November 15, 2000

Weak dollar could do small-biz more harm than good

Ask small business exporters about the recent weakness in the Canadian dollar and most will rub their hands with glee. Canada's exports now comprise more than 35 per cent of GDP. Of those, close to 85 per cent go to the U.S.

Much of this has been accomplished due to the cheap Canadian dollar. Since the beginning of the 1990's the loony has lost close to 25 per cent of its value. Earlier this month Jeffrey Rubin, an analyst at CIBC World Markets attracted considerable attention by predicting the dollar could hit U.S.60¢ within 12 to 18 months.

A weak dollar, as Jean Chrétien never tires of pointing out, is good because it makes local goods more competitive in U.S. markets. Unfortunately while this is true, anything taken to its extreme has its downside. And there are signs that the dollar's weakness is reaching a point where it may be doing more harm than good.

The problem is that Canadians buy almost as much from the Americans ($249 billion in 1999) as we sell to them ($309 billion).

"We don't take a position on the dollar's weakness," said a spokesman at the Canadian Federation of Independent Business. "Whenever we ask members what they think, those who export are happy, but those who import are not."

A weak dollar makes it more expensive for Canadians buying U.S. goods. That means importers end up paying for benefits Canadian exporters get due to a weak currency. But relying on a weak dollar is like taking Cocaine: as time passes you have to take higher doses to get the same effect. For each additional cent our dollar drops, benefits to exporters are smaller, and costs to importers are higher.

Not long ago cross-border shopping was a big story. For months, every other night, news watchers were treated to the sight of huge line-ups at the border. Going to the U.S. for the day to scoop up bargains, became a national pass time. Today no one goes to the U.S. to save money.

Nor are the weak currency's benefits split equally among Canada's businesses. The big winners are shareholders and unionized workers in a Canada's resource industries who are having a grand old time selling off our national wealth for far less than what its worth. Southern Ontario's big automotive plants and United Auto Workers members are also living high off the hog.

The benefits to Canada's small business owners are not nearly so apparent. SMEs such as the corner store, who don't export, won't benefit at all from the cheap dollar. In fact it will cost them whenever they buy American products, either for use or for resale.

Other Canadian small businesses exporters in high value added areas such as technology and software -- are in sectors not as price sensitive as commodities. Thus they benefit less.

Most important, the cheap dollar is making a lot of Canadian companies soft. Rather than investing in equipment, research and other productivity enhancing features, they are being lured by the easy profits created by a weak currency. This could have a drastic effect, should the Canadian dollar rebound.

Canadian economists can't understand why our dollar doing so poorly despite the fact that our economy is going great guns. Growth is stronger than it's been in a decade, Ottawa recently paid off $12 billion on the federal debt, and we have a record trade surplus. In addition there are huge projected surpluses in the works, that should lead to big tax cuts, whoever gets into power after the next election.

But with my extensive background gained from one university introductory economics course, I'll take a stab at it. What's happening has more to do with the U.S. currency's strength than the loony's weakness. Our dollar continues to do well against the world's other currencies.

But with the demise of gold, the U.S. dollar has increasingly become the new standard of wealth in today's global economy. People, companies and country's judge their success less in national terms, and more in many U.S. dollars worth of value they have generated.

Consequently countries such as Argentina, companies such as Nortel and individuals from Russian black marketers to Afghan smugglers now measure their success in greenbacks.

It is a fundamental trend that is leading to the increasing irrelevance of the loony, and many other currencies as well. It is also a trend that will only increase the pressures for a common North American currency.

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