Canadian Forestry and the Rising Loonie
The Canadian dollar has been on the way up for a long time. This has been particularly peculiar after the currency hit a record low in the earlier years. A lot of factors can be linked to this rise in the Canadian dollar. Since the currency is primarily pitched against the US Dollar as the two countries enjoy close trade relations being part of the NAFTA and because of geographical proximity and a relatively open border, it is best to analyze the spike with respect to the US Dollar.
As the Canadian dollar rose is value, it slowly crept up to the point of parity in value with the US dollar. This has been helped by the troubles faced by the US economy as of late with its spiraling debt and trade deficit which has seen it borrow extensively. This has resulted in there being excess supply of the dollar in the international market, ultimately resulting in depreciation in the currency. The fall against the Canadian dollar came late but eventually the trade deficits started taking their toll and the US dollar fell relative to its counterpart. This has been complemented by the economic activity of Canada. It was able to control unemployment bringing it to a historic low in the country which was aided by a sustained GDP growth figure. In this scenario, the central bank opted to watch demand pull inflation by escalating the interest rates which brought in capital to the country, thus increasing the demand for the Canadian dollar in the international market. This is directly correlated with an appreciation in the currency. Prices of resource based raw materials have also been on the rise, which according to figures for the economy account for a significant portion of Canadian exports. The oil rich Canada along with strong deposits of copper and nickel has been able to benefit from the price hikes in the commodities as well as seeing the loonie go up in value.
One beneficiary of this is the commodities businesses themselves as they are able to enjoy higher intake as a result of the rising Canadian dollar. This is because there are not many substitutes for commodities such as oil and others are in short supply. The US dollar denominated debt of the Canadian enterprises will be easier to pay off as a result of the appreciation and also allow businesses to invest in capital expenditures on machinery and software from the US because of the rising currency. The hit has been taken by the manufacturing sector however. Canada was already dependent on resource based exports and this situation is making it more dependent on the sector. Technology and other manufactured items have become less competitive in the international market leading to loss in competitiveness of the economy where it had already fallen from 13th to 16th place in the recent figures. Manufacturing jobs are also being hit and continued to decline amid pressure on the sector from the rising loonie.
Assess the impact of the rising dollar on Canadas competitiveness in the forestry industry particularly with the United States.
The forestry industry is of immense importance in Canada which is able to make use of its vast landscape and abundance of forests to produce products for domestic consumption as well as export. The industrys contribution to the GDP was about 2.7 in recent years, backed by the countrys position of being the largest exporter of products from the industry in the world. However, the rising Canadian dollar has begun to hit the forestry industry hard.
The US is the largest export market of the industry. The appreciation in the currency means that Canadian products become less competitive as compared to domestic ones and the companies will lose out on trade and exports in the sector. Already the housing sector has been on the decline in the US in the wake of the sub prime mortgage crisis which has hit the market and the situation is being aggravated by the strong position of the loonie. The expenditures of most of these firms are denominated in Canadian dollar but sales are accounted for in US dollars which are an unfavorable outcome when the appreciation of the currency is considered. The Canadian dollar has usually been linked with the changes in commodity prices which is one of the reasons for the present rise but in the case of some products of the forestry industry such as lumber and paper, the rise in commodity prices has less of an impact, being dictated more by demand factors in the industry base.
There is a strong need to adjust to the changing position of the loonie and revamp the forestry industry. Since credit will be cheaper as a result and debt payments denominated in US dollars will be made easier, the forestry sector can embark on capital intensive investment and adjustment, bringing in new and efficient machinery to plug the gap introduced by the rising Canadian dollar. This may help the industry regain its competitiveness against the US counterparts who have seen their position improve relatively on the back of the falling US dollar and hence increased demand for their products due to lower effective prices. Canadian firms will thus have to adjust and invest strongly in efficiency which has been made easier though because of the strong currency. It is a long path ahead for the industry however.
Identify the roles played by the Bank of Canada and the Government in Canada in dealing with this problem and assess the pros and cons of any action that could be taken specifically by the Bank of Canada or the Government of Canada to alleviate the problems facing the forestry industry.
The government has been attempting to aid the forestry industry because of the disadvantage it faces because of the rising Canadian dollar relative to the other industries and its strong contribution to the GDP of the country. This has been pursued through a string of financial incentives to help the industry adjust and invest in efficiency. A strong support has been given to value added manufacturing which brings in higher margins as well as conservation of power via loan guarantees targeted towards activities that foster that. Additional money has been put forward to aid investments as well as the construction of access roads and other facilities. Electricity cost incentives are being offered to the manufacturing part of the industry such as paper mills, showing a strong support for the value added manufacturing sector. The Bank of Canada has also been monitoring the path taken by the global economy and the recent recession to assess the impact on Canada. The financial crisis has hit the US market which has in turn bided badly for Canadian forestry. However as yet, the Bank of Canada has refused to lower interest rates. Continuing pressure following recovery from recession is prompting the bank to step in to quell the rise in the loonie which is expected shortly.
These steps are useful as they not only help the industry cope with the adverse impact of the strong loonie but also point a direction to follow to improve the competitiveness of the industry. Financial incentives help quell some of the costs of the adjustment process and investment in infrastructure as well as fostering of the value added sector not only provides a lifeline to the industry but is also in line with the governments effort to reduce reliance on resource based exports and move to the value added sector in the international market. There are certain drawbacks however. The adjustment process will take a long time and thus may require a continued commitment from the government. Given the strong contribution of the forestry sector to the GDP and the employment it generates in provinces such as Ontario, if the measures prove inadequate then it will have a tremendous impact on the whole sector and could shake the economy as a whole. Furthermore, some of the governments incentives are contingent on conservation of poplar and birch etc which may not be the best time to pursue such policies as the industry is already facing stiff competitive pressure from the US. Bank of Canadas move to curtail rise in the loonie could help the forestry industry recover as the constantly lagging competitiveness wont remain as much an over riding factor. However, the refusal to lower interest rates may mean credit will not come cheap for investment and continued capital flight to the country may make controlling the Canadian dollar more difficult.
Referencing the framework provided in Stanbury and Moores article entitled Role of Interest Groups in Influencing Public Policy in Canada, identify a Canadian interest group that represents business in the forestry sector and who are encouraging action be taken to deal with the rapid rise of the Canadian dollar.
The Forest Products Association of Canada is a special interest group that has been addressing the need to take action against the rising Canadian dollar and its flamboyant head Avrim Lazar has been in the media advocating their stance.
B. Explain how the interest group fits the framework presented in the article and using the framework explain and demonstrate with examples how and why it has encouraged strong action by the federal government. Give real examples of what actions the group is pursuing.
The interest group taken in the question has been actively involved in putting forward the voice of the paper and pulp manufacturers and the other related producers in the forestry industry. The group has been relatively less involved in litigation. As the framework points out, most of the interest groups tend to support litigation indirectly by getting involved in funding activities and providing substance rather than directly go for prosecution. The conspicuous absence of the group from any major litigations but the success in terms of getting the government to support the forestry sector speaks of this indirect support generation that the group is able to generate. An example is the recent announcement of financial incentives by the government for the forestry sector which included electricity rebates as well as finances for value added product services. The group was also able to acquire this support for the sector without having tough provisions with regards to conservation of birch and poplar trees which were offered as a separate incentive, not linked to the overall billion dollar set of incentives.
The group is primarily involved in heavy lobbying activities which are spearheaded by Avrim Lazar recently. His rhetoric in the media backed by the lobbying activities at the Canadian parliament and the bank of Canada have drawn action such that the central bank is considering finally to curtail the rise in the loonie further after years of steadily high interest rates and reports suggesting the appreciation in the Canadian dollar benefited most industries. The framework also highlighted the role of cross border interest group action because of globalization. This is increasingly true of the FPAC. Canadas forestry is mainly dependent on the US market where most of its products are sold. Thus to counter the US step to put duties on softwood lumber, the government handed the group an amount equaling 17 million dollars to raise awareness in the US of the adverse consequences this will have on the US market and also to suggest a range of alternate solutions that could be considered. This was an example of effective cross border activity by the interest group. The strong media presence of the group bears testament to its use of media and technology in its efforts which could hamper some of the steps MPs could take independently but could also mean that the group could aid the government in advancing the cause of Canadian forestry in the global world through a limited partnership.
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