Subsidizing Exports Means Higher Prices

I live in Sault Ste. Marie, Ontario, which is located on the Canada-U.S. border, neighbouring Michigan. Here, it is commonplace for Canadians to go shopping “across the river.”

This is because prices for most goods and services are considerably lower in the United States. For example, gas is less expensive. So is beer. Factors such as increased competition and the absence of protective tariffs and other taxes contribute to these price differences. Consumers love bargains, especially when money is tight. After all, Canadians drink a lot of beer.

Another factor that influences cross-border shopping is the strength of the Canadian dollar versus the U.S. dollar. As the purchasing power of the Canadian dollar increases, Canadian citizens are able to buy more goods and services produced in other countries. In other words, a strong Canadian dollar benefits Canadian consumers.

This is why I was particularly disappointed to read an article in the Globe and Mail which asserts that “plenty of other countries, including Canada, the U.S., Japan, and the euro nations, would be delighted if their currencies happened to weaken without direct intervention.”

Seriously? Would you be “delighted” if the purchasing power of your money declined? Say, for example, that tomorrow morning the Canadian dollar returned to its 21 January 2002 all-time low of 61.79 cents US. Would you rouse from your slumber and think to yourself, “This is terrific! My life is so much better now that it will cost more to vacation in Las Vegas this winter”? Hardly.

A depreciating Canadian dollar does not benefit Canadians. It benefits the export sector of the economy and the politicians who are elected by catering to this favoured group. This is called mercantilism. It involves a coercive wealth transfer from the majority to a favoured minority by means of central bank currency depreciation. Gary North elaborates:

Only a relatively small percentage of the nation’s businesses and workers is in the export sector of the economy. This is why the subsidy from a depreciating currency is a benefit to a minority of businesses and workers. The vast majority of the residents in the society pay more for their imported goods because of central bank policy, namely, to inflate the currency in order to keep its international value low. But by doing this, the monetary planners are harming the interests of the vast majority of the nation. The subsidy benefits a minority. There are enough people in the majority from which to extract wealth, by means of inflating the currency, which enables the export sector to gain above market revenues by exporting. The minority cannot effectively subsidize the majority. It always has to be the other way around.

When evaluating economic policy, always count the costs. Dollar depreciation subsidizes exports. It does so at the expense of consumers who pay higher prices for the goods and services they wish to buy. Adam Smith warned against this in 1776. As a nation, we have yet to catch up to him.

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  • About Gregory Cummings

    Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.

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