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CHAPTER 2:
Trade in the Modern World
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Key Terms
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importing
global sourcing
exporting
value added
licensing agreement
exclusive distribution rights
franchise
joint venture
foreign subsidiary
protectionism
trade quotas
Chapter 2:
TRADE IN THE MODERN WORLD
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trade embargo
trade sanctions
exchange rate
floating rate
currency revaluation
currency devaluation
terms of trade
hard currencies
soft currencies
 currency speculating
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Chapter Objectives
By the time you finish this chapter, you should be able to:
 Identify the types of international businesses
 Describe the impact technology has had on the international
business environment
 Identify the factors that affect foreign exchange rates
 Explain how changes in the value of the Canadian dollar can
affect business opportunities
 Identify the types of products that trade freely into and out of
Canada and those that are restricted in their movement
 Identify and locate on a map Canada’s major trading partners
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
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Reasons that Canada trades:
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Company growth
Entry into new markets
Expanded customer base
Increased profits
Access to inexpensive supplies
Lower labour costs
Access to financing
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
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
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
© iStockphoto.com
International Business Practices
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Photos: © iStockphoto.com
International Business Practices
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
International Business Practices
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-today operations as long as those targets are being
met.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
Protectionism
The theory or practice of shielding domestic
industries from foreign competition, often through
trade barriers such as tariffs.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
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
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Trade Barriers
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
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Winners of a High Canadian Dollar
© iStockphoto.com
 Importers
 Canadian travellers
 Major league sports teams in Canada
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
Losers of a High Canadian Dollar
 Exporters
 Canadian tourism
 Canadian retailers
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
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
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
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.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Currency Fluctuations
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Currency speculating
Buying, holding, or selling foreign currency in
anticipation of its value changing in order to
profit from fluctuations in the price of
currency.
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Time Zones
Time Zones
 Communication technology allows the world of
international business to operate twenty-four
hours a day
 Certain methods of communication can be used at
any time (email); other methods (telephone)
require knowledge of time zones
 Some methods offer immediate feedback and
interaction; others do not
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.
Used under license from Shutterstock, Inc.
Time Zones
Chapter 2:
TRADE IN THE MODERN WORLD
Fundamentals of International Business
Copyright © 2010 Thompson Educational Publishing, Inc.