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IMF Report - Tar Sands Oil Has Ruined Manufacturing

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From the Progressive Economics Forum:

A background study for the latest IMF report on Canada (see pages 42 to 51) adds further weight to the argument that the rise in the exchange rate of the Canadian dollar, driven in large part by high commodity prices, has underpinned a sharp decline in the US market share of Canadian manufacturers since 2000 and a major shift in the composition of Canadian exports from manufactured goods to energy and minerals. This report notes that China has taken market share in the US at the expense of Canadian manufacturers without underlining the fact that China’s currency is closely linked to the US dollar ie. the high Canadian dollar puts our manufacturers at a disadvantage compared to both US domestic producers and China based exporters to the US.

On page 43 of the IMF report:

1. Canadian merchandise exports have been on a roller coast over the last two

decades, surging to 40 percent by end-2000 and falling to 24 percent of GDP in 2010.

After 2000, the fall in exports as a share of GDP was predominantly concentrated in manufacturing, while energy exports continued to expand and now represent about one fourth of all merchandise exports. While exporters benefited from a depreciation of the Canadian real effective exchange rate (REER) in the 1990s, commodity prices surged in the 2000s and were accompanied by a large appreciation of the REER.

Higher commodity prices may well have an overall positive effect on the Canadian economy

(see Carney, 2012).2 But by driving the real exchange rate up, they may have also contributed

to Canada’s loss of external competitiveness and faster decline of its manufacturing share of

value added over the last decade (chart). In this chapter, we focus on the factors behind

Canada’s loss of external competitiveness, and in particular we try to assess the role played

by higher commodity prices and the emergence of China as a major trade power.

I would qualify that any overall positive effects that they might take as a given rather than a debate point, are still temporary effects that end as soon as the resource starts becoming depleted and more costly to continue extraction.

You would think that it wouldn't take a rocket scientist to figure out that a high dollar is going to damage economic activity like manufacturing, which adds value rather than shipping resources off to foreign markets. But the right....especially the oil-funded right, have been vigorously spinning a false narrative that dirty tar sands bitumen benefits all of Canada economically. This should be the final nail in the coffin for the right wing economic policy of just hoovering out oil and other natural resources for export as fast as possible, but I wouldn't count on it yet! There is too much money at stake for Canadian oil and mining companies, and they own too much of our media already to let this report intrude on all of the panicked narratives now that they won't get their pipelines built to ship crud out of Canada to be processed into something resembling oil.

The report also notes the negative effects on manufacturing caused by the influx of cheap imports from China and more recently other impoverished third world nations thanks to 'free trade' agreements that allow manufacturers to just close factories and pick up and move production to China or Bangladesh without facing any reprisals when shipping the products back to North American markets. After the double whammy of open door imports and relying on oil exports, it's surprising that we still are making anything for ourselves anymore!

The tar sands aren't going anywhere! If it's that important, leave it in the ground for future need if it's really necessary. But the greed-driven oil industry and all of their flunkies who depend on cheques from them (like Alberta Premier Alison Redford) are in full panic mode that the U.S. will be able to get through the near future using gas and shale oil fracking instead. Once non-renewable resources are used up, they're gone for good! That should be obvious, but those who lobby for economies powered by resource extraction, act like it can just go on forever. But, as soon as developers have to start digging deeper for lower quality grades, costs rise and when it's determined that the costs outweigh the rewards of extraction, the mining operation is closed and it's time for the company to move on and dig new holes in the ground.

And because the resource-dependent economy has seen their currency values increase due to resource exports, manufacturing exports decline, while the cheap dollar increases imports of all kinds. This is the Dutch Disease that oil extraction has created in every economy that has become dependent on large scale oil development; and should we be surprised that tar sands development has hollowed out manufacturing and other economic activity.

Edited by WIP

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From the report:

The large exchange rate appreciation between 1999 and 2011, driven by the surge in commodity prices, explains close to 60 percent of the fall in Canada’s market share of U.S. manufacturing imports in the same period.18 The increased presence of China as a competitor in the U.S. market explains around 40 percent of the loss. Canada’s response to the new competitive challenges from China and stronger currency has been hindered by the lackluster growth of productivity.
Except the report completely fails to take into account the effect of US monetary policy on the exchange rate - i.e. the fed has been printing money like there is no tomorrow and that is depressing the US dollar. The IMF report leaves one with the impression that the change in exchange rate is entirely due to commodity prices - an assumption that is clearly false.

If you take into account that the US dollar would have gone down no matter what commodity prices did you would find that the effect of commodities is significantly less than what the IMF report claims.

What is interesting is this report is the reverse of the last one report WIP was waving about because this report took into account the effect of china but ignored the fed. The last one took the fed into account but ignored the effect of china. proof of the old adage: there are lies, damned lies and statistics.

Edited by TimG

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So the NDP leader was right?
No. We have yet another study that fails to take into account all of the factors and, as a result, inflates the impact of the factors it did look at.

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Except the report completely fails to take into account the effect of US monetary policy on the exchange rate - i.e. the fed has been printing money like there is no tomorrow and that is depressing the US dollar. The IMF report leaves one with the impression that the change in exchange rate is entirely due to commodity prices
oh my! If one accepts what you're claiming, are you making the point that the U.S. is a currency manipulator? Why... just a few days ago, G7 Finance Ministers and Central Bank Governors reiterated the point, that they haven't been... and will not be... targeting exchange rates:
We, the G7 Ministers and Governors, reaffirm our longstanding commitment to market determined exchange rates and to consult closely in regard to actions in foreign exchange markets. We reaffirm that our fiscal and monetary policies have been and will remain oriented towards meeting our respective domestic objectives using domestic instruments, and that we will not target exchange rates. We are agreed that excessive volatility and disorderly movements in exchange rates can have adverse implications for economic and financial stability. We will continue to consult closely on exchange markets and cooperate as appropriate.

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oh my! If one accepts what you're claiming, are you making the point that the U.S. is a currency manipulator? Why... just a few days ago, G7 Finance Ministers and Central Bank Governors reiterated the point, that they haven't been... and will not be... targeting exchange rates:

Where did Tim say the US is a currency manipulator? The US is printing money to fund an enormous military and massive entitlement spending... and Bernanke has promised to keep printing money until the US unemployment reaches 6.5%. The US is not intervening in FX markets, the markets are simply reacting to the domestic policy decisions of the US.

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did not say that... I asked a question - one in line with the absolute liberty MLW member 'TimG' took with his statement/interpretation of the IMF study finding. As an aside, isn't it convenient for a country... say the U.S.... to fancy up a "domestic" practice with a name like, 'quantitative easing' and realize an ancillary result... like currency devaluation - while at the same time have some of its politicos label China a "currency manipulator". Just sayin!

now, as for the study finding that MLW member 'TimG' falsely claimed/interpreted, the study most certainly qualifies the exchange rate appreciation to, within its regression testing, recognize the ties to both the rise in commodity prices as well as U.S.-Canada impacting variables (like the Canada-U.S. productivity differential, the Canada-U.S. interest rate spread). What the study did find was that the rise in energy/metal commodity prices led to a 25% appreciation of Canada's (multilateral) effective exchange rate... or ~75% of the total appreciation observed over the period in question. For comparison, the Bank of Canada itself, attributes commodity price increases as 50% of the (bilateral) appreciation of the Canadian dollar vs. the U.S. dollar.

in any case, the study's actual market focused methodology and it's ultimate conclusion relies upon the aforementioned commodity driven exchange rate appreciation; a result that is clearly tested for, analyzed and identified... MLW member 'TimG's' false statement/interpretation simply chooses to ignore it. Or, more pointedly, it would appear MLW member 'TimG' simply went right to the study conclusion without even considering the underlying leadup analysis/support... cause, apparently, he knows more than the IMF!

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From the report:

Except the report completely fails to take into account the effect of US monetary policy on the exchange rate - i.e. the fed has been printing money like there is no tomorrow and that is depressing the US dollar. The IMF report leaves one with the impression that the change in exchange rate is entirely due to commodity prices - an assumption that is clearly false.

If you take into account that the US dollar would have gone down no matter what commodity prices did you would find that the effect of commodities is significantly less than what the IMF report claims.

What is interesting is this report is the reverse of the last one report WIP was waving about because this report took into account the effect of china but ignored the fed. The last one took the fed into account but ignored the effect of china. proof of the old adage: there are lies, damned lies and statistics.

Because this like every other issue, is not an either/or situation. Which is what you seem to look for on every issue you comment on! A nation's currency can lose value if it is printing money....or more correctly in the modern banking system adding too much credit too fast, or a nation that is a major net importer of oil like the U.S. will see a drop in currency value if more money has to be spent on oil imports. It's not an either/or situation and NO, the U.S. Dollar decline cannot be detached from the increase in oil prices.

Going back in time, the economic malaise that was pervasive through the 70's just happened to coincide with the increase in oil prices, as the mostly debt-fueled economic growth of the 80's - attributed to Reagan and Thatcher, just happen to coincide with the sharp drop in oil prices when non-OPEC nations like Mexico and England/Norway started becoming major oil producers. And I wouldn't blame all of the present debt loads and economic ruin on George Bush II's unbridled war spending either, which doubled the U.S. national debt. The increase in oil prices preceded the slowdown in imports and the banking meltdown five years ago. And I have no doubt that the Obama Administration is banking on Bakken shale oil and tar sands oil imports to save the economy again, regardless of whatever empty slogans he spouted in his State Of The Union Address....so as for the other thread, Obama is going to approve the Keystone XL Pipeline.....I'd be willing to put money on it! http://therealnews.com/t2/index.php?option=com_content&task=view&id=31&Itemid=74&jumival=9633#.USKBrGe1MfS

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