Currency wars changing the world’s economic landscape

Welcome to the new normal

February 1, 2013

charlebois-sylvainLOGOGUELPH, ON, Feb. 1, 2013/ Troy Media/ – For those who expected global war in their lifetime, prepare yourself: it may have already begun. Unlike other wars of a similar scale, however, the weapon of choice this time around is currencies.

This issue was an important topic of discussion at the recent World Economic Forum in Davos. With significantly low interest rates, the most effective armament for central banks is their currency, and with it, many are deeply committed to have their domestic monetary policies support world economic growth. There was a minor currency war in 2010, but this one may last a while.

The latest country to have entered this currency war is Japan. Since Shinzo Abe became Japan’s Prime Minister last fall, the Yen has depreciated significantly. It is in the conflict with the Australian dollar that the Yen has suffered the most. Australia is a crucial importer of goods into Japan, particularly agricultural commodities. The Aussie dollar has appreciated 19 per cent against the Yen since October. This is Japan’s retaliation against Europe, the U.S. and China, which are all trying to rebuild their economies on the back of exports. Not only will this conflict influence economies around the world, but it will severely affect agricultural trades.

Canada has already been affected. A currency war is an all-out determination by a central bank to debase or weaken their currency, so that they can boost exports and strengthen their economy. The U.S. has been easing its monetary policies and has made its dollar weaker; one of the many reasons why our dollar is trading so much higher now.

This is our new trading normal as a country. For decades, we relied on a weak currency to build our economy. The world needed our commodities, and our lower Canadian dollar made our goods more attractive, particularly for Americans, our most important trading partner. The world still needs our commodities, but our competitive advantage is no longer our currency. And because of such international skirmishes as between Japan and Australia, if we are to resume playing the weak-currency game as we did 20 years ago, we will lose.

The American Fed is in a powerful position, clearly embarking on a path of loosening its monetary policy and increase exports, armed with over 300 million consumers looking for affordable foods in a low inflationary environment.

With a stronger Canadian dollar, many commodity sectors have suffered in recent years, with hogs, cattle, and food among the clearest victims. Canada is experiencing a rapidly declining trade balance in the processed food space, due in large part to our strong currency. Our trade deficit in food manufacturing now exceeds $6 billion annually. This means that we have seen little or no capacity growth to allow the food processing industry to invest, expand and to support what we grow and produce in the agricultural sector. As a result, we are seeing a slowdown of the value-adding process to our own agricultural commodities. An increasing number of domestic food retailers want to serve Canadian-manufactured foods, which is why this trade deficit has implications.

Moving forward, the food processing sector needs to establish strategic foundations to become more globally competitive. The hostile reaction of the industry to the proposed policy to standardized containers sizes between the U.S. and Canada for certain food packages is evidence of how vulnerable the sector is. More efficient cost management schemes and access to other markets are required. The sector needs to diversify its portfolio instead of only relying on the U.S. market, which is becoming increasingly unreceptive to Canadian goods. More innovation in products, processing technology, packaging and distribution are also variables worthy of consideration in our efforts to economically strengthen this industry.

Macro-factors are to be reckoned with. The current currency war won’t go away anytime soon, which will significantly impact the prospects of our food economy. Unlike a few decades ago, warfare is about innovation and investment in order to offset the damaging effects of other nations’ monetary policy. We either wait for an economic 9/11, or we prepare ourselves for warfare now. Most would argue that the latter option is the most reasonable.

Dr. Sylvain Charlebois is Associate Dean of the College of Management and Economics at the University of Guelph.

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