Sept. 27, 2012
/CNW/ - Global trade may be anything but free if
trade agreements focus solely on eliminating tariff and regulatory barriers, and not on currency intervention policies abroad that are driving the country's trade and monetary imbalances, notes a new report from CIBC World Markets Inc.
"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," says Chief Economist at CIBC, who co-authored the report with Economist
trading partners have been intervening to keep their currencies softer than markets would otherwise take them, giving them cost advantages in both Canadian markets and in competition for share of the U.S. market, notes Mr. Shenfeld. That practice has been particularly prevalent in emerging markets. In the process of selling their own currencies, emerging market central banks have built up reserves that in many cases exceed 30 per cent of GDP.
While these reserves were formerly largely in the U.S. dollar, Euro and other major currencies, the study estimates that holdings of non-major traditional reserve currencies, including the Canadian dollar, have grown five fold in the last half decade, to the equivalent of
$US 550 billion
Buying by foreign central banks and sovereign wealth funds has played a key role in the accumulation of
in Canadian bonds by foreign investors, compared to only
in the prior five year period. Such buying has been amplified by
solid credit rating and safe haven status, says Mr. Shenfeld but has pushed up the value of the loonie in the process. The IMF now puts the Canadian dollar as among the most overvalued currencies relative to trade fundamentals.
While foreign purchases of Canadian bonds have helped keep yields lower, the strengthened currency has dented net exports. To avoid further hits to exports, Mr. Shenfeld says that the Bank of
is stuck keeping interest rates lower than they otherwise would be, which presents another risk. "That might be too much of a good thing for sectors like housing, where a long period of low rates risks building a house price and mortgage credit bubble."
The report further notes that "while
recently opted to delay a formal deal on tariffs and other barriers with
, the issue of trade will remain front and centre in relations with
largest economy. But the bigger picture goes beyond just tariffs and regulatory barriers, centering on currency and other policies that affect the balance of trade between
, and other emerging market economies.
"Currency policies are politically sensitive, but dealing with such sensitive issues is what trade negotiations should be all about."