Friday, April 9, 2010

Canada Continues to Make the US Look Like a Hoser

Boy, the Canadians are just dominating their southern neighbor these days.  First, they announced the unilateral elimination of all industrial tariffs in order to boost Canadian manufacturers (as US officials were complaining about the trade deficit and embracing mercantilism).  And now, they've announced an amazingly sane response to rapid currency devaluation by... wait for it... the United States.  Here's BNA (subscription) with the embarrassing details:
The government will not intervene in the Canadian dollar's continued increase in value compared to the United States dollar, but will instead focus on making businesses more competitive so they can better adjust to a stronger currency, Prime Minister Stephen Harper said April 7.

The dollar's value against other currencies is not the government's primary concern, but rather the level of competitiveness of Canadian industry, Harper told reporters at a news conference in Toronto with Ontario Premier Dalton McGuinty. “This is outside the purview of the government of Canada, outside the responsibilities of the prime minister,” he said.

The government is aware of concerns over the dollar's value, but the Bank of Canada is solely responsible for monitoring the value of the currency as part of its process of setting its trendsetting interest rate, he said. “It is the Bank of Canada that independently guides Canadian monetary policy,” he said.

The Canadian dollar (loonie) had moved above parity with the U.S. dollar for parts of April 6 and 7, although it returned to slightly below parity by the close of trading on each of those days....

Meanwhile, the Conference Board of Canada stressed April 8 that the best options for the Canadian economy to respond to a dollar at or near parity with its U.S. counterpart is to boost business productivity growth and expand the internationalization of individual firms.

Canada's solid banking system, strong domestic economy, relatively healthy fiscal situation, and wealth of raw materials will support a dollar at par with the U.S. dollar, Conference Board chief economist Glen Hodgson said in a statement accompanying a report entitled “Learning to Live With a Strong Canadian Dollar: Four Options for Business and Governments.”

“For firms that are willing and able to adapt, a strong dollar may be just the challenge that unlocks new economic potential through enhanced innovation, faster productivity growth, and expanded internationalization,” he said.

Improvements to productivity growth, both of individual firms and the overall Canadian economy, should focus on promoting stronger investment in physical and human capital, reducing regulatory barriers, and re-energizing free trade and investment within North America and globally, he said. Firms should also use multiple approaches to improve their participation in the global economy, as firms and industries that have more ways of hedging their operations are better positioned to reduce the financial risks associated with currency fluctuations, he said.
The aforementioned Conference Board report is available here.  Now, students, please compare and contrast how Canadian politicians have addressed the effects of US dollar devaluation with how American politicians have handled the pegged Chinese RMB.  Please allow me to satirically paraphrase:
  • Canadians: Hey, the Americans' currency policy is their business; and monitoring of nations' currency policies is a central bank issue, not a trade issue; and the cheaper dollar can benefit many of our producers, so we plan to adapt and take full advantage.  (Now, who's up for some hockey, eh?)
  • Americans: No fair!  You're cheating!  We demand you stop or else!  Wahhhhhhhhhhhh!  (I'm Chuck Schumer/Arlen Specter/Lindsay Graham, and I approve this message.)
Like I said, embarrassing.


Simon Lester said...

Hi Scott,

Isn't there a difference between "depreciation" and "devaluation"? The latter implies government action designed to lower the currency's value. Here, the U.S. government is not devaluing the U.S. dollar. Rather, the U.S. dollar is depreciating in value on its own (due to various factors).


Scott Lincicome said...

Hi Simon,

While there might be a semantic difference between the terms, I see very little difference between what China does/did (i.e., hoarding USD to maintain the RMB's relative value) and what the US is doing (flooding the mkt with dollars at almost 0% interest and constantly signaling a desire for a weaker Dollar). Both nations are "manipulating" the value of their respective currencies for domestic policy reasons. The Chinese action might be a little more blatant, but both strategies involve "unnatural" (i.e., non-market) distortions of currency markets to further domestic policy agendas. See, e.g., here for a good discussion:

The Canadians could, if they were as illogical and cynical as our pols, scream bloody murder about the United States' currency moves, but they're not. And that, I think, is commendable.

Simon Lester said...

I think it's basically a question of intent. To me, there's a difference between, on the one hand, saying "we want our currency to be at value X" and taking actions to make that happen, and on the other hand, taking economic measures that incidentally affect the value of the currency. Just about all economic policy-making by a government has some impact on the currency value. The government can't really avoid influencing it to some extent. But that's different than a policy intended to keep the currency at a set value (or even one designed to lower its value).

And I'm not sure that signaling a desire for a weaker dollar is always a problem. It could be that due to behavior by other governments, your currency is overvalued. If you are simply expressing a desire for a market-based value, a desire for a lower valued currency is not necessarily "manipulation".

Having said all that, I'm not familiar enough with all that the U.S. saying and doing, so it may be that some of their actions go a bit further than I'm aware of.

Scott Lincicome said...

I agree that intent matters, but I think (a) the impact is the same, regardless of intent; and (b) your last sentence really hits on the matter.

The US wants a weaker dollar - it started with Bush and continues now. And they're taking measures to ensure that. Granted, they're not at the pt of trying to overtly monetize US debt, but they're certainly taking monetary actions to do quietly and effectively the same thing. (And many of our creditors and trading partners are none to pleased about it - hence, why I find the Canadian response so refreshing!)