Mo’ money, mo’ problems
Is dollar parity too much of a good thing?
James Battershill
A battle cry has risen up from consumers nationwide: “Why are we still paying significantly more for things than our American counterparts?”
When describing the effects of dollar parity, terms like “gouged” and “ripped off” are being used by many Canadians, including high-ranking politicians like finance minister Jim Flaherty. Canadians are demanding that prices be lowered, so that we may reap the rewards of the almightily loonie as its value rockets above that of the greenback. Unfortunately the price cuts Canadians are looking for are not going to come, at least not to the extent Canadians want them to. Any lowering of consumer prices you see in the near future will be the result the basic supply demand principals of the market. Domestic retailers are going to cut prices based on a reduced demand for domestically sold goods as Canadians begin to pump their money into the U.S. economy by buying their iPods, jeans, snowmobiles, books, and CDs south of the border.
Why then aren’t prices being slashed in Canada? The main reason is because Canadian prices for consumer goods were never originally set based on comparative American prices alone. Common perception of the issue is that at some random point in time when the loonie was weak Canadian retailers looked at how U.S. retailers priced a product and multiplied that figure by the weak exchange rate. Thus the resulting outrage when the loonie reaches or exceeds the value of the greenback, resulting in no change in the final price paid by Canadians. The problem is that retailers don’t care about currency value; they care about profit.
A certain minimum profit is expected by a retailer from the sale of a good, otherwise the market will not provide the good in question. It is very possible that the expected profit is a comparative figure based on exchange rates, but there are many other factors which are independent of currency value fluctuations that factor into how the retail price is arrived at.
Simply put, the U.S. has a more business-friendly environment than Canada. The political and economic structures which the American market operates in are more conductive to higher profits than those in Canada. If the rent, wages, and transport costs that have to be covered by the price of a product are higher in Canada, and are always paid in Canadian dollars, why shouldn’t we expect to pay higher prices? Further, a firm will insist on a higher level of profit in Canada because that profit will be subject to more corporate tax than a similar profit is in the U.S. As well, if we are importing goods from the U.S. that Americans themselves imported, we shouldn’t expect to see a discount. This is because the value of the U.S. dollar is low, so Americans will be paying more to import and will demand a high price to export to make up for their losses due to low currency value. All these factors together mean that Canada’s economy and the loonie’s purchasing power are both independent of the American economy and the greenback (although they are influenced by it). The only significant exception to this will be goods that have a high initial purchase price for retailers and comparatively little value added, like jewelry. In this case there might be some significant price cuts if there is enough market competition to keep profits at a reasonable level. What is most likely to happen is retailers will drop prices over a short period to deter Canadians from shopping south of the border, but eventually prices will return to their normal levels. The only difference will be that you won’t see a comparative American price on labels.
Don’t get me wrong, I am not defending retailers who convince us to buy goods we don’t really need and then earn high profits, which are now made slightly higher if import costs go down. I’m just arguing that the change to these profits due to the increased value to the loonie isn’t as significant as may first appear. Then there are also the problems that are directly caused by the loonie being above par. If prices drop dramatically on imported goods, consumption of these goods will increase at the expense of those produced domestically. This, coupled with a lower international demand for Canadian products due to their increased price, could very well put us into the same position as the Americans are right now — where a large negative balance of trade is making their economy very unstable.
We should not be to overzealous about the value of the loonie, anyway. Currency value is based by-and-large on the speculation of financial investors, and increased financial investments can actually have a negative relationship with real economic growth. Even worse, the most potentially significant real economic investment Canada is seeing right now is in energy production in Albertan oil sands. The problem is that the resulting product of this investment (of Canadian dollars), is a product (oil) which is only sold on the world market using the American dollar. So we’re investing valuable loonies to produce a product which will garnish a lower return because it is paid for in less valuable greenbacks. A strong loonie is actually subsidizing American oil consumption in this instance.
While the Canadian government does have the ability to influence this problem, it is unlikely that they will do so. The strong loonie seems to be a source of pride for Canadians and dismay over not achieving a higher purchasing power is a shared concern. Politicians from all sides of the spectrum will not risk facing the wrath of the voting public by suggesting that a lower value for the loonie might actually be a good thing. Instead, politicians like Jim Flaherty will continue to champion the short-term desires of Canadians — more bang for our buck. While it might seem that this minority government situation is working in the favour of the masses by forcing politicians to listen to our concerns and demands, the problem is that we’re very often either short-sighted or just plain wrong.
James Battershill is a fourth-year global political economy student.
