The Newest Front

I remember learning about the Great Depression when I was in high school.
My economics teacher, Mr. Cook, believed that there were all sorts of important lessons from that dark episode of history. One of the things he taught us was that something called the Smoot-Hawley Tariffs prolonged the economic suffering.
I’ll be the first to admit that I had to do a bit of research and refresh my memory.  But as it turns out, the Tariff Act of 1930, more commonly known as Smoot-Hawley, was a law that raised US tariffs on 20,000 products to record levels. Even before it passed, Canada responded with tariffs of its own, and a trade war was on!
Difficult economic conditions often lead to bad public policy decisions. Most people understand, theoretically at least, that the vast majority of folks benefit when trade barriers between countries are low. For Canadian businesses, it means they can specialize in producing those goods and services where they enjoy a comparative advantage. For Canadian consumers, it means lower prices in our grocery stores and shopping malls.
But when the economy is in recession and jobs are being lost, Free Trade is frequently misunderstood as the enemy of prosperity. And inevitably, calls ring out to either raise tariffs or find other ways to restrain trade.
It seems that the newest front in the trade wars is being waged with currency values. Every developed country and region–the US, Canada, Japan and the Eurozone, seems to think that its currency is over-valued and the currency of its trading partners is under-valued. And all of these countries and regions are united in the belief that the Chinese currency is grossly under-valued.
Americans would like to see their dollar depreciate because then it would be cheaper for foreigners to buy stuff made in America. Japanese would like to see the yen slide in value for the same reason. Ditto the Europeans. But it stands to reason that not everyone can have their way.
If the US greenback depreciates, then other currencies by definition must appreciate. This is because we price currencies in relation to each other.
As I write this column, the Canadian dollar is trading pretty much at par–it’s a one-for-one trade. If the US dollar falls in value by 10 percent, it of course means that one of our loonies will be worth US$1.10. Which is bad for exporting industries–everything made in Canada just became ten percent more expensive in the US.  Ultimately, depreciating one’s currency is a mug’s game–it just means you’re sacrificing your standard of living.
But it doesn’t mean we’ll see many countries pursuing this strategy. If the first casualty of war is truth, the second is common sense.
Toronto-based Michael Hlinka provides daily business commentary to CBC Radio One and a column syndicated across the CBC network.