodity cycles have led to a re-structuring of Canada's economy because of the role that resources occupy. Because resource industry outputs constitute an important input to all production processes, resource price changes are felt all across the economy. Resources also constitute an important component of Canada's international trade and, as a result, changes in global demand for resources affect the exchange rate (see: Bailliu and King 2005, Amano and van Norden 1993).
In Canada, resource industries account for about 8.7% of GDP, roughly the same weight as all non-durable manufacturing. 1 However, because of the importance of commodities in exports and investment and their impact on the exchange rate, changes in resource demand exert a disproportionate influence on the Canadian economy. Since Canada's natural resource wealth is not distributed equally across the country, the influence of resources varies substantially by region. As a result, commodity cycles that lead to broad shifts in economic structure are more pronounced for individual provinces.
The resource boom that began in 2003 has been an important force shaping provincial economies. The integration of Asia into the global economy increased the world's manufacturing capacity, thereby helping to lower industrial prices, while at the same time boosting demand for resources (Francis 2007, Economist 2005). Meanwhile, the loonie appreciated, reflecting increased global demand for commodities. Unlike previous resource cycles, however, the post-2002 boom also accompanied a decline in many prices for consumer and investment goods on world markets. This paper explores the impact on central Canada of these relative price shifts.
The adjustment that Canada underwent in response to the China-induced price changes looks, at first blush, like 'Dutch Disease'– a situation where a resource boom leads to an appreciation of the national currency and a widespread reduction in manufacturing output. However, manufacturers in Canada adjusted to the competition from Asia by re-orienting to produce more durables and less non-durables (where competition from emerging nations is particularly strong). At the same time, Canada's terms of trade improved as commodity prices increased, raising the purchasing power of Canadian incomes. In fact, the 19.0% increase in the terms of trade between 2002 and 2007 helped lift real income enough to support more consumption and investment in the face of rising energy prices (Macdonald 2007a). As a result, from 2003 to 2007, Canada went through a period that we recently characterized as 'China Syndrome' rather than 'Dutch Disease' (Macdonald 2007b). 2
This paper shows that the impact of these forces varies across central Canada. Quebec and Ontario are the manufacturing heartland of Canada. Since 2002, they have accounted for an average of 75.1% of manufacturing employment and 76.8% of manufacturing output. Their exports are tilted towards manufactured products; in Ontario, automotive products alone make up 40.4% of exports, while in Quebec machinery and equipment accounts for 35.4% of exports.
While both provinces have rich resource bases in mining, forestry and agricultural commodities, most of their energy must be imported.
The size of manufacturing in Quebec and Ontario, which some expected to be a weak performing sector during a commodity boom, and their reliance on imported energy make their response to rising commodity prices a revealing story about adapting to rapid change.
1 . Resources include agriculture; forestry and support activities; fishing, hunting, and trapping; and, mining, oil and gas extraction.
2 . See Macdonald (2007b).
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