Thank you, Chair.
I've distributed to members of the committee a short paper. There was a group of economists from the labour movement that met with the Bank of Canada this morning. This was prepared as a background note for that meeting.
In our view, the Canadian dollar is greatly overvalued compared to economic fundamentals. We see the key need now as being an interest rate cut by the Bank of Canada. That is by no means the entire solution to the problem. It's the immediately available solution that would be of most use in dealing with the problem. I think in the longer range there's a whole series of issues bound up with the international currency regime. The fact that the currencies of China and most other Asian countries are tied effectively to the U.S. dollar fundamentally makes the problem of overvaluation for us significantly worse.
In our view, an exchange rate at or above parity will destroy cost competitiveness for large and important sectors of the Canadian economy—not just manufacturing, but also, as my colleague has alluded to, cultural industries, tourism, anybody selling goods and services into the U.S., and for that matter, the Asian market, given their tie to the U.S. currency.
I think history teaches us that exchange rates can and do overshoot the level justified by fundamental economic factors, and that can persist for long periods of time with permanent structural damage being inflicted. One view of that damage can be seen by looking at the United States and what has happened to its manufacturing sector over the past few years as the U.S. dollar was overvalued.
How do we assess or correct the exchange rate? One way would be by purchasing power parity, which would take you to the low 80¢ range. Another really important benchmark for the manufacturing sector is the exchange rate that's needed to equalize unit labour costs between Canada and the U.S., and by most estimates that would be in the low 70¢ range. That's just given our lower level of productivity than the U.S. The fact is that now, in dollar terms, wage rates in Canadian manufacturing are equal to the U.S. Unless on average you have an exchange rate that offsets the productivity disadvantage, you're going to see significant shrinkage of the Canadian manufacturing sector.
In round numbers we've lost 300,000 jobs in the manufacturing sector already. That reflects the exchange rate appreciation that's taken place over the last two years. These exchange rate impacts operate with a lag for a number of reasons. It would be our estimate that if the dollar persists at parity, we're going to lose something in the order of another 300,000 jobs over the next two or three years, unless it falls back earlier.
So what is causing the surge of the dollar? Well, the conventional explanation, of course, is that it's an oil price effect, that Canada's dollar is a petrodollar, that this is what has driven the upward appreciation of the exchange rate. In point of fact, it's a misperception that the Canadian currency is a petrodollar. Only 12% of Canada's exports consist of oil and refined oil products. Energy exports are larger, but that includes natural gas. Natural gas prices have not been shooting out of sight. They're no higher than they were a year ago.
The fact that our dollar adjusts so quickly in relation to oil prices is, on the face of it, rather absurd. If it was the case that the increase in the price of oil was improving our balance of payments by increasing our exports, an oil price effect would be to improve our balance of trade. In fact, what we're now beginning to see is the emergence of a huge and growing manufacturing trade deficit, and a severe deterioration in our trade balance reflects in the overvaluation of the currency. Just look at the trade figures from last month.
The other factor that is driving the appreciation of our dollar is the fall of the U.S. dollar. And yes, this is indeed important. But over 30% of the depreciation of the U.S. dollar, in terms of their basket of trade with the rest of the world, is accounted for by Canada alone. We are bearing 30% of the brunt of the depreciation of the U.S. dollar. Most other major exporters into the U.S. market, from China through Japan through the developing Asian countries, have tied their currencies to the U.S. dollar, so they're not affected by this depreciation.
In fact, as our export share of the U.S. market falls, it's not being filled by U.S. domestic production, by Asian exporters, just as the U.S. is not gaining in our market as their dollar depreciates. In fact, that is going to Asian imports.
So what is the explanation? Why has our dollar surged so high just recently?