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An Econometric Model of the Steel Trade

In this report, the author uses steel as a case study for an analysis at the industrial level of forces at work in the international economy that have had an important impact on recent Canadian economic performance. Prominent among those forces are cost competitiveness and aggregate demand in Canada and abroad.

The author presents a model of the steel industry featuring relative price effects on trade and consumption volumes as well as price, volume, productivity and wage responses to demand pressure.

Simulations over the period 1977Q1-80Q1 suggest that the industry's output and profits have benefited from the depreciation of the Canadian dollar. They also reveal that an increase in the price of foreign exchange causes the relative price of steel to rise, discouraging steel consumption. In addition, imports are further reduced by substitution from foreign to domestic sources. As regards the trade balance in steel, this favourable substitution effect is counteracted after a while by the impetus that depreciation gives to domestic aggregate demand. The model is thus able to shed light on some otherwise puzzling developments. For example, the surge of steel imports and slowdown of exports in 1979, a period in which the Canadian industry's cost competitiveness was strong, can be explained in terms of the depreciation-aided acceleration of domestic economic activity, which resulted in tight constraints on the ability of the industry to satisfy additional customers' orders.