Writing in Maclean’s Magazine, Macdonald-Laurier Institute Senior Fellow Philip Cross explains why Dutch disease – the idea that surging revenue from resource exports can lift the loonie to levels that stifle manufacturing – is not a problem in Canada.Philip Cross

The item appears as part of a debate with Unifor Chief Economist Jim Stanford.

By Philip Cross, Feb. 3, 2015

Canadian manufacturers did suffer a mild case of Dutch disease during the initial move to parity with the U.S. dollar leading up to 2007. Since then, manufacturing firms have had to deal with parity with the U.S. greenback in almost every one of the seven years before 2014. Most of them adapted successfully to this new reality; those that could not went out of business a long time ago. Successful firms adapted by: searching out new markets in Canada, notably out west, to replace U.S. export markets; using more imported inputs as a “natural hedge” against the high dollar; and boosting productivity. As a result, business investment in manufacturing has risen every year since the 2009 recession and, more recently, factory-output growth has been one of the fastest of any industry in Canada.

What now, as oil prices tumble? The outlook for manufacturing was already good as the U.S. economy improved, notably in the auto and investment sectors. This will keep the volume of our factory output growing faster than most industries. The lower dollar and oil prices mean that profits earned on this output will increase significantly, as oil prices reduce input costs, and revenues generated by exports to the U.S. increase in lockstep with the lower dollar. However, it’s unlikely that firms will change their long-term planning strategies from the assumption of parity with the U.S. dollar, and will continue to emphasize raising productivity. This means manufacturing job growth will be limited, and confined to the highest-paying jobs. This is the lesson manufacturers learned from their sometimes bitter experience with the rising dollar in the last decade, and one they are unlikely to forget.