The Bank of Canada’s (BoC) focus on helping the country’s economy shift from being driven by domestic demand to export growth has prompted a number of intriguing analyses in recent weeks. The main thrust of most commentaries is that while a resurgent US economy coupled with a declining exchange rate has boosted export activity in the past, the benefits from these two factors won’t be nearly as pronounced this time around.

As we’ve noted in previous reports, BoC Governor Stephen Poloz has described this emerging disconnect as a “wedge,” part of which the central bank has attributed to strength in the Canadian dollar that persisted far longer than the fundamentals warranted. Of course, that relative strength is now in the recent past, as the loonie has steadily declined over the last year and now trades near USD0.895, down about 15.6 percent from this cycle’s high.

At roughly a quarter of total exports based on value, Canada’s energy products and commodities are the country’s leading export category. But Mr. Poloz is particularly keen on resuscitating the country’s ailing manufacturing sector, which was decimated during the Great Recession. According to TD Economics, the sector’s production and employment numbers remain 16 percent and 18 percent below pre-recession levels, respectively.

In a recent Maple Leaf Memo, we described the challenges export-oriented manufacturers face as a result of labor productivity that lags developed-world peers, lack of investment in research and development or more efficient machinery, and dependence on slow-growing first-world economies.

The aforementioned issues are all long term in nature. In the short term, exporters should enjoy a bump from a rebound in the US economy and a falling Canadian dollar. But the effect of these two factors could be dampened this time around.

For one, US policymakers are similarly fixated on reviving our own manufacturing sector by reversing the offshoring of jobs and facilities that happened over the past decade. There has been some movement in this area thanks to tax incentives and other subsidies, rising labor costs in emerging markets, and cheaper energy resulting from the prolific US shale plays.

These trends may not be quite strong enough to create the 1 million manufacturing jobs that President Obama has targeted as a goal of his second term. But the US absorbs roughly three-quarters of Canada’s exports, so stronger competition from our own manufacturing sector, which boasts significantly greater efficiency and labor productivity, could pinch at the margins.

TD’s economists also describe one other feature of the US economic rebound that could mean it won’t be as helpful as in the past. The bank says the economic resurgence will be strongest in the southern states, as opposed to the northern states with which Canada traditionally has the strongest trade ties, owing to their proximity.

Of far greater import is the fact that Canada’s supply chain is more global now than it was in the past. According to The Globe and Mail, export-oriented manufacturers imported about 42 percent of their supplies in 2010 (the most recent year for which data are available), while for individual industries, such as the tech and automotive sectors, this number was above 50 percent.

Part of the reason for this is that the different players in the global economy are simply more interconnected than they were in the past. But the relative strength of the Canadian dollar likely increased the sector’s dependence on inputs sourced from overseas since they were cheaper in local currency terms. But following the loonie’s decline, these same inputs are now at least 10 percent more expensive than they were a year ago, and it’s difficult for firms to quickly adapt by finding cheaper alternatives.

Additionally, a lower exchange rate won’t help alleviate the aforementioned under-investment in machinery and equipment, since much of this tends to be imported regardless of the exchange rate.

Despite these headwinds, some industries will fare better than others. TD says the wood, machinery, chemical, and primary metals industries are poised to show the greatest near-term strength in this environment.

As for the export sector and the economy as a whole, the BoC’s main forecasting model assumes each 10 percent decline in the currency will boost exports by about 2.6 percent annually and gross domestic product (GDP) growth by 0.4 percent annually. However, given the continuing weakness in the sector, Mr. Poloz believes the actual results could be lower.

But even if growth in these areas increases at a lower-than-expected pace, this would still be an improvement for both the sector and the economy, so we’ll take it.