Effects of exchange rate variability on trade of agri-food products between Canada and the United States
Since the demise of the Bretton Woods system and the introduction of a flexible exchange rate regime, Canadian dollar depreciated relative to the U.S. dollar. The favorable Canada-U.S. exchange rate has been cited as an important reason for the growth in exports of processed potato. Similarly, other agri-food industries in Canada have also been enjoying improved price competitiveness relative to their U.S. counterparts. An important policy question is the extent to which exchange rate changes contributed to the expansion of Canadian agri-food exports to the United States over the past few years. The purpose of this study is to quantify the effects of Canada-U.S. exchange rate changes and its volatility on "two-way" trade in selected fresh and processed agri-food products between Canada and the United States using Johansen's Maximum Likelihood Cointegration analysis. The conclusions of this study suggest that while currency devaluation has a positive long run effect on bilateral trade, fluctuations in bilateral exchange rate lead to adverse effects on trade of selected agri-food products in both the short and long term. The policy implications imply that exporting firms should adjust their sales quickly following a depreciation to increase their profits in the short term. Exporters should also make effective use of forward (futures) markets for foreign exchange to minimize risk associated with exchange rate changes.