Global Trade
Environment
Global Marketing
Global Financial System
Exchange rate = the price of a currency in terms of another
currency
1. Gold standard system: Before World War II. the price of each
currency was expressed in gold. Each currency was convertible
to gold
2. Fixed ER System, Bretton Woods, USA, 1944
International Monetary Fund was created
The price of IMF member country’s currencies to be “pegged” or
valued against the US $. Only the US $ was convertible to gold
Crisis of the 1960s-1970s: high inflation, Vietnam War
1971: President Nixon suspends the US $’s convertibility
3. Floating Exchange Rate System, since 1976
Jamaica Agreement: currency prices are determined by supply and
demand in foreign exchange markets
Purchasing Power Parity (PPP) Theory:
The Big Mac Index by The Economist
Rule: $1 should buy the same product in all countries
1.
2.
The Big Mac PPP provides us a theoretical
Exchange Rate assuming that a Big Mac would cost
the same in the US vs. in Canada
Compare the actual exchange rates with PPP rates
Trade theories
Free Trade: the government does not attempt to influence
what its citizens buy from another country or what they
produce and sell to another country
Benefits? Free trade should allow a country to specialize
in manufacturing and exporting products that can be
produced most efficiently in that country
The patterns of international trade have been explained
different ways
Trade Theories: 1. Mercantilism
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France in the 1600s – 1700s: first classic trade theory
A nation’s wealth equals its accumulated treasures
Gold and silver are the only currencies of trade
Each country strives for a trade surplus
– Maximize exports through subsidies
– Minimize imports through tariffs and quotas
Trade Theories: 2. Absolute Advantage
• Adam Smith: Wealth of Nations – 1800s
• Countries naturally have different resources, so they
differ in their efficiency of producing different goods
• Countries should produce goods where they are more
efficient than their partner
• They should import goods where they are less efficient
than the trading partners
• Canada: export wood, import bananas
• Then trade between countries may be mutually
beneficial
Trade Theories: 3. Comparative Advantage
David Ricardo – 1800s
Involvement in international trade may be beneficial
even if country A is more efficient in producing all
goods than country B
Ex: Canada should export wheat where its comparative
(relative) advantage over the USA is greater than the
average advantage it has over the USA
Canada should import soybeans where its comparative
(relative) advantage is below its average advantage
Trade theories: 4. Heckscher-Ohlin Theory
• Swedish economists, 1930s
• Countries tend to export goods that intensively
use the production factor (labor, capital, land)
which is abundant in your country
Ex: Canada should export wood or oil…
• Patterns of trade are determined by differences in
factor endowments – and not by productivity
measures
Free trade? Not really… New Trade Theory
Other theories, like the International Product Life Cycle
theory have also failed to explain trade patterns
“New Trade Theory:” some kind of intervention is still
necessary and beneficial to the country. Why?
 Protecting jobs and industries (ex: biotechnology)
 Increasing exports (ex: with a “weak” Canadian $)
 Protecting national security (ex: Bombardier)
 Trade retaliation (ex: beef, softwood lumber trade)
 International market domination (ex: Airbus developed
jointly by EU countries vs. Boeing)
GATT

General Agreement on Tariffs and Trade
 treaty among nations to promote trade among
members
 series of multilateral negotiations significantly
reduced tariffs globally
 GATT handled trade disputes between nations
 However, it lacked enforcement power
 GATT has been replaced by World Trade
Organization in 1995
WTO
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World Trade Organization, since 1995
Provides forum for trade-related negotiations among 141
members
 based in Geneva
 serves as dispute mediators
 empowered with ability to enforce rulings
Countries found in violation of WTO rules are expected
to change policies or else face sanctions
WTO has enforcement power, however, it doesn’t seem
to have significant power to regulate the strongest
economies: USA, EU, Japan, China
Preferential Trade Agreements:
1. Free Trade Area
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Two or more countries agree to abolish all
internal barriers to trade amongst themselves
Reducing tariffs or non tariff barriers among
member countries
2. Customs Union
Evolution of Free Trade Areas
 Includes the elimination of practically internal
barriers to trade (as in FTA)
PLUS
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3. Common Market
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Includes the elimination of internal barriers to
trade (as in free trade area) PLUS
Establishes common external barriers to trade
(as in customs union) PLUS
4. Economic Union
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Includes the elimination of internal barriers to trade (as in free
trade area) PLUS
Establishes common external barriers to trade (as in customs
union) PLUS
Allows for the free movement of factors of production, such as
labor, capital, and information (as in common market) PLUS
NAFTA
 Became a law on January 1,1994
 Over a 15 year period:
 Tariffs to be reduced (for 99% of goods traded)
 NTBs also reduced, investment opportunities
increased
 Protection of intellectual property
 Applies national environmental standards
Free Trade Area of the
Americas (FTAA)

An agreement to form a
regional trading zone
stretching from
Point Barrow, Alaska
to Patagonia, Argentina.
US$ as the currency of Canada?
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http://www.euro.ecb.int/en/another/play.html
EU
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Initially began with the 1958 Treaty of Rome
Objective to harmonize national laws and regulations so
that goods, services, people and money could flow freely
across national boundaries
1991 Maastricht Treaty set stage for transition to an
economic union including a common central bank and
single currency (the Euro)