Small Business Blog from Atlantic Canada

I am "CA" Atreya (PMP, MBA), the author of this blog. I help businesses in Atlantic Canada achieve their BHAG successfully. You may subscribe to this blog using a feed reader (RSS).

We discussed the rationale for why I think Manufacturing may move back to the US. It may not be the exact same jobs that were lost, but they will be manufacturing jobs nevertheless. Countries exporting to the US may see the customer become a competitor. Today the US is the world’s largest consumer. Countries like China, Korea, Taiwan are the suppliers. Will the roles reverse?

Consider the scenario where the US dollar has depreciated so much that it not only becomes cheaper for the US to manufacture its own goods (dollar stores stocked with American goods … hmmm) but it is also cheaper for, say China to import from the US. This is theory - sorry to burst your bubble. In practice, what may happen is that these countries may also devalue their currencies – especially with a peg (see definition of peg at Wikipedia), and we are back where we started.

Let’s look at a couple of scenarios at how the current account deficit can be reduced or turned into a surplus.

1. The private sector saves like crazy – what are the chances of that happening in the next five years? Minimal. Look at the current mortgage crisis in the US. Frugality is an alien concept to the majority of the US population. When you can buy a house without the capacity to repay the loan, what are the chances of savings? Zilch, zero! Hence the US cannot depend on the private sector savings for any significant contribution. Now will the Fed raise interest rates sufficiently high to attract savings? I do not think so.
2. The government reduces spending like crazy – hmmm … what are the other options? A large number of companies (including small businesses) depend on the government for business and if the government practices frugality, it may just help in bringing down the economy. For example, will the government reduce funding for SBA? No, I do not see that happening. But what about “other expenses” that can be qualified as wasteful?
3. Depreciate currency and increase exports – that seems like a doable thing. But what’s the catch? Of course there is a catch. Did you think wiping out $2 trillion plus of debt is going to be easy? The one AND only reason, why the US dollar has not been attacked by speculators so far is that most of the world’s assets are denominated in US dollars. Unless they want to wipe out the world’s economy, speculators are not going to attack the US dollar.

Reactions & fall-out

The most likely scenario where I see the most impact is with a combination of trade and exchange rates. But it is not going to be easy.China, for example, has the yuan pegged to the US dollar. Any depreciation in the US dollar is going to depreciate the yuan against the dollar too.

India has a managed exchange rate and consequently, the rupee will tend to depreciate along with the US dollar. It will hurt India’s exports to the US if they allow the rupee to appreciate considerably against the dollar. Other currencies in Asia follow a similar system – either pegged or managed. So the US dollar is not going to get much help from Asia in balancing its trade deficit.

What is going to help the US dollar is the Canadian dollar and Mexican peso (NAFTA), and the Euro. The US dollar will have to depreciate considerably against these currencies. If this happens (and we see this happening already) the cost advantages offered by these countries – particularly Canada and Mexico – will erode. The US is Canada’s largest market. How then will Canadian businesses adapt to these changing economic realities?

Recently, TrentonWorks Limited closed shop in Nova Scotia. Hershey announced it will close its Dartmouth Plant in Nova Scotia. Are these some of the casualties of rising Canadian dollar? It makes sense, doesn’t it? Industries that depend on efficiencies alone will be the quickest to get effected. I have alluded to that fact in a number of earlier posts. (Low cost or niche provider)

Large scale manufacturing is one such industry. What happened to the US in the 90s will happen to Canada. Over the next five to ten years, I expect Canada to lose a lot of manufacturing jobs. Even oil exports to the US may reduce. Making US the largest customer, Canada has put all its eggs into one basket. They need to diversify their customer base – and quickly.

The US is now strong in IT services. So it follows that any manufacturing that returns will be IT related. This is where the US will have the maximum competitive advantage and they ought to use it to the fullest. It remains to be seen how the policy makers in the US play out the next five years … and how will their counterparts react in Canada.