 | | Kip Beckman
Principal Research Associate,
Economic Services |
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| Danielle Goldfarb
Associate Director
Global Commerce Centre |
Many view Canada’s exchange rate as the main reason for Canada’s recent lacklustre trade performance. The exchange rate remains a key factor affecting Canada’s total exports, given the dominant role of Canada-US trade in Canada’s overall trade.
But Canada’s exports to fast-growth markets such as China have surged over the past two decades, changing the role that the exchange rate plays. The exchange rate matters less when it comes to Canada’s trade with these fast-growing developing markets.
This is one of the major conclusions from a new study from the Conference Board of Canada’s Global Commerce Centre titled, What Might Canada’s Future Exports Look Like. The report examined how exports to Canada’s largest trading partners would change by 2025 based on projections of key variables that influence export growth such as the size of the economy and the exchange rate. We looked at both developed and emerging markets including the United States, the United Kingdom, the Eurozone, China, Brazil, Mexico, Japan, and India.
Our forecast predicts big changes to Canada’s share of merchandise exports in many of these countries. The key factor behind these changes will be sharply different rates of long-term real (inflation-adjusted) economic growth, rather than the exchange rate. For instance, we expect that Canada’s share of its goods trade to booming China will expand from 3 to almost 7 per cent by 2025. And anaemic economic growth in Japan will reduce Canada’s share of goods exports to that country from 2.3 per cent in 2010 to only 1.6 per cent in 2025. Canada’s share of goods exports to the US will decline from 74 per cent in 2010 to 68 per cent by 2025, and the exchange rate’s trajectory will be a key factor in this case.
Several factors explain the likely diminished role of exchange rate in Canada’s future trade. For one, Canada’s trade mix has changed. Canada’s exports of energy and mining products have grown from 30 to 50 percent of our trade over the past decade. This is because of soaring demand for Canada’s raw materials from developing countries such as China. Since many raw materials are priced in U.S. dollars, changes in the exchange rate have no impact on the price charged to our foreign customers and hence have little impact on our exports. Also, China has been willing to purchase the raw materials required to keep its industrial machine growing irrespective of the changes in relative prices attributable to movements in global exchange rates.
Another key reason that export flows are less affected by the exchange rate is the accelerated use of global supply chains. Imported components from many countries are used in the production of manufactured products, especially autos. As a result, the impact of changing prices resulting from exchange rate adjustments may not factor into a firm’s purchasing decisions, especially in the short term.
The bottom line is that economic growth in emerging markets will be the key factor affecting Canada’s future trade in those markets. So the exchange rate should not hold Canadian businesses back from pursuing future trade opportunities.
Read What Might Canada’s Future Exports Look Like