Finance Committee on May 1st, 2007

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you.

Thank you, Mr. Chairman.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup.

We'll now continue with Mr. Del Mastro.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you, Mr. Chair.

Mr. Jenkins, you spoke about the broader global economy. I want to go back to that for a moment, if I could.

Certainly, we see emerging economies. They're growing quite strongly. In fact, in the case of China, some would argue it's growing too strongly.

Canada hasn't cut a lot of bilateral trade agreements over the last number of years. We see that the government is investing a lot in the Asia–Pacific gateway as we try to decrease our dependence on the U.S. market for our overall economy. Could you talk a bit about the importance of furthering trade specifically with the Asia–Pacific Rim?

[Paul Jenkins]

Broadly, I think the importance of seeing trade continue to grow globally is a critical issue.

The governor talked about it in terms of the reverse, where the risks of protectionist pressures will take hold if the world economy doesn't move forward in terms of dealing with some of the imbalances that exist right now, the imbalances in terms of the U.S. current account deficit and the large surpluses you're seeing in countries, particularly in Asia.

For the continued strong growth of the global economy, world trade needs to continue to grow so that everyone can have a part of the growing pie. From our point of view, one of the elements that's also critical there is to have a global monetary order, as we call it, that facilitates the growth in trade.

Yes, from the point of view of what is beneficial to the global economy and what is beneficial to the Canadian economy as an open economy, I would say a continued effort to promote growth in world trade is indeed important.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thanks very much.

Governor Dodge, generally speaking, there's an inverse relationship between the price of gold and the price of oil.

You mentioned the surplus of China's reserves in U.S. dollars. I think they're holding about $1 trillion in U.S. reserves right now. As they've been somewhat funding the U.S. overall deficit, they've been eating up about 75% of the world's savings.

If they were to want to take away some of their exposure to the downside risk of the U.S. dollar and invest it in precious metals, it could adversely affect the overall valuation of the U.S. currency broadly, could it not?

[David Dodge]

Yes, but let's be quite clear. Whether it's China, Europe, the United States, or Canada, it's in the interests of everybody to have the resolution of these imbalances take place in a smooth manner. It's in the interests of everybody domestically. It's in the interests of no one to do something foolish.

The question is this. Can we do enough to get a smooth adjustment so that the protectionist pressures Paul mentioned don't build up? That's the real danger.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay.

Do I still have time, Mr. Chair?

[The Chair, Conservative, Brian Pallister]

You have one minute, sir.

[Dean Del Mastro, Conservative, Peterborough, ON]

Thank you very much.

I'd like to go back, if I could, with respect to the overall potential upside for Canadian trade.

We've heard a lot about being at a type of labour disadvantage or a cost disadvantage to some of the trading nations in Asia. I'm curious. As we look towards setting up greater trade with Asia, could you outline this? Does the bank have any opinions on where we may have competitive advantages and where there may be gains for the economy? Obviously, when you're looking to set up trade agreements, you're looking for competitive advantages to expand.

[The Chair, Conservative, Brian Pallister]

Le prochain, monsieur Crête.

[David Dodge]

Could I just make one comment there?

[The Chair, Conservative, Brian Pallister]

Yes, okay.

[David Dodge]

It's really important that we in Canada push for multilateral arrangements, because we're small enough and exposed enough that we will not be able to derive the great advantages from bilateral arrangements that larger economies can. And once the world breaks into a whole bunch of bilateral arrangements, in fact historically that's been highly impeding to trade and will really not benefit us.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

Next on our list is Mr. Crête.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chairman.

I'd like to come back to the dollar's value in relation to a single currency. You spoke about criteria. What level, whether it be 95 cents, 96 cents or $1, would be good enough for the Canadian government to seriously consider this option?

[David Dodge]

It's important that our unit cost remain competitive. Some variations in the Canadian dollar's nominal exchange rate do not necessarily lead to a variation in the real exchange rate. Even though the nominal exchange rate has, overall, been higher in recent years, our unit costs haven't increased much. The real exchange rate in relation to the US dollar has remained virtually unchanged.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I need to have enough time for another question. I'll ask you the question right away and then you can finish your answer.

[David Dodge]

In any event, we have...

[Paul Jenkins]

It's important to control the inflation rate in Canada because, recently, Canada's inflation rate has been lower than the US's. In real terms, the dollar is relatively stable.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Yes it is, but it's currently being controlled. Oil and the West are very important. In a broader North-American context, the variation may in fact not be as great as in other parts of Canada, such as Quebec and Ontario. Is this possible? If we had a single currency in North America, would there be less of an impact on the regions than we're currently seeing in Canada as a result of rising energy costs?

[David Dodge]

Such adjustments are always difficult to bear when relative prices change as they have over the last three years. Canada should be proud of its economy's capacity to bear these adjustments, especially in the manufacturing regions like Montreal, Winnipeg and Southern Ontario.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

What other things can Canada and international community do to get China to increase the value of the yuan more quickly? In my opinion, this is one of the keys to Canada's access to the American market. We are losing a substantial share of the US market partly as a result of that.

[David Dodge]

We need to work closely with the Chinese authorities. We have a good relationship with the People's Bank of China. It isn't easy for them either. We are used to leaving it up to the market to make the necessary adjustments. Since it's a matter of maintaining control, they're afraid of making adjustments to relative prices, even though it would benefit them a lot.

[Paul Jenkins]

The prospect of a higher inflation rate in China is very real. The scenario of a fixed exchange rate accompanied by a stockpiling of cash reserves could lead to a higher exchange rate and, consequently, to a stronger yuan owing to an increase in the inflation rate.

[The Chair, Conservative, Brian Pallister]

Thank you, Mr. Crête.

Housekeeping first. For committee members who are interested in discussing the motion we have received from Mr. Pacetti, we'll be discussing that on Thursday. In advance of that we'll have a steering committee meeting at 11 for half an hour, prior to the committee in full devoting an hour and a half to the discussion of both Mr. Pacetti's motion and the pre-budget consultation process, because the two are of course linked. In terms of the time we have available for one or the other, we must discuss them at the same time, and we'll do that on Thursday.

I have five or six more questioners remaining.