-Caveat Lector- INTERNATIONAL TRADE Imagine a single U.S.-Canadian currency By FRED O. WILLIAMS News Business Reporter 1/12/2003 http://www.buffalonews.com/editorial/20030112/1026947.asp
Click to view larger picture One day in the future, you might pull into the Tim Hortons in Fort Erie and pay for your doughnuts with "namu," a single currency that's accepted throughout the United States and Canada. It sounds farfetched to American ears. But in Canada, where the $10 trillion American economy is an omnipresent force, a single currency is the subject of opinion polls and political discussion. In a survey of Canadian CEOs last month, 49 percent favored adopting the U.S. dollar as the national currency, according to pollster Compas Inc. and the Financial Post. "A lot of companies are already using U.S. dollars - it's just more efficient," said Richard G. Harris, a Canadian economist who helped draft NAFTA. With their two national currencies, the world's largest trading partners speak different economic languages, economists say. The inconvenience grows more vexing as the flow of trade rises. Canada-U.S. trade was $380 billion in 2001, up 79 percent since NAFTA was signed in 1993. As NAFTA passes its 10th anniversary, some economists say that a single North American currency - similar to Europe's adoption of the euro - would spur economic growth in the trade bloc. "By having a single currency, you in one stroke remove all the inefficiencies of exchange rates," said Daniel Griswold, trade economist at the Cato Institute in Washington, D.C. "It's much more efficient for travel and tourism." One name floated for the new currency is the NAMU, for North American Monetary Unit. But whatever it's called, a continental currency would essentially be the U.S. dollar, given the power of America's economy, experts say. "No one's talking about getting rid of the U.S. dollar," said Harris, economics professor at Simon Fraser University in Barnaby, British Columbia. That makes the idea politically unpopular in Canada. But some economists say that monetary union would mean big savings for businesses and travelers in all the NAFTA nations. Border areas like Buffalo and Niagara Falls would feel the effects powerfully, since leisure travelers to Canada would no longer have to calculate exchange rates. More important, businesses in the U.S. would benefit from lower barriers to trade. Canada's weak exchange rate - one loonie is worth about 63 U.S. cents - makes U.S. products expensive there, and harder to sell. Under monetary union, price differences between comparable goods would diminish. For Pierce & Stevens Corp. in Buffalo, a single currency would wipe out a number of hassles facing its $15 million a year export business to Canada, Executive Vice President Richard W. Johnston said. "Our (profit) margin is 10 percent lower" on cross-border sales of the company's adhesives products, he said. The main reason is the weak Canadian dollar. At Eastman Machine Co. in Buffalo, "the weak Canadian dollar does not help our business," President Robert L. Stevenson said. The maker of fabric cutting machinery gets about 5 percent of its sales in Canada. Since there are no Canadian-made alternatives to Eastman's equipment, its hard to estimate the impact of single currency. "It's hard to say though - you don't know what (sales) you're not getting," he added. Another barrier to trade is the risk of changes in currency rates. Many exporters and importers pay banks for hedge instruments, a sort of insurance policy that currency fluctuations won't wipe out their profits on cross-border business. "Say in Buffalo, if this (monetary union) were to happen, you would eliminate all our hedging transactions," said Alan McPherson, director of the Canada-U.S. Trade Center at the University at Buffalo. "That would be a major benefit." Canada used to fix its exchange rate to the U.S. dollar, a policy it dropped in 1970. A fixed rate reduces problems for trade, but doesn't eliminate them the way a single currency would. Maintaining fixed rates forced Canada to adjust its economic policies - particularly interest rates - to stay in step with the U.S. currency. Similarly, giving up control of domestic economic levers is the chief sticking point against monetary union. With today's floating exchange rate, Canada's central bank can adjust the money supply to spur the economy or put the brakes on inflation. "If we want to run a monetary policy suited to our own . . . circumstances, we need monetary independence," central bank governor David Dodge said during a speech in Edmonton. Dodge and his predecessors at the central bank - the equivalent of the U.S. Federal Reserve - are stalwart critics of one-currency talk. Canadian workers would bear the brunt of a monetary marriage, Dodge argues. However, he said that union might make sense in the future, if the two economies do become more closely intertwined. Why would Canada consider a U.S. dollar-denominated economy? In the wake of NAFTA, trade with the U.S. now accounts for about a third of Canada's economy. Trade has been a boon for many companies, but it also highlights the problems that a gap in national currencies creates - especially now, when the gap has widened to historic levels. The weak loonie makes it easier to export goods to the United States. But the price, economists say, is a long-term deterioration in Canada's productivity and standard of living. It's harder for Canadian consumers to buy imported goods. Highly skilled workers migrate to better pay in the states. And U.S.-made equipment that raises productivity - like Eastman's cutting machines - is less affordable for Canadian factories. The result could be a downward spiral of lower exchange rates, lower productivity and lower living standards in order to prop up employment, said Thomas J. Courchene, economist at Queen's University in Kingston, Ont. Courchene, like Harris, is a leading advocate of monetary union. "We're losing top talent," he said. One example of the two-currency problem is the plight of the Ottawa Senators. Although the hockey team has one of the top records in the NHL, it has filed for bankruptcy. Part of the reason is because it must figure players salaries in U.S. terms while pricing tickets in Canadian dollars, worth one-third less. "All of the Canadian teams are suffering," Courchene said, because of the necessity that they pay players what they could make in the states. How would a currency union work? One idea is for a bi-national agreement that makes Canada the 13th district of the Federal Reserve, with a voice in decisions on monetary policy. That scenario will probably remain only an idea, Courchene and Harris say in a joint paper. The U.S. Fed isn't likely to share authority. Instead, Canada might adopt the U.S. dollar, or a proxy currency exchangeable one-to-one for U.S. funds. After all, north-south trade is almost twice the volume of east-west trade between Canadian provinces, they say, and the majority of funds in Canadian banks are denominated in U.S. dollars. "If you look at the way currencies are consolidating around the world," Courchene said, "I don't think the Canadian dollar can exist in 10 years." e-mail: [EMAIL PROTECTED] A<:>E<:>R ~~~~~~~~~~~~~~~~~~~~ Forwarded for your information. The text and intent of the article has to stand on its own merits. Therefore, unless I am a first-hand witness to any event described, I cannot attest to its validity. ~~~~~~~~~~~~~~~~~~~~ In accordance with Title 17 U.S.C. section 107, this material is distributed without charge or profit to those who have expressed a prior interest in receiving this type of information for non-profit research and educational purposes only. ~~~~~~~~~~~~~~~~~~~~ "Do not believe in anything simply because you have heard it. 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