Conventional wisdom suggests a lower currency value is good for Canadian export values, but our latest report, A Look at Global Trade 2015, proves this isn’t always true.
Currency matters, but how much?
In theory, as our dollar declines, more buyers should step in to buy more Canadian exports as they become cheaper relative to similar products offered by other exporters. This should – and does – happen quickly in the U.S. market, where Canadian exporters have a firm competitive position based on long-term relationships with U.S. buyers.
In other export markets however, it can take longer for exchange rates to affect Canadian export values because trade flows aren’t as established in those markets. European buyers may be more willing to buy Canadian exports when the loonie falls, but it will take more time to source Canadian suppliers and write contracts.
Further, even as the Canadian dollar falls relative to an importer’s currency, it may still be stronger than currencies of other exporting countries. As a result, Canadian exports don’t always see a boost despite a lower dollar.
Consider the different impacts on different commodity groups
Exports of different commodities are impacted differently by changes in the exchange rate.
Canada is a major exporter of a number of different commodities such as livestock, oilseeds and pulses. The impact of the dollar’s fluctuations varies by commodity group because each group has different trade characteristics. For instance, livestock exports only go to the U.S. market so only one exchange rate (the CAD/USD) is going to impact Canadian trade values.
Other exports however, go to more than one market, each of which is unique. 71 per cent of Canada’s manufactured food products are exported to the U.S. where again, the exchange rate matters to trade values.
Our food exports to Japan and Mexico are also affected by changes in the exchange rates – it just takes longer for the impacts to be felt.
Other top Canadian food export markets (Europe and China) aren’t as sensitive to the exchange rate, but for different reasons. China’s income growth is more important to increasing their imports of Canadian food exports, while demand in European markets for high-quality products may be less price-driven.
Crop exports differ from either livestock or food exports. We looked at the overall category of crops, a heavily diversified product category including fruits and vegetables, oilseeds and grains. Because of the large number of different commodities included in “crops”, our exports also go to a more diversified set of export markets: only 25 per cent go to the U.S. That lack of market concentration seems to make a difference to the sensitivity of each market’s imports of Canadian crops, especially over time, to changes in the exchange rate.
Understanding the complex interactions underlying exchange rates is good for business, but only as one component of an overall strategy. Productivity, innovation and solid trade relationships will contribute more to Canada’s long-term success as an agriculture exporter than the value of its currency.
Martha Roberts, Economic Research Specialist
For more on the drivers of Canadian export values, watch the video Exchange Rates and their Effects on Canadian Exports and stay tuned for my next blog post on Emerging Markets and their Effect on Canadian Exports.