A Cheap Loonie

A common Canadian misconception states that a low valued loonie is good for domestic business. The logic is simple to follow. Since our biggest trading partner is the States having a dollar worth less than theirs encourages them to buy goods from us due to their increased purchasing power — which is good for the expansion of Canadian business interests. Our competitive edge is our cheap dollar interpreted as beneficial to the manufacturing based export industry and politically we have tried to keep our dollar worth less to appease these manufacturing interests.

But this logic is faulty in a couple of ways. First manufacturing industries are now globally competitive. For instance our cheap labor advantage has been completely negated by countries like China who manufacture their goods much cheaper according to the worth of their dollar comparative to Canada’s.

Instead Canada’s competitive edge lies in our technological capabilities and a low valued dollar inhibits Canada’s ability to purchase technology abroad. The best way to negate the advantage of cheap labor is with better technology. Picture eight men pulling a cart filled with 100 bottles of milk compared a single driver transporting 2000 bottles via gas powered van. Sure you got to pay the driver 10 times the wage of the cart puller plus owing $30,000 for a van, but the ability to distribute 20 fold the product more than makes up for the initial capital investment. Canada needs a strong dollar to buy better technological capabilities abroad.

These technologies are usually developed in free counties with strong dollars—United States and Britain—and with a low valued dollar it is increasingly hard to purchase needed technologies so Canadians can compete against cheap labor pools. So in a sense instead of buying a van to deliver the milk Canada has chosen to hire more cart pullers forgoing the chance to be a nation of engineers, scientists, artists and doctors for the servitude of being a wage earning mule.

The worst aspect of this tragic logic is the fact our dollar naturally wants to climb—see dollar climbing 15 cents in the last 18 months. Being a resource nation, oil, gas diamonds, electricity, fish… with an unlimited ceiling, investors are frantically buying Canadian dollars which drives up the dollar’s worth on international markets (no matter how much inflation liberals have tried to create with massive amounts of spending). Instead we should be encouraging this climb and reaping the rewards of the increased purchasing power that a higher dollar provides.