Negotiate free currencies when signing trade deals, economists tell Ottawa
OTTAWA — Two leading economists are urging Ottawa to add free currency conditions in its trade negotiations, saying manipulation is rigging the game against Canadian exporters.
The Harper government has placed negotiating free trade deals around the world as a principal pillar of its economic policy, calling it the “new stimulus.”
They do not quantify the damage, but note that the International Monetary Fund has pegged the loonie as one of the world’s most overvalued currencies compared to its trading fundamentals, at more than 10 per cent above its true value.
“Trade may be liberalized, but are the exchange rates that set relative prices and costs also going to have their shackles removed? If not, the free market will be anything but free,” they say.
In an interview, Shenfeld said Canada has two choices: join in on the currency manipulation or place conditions for liberalized currencies whenever it negotiates free trade or liberalized trade agreements.
To date, Bank of Canada governor Mark Carney has ruled out intervening to weaken the dollar, but has expressed concern about what the high-flying loonie is doing to exports.
In a recent analysis, Carney argued that driving the currency down — which he can do by flooding the market with loonies — would likely only bring temporary relief, but in the long term would be more damaging than beneficial.
Shenfeld also does not recommend market intervention. Rather he says the way to go is through trade treaties, especially in talks with emerging markets, which have been the worst offenders in rigging their currencies to favour their producers and disadvantage competitors. Japan has also intervened in the market to soften the yen over the past few years.
Canada’s relatively strong economy and fiscal soundness has contributed to the distortion because foreign nations have been buying up loonies as a safe haven currency.
In the last five years, foreign purchases of Canadian bonds have totalled $280 billion, compared to only $65 billion the previous five-year period, the report says.
“While foreign purchases of Canadian bonds have helped keep yields lower, the strengthened currency has dented net exports,” it adds.
The dynamic has also tied Carney’s hand on interest rates, with the likely result that they have been kept lower than otherwise might be the case, even at the risk of triggering a housing bubble.
Canada has recorded four consecutive months of ever-expanding trade deficits, with July, the last month measured, setting a new record high deficit of $2.3 billion.
Although there has been no big breakthrough yet, the Harper government is in negotiations or the exploratory stage of talks with most of the big economies in the world, including Europe, Japan, Korea, India, China and several Asian countries covered under the Trans-Pacific Partnership.