Chapter 1 - What is Trade

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CHAPTER 1:
What Is Trade?
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Key Terms
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business
transactions
domestic business
international business
domestic market
foreign market
trade
foreign or international
trade
 trading partner
 duty or tariff
Chapter 1:
WHAT IS TRADE?
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globalization
interdependence
primary industries
secondary industries
branch plant
tertiary industries
service sector
foreign direct
investment
 portfolio investment
 culture industry
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Chapter Objectives
By the time you finish this chapter, you should be able to:
 Describe key concepts related to international business
 Explain how and why Canada’s major international business
relationships have evolved over time
 Demonstrate an understanding of how globalization has
affected international business
 Describe ways in which international business activity
develops interdependence among nations
 Evaluate the benefits and drawbacks of international trade for
Canada
 Explain how the global market has affected consumer
demand
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Defined
Business
The manufacturing and/or sale of goods and/or
services to satisfy the wants and needs of
consumers to make a profit.
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Defined
Transaction
An exchange of things of value.
$
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Defined
Domestic business
A business that makes most of its transactions within
the borders of the country in which it is based.
A domestic business in Canada is:
 owned by Canadians
 relies on Canadian products and services
 sells products and services to Canadians
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Defined
International business
The economic system of transactions conducted
between businesses located in different countries.
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Defined
Domestic transactions are made between two
Canadian companies.
International transactions involve a Canadian
company and a non-Canadian company.
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Defined
Domestic market
The customers of a business who live in the country
where the business operates.
Foreign market
The customers of a business who live in a different
country than the one where the business operates.
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Defined
Five ways for a business to be considered
an international business:
1.
2.
3.
4.
5.
Own a retail or distribution outlet in another country
Own a manufacturing plant in another country
Export to businesses in another country
Import from businesses in another country
Invest in businesses in another country
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Defined
Trading partner
When a business in Canada develops a relationship
with a business in another country, that country
becomes a trading partner with Canada.
It is important to note that international trade takes
place between businesses, not countries.
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
History of Canadian Trade
 Explorers from France and England landed in what is
now Canada in the 1600s
 Traded with First Nations people, especially the
Ojibwa and the Cree, for fur and food, then sent
goods back to Europe
 The success of this international business led to the
establishment of colonies and outposts in Canada,
notably the Hudson’s Bay Company and the North
West Company
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
History of Canadian Trade
European Trade
 Trade grew quickly after permanent settlements were
established in Canada in the 1700s
 Demand for raw materials (beaver pelts, fish, lumber)
grew in Europe, where manufacturing took place
 England defeated France in Seven Years’ War, which
led to Canada’s reliance on England for finished
goods
 Many major cities were established near ports to
facilitate export of raw materials and import of
finished goods
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
History of Canadian Trade
Major fur trade routes used to travel between Canada and Europe
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
History of Canadian Trade
Trade with the United States
 United States declared independence from Britain in
late 1700s
 Needed to become self-reliant
 Invention of steam engine, cotton gin helped rapid
growth of American industry
 Canada supplied raw materials that were needed in
the United States
 United States became Canada’s largest trading
partner—this remains true today
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
History of Canadian Trade
Trade with Asia
 Canada began trading with Japan after
World War II
 Japan became known for high-quality
electronics and automobiles
 China has more recently become a trading
partner
 Chinese-made products are inexpensive
and well made, and popular with North
American retailers
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
History of Canadian Trade
Trade with Mexico
 Developed since signing NAFTA in 1993
 Goods made in Mexico and the United States now
enter Canada duty-free
 Mexico has become one of Canada’s top five trading
partners since 2000
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
History of Canadian Trade
Trade with Emerging Markets
The Middle East
 Has traditionally centred on oil, but this
commodity is not sustainable
 Political instability, lack of industrialization in
much of the region has limited trade
 United Arab Emirates (Dubai), Israel, and Egypt
have established trading relationships with
Canadian businesses that do not depend on oil
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
History of Canadian Trade
Trade with Emerging Markets
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India
Chapter 1:
WHAT IS TRADE?
 Population of over one billion people
 Workforce generally young and well
educated
 Has become major centre of
outsourcing and manufacturing
 Lack of infrastructure and widespread
corruption are persistent problems
 Indian companies are aggressively
expanding into international markets
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Trade with Emerging Markets
© iStockphoto.com
History of Canadian Trade
Africa
 African imports to Canada are very low
 Business opportunities limited by unstable
governments, lack of infrastructure, rural
economies
 Rich in primary resources
 Some countries (Morocco, South Africa) are
beginning to emerge as major trading partners
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Globalization
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
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Globalization
History of Globalization
 Began after World War II with establishment of the
United Nations and fostering of trade relations
between countries
 Economic ties between countries strengthened—tax
treaties were negotiated, tariffs abolished, global
corporations developed
 New technology allows international business to
occur in real time, transforming the globe into one
market
 Has increased interdependence of all nations,
blurring political boundaries
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Interdependence
Interdependence
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
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Interdependence
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
In Canada, water is sometimes included in this list as well
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Secondary Industries
© iStockphoto.com
Interdependence
Industries that create a
finished, usable product.
Secondary manufacturing produces capital goods
(products used by businesses) and consumer goods
(products purchased by individuals).
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Interdependence
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
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Interdependence
Example of a company with branch plants in Canada
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Interdependence
Tertiary industries (service sector)
Industries that do not make a product or extract
resources from the earth, but provide necessary
services to consumers and other businesses.
Examples include banking, construction,
communications, transportation, and retail sales.
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
How International Business Helps Canadians
International business helps Canadians:
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Variety of products
New markets, more jobs
Foreign investments
New processes and technologies
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
How International Business Hurts Canadians
International business hurts Canadians:
 Loss of culture/identity
 Increased foreign ownership of companies in Canada
• Foreign companies are loyal to investors and
executives in home country
• Research and development is usually carried out
in the home country
• Exports are reduced, as products manufactured in
branch plants stay in Canada
• Revenues leave Canada to pay head office costs
• Economic destabilization
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
How International Business Hurts Canadians
Products commonly used in Canada are imported from
countries around the world.
Chapter 1:
WHAT IS TRADE?
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
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