Unit 1: Introduction to International Trade

Unit 1: Introduction to International Trade

Topic 1: Trade in the Modern World (Ch 1&2)

Definitions

Business: The manufacturing and/or sale of goods or services to satisfy the wants/needs of consumers to make a profit.

Transaction: An exchange of things of value

A domestic business in Canada is:

• owned by Canadians
• relies on Canadian products and services
• sells products and services to Canadians

International business: transactions conducted between businesses located in different countries

Domestic / International
Transactions / Transactions between two Canadian companies / Transactions between a Canadian company and a non-Canadian company
Markets / The customers of a business who live in the country where the business operates. / The customers of a business who live in a different country than the one where the business operates.

Five ways for a business to be considered an international business:

Example

1. Own a retail or distribution outlet in another country

1. Own a manufacturing plant in another country

1. Export to businesses in another country

1. Import from businesses in another country

1. Invest in businesses in another country

Trading partner

When a business in Canada develops a relationship with a business in another country, that country becomes a trading partner with Canada.

International trade takes place between businesses, not countries.

Globalization

The process whereby national or regional economies and cultures have become integrated through:

New global communication technologies

Foreign direct investment

International trade

Migration

New forms of transportation

Flow of money

Interdependence

Definition: The reliance of two or more nations on each other for products or services.

Three main areas of interdependence:

1. Primary industries
2. Secondary industries
3. Tertiary industries

Primary industries

The sector of the economy characterized by the extraction of natural resources from the earth or sea.

Five major primary industries:

• agriculture
• fishing, hunting, and trapping
• forestry and logging
• energy
• mining

Secondary Industries

Industries that create a finished, usable product.

Secondary manufacturing produces capital goods (products used by businesses) and consumer goods (products purchased by individuals).

Branch plant

A factory owned by a company based in another country.

Canada has a branch-plant economy, based on businesses owned by foreign interests

National Policy of 1879, which stated that businesses wanting to reach Canadian consumers needed to build factories in Canada, led to this situation

Tertiary industries (service sector)

Provide necessary services to consumers and other businesses.

Examples include banking, construction, communications, transportation, and retail sales.

Pros and Cons of International Business

International business helps Canadians by: / International business hurts Canadians by:

Current Issue: Foreign Ownership of Canadian Companies

In 2009, 1% of Canadian companies were foreign owned. These firms generated 30% of Canada’s business revenue.

Reasons for Concern:

Foreign companies have foreign loyalties

Lack of research and development

Reduced exports (in some industries)

Revenues leave Canada to pay head office costs

Economic destabilization

International Business Practices

Reasons to trade:

1.

2.

3.

4.

5.

6.

7.

Foreign portfolio investment

Investment in businesses located outside of Canada through stocks, bonds, and financial instruments

Allows Canadians to spread out their investments, which is less risky than investing in just one area

Also provides greater choice and opportunity

Importing

To bring products or services into a country, for use by another business or for resale.

The majority of the goods that Canada imports come from the United States.

Global sourcing: The process of a company buying equipment, capital goods, raw materials, or services from around the world.

Top 10 Products/Goods Canada Imports / Top 10 Countries Canada Imports From

Exporting

To send goods or services to another country, for use by a business or for resale.

The majority of goods that Canada exports go to the United States.

Top 10 Products/Goods Canada Exports / Top 10 Countries Canada Exports To

Value added

The amount of worth that is added to a product at each stage of processing. It is the difference between the cost of the raw materials and the finished goods.

Licensing agreement
An agreement that grants permission to a company to use a product, service, brand name, or patent in exchange for a fee or royalty.
Exclusive distribution rights:

• A form of licensing agreement that grants a company the right to be the only distributor of a product in a specific geographic area or country.

Franchise
An agreement granted to an individual or group by a company to use that company’s name, services, products, and marketing.
For a fee, the franchisor provides support to the franchisee in the areas of financing, operations, human resources, marketing, advertising, quality control, etc.
Joint venture
A common type of international business, in which a new company with shared ownership is formed by two businesses, one of which is usually located in the country where the new company is established.
Foreign subsidiaries
Often referred to as a wholly owned subsidiary, a branch of a company that is run as an independent entity in a country outside of the one in which the parent company is located.
The parent company often sets financial targets, and allows the subsidiary to manage its own day-to-day operations as long as those targets are being met. / Examples

Tariffs

Trade Barriers

Protectionism

The theory or practice of shielding domestic industries from foreign competition, often through trade barriers such as tariffs.

Tariffs
The most common type of trade barrier, are taxes or duties put on imported products or services.
Tariffs raise the cost of imports, so that locally manufactured products are less expensive and more appealing to consumers.
Trade quotas
A government-imposed limit on the amount of product that can be imported in a certain period of time.
Trade embargo
A government-imposed ban on trade of a specific product or with a specific country, often declared to pressure foreign governments to change their policies.
Trade sanctions
Economic action taken by a country to coerce another to conform to an international agreement or norms of conduct.
Foreign investment restrictions
Canadian law with the greatest impact is the Investments Canada Act
Ensures that all foreign investments are reviewed to determine how they will benefit Canada
Standards
Countries have different standards for products in areas such as environmental protection, voltage, and health and safety
The ISO (International Organization for Standardization) is a network of standardization groups from over 170 countries established to set quality regulations / Examples

Currency Fluctuations

Exchange rate

The amount of one country’s currency in relation to the currency of another country.

The Canadian dollar (CAD) is most often quoted against the U.S. dollar (USD) because the two countries are the largest trading partners in the world.

Winners of a high Canadian dollar / Losers of a high Canadian dollar

Floating rate

An exchange rate that is not fixed in relation to other currencies.

The price at which currency with a floating rate is bought and sold fluctuates according to supply and demand.

Currency revaluation

The increase in value of a currency because the demand for that particular currency is greater than the supply.

Currency devaluation

The decrease in value of a currency because the supply of that particular currency is greater than the demand for it.

Factors Affecting the Exchange Rate

Economic conditions in Canada—inflation rate, unemployment rate, GDP, interest rates

Trading between countries—the more favourable the terms of trade (comparison of exports to imports), the higher the currency exchange

Politics—political tension and instability or the threat of terrorism decreases the demand for a currency

Psychological factors—historical significance and stability change the way currencies are viewed

Hard currencies

Stable currencies, such as the euro, and the U.S. and Canadian dollars, which are easily converted to other currencies on the world exchange markets.

Soft currencies

A currency belonging to a country with an economy that is small, weak, or that fluctuates often, and is difficult to convert into other currencies, such as the Russian ruble or the Chinese yuan.

Current Issue: The Euro

Material adapted from Wikipedia and the BBC

The euro (sign: €; code: EUR) is the currency used by the Institutions of the European Union and is the official currency of the eurozone, which consists of 17 of the 27 member states of the European Union: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.

The European sovereign debt crisis is an ongoing financial crisis that has made it difficult or impossible for some countries in the euro area to re-finance their government debt without the assistance of third parties

A Crisis in Four Graphs

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