International Economic Law and Policy Blog

The Impact of Exchange Rates on Trade

From Canada's Financial Post:

... The data is clear that Canadian consumers can save major bucks if they head south of the border to buy their goods.

A Bank of Montreal study released this month looked at a basket of goods and found on average Canadians were spending 20% more here on the same items that could be found stateside. With the dollar at par and now above, the discrepancy is clear.

Canadians have figured it out because spending in the U.S. has lurched ahead over the last year, according to Visa Canada. The credit card company says visitors spent $9.2-billion in the U.S. in 2010, more than triple of any other nationality, and an 18% jump from 2009.

As Mr. Wiginton found out, the savings can be huge when you get to the big ticket items.

“Buying a car in the U.S. was a bit of challenge because there is so much to figure out to do that,” says Mr. Wiginton, who looked for a car manufactured in North America that would be covered by the North American Free Trade Agreement and therefore not subject to duty. “I paid $18,000 and change for a $26,000 car. There was no HST at the time, so I just had to pay GST, there were no other fees.”

"the U.S. dollar just ain't what it used to be"

From Reuters:

In the latest example that the U.S. dollar just ain't what it used to be, some shops in New York City have begun accepting euros and other foreign currency as payment for merchandise.

"We had decided that money is money and we'll take it and just do the exchange whenever we can with our bank," Robert Chu, owner of East Village Wines, told Reuters television.

The increasingly weak U.S. dollar, once considered the king among currencies, has brought waves of European tourists to New York with money to burn and looking to take advantage of hugely favorable exchange rates.'

For some reason, the fall in the U.S. dollar doesn't concern me that much.  In part, that's because our subscription service has a lot of export sales, so it helps our competitve position.  But even thinking about the issue more generally, isn't the problem essentially self-correcting?   As noted in the article, the weak dollar will stimulate U.S. sales to foreigners, boosting the U.S. economy and, probably, the dollar as well.  It's true that if the U.S. economy were collapsing, or inflation were out of control, the problems might not correct themselves so easily.  But that doesn't seem to be the case.

Some Support for a WTO Agreement on Currency Manipulation

I've said before on this blog (see, e.g. here) that WTO rules on exchange rate manipulation would be useful.  I didn't have any detailed proposal in mind; it was my gut instinct plus some very basic arguments.  Well, now I can cite to some top-notch economists who support the idea.  In an op-ed piece, Arvind Subramanian writes:

India could work toward multilateralising the exchange rate issue. And here’s the punch line: this multilateralisation should be in the context of the WTO rather than the IMF. In a new paper, Aaditya Mattoo of the World Bank and I offer suggestions on how the exchange rate can be made into a multilateral trade issue. The WTO is the obvious alternative to the IMF since undervalued exchange rates have large and direct trade consequences. What is needed is a new rule in the WTO proscribing undervalued exchange rates, which are in effect a combination of export subsidies and tariffs, each of which is currently disciplined by the WTO.

I haven't seen the paper online yet, but I'll look for it, because it would be nice to have some support for my off-the-cuff blog post views.  I agree with them in principle and I think something along these lines can be achieved.  No doubt the details will be very tricky, though.  I'm curious to see what they have to say in this regard.

Some Exchange Rate Items of Interest

Here are two unrelated items about exchange rates:

1. From Marginal Revolution:

Canadian shoppers taking advantage of the parity between the U.S. and Canadian dollars are leaving behind more than cash when the head home.

They're leaving behind their old clothes.

Some Canadian shoppers wear their new clothes home to avoid paying a duty when they cross back into Canada. The old clothes get left behind in parking lots, dressing rooms and restrooms at malls and shopping plazas in the Buffalo-Niagara Falls region.

This could have gone under the "trade in everything" theme, but I put it here because I have this next item to mention ...

2. From an AP story reported in various papers, regarding the increase in foreign buyers of U.S. real estate due to the dollar's fall:

The currency advantage is greatest for British citizens, given that each pound is worth well over $2. By contrast, the euro currently is worth about $1.45 while the Canadian dollar in recent weeks is hovering near parity with its U.S. counterpart.

Sigh.  If I'm reading this correctly, the AP reporter seems to think the strength of a currency is based on the absolute numbers.  Thus, under this view, the UK has a stonger currency than Canada because one British pound buys 2 US dollars whereas Canada's dollar only buys 1 US dollar.  This kind of confused thinking out there in the media can only make the policy debates more muddled.