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Industry Watch

Forest industry has a lot at stake in linking loonie to the American dollar

By John Clarke

The little loonie is just about the perfect logo for Canada Inc these days: a gentler, kinder dollar, no pretensions to power, a size-six coat-tail to the American matinee idol up there in the lights all over the world.

A stubborn little thing too, resisting all the brave talk of Finance Minister Paul Martin and Bank of Canada governor David Dodge on booster trips to the financial stars in New York City.
It may be true, as they say, that international investors aren't paying enough attention to Canada's sterling economic performance in the last few years. But the New York people don't seem to be easily fooled.

Gail Fosler, chief economist of the United States Conference Board, says talk never works because there's little the investment managers don't already know about the Canadian situation. And according to Morgan Stanley chief economist Stephen Roach, the market is always suspicious of attempts to manipulate currency with rhetoric.

Yet, while the loonie is apparently going to be left to fend for itself, it's being battered by President George W Bush's latest budget and US productivity that continues to outstrip Canada's.
The budget's stimulus package will return the US to deficits. That puts more pressure on Canada to cut taxes to compete for investment that, in turn, might force us into deficits again, likely driving the loonie down still further.

All of which is giving impetus to a debate on whether we should scrap the loonie and adopt a common currency with the Americans, either dollar for dollar or pegged at some proportional value.
Professor Robert Mundell, Canadian-born Nobel Prize winner in economics and an architect of the European Union Euro, says the loonie should be set within a range of 60 cents to 70 cents US.
As the biggest single exporter to the US-at about $10 billion a year- the forest industry has a huge stake in the outcome of any kind of exchange rate debate. It has been calculated that a one cent increase in the dollar's value in 2000 would have cost lumber producers about $150 million-25 per cent of that year's net earnings of $606 million.

Forest products, particularly lumber, are among the basic commodities doing poorly and helping to depress the currency traders' confidence in the Canadian economy.
Canada may have outperformed the US over the last five years, moving into budgetary surplus ahead of the Americans and posting stronger growth numbers as well as consistently lower inflation, which have all been part of Martin's rhetoric. But our smaller economy, still heavily dependent on commodities, is hardly an anchor of security for investors in an unstable world.
Whether to become part of the one currency that is an anchor is becoming an increasingly moot point. A line-up of economists, chief executive officers and assorted others have started pushing for it or at least for a debate on the issue.

One of the most strident voices is Sherry Cooper, chief economist of BMO Nesbitt Burns Inc. Described as a global strategist, she says straight out that the loonie's days are over.
To Cooper, it is in "secular decline". It has failed as a shock absorber in times of economic trouble, has become a "licence to under-perform" and sinks rather than floats. Let's dollarize while there's still something to bargain with, she says.

Paul Tellier, chief executive officer of the Canadian National Railway, is not quite so blunt. But there's no doubt he speaks for more and more CEOs (half of them in a recent poll) when he calls for a national debate on closer economic ties with the US.

A common currency would be part of a closer economic union that, to integrationists, would be perfectly compatible with sovereignty. Yet sovereignty is not just a patriotic issue. Many economists argue it ensures flexibility in managing problems that international markets sometimes throw at Canada.

So the debate is far from academic for the forest industry. It's been said often enough to have acquired the mantle of truth that a cheap loonie has been a great boon for lumber, even in the face of American attempts to restrain softwood shipments into their market.
In its way, the loonie is a subsidy the Americans can't do anything about by way of countervails or anti-dumping duties. Softwood sales to the US have been tracked precisely to the exchange rate-up when the loonie is down and down when it's up. Hence the importance of any move to a common currency.

The loonie, together with more efficient production systems, helps lumber to compete somewhat better than other industries where the productivity gap is larger. Whether that gap is a cause of dollar decline or a symptom of it is very much an open question.
Professor Michael Percy of the University of Alberta says that, until the reasons for the productivity gap are understood, it's unwise to talk of dollarization.

"Until we find out whether it's our tax policies, capital gains practice or a general failure of management and business practice and how to deal with these issues, going to dollarization would have a significant negative effect," he says.
"As for softwood lumber, once the current round (in the export dispute) is complete, what is the next step? If the Americans are successful in forcing the Canadian provinces to replicate timber allocation in the US and we are still successful in the US, the next target would be the Canadian dollar."

What's missing here amazingly is a voice from lumber in the emerging debate. There are other preoccupations but none of them more important than the exchange rate. It would be unfortunate if they diverted attention from an issue with such potentially long-term implications for the forest industry.

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