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The United States needs Canada

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Alex Carrick

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Alex Carrick is Chief Economist for CanaData, Reed Construction Data’s Canadian economic forecasting and statistical service.

Economists

I have written before about the benefits of a joint currency and common market between the United States and Canada. Unique in the history of the U.S. and Canada, the former needs the latter to a greater degree than ever before, whether it knows it or not. Future investment plans and mega construction projects are hanging in the balance. The time may have finally come to bond further in ways that will help each of us realize our long-term goals.

I have written before about the benefits of a joint currency and common market between the United States and Canada. Eventually, this should also include Mexico, but that is a long way in the future and requires considerable efforts by that nation to clean up social and environmental issues and a resolution of its struggle to break free from the illicit drug trade.

A Joint U.S.-Canadian Dollar and a Common Market

However, unique in the history of the U.S. and Canada, the former needs the latter to a greater degree than ever before, whether it knows it or not. For the first time ever, international debt rating agencies are carefully considering whether the AAA rating for U.S. government bonds should be downgraded. The U.S. finds itself in this position due to the assumption of massive debt and a new proclivity towards printing money.

If Washington/'s debt rating is lowered, this will have serious implications for the U.S. economy. For starters, it will raise interest rates. For a follow-up, it will require government spending restraint. In both cases, the imperatives will be imposed on the United States from outside the country. This will be a huge jolt to that nation/'s pride.

What does Canada have to offer under a co-currency in the eyes of the world? The list includes the following: a stable democratic government with stronger federal and provincial budgets than exist for Washington and many states; a strong financial services sector that has weathered the credit freeze better than anywhere else on earth; and raw material assets, particularly in energy, that will help the U.S. greatly to lower its dependence on unstable offshore sources.

Productivity Gains from a Borderless Crossing

A single dollar would either be a prelude to or could occur in conjunction with borderless crossings, as is the case in Europe. There would be no need for warehouse storage nor off-loading and re-loading cargo in instances where carriers are blocked from easy access to the other nation. The cost and time savings and resulting productivity gains would be enormous.

With respect to the rest of the world and the threat of violent acts from outside North America, the security perimeter should be established around both nations. This is already happening regardless, with the moves in both countries to greater use of passports, enhanced drivers licenses and other documentation cards.

A Too Low-valued Loonie

Manufacturers in Canada, and that includes building product manufacturers, would not like the loss of opportunity that a lower-valued Canadian dollar sometimes gives them in winning U.S. export sales. But they have had recent experience of living with this situation anyway, as the loonie climbed more than 50% between 2003 and 2007.

The loss in price advantage from dollar parity would, more than likely, be made up in transportation cost savings. Furthermore, the current danger for Canadian producers is that the value of the loonie may rise too high versus the greenback. China and Japan and several other nations are looking more seriously at reducing their U.S. dollar holdings.

Strength in the value of the Canadian dollar is somewhat guaranteed by its new status as a petro-currency. When the global price of oil rises, the value of the loonie relative to the greenback climbs as well. The emergence of the BRIC nations and other newly developing countries in Southeast Asia and elsewhere means that the demand for commodities, once this current recession has been bypassed, can only be upward.

The linked currency would serve one other key function. There are moves underway in the U.S. to impose more serious clean-air restrictions on oil and gas production. Major players in Alberta/'s Oil Sands have to take notice. Further integration of the U.S. and Canadian economies would provide more incentive to ensure that carbon emission issues are resolved and that the huge potential from Canada/'s heavy oil reserves is realized.

A Too High-valued Loonie

I have also written about how a stronger-valued Canadian dollar may be good for Canada in a counter-intuitive way. It will help to keep workers in this country. Canada has always had to contend with a real or potential brain drain. That has been exacerbated by the fact that salaries across the border and, by extension, asset accumulation in the form of housing, cars and other consumer and investment goods have held strong appeals due to the currency difference.

A Canadian dollar at parity with the U.S. dollar removes that incentive. But there is also such a thing as a too-strong loonie. If the U.S. dollar sinks and the Canadian dollar surges, then this presents problems across the spectrum for a Canadian economy that counts on goods and services trade with the U.S. to such a significant degree.

It would also endanger the backbone of this nation/'s trade success and the cause of much of the capital spending that the construction industry is dependent on. A too-high loonie would reduce the returns, and therefore the profits, of raw materials suppliers. Or at least this would be the case as long as commodities continue to be priced in U.S. dollars.

In summary, considering the whole picture and in light of the arguments presented above, parity would be just fine, thank you. The U.S. needs us and we need the U.S. Future investment plans and mega construction projects are hanging in the balance. The time may have finally come to bond further in ways that will help each of us realize our long-term goals.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News. Mr. Carrick also has a lifestyle blog that can be reached by clicking here.

by Alex Carrick

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