This is a post from Alex Carrick's blog that covers the Canadian construction industry.

Since 1985, Mr. Carrick has held the position of Canadian Chief Economist with Reed Construction Data's CanaData, the leading supplier of statistics and forecasting information for the Canadian construction industry.

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Notes from Alex Carrick - Oct 30, 2008

Alex Carrick
Should the U.S. and Canadian Dollars be Combined?

I would like to start a dialogue by making the following comment. Canadians should give serious consideration to whether or not the loonie and the greenback should be combined under one “umbrella” dollar.

This is not a new idea. Interestingly enough, however, the argument in favor of a dollar-zone for U.S.-Canada may come more from the American side than the Canadian in the years ahead.

Here are some of the reasons in favour of such a joining of the two currencies. The U.S. has two big problems that are not going away quickly – a huge foreign trade deficit and a huge federal government deficit.

The U.S. is running a goods trade deficit of about $900 billion USD. Much of this is due to importing foreign oil. Canada has a goods trade surplus with the U.S. that often approaches or exceeds $100 billion CAD. Much of this comes from exporting energy to the U.S.

The integration of energy markets between the two countries is only going to become stronger in the years ahead. A number of major oil pipelines from Alberta to Texas are set to open next year. These will add to Canada’s trade surplus.

The same is likely to happen with respect to electricity. Both countries are facing massive increases in power demand as plug-in cars become more prevalent. The U.S. has no more major potential hydroelectric sites to develop. On the other hand, a number of Canada’s provinces do. A next wave of mega power projects is about to get underway in Canada.

Again, Canada will likely be exporting more energy to the U.S., in the form of electricity, thereby adding to the trade surplus. There is even an environmental argument for encouraging such a move. The major additions to power in Canada will be hydroelectric and nuclear, both of which are non-polluting, thereby reducing North America’s total carbon emissions.

Currently, the U.S. dollar is riding high because of the commodity price collapse and the turmoil in financial markets. The greenback has made gains in value due to the flight-to-safety in these uncertain economic times. However, if the twin deficit problems are not resolved, this buoyancy for the U.S. dollar may be relatively short-lived.

In Europe, the value of the Euro is determined to a significant degree by the net trade position of the entire Euro-zone. A U.S.-Canada dollar would knock about 10% to 15% off the size of the perceived U.S. trade deficit. Such action offers an early promise of relief for one of the main overhanging anxieties about the U.S. economy. And make no mistake, a stronger U.S. economy is good news for Canada.

Therefore, a combined U.S.-Canada energy market is one argument for a joint currency. There are several others. A joint dollar would certainly make cross-border business activity, and investment for that matter, easier from an accounting standpoint. And it would help with a major hang-up that is inhibiting economic activity in both countries, the drop in cross-border tourism and business travel.

In fact, it might lead to the kind of borderless travel that exists between countries in Europe. The main holdup at the moment is border security, imposed on behalf of Americans more than Canadians. A common dollar would be a strong argument in favour of establishing a “terrorist perimeter” around the U.S. and Canada as a joint entity, allowing unrestricted travel between the two countries.

What about some of the positives from a Canadian perspective? Due to the bursting of the commodity price bubble, the loonie has dropped to $0.80 USD from around parity over much of the past year. The lower-valued loonie looks appealing. It helps manufacturers to sell into the U.S. market. History has shown, however, that it encourages less efficient business practices. It inhibits productivity gains. Also, for some manufacturers, those that import most of their inputs, it squeezes margins and makes life tougher.

The lower-valued loonie has some other deleterious effects. Too often it is an excuse to raise prices. Sure imports from the U.S. cost more, but markups are often in excess of what they should be and consumers suffer. As such, the lower-valued loonie reduces the standard of living of all Canadians, never mind that it makes travel to your favourite vacation destination more expensive.

At present, perhaps the major roadblock standing in the way of a joint-dollar proposal is the size of the debt taken on by Washington. Canadian governments, both at the federal and provincial levels, have cleaned up their balance sheets, although this is threatened by the current world economic slowdown.

In Europe, there is an understanding that government deficits are not to exceed a certain percentage of each country’s Gross Domestic Product in any given year. A similar target could be chosen for Canada and the U.S., but there is a major stumbling block. The American are unlikely to agree to such a condition as it would jeopardize their capacity to take military action, of a policing nature or otherwise, as the need arises.

There can be little doubt that Canadians are a long way distant from desiring political integration with the United States. However, as the energy markets in both countries become ever more entwined and if the problems of cross-border travel and huge deficits persist, expect discussion about combining the two currencies to heat up.

Think seriously about the issue. It offers a whole new doorway into the future for the citizens of both countries.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.


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