Finance Committee on March 12th, 2015

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Oh, oh!

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

All right, moving on, Mr. Myers and Mr. Mendes, I appreciate your comments.

I've been on the trade committee for more than nine years. We obviously saw a downturn in January with our trade. We had a trade surplus of about $5 billion in 2014. Does taking the energy component out of the trade equation improve the picture dramatically for Canadian exporters?

[Jayson Myers]

It does, both in terms of volume as well as price terms. For companies that are contracting in U.S. dollars, as the Canadian dollar falls against the U.S. dollar, that will show up as a price increase for the export side. As well, of course, a stronger U.S. economy and lower dollar will make Canadian goods relatively more competitive, although as I think the point has been made, we're also seeing other currencies fall as well.

I think we will see stronger export performance on the non-energy side of our exports, mainly manufactured products.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

You mentioned competitiveness. Productivity is something I hear often from constituents in working with small businesses in our community.

How does Canada compare in productivity versus the United States?

[Jayson Myers]

According to our statistics, not very well, but I don't think our statistics really measure productivity very well, or manufacturing output. For instance, It's very difficult today when companies are competing more on customer service. Our GDP numbers don't differentiate very well between that increase in value as a result of service versus just a price increase.

What I look at is the capability of our companies to grow in market share. I think that is a very, very intensely competitive situation. There, frankly, our record has not been all that great over the past 10 years, particularly in the major market that we have in the United States.

My answer, in short, is that we need to do more. Companies need to do more in terms of being sure that they're bringing the products and services that their customers want, and doing that in a way that's competitively priced.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

Quickly, I will ask you and Mr. Nantais, there's the RCC, regarding regulatory cooperation and harmonization and we have been working on that. There's the automotive innovation fund and accelerated capital costs. What else can the government do to help?

[The Chair, Conservative, James Rajotte]

One minute, please.

Mr. Nantais.

[Mark Nantais]

Basically, it's stay the course, but be cognizant of what's going on in other jurisdictions that are aggressively seeking these new investment decisions. Clearly they have upped their game. They are being very aggressive.

Let's continue to keep what we're doing because it's all extremely helpful and absolutely necessary, but let's be mindful of what's going on around us.

[Jayson Myers]

I think the extension of the accelerated depreciation is key, particularly in this budget.

The other thing is that around the world we're seeing a revolution in technologies being used in manufacturing, not only product technologies, but the types of technologies being used in manufacturing processes. It's really very important that we ensure that our manufacturing sector, particularly small and mid-sized businesses, are adopting those technologies.

It's about more effort in terms of technology demonstration, de-risking the adoption of those technologies, and a part of that is better skills training, better work with universities and colleges to provide more practical experience. All of that is key.

[Ron Cannan, Conservative, Kelowna—Lake Country, BC]

I'd like more on the rocket and feather as well, thanks.

[The Chair, Conservative, James Rajotte]

Thank you.

Mr. Côté, you have the floor.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you, Mr. Chair.

I would like to thank all the witnesses for attending.

Mr. Mendes, in the past 10 years, the value of the Canadian dollar against the U.S. currency mostly followed the various oil prices on world markets. It is very interesting to see that it peaked on November 7, 2007, at $1.10; it was very high. In 2009, following the dramatic fall in oil prices and because of the crisis we were going through, the Canadian dollar went down to 76¢ against the U.S. dollar, then increased considerably, moving up with the rise in oil prices.

In your opinion, is this fluctuation of the Canadian dollar relative to the U.S. dollar linked to the strength of the U.S. dollar or to the world price of oil? Do these two factors have a roughly equivalent impact on the Canadian dollar?

[Rhys Mendes]

I think both factors do have an impact on the currency.

As I said in my opening statement, the Canadian dollar does tend to move with the price of oil. That's because we're a net exporter of oil. When oil prices go up, foreigners have to buy more Canadian dollars to basically buy our oil or to invest in our oil sector. There's a fundamental reason that it causes the dollar to move with oil prices.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you very much.

In his remarks, Mr. Stanford said that it would be better to avoid excessive appreciation of the Canadian dollar relative to the U.S. dollar. The Bank of Canada has been quite active in terms of intervening in the Canadian economy. Do you think it is able to slow the appreciation of the Canadian dollar against the U.S. dollar if oil prices go back up, as this seems to be somewhat related? We can then expect that the Canadian dollar would still follow a possible increase in world oil prices.

[Rhys Mendes]

Monetary policy is focused on returning inflation to target over the medium term, and the value of the dollar is determined in markets. I think the focus on inflation is the best contribution that Canadian monetary policy can make to the economic and financial welfare of Canada, because ultimately, attempting to lean against movements in the dollar would force adjustment onto economic activity, employment, prices, and wages within the economy, and in that way would create additional volatility but also undo any or at least some of the impact of leaning against movements in the dollar.

[Raymond Côté, NDP, Beauport—Limoilou, QC]

Thank you.

Mr. Stanford, would you like to comment on the fact that the Canadian dollar may well shoot back up and could even become overvalued as a result of an increase in oil prices on world markets?

[Dr. James Stanford]

I certainly think this is an important concern going forward. The fear, and I think the legitimate fear, that the dollar may indeed shoot back up if and when oil prices do recover is indeed limiting the beneficial impacts of the lower dollar now on investment decisions.

I do disagree with Mr. Mendes on a couple of points.

Number one is the transmission mechanism linking oil prices to the value of the Canadian dollar. Why do those two variables move in tandem? It is not because of the need for foreigners to buy Canadian dollars to purchase our oil.

As you've seen, including from the Bank of Canada's own research, the net demand for all Canadian-made products, energy and non-energy, has declined during the period of the oil boom, and we have gone from a situation of trade surplus into chronic and significant current account deficits. Counting everything that Canadians make, foreigners were buying less of what we make even when the oil price was high, so it is absolutely not a function of demand for the dollar resulting from real purchases of our commodities.

I think the transmission mechanism is more through financial assets and the demand among foreign investors for Canadian assets related to the energy sector when the oil price and other commodity prices are high. Through both portfolio investment flows and direct investment flows, that was a mechanism that drove up the dollar, even though our net export performance was deteriorating badly.

I think the Bank of Canada and the Government of Canada can both play a role in breaking that link, because our dollar is considered a petrocurrency, but Canada is not, by and large, a petro-economy. Depending on how you measure it, petroleum extraction is only perhaps 5% of our national GDP.

I think the Bank of Canada needs to reconsider its view that they will leave the foreign exchange market alone. Other central banks around the world have intervened quite effectively. The bank clearly has the capacity to do that when the problem is over-appreciation; there's no limit to the bank's ability, even indirectly through the bank's positioning statements. I do notice that Governor Poloz and others have indicated that the narrow focus on inflation rate targeting may not be appropriate anymore. We've learned the hard way that there are other things the bank has to keep an eye on, including the dollar.

The federal government could also play a role by regulating those inflows of foreign capital that are driven by very high oil prices, in particular by I think a stronger mechanism for reviewing foreign direct investment in the oil patch when oil prices are shooting up. That, I think, was a key part of the transmission mechanism to a higher dollar.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Côté.

We'll go to Mr. Van Kesteren please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thanks to all of you for being here. I'm going to throw in my favourite quote from Harry Truman about economists, which is that he asked for a one-armed economist because his economist kept saying, “Mr. President, on the one hand...and on the other hand...”.

[The Chair, Conservative, James Rajotte]

I think you're quoting me from the last meeting.

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Oh, oh!

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I don't think so.

Anyway, Mr. Stanford, it's good to see you. I have to say that we've heard a lot of testimony, and I agree with everything you said in your opening testimony. I commend you for that too. I think there are a lot of opposing views, but I share virtually everything you said in your opening remarks. I'm encouraged by that, because one of the things I see within this testimony and other testimonies is that what the government has been doing is also a recognition from all sides that we need cooperation and that the days are over where we pit the one group against the other.

Somebody mentioned in their testimony—I think it was you, Mr. Myers—the need for universities and colleges to work in conjunction with industry. Maybe I'm a dreamer, but those are things that I believe are going to happen in this country. Increasingly there's an appetite for that. I commend you for your testimony.

I'm going to do a little dig, Jim, if you don't mind. One of the things that I think and personally feel is the biggest mistake we made in the automotive sector back in the 1980s and 1990s is that when we had the lower dollar we leveraged that against the automakers and we demanded higher rates. I hope the union sees that. I believe, just in listening to your testimony, that you recognize the importance of the lower dollar or the advantage we have. I hope we don't blow that like we did the last time. That's just an encouragement on your part.

I also wanted to make mention of what you talked about, Mr. Walker, in regard to the possibility of looking into the oil prices. I have to say that's been done a number of times, and there is a Competition Bureau. When it has been studied in committee, there was representation from all sides, and I know that at each particular committee, the committee members walk away and say that they guess it's explained.

I liked what you said, too, Jayson, about the fact that they're going to use that money, and they're going to use that money for investment. Again, I think we need to reiterate that it is a corporate decision. I don't know if we want to get into a position where governments will tell businesses what to do. I think we need that cooperation.

That's my little spiel. I just wanted to say that. I see that we're seeing some agreement across the board there too.

Jayson, I wonder if you could talk about the importance of—maybe we could go to you as well, Mark—what has happened to the auto industry and how it has positively affected.... I remember that back in 2006 they said that we needed a bridge, we needed harmonization, and we needed all those things you're talking about. Just tell us how that has strengthened our position in the auto industry. I'll leave it to either one of you to start.

[Mark Nantais]

Maybe I'll start, Jayson.

Had those things not occurred and continued to happen, I can say with a great deal of confidence that the most recent investments would not have happened. That's very clear.

The question is—and I've talked about upping our game—that we need to capitalize on what we have, but when you look at the packages of incentives that other jurisdictions are putting together, they are massive. Obviously, I don't think we have the wherewithal to match dollar-for-dollar that type of thing, but we have to be mindful of that, and we have to put together the best package that we can.

What has happened over the last three months with the very positive announcements I can't say is going to happen in the next three years, but we are at a point in time where we are in another investment cycle now. That's going to be driven by regulatory issues such as greenhouse gas regulations and so forth. It will be probably the most significant advancement of technology in motor vehicles that has ever occurred in our history. As Jay mentioned, this does translate into our ability to produce these vehicles and the technology that goes onto the shop floor to build them. It will be a very different game as we go forward.

It's very critical that we can maintain what we're doing, as I mentioned, while we need to look at things like whether the automotive investment fund is a permanent thing, because certainty is very critical in terms of investments through the long term. We need to look at SR and ED tax credits and how we can best use unused credits, etc., and at all of the accelerated capital costs. These are all things that are useful and necessary not just for the auto industry, but for manufacturing generally.

We've come out of that recession with a great deal of new capacity. We are operating at maximum capacity right now. To move forward, we need to look at these additional things.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Jay?

[The Chair, Conservative, James Rajotte]

You have about 30 seconds.