THE WESTERN CANADIAN LUMBER WORKER)» APRIL-MAY, 1977 CANADIAN DOLLAR DEVALUATION )DES PURCHASING POWER OF WAGE DOLLAR By DOUG SMYTHE Regional Research Director Z Considerable excitement was generated by the dramatic decline in the value of the Can- adian dollar during November, 1976. The exchange value of the Canadian dollar plummeted from a high of approximately $1.03 U.S. dollars in early November to a low of 95.5 U.S. cents on November 30. Since- then the value of the Canadian dollar has fluctuated between 95 and 99 cents U.S., and it will probably stabilize at 97 cents U.S. for the next few months. This value represents a decline of 6 cents from the levels that prevailed throughout most of 1976. 5 foal ae EFFECT ON man B rT hwWwe YU HN = [A MEMBERS WO RW hh rae Under ordinary circum- stances a decline of this magnitude would have an extremely positive impact on the welfare of the average IWA member. Most British Colum- bia wood products are ex- ported to the United States and the depreciation of Canadian currency relative to U.S. dollars will bring about higher levels of production and em- ployment in the industry. There are three reasons for this development. 1, Canadian wood products have become cheaper to U.S. buyers. During November, 1976 the value of the Canadian dollar dropped from $1.03 U.S. to $.97, or six cents. Before the devaluation took place a U.S. buyer could only purchase 97 cents worth of Canadian lumber for his U.S. dollar because it took an extra 3’cents U.S. to buy a Canadian dollar. Since the devaluation, how- ever, the U.S. buyer is now able to purchase $1.03 worth of Canadian lumber with his U.S. dollar because he will receive anextra 3 cents U.S. when he buys a Canadian dollar. In other words, U.S. buyers will be able fo purchase more Canadian lumber because the price of the lumber in U.S. dol- lars has suddenly dropped by almost 6%. This means that U.S. buyers will be encouraged to buy more lumber from Canadian producers, who now enjoy a price advantage, than from American producers. 2. Profit margins of Canadian wood products companies will increase. If all B.C. forest products exports to the United States are considered, in- cluding pulp and paper, each one-cent drop in the value of the Canadian dollar will produce $23 million in ad- ditional sales revenue. At current levels of exports, the six-cent devaluation of the Canadian dollar could result in increased sales revenues for this industry of approximately $125 million in one year alone. emma HOUSING It is important to emphasize, however, that during the past 3 years both housing starts and pulp and paper consumption in the United States have been severely depressed compared to the boom years of the early 1970’s. During 1977, on the other hand, U.S. housing starts are predicted to be 1.85 million units, which will compare favorably with the 2.1 million . starts of the last boom year of ; 1973. Even before devaluation took place, British Columbia producers were set to take advantage of a substantial rise in U.S. dollar prices which always a ies a rising lumber market. In addition to benefiting from rising U.S. _ dollar prices, however, B.C. - companies will enjoy a com- petitive edge over US. oe because _ the ian dollar devaluation has made Canadian lumber cheaper in U.S. dollars, And 3. Canadian production costs ome cheaper than American production costs. ch publicity has been given higher unit labe evail in the British Columbia wood roc industry. But when valuation of the anadian dollar caused the tice of B.C. lumber to fall in U.S. dollars, it also brought about a substantial decline in e relat s of B.C. fe oT ADTe Lip w io & AAD UPr labour. For example, before the 1975 negotiations took place between the IWA and B.C. Coast companies on the one hand, and between the IWA and Coast companies in Washington and Oregon on the other, labor costs in British Columbia would have ex- ceeded U.S. labor costs by 61 cents an hour if the Canadian and U.S. dollar had been at par. : At that time the Canadian dollar was worth 2.7 cents less than the U.S. dollar, however, so that B.C. Coast unit labor costs actually exceeded U:S. costs by only 40.2 cents. If the exchange values had been reversed, as they were throughout most of 1976, B.C. costs would have exceeded U.S. Pacific Northwest costs by 81.8 cents, or 41.6 cents more than the actual dif- ferential which prevailed during 1975. The recent devaluation of the Canadian dollar will bring about a similar improvement in comparative labour costs for B.C. companies who export lumber to the United States. B.C. companies will move to a favorable position of relative labour costs and the dif- ferential with U.S, costs will be reduced to one-half of that which prevailed before devaluation took place. All of the developments discussed above will have a beneficial impact on levels of production and jobs for IWA members in British Columbia. Unfortunately, current cir- cumstances will not permit the improved economic conditions for the industry to be shared with the average IWA member in the form of substantially improved earnings. EFFECT ON IWA MEMBERS AS CONSUMERS While the devaluation of the Canadian dollar has resulted in a6 percent price advantage for our export industries, it will also bring about a 6 percent price increase for key imports consumed by IWA members. Examples include food, oil and auto parts. Taken together these items constitute a large portion of the goods and ser- vices whose prices are measured by the Consumer Price Index. When these prices rise, IWA members will suffer a substantial decrease in the purchasing power of their wage dollar. During the next 12 months the current devaluation is expected to increase consumer prices by between 0.5 and 1 percent. Unfortunately, this increase must be added to a natural rise in the. prices of food and petroleum imports which market conditions had already dictated for the next few months. Practically all of the moderation in the rise of the Consumer Price Index in recent months has been due to smaller increases in the prices of food and petroleum products in both Canada and the United States. .When the prices of these items begin to accelerate again during the next few months, however, the entire Consumer Price Index will also climb at a faster pace. And that increase will be com- pounded by -a_ further automatic increase in the price of imported goods and services brought about by the devaluation of the Canadian dollar. ROLL OF THE ANTI- INFLATION PROGRAM It is important to emphasize that the apparent moderation in the Canadian inflation rate during 1976 has not been a . result of the Anti-Inflation Program. Food and oil prices were mainly responsible for this improvement and they are not controlled by the Program. Moreover, the true rate of inflation in Canada is much higher than the annual rate of 6.0% which has been recorded for the past few months by the Consumer Price Index. Ac- cording to a more sophisticated measure of in- flation, known as the Gross National Product Implicit Price Deflator, the underlying annual rate of inflation is closer to 9 percent, and the devaluation of the Canadian dollar will add another 1 to 2 percent to this figure during the next 12 months. One of the major defects of the Anti-Inflation Regulations is that the maximum per- missible percentage increases in compensation for each program year are determined by the anticipated increase in the Consumer Price Index, not the more sophisticated Im- plicit Price Deflator. During the current program year the anticipated rise in the Con- sumer Price Index, known under the Anti-Inflation Regulations as the Basic Protection Factor, has been set at 6%. In view of the true un- derlying rate of inflation in the economy, however, a 6% Consumer Price Index factor is highly unrealistic. IWA members are already ex- periencing, on the average, far greater increases in the cost of living than are measured by the Consumer Price Index. And during the next few months the cost of living will be further increased by the price increases for food and oil products which have been discussed above. On the other hand, British Columbia wood products companies will enjoy the best of both worlds. Prices and profits for export industries have been specifically ex- cluded from controls under the Anti-Inflation Regulations. Employers in this industry will therefore be able to reap the benefits of price increases in DOUG SMYTHE the U.S. market which will be unrestricted by the Canadian Anti-Inflation Program. During past upturns in U.S. housing starts U.S. prices for B.C. lumber have risen 60 percent in one year alone. When these real price rises are coupled with the price. and. profit advantages resulting from the recent devaluation of the Canadian dollar, the economic health of the British Columbia wood products in- dustry should be substantially improved during 1977. PY TD a ss YGea Ea It is certainly true that the devaluaion of the Canadian dollar and the Federal Anti- Inflation Program will permit the average B.C. wood products company to enjoy the best of both worlds. And the dollar devaluation in par- ticular will result in substan- tial increases in production and jobs for IWA members. But the real earnings potential of the average IWA member will be severely limited by the devaluation of the Canadian dollar and the Anti-Inflation Regulations. Too much credit has been given to the role played by the Quebec elections in the devaluation of the Canadian dollar. It is true that fears of separatism may have un- dermined the confidence of American investors in the Canadian dollar. But the Quebec elections had only a marginal influence on ex- change rates because there were underlying economic reasons for the Canadian dollar’s decline. During the first 10 months of 1976 the Canadian dollar had in fact been grossly overvalued compared to the American dollar. Throughout most of 1975 the Canadian dollar had ex- changed for approximately 97 There can be no doubt that the devaluation of the Can- adian dollar’ will seriously erode the purchasing power of the worker’s wage dollar. If the workers were free to negotiate substantial wage increases to compensate them for rising import prices, however, the lost purchasing power could be restored. But the Anti-Inflation Regulations will prevent IWA members from doing so, and the companies will be able to retain a large portion of the windfall profits which the devaluation of the Canadian dollar will bring them. ARAIircR to 98 U.S. cents, but by January of this year its value began to climb: sharply ‘because of a sharp upswing in borrowing in* the United States by Canadian corporations and _ provincial and municipal governments. Canadians were encouraged to borrow in the U.S. market because interest rates there have been running 3 to 4 per- - cent lower than comparable rates in Canada. Unfortun- ately, when the borrowed U.S. funds were exchanged into Canadian dollars in order for them to be spent in Canada, such a large-scale conversion created an artificial demand for Canadian dollars and an overvaluation of Canadian dollars relative to U.S. dollars. WAFER 8 e2AMHAAL CFA BDI. VE WILK BDYUUN JVJIADILIZE During the Fall of 1976 this trend had already begun to reverse itself. Most large Can- adian borrowers had already filled their needs in the U.S. market during the first half of the year. AS a result of the sharp decline in Canadian borrowing of U.S. funds the Canadian dollar has finally dropped back down close to the value of 97 U.S. cents which prevailed during 1975. And all indications are that the Canadian dollar will stabilize at that value for the next few months.