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Soaring loonie impeding Canadian car-maker competitiveness

Canadian auto-manufacturers looking to extend federal incentives to balance $2 billion trade deficit with Korean car-makers


February 22, 2011
by Matt Powell

TORONTO‑Canadian automotive executives are pushing Ottawa to stop free-trade talks with South Korea and the European Union and to extend manufacturing incentives that compensate for challenges facing their industry.

Executives from auto parts giant Magna International Inc., all five auto makers with manufacturing plants in Canada (GM, Ford, Chrysler, Toyota and Honda) and Canadian Auto Workers (CAW) president Ken Lewenza met with Industry Minister Tony Clement last week. They are pushing for more government support to make upgrades at manufacturing plants in Canada and make new automotive investments into Mexico and emerging markets like China, Brazil and India.

The auto makers are calling on the government to slow the import of foreign‑made vehicles from Korea like Hyundai and Kia because of massive trade imbalances.

CAW chief economist Jim Stanford says Canada’s current automotive trade deficit with Korea is about $2 billion, showing there is a significant trade imbalance between the two countries.

Clement has said the federal government would not sign an agreement that’s not in the best interests of Canada, but the loonie’s parity with the U.S. dollar isn’t helping the Canadian industry’s cause.

Stanford says the loonie is a major point of concern because it has gone from being completely undervalued in the early 2000’s to being substantially overvalued today.

“It makes our products look artificially expensive, making it harder to make a case for foreign investment in our automotive industry,” he says. “The high-valued dollar completely undermines the competitiveness of Canadian auto manufacturers because it harder to sustain growth and keep jobs.”

Stanford added the federal government has a number of options to reduce the value of the dollar by reducing interest rates, further restrictions on export purchases and limiting foreign takeovers. The Bank of Canada could also use quantitative easing, a strategy used by the U.S. during the financial crisis that creates money to buy government bonds and other financial assets to increase the money supply.

“Canada has been the boy‑scout doing nothing about our dollar soaring,” he says. “All the major studies have shown that deficits will continue to worsen under free-trade. That would truly be the final nail in the coffin of the Canadian auto industry.”

Stanford added government participation will be a big part of the industry’s recovery and federal incentives will push investment. He also said improving infrastructure will be integral to better logistics, including better access between the U.S. and Canada at the Windsor‑Detroit border – a major crossing for both American and Canadian auto-makers.