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Strong currency affects exporters, causing losses in competitiveness on international markets. The Canadian dollar hit a 3.5-year high recently, as the market reacted to concerns about higher inflation and about the long-term effectivity of recovery measures in the US. “Traders are also worried about the possibility of a downgrade of U.S. government debt after ratings agency Standard and Poor’s warned Monday of a one-in-three chance it would lower the rating within the next two years,” posted CBC news.
According to a TD Economics report, the strong Canadian dollar, combined with rising unit labour costs, is eroding export competitiveness on the international market. In the 1990s and 2000s, the Canadian dollar wasn’t so strong; it fell far below estimates of a long-term fair value by 2002, which created a considerable competitive advantage for national exporters. Firms weren’t forced to take action in company improvements and business innovation. Later, productivity growth declined and some business investments led to disappointments. In the list of average annual growth in manufacturing output over the last decade, Canada ranks third last among 20 developing and developed economies. TD Economics warns that competitiveness will be a pressing problem for national exporters.
Moreover, strengthening currency can cause troubles in various industries. The Business Review of Canada explains: “As the Canadian dollar swings upward in value, the goods and services sector is now not only continuing to compete amongst Canadian business, but also foreign import competition has increased because of their new association as a cheaper alternative.”
TD Economics advises exporters to take resolute measures, such as implementing new technology and innovations, increasing spending on research and development, and developing specialized skills training programs for the workforce. “Companies do not have to be innovators – they could simply become imitators of high-productivity foreign firms,” the report concluded.