ECONOMY LAB
Canada in the forefront of a currency cold war
CARL MORTISHED
From Tuesday's Globe and Mail
Published
Last updated
It’s a new Cold War and once again, Canada is on the front line. There are no remote air bases or Arctic radar stations, just flickering screens in offices on Bay Street, Wall Street and the City of London where people watch the precipitous fall of the U.S. dollar and the rise of the Australian, Brazilian and Canadian currencies.
The war is cold because no one has yet fired a gun. As in the nuclear arms race between Russia and the United States
, there is a lot of name-calling. Decades ago, the Cold War antagonists in Washington and the Kremlin accused each other of seeking global hegemony. Today, Washington accuses China of being a “currency manipulator,” of artificially depressing the yuan, a strategy that helps China’s exporting manufacturers by making their goods cheaper while at the same time making US imports into China look expensive – a tariff barrier in all but name. In retaliation, Beijing blames the U.S. for its profligate spending and for playing fast and loose with monetary policy, flooding the developing world with cheap dollars.
No one has launched gunboats but America is threatening trade violence: A bill is through the U.S. House of Representatives, that would, if it gained Senate support, allow the U.S. to retaliate using real tariffs against Chinese imports.
It is the nuclear option and, as in the 1960s Cold War, no one wants to pull the trigger because a global trade war would cripple a world economic recovery that is already looking shaky. Last week’s U.S. unemployment statistics were truly worrying, not least the tepid figures from manufacturing that suggest America is deriving little advantage from the weakness of its dollar. Instead, this war is being fought, like the last one, in the Third World. Cash is flying from the West into emerging markets, pumping up the value of assets in Latin American and Asian countries, creating dangerous bubbles. The fighting has already started in countries such as Brazil, which are imposing taxes on hot money imports in a desperate attempt to stop the upward climb of the Brazilian real.
Everyone looks for a powerful peacemaker; there is a global institution dedicated to monetary peace and stability. But like the United Nations, the International Monetary Fund is a toothless old tiger. Over the weekend, the U.S. and China exchanged insults at an IMF summit meeting and the institution’s bureaucrats wrung their hands. In a hilarious rerun of the UN’s behaviour during the Cold War when its agencies conducted endless critical studies of the behaviour of the capitalist West, the IMF said, in a sop to the emerging-market lobby, it would in future study the economic health of rich countries.
It is not as if we were unaware that Americans borrowed too much money. There is, however, a real ideological divide at the root of this new Cold War. China has embraced a form of capitalism but it has not embraced free markets any more than it has embraced democracy. In the world view of Beijing’s mandarins, the global economy is a finite resource in which every nation seeks to grab as much wealth as it can. For China, the notion of the level playing field is nonsense because resources are not evenly apportioned. The solution is to play your advantage to the hilt and accumulate power in the form of trade surpluses that can be reinvested in acquiring valuable resources overseas: oil, iron ore or potash. In other words, mercantilism; this is a land grab on a massive scale.
Canada, is on the front line of this struggle, exposed to the chronic underperformance of its sickly neighbour to the south. As the Federal Reserve prepares to trash the greenback with another barrage of manufactured money, called quantitative easing, Canadian exporters should brace themselves for a surge in the value of Canada’s currency. Like Australia, Canada is being pumped up by China’s ravenous appetite for stuff: metals and minerals. An investor in the loonie gets a yield premium and exposure to an economy pumped up with oil, gold, base metals, grain and fertilizer. The price for riding the Chinese-driven commodity wave is that Canadians who make things are going to suffer a great sweating – factories will close and only clever businesses will survive.
There is hope that at a meeting of the G20 nations in South Korea next month, a coalition of America, Europe and emerging-market nations will gang up on Beijing and force a yuan revaluation, using the threat of trade sanctions. History suggests that a cold war doesn’t defrost after a single meeting. Canada could be in for a long haul of commodity inflation and dear money.
Carl Mortished is a Canadian financial journalist based in London.
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