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Trade talk puts punishing currency manipulation back in spotlight

The new idea in trade negotiations is an old idea: punish currency manipulation.

Avery Shenfeld, chief economist at CIBC World Markets, said Thursday in a new commentary that currency policy should be included in any new free-trade agreements.

"Free trade, but free currencies as well," Mr. Shenfeld wrote. "Trade may be liberalized, but are the exchange rates that set relative prices and costs also going to have their shackles removed? If not, the free market will be anything but free."

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The government refuses to counter the heavy intervention of countries such as China in currency markets. That's admirable, but it comes at a cost.

Mr. Shenfeld says that since 2007, international investors have purchased Canadian-dollar bonds worth $280-billion, compared with $65-billion over the previous five years.

That demand is partly explained by a healthy appetite for AAA-rated securities. But international investors also are buying Canada because they are being pushed out of other markets by interventionist central banks. Canada's dollar is among the most overvalued in the world, Mr. Shenfeld said, citing calculations by the International Monetary Fund.

Mr. Shenfeld is hardly the first to suggest foreign exchange policies should be subject to rules. The IMF and the World Trade Organization both have the authority to punish currency manipulation – at least on paper. The problem is these rules are never enforced because currency policy is such a political issue.

Fred Bergsten of the Peterson Institute for International Economics is one of the most vocal in arguing that the time has come for countries such as the United States and Canada to get serious about punishing unwarranted currency intervention.

Earlier this month, Mr. Bergsten and Joseph Gagnon, a colleague at Peterson, argued in the Financial Times that the U.S. and Europe should retaliate against currency "aggressors" by directing the Federal Reserve and the European Central Bank to purchase international currencies at a scale big enough to neutralize the intervention.

Retaliation isn't their preferred route. Better would be to force the IMF and the WTO to enforce their rules, and to include currency policy restrictions in new free-trade agreements such as the Trans Pacific Partnership, Messrs. Bergsten and Gagnon said.

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It's unclear how interested the world's major economies are in pushing these ideas. But these things take time. Ideas start with people like Mr. Bergsten, and are picked up by people like Mr. Shenfeld. They are circulated in newspapers and on blogs. Readers write letters to the editor praising or panning the suggestions.

The notion of finally getting serious about punishing currency manipulation has made it to that stage. The question now is whether people like Trade Minister Ed Fast are listening? Stay tuned.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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