COVER

SHIFTING GROUND

National sovereignty is on the line as trade and capital markets globalize

DEIRDRE McMURDY March 20 1995
COVER

SHIFTING GROUND

National sovereignty is on the line as trade and capital markets globalize

DEIRDRE McMURDY March 20 1995

SHIFTING GROUND

COVER

National sovereignty is on the line as trade and capital markets globalize

DEIRDRE McMURDY

Newspaper headlines screamed of a Canadian currency crisis. Below the headlines were breathless reports of “the toughest period of economic austerity since post-Second World War days.” The Prime Minister had just announced emergency measures designed to slash $450 million from the federal government deficit in one year, along with plans to borrow the unprecedented sum of $1 billion from the International Monetary Fund to bolster Canada’s dwindling exchange reserves. The year was 1962. The Prime Minister was John Diefenbaker. And the psychological impact on Canadians was profound.

After 33 years—and subsequent bouts of currency market volatility—the shock value of sudden, destructive swings in financial markets has greatly diminished. But the complexity of those markets, Canada’s vulnerability to the dictates of foreign creditors and the implications for national sovereignty have grown—along with the country’s $37.9-billion deficit. The relentless pace of technological change and the proliferation of borderless business transactions have shifted the ground beneath Canada’s socioeconomic structure. And Canadians are

struggling to understand just where they fit into an uncertain world where exchange-rate volatility makes everything from budget projections to travel plans unpredictable, where credit analysts in New York City and insurance companies in Japan dictate social spending to Ottawa, and an aggressive 28-year-old trader in Singapore detonates the charge to bring down a 233year-old merchant bank in London (page 32).

In fact, the Liberal government has deliberately played on that growing anxiety about the erosion of Canada’s domestic sovereignty in its bid to win broad political support for an austere cost-cutting budget. In a speech in Vancouver last week, Finance Minister Paul Martin declared that his hardline budget, tabled on Feb. 27, was imperative for Canada’s autonomy. “My goal is to make sure that my kids don’t have their sovereignty dictated to by somebody outside of this country,” he said, referring to the clout of foreign creditors.

As the age of high-technology global markets and multilateral trade has diminished traditional national borders, the clout of supranational bodies and the consequences of economic interdependence have become increasingly apparent. To successfully conclude complex trade agreements, such as the Uruguay Round of the 123-member General Agreement on Tariffs

Policy in areas that were once the exclusive economic preserve of domestic governments is now dictated by supranational agreements

and Trade, all participants have given up at least some control in areas such as agriculture, environment and labor, traditionally the exclusive preserve of national governments. And for relatively small economic powers like Canada, that process can be threatening. “The word sovereignty automatically introduces an edgy emotional note to any economic discussion,” says David Laidler, an economics professor at the University of Western Ontario in London. “But the fact is, you have to compromise if you want to participate in a world economy, and you want it to be an orderly place.”

Over the past several months, however, global currency markets have been anything but orderly. Last week, the pressure of attacks from foreign exchange traders, who move more than $1 trillion around the world each day, forced Spain, Portugal and Brazil to devalue their currencies in rapid succession. At the same time, the currencies of Britain, France, Sweden and Italy hit record lows against the German mark. The markets also pushed the Mexican peso to historic depths and dragged the U.S. dollar to postwar lows against the Japanese yen and the German mark. Inevitably, the Canadian loonie was pulled into the downward spiral. It fell eight per cent against the German mark, and bounced around 70 cents (U.S.) during the last week, before closing where it started—71.07 cents.

Although the U.S. dollar also stabilized late last week and currency markets calmed overall, the aftershock of those international tremors still reverberated in Canada. As the Canadian dollar slid downward, the six chartered banks boosted their prime lending rate to a two-year high of 9.75 per cent, up from 9.25 per cent. “The lockstep march of technology and economic interdependence is being fully displayed,” said Michael Hart, a federal trade policy adviser. “The reach of international currency markets may not be new, but they are bigger, faster—and more disruptive—than ever.”

The force of foreign exchange markets was also underscored by their ability to blithely disregard the conventional tool kit of national governments—central bank intervention. As the U.S. dollar tumbled, the Federal Reserve—as well as the central banks of 17 other countries—vainly waded into the market to buy and to bolster the U.S. currency last week. According to analysts, the principal concerns reflected in the market were the U.S. government’s commitment of $28 billion in loans and guarantees to Mexico, as well as the congressional defeat of the proposed balanced-budget amendment to the constitution on March 2. More generally, currency speculators were also shunning countries with significant debt burdens—the United States had external liabilities of $750 billion at the end of 1994. And they were also anticipating that Japanese investors will soon embark on their annual sell-off of foreign holdings, to bolster their own balance sheets just prior to Japan’s fiscal year-end on March 31.

To contain such destabilizing market attacks and to help national governments to preserve at least some of their economic agenda in the midst of crises, there is growing support among trade analysts for the creation of a supranational regulator for foreign exchange and capital markets. American economist James Tobin has proposed that a one-per-cent tax be imposed upon every foreign exchange transaction. He argues that the tax would make speculation more expensive and would slow down the feeding frenzy when global markets turn against a country. Said trade policy adviser Hart: “It used to be that a single government had the levers to control and to govern. But in more and

more cases, a new level of global governance is required.”

For his part, however, Western’s Laidler strongly disagrees with that view. “Market volatility is about a healthy market challenging unhealthy national policies.” Laidler adds that even if exchange controls, which were only recently lifted in countries like Britain, were imposed, “a healthy market subverts all artificial barriers to its will.”

With 24-hour global trading by innumerable financial institutions and corporations, it would be impossible and impractical to monitor all the transactions, he noted.

Still, for Canada, the stark reality of global capital markets and their often-punishing discipline of debtors, has gradually frayed the country’s social policy underpinnings. At the heart of the net of national social programs is the established prece-

dent that the federal government has a key role to play in directing the economic life of the country. But with a heavy national debt burden, Ottawa’s control of that agenda has clearly been overshadowed. In an interview with Maclean’s last week, Industry Minister John Manley noted: “It’s never pleasant to be a borrower. Our policy options are limited by our need to fuel the national deficit machine.” □