BBB Ch1
Chapter 1
What Is
Trade?
Learning 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
 Describe ways in
which
international
business activity
develops
interdependence
among countries
 Evaluate the
benefits and
drawbacks of
international trade
for Canada
 Demonstrate an
understanding of
how globalization
has affected
international
business
 Explain how the
global market has
affected consumer
demand
PAGE #3
Key Terms
 business
 transaction
 domestic business
 international
business
 trade
 interdependence
 trading partner
 imports
 exports
 balance of trade
 trade surplus
 trade deficit
 domestic market
 duty (tariff)
 foreign markets
 foreign direct investment (FDI)
 portfolio investment
 branch plant
 globalization
 populism
 protectionism
Chapter Index
» 1.1
An introduction to
business and trade
» 1.2
History of
Canadian trade
» 1.3
Advantages of
international trade
» 1.4
Disadvantages of
international trade
» 1.5
Globalization
Business Skills First Impressions
PAGE #46
Chapter Review
Knowledge
1. Define the term
business. Explain
the difference
between a
domestic business
and an
international
business. Which
type do you think
is more common?
2. Define imports
and exports, and
explain how they
are used to
calculate a
country’s balance
of trade. What is
the difference
between a trade
surplus and a trade
deficit?
3. Explain, using
three factual
examples, how
Canada is a trading
country with the
world.
4. List three main
advantages of
international
business, and
provide
examples of how it
positively impacts
Canadian
consumers and/or
businesses.
5. List three main
disadvantages of
international
business, and
provide examples
of how it
negatively impacts
Canadian
consumers and/or
businesses.
6. Define the term
globalization.
7. Identify three
positive effects
and three negative
effects of
globalization.
8. What are some of
the social and
political issues of
globalization?
9. What is the impact
of the rise in
populism on trade
agreements?
Thinking
10. Identify where two
articles of clothing
you own were
made.
11. Name three
products you have
used today that
were made in
Canada and three
products that were
made outside of
Canada.
12. Using the data
below, calculate
Canada’s balance
of trade in each
year from 2012 to
2016. Which years
had trade
surpluses, and
which had trade
deficits?
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PAGE #47
13. Calculate
Canada’s balance
of trade for 2016
with the following
countries (refer to
the figures
throughout section
1.2): Japan, India,
Mexico, and Chile.
Did Canada have a
trade surplus or
deficit with each?
14. Indicate whether
each the following
is an example of a
domestic or an
international
business
transaction.
a. Two sisters in
London, Ontario,
travel to Montreal
to watch a hockey
game.
b. A couple from
Toronto has a
destination
wedding in Cuba.
c. A car dealership in
Ottawa buys used
cars from a car
auction in British
Columbia.
d. A visa student
from Shanghai,
China, attends
high school in
Richmond Hill,
Ontario.
e. Your friend
watches Netflix
every Friday night
as part of family
movie night.
f. A grocery store in
Hamilton
purchases bananas
from a supplier.
15. Provide an
example of an
international
business that
trades with Canada
from each of the
following
countries: the
United States,
Japan, South
Korea, China,
Italy, and France.
Identify one
product that each
business sells.
Communication
16. With a partner,
discuss the
following
statement:
“Countries don’t
trade, people do.”
Do you and your
partner agree or
disagree with this
statement?
Explain.
17. In a small group,
draft a letter to the
federal trade
minister either
supporting or
challenging
Canada’s
involvement in the
TPP.
18. Martin Luther
King, Jr., said that
“before you finish
eating breakfast in
the morning,
you’ve depended
on more than half
the world.” What
do you think he
meant by this?
How many
different countries
have you relied on
today?
19. In groups of two
or three, create a
news report
(written, audio, or
video) on the
importance of one
of the following
industries in
Canada:
automotive, oil, or
technology.
Present your news
report to another
group.
20. With a partner,
create an
infographic that
traces Canada’s
history of trade
with one of the
following regions:
United States,
Europe, Asia,
South America.
Present your
infographic to
your class.
PAGE #48
Application
21. Using the
information
presented in the
chapter and
through additional
online research,
create a timeline of
Canada’s
economic
development from
the early 1900s to
today.
22. Using a
spreadsheet (such
as Google Sheets
or Microsoft
Excel), create two
charts showing
Canada’s trade
with a region of
your choice. Use
updated data from
a Government of
Canada or Export
Development
Canada website.
23. In 10 to 20 years,
which part of the
world would you
predict will be the
most important to
Canada in relation
to international
trade? Which part
will be the least
important? Do you
think the United
States will still be
Canada’s largest
trading partner?
Create a mind map
showing Canada’s
trade future.
24. For each of the
following
businesses, make a
recommendation
on a country you
would consider
expanding into and
a country you
might avoid.
Explain your
reasoning for each.
g. A Canadian
company that
makes arctic wear
for extremely cold
temperatures
h. An Ontario farm
that sells apples
across Canada
i. A Canadian
company that
manufactures tools
for the
construction
industry and
already exports to
the United States
j. An American fastfood company that
has 300 restaurants
in the United
States, Canada,
and Mexico
k. A Mexican
healthcare
company that sells
pharmaceutical
drugs
l. A non-profit
organization in the
U.K. that provides
basic necessities to
the homeless
PAGE #49
Inquiry Activity
Globalization
Canada is a trading
country. Each day
we consume
products that are
imported from other
countries.
In this chapter
you learned that
there are many
advantages to
globalization: more
jobs; greater variety
of products; access
to resources and
bigger markets.
However,
globalization does
have its
disadvantages: job
loss; economic
instability; and
harmful or unhealthy
products.
In groups, create
a presentation on
how globalization
has impacted you as
a Canadian
consumer. Take
pictures around your
home and school for
evidence of
international trade in
your life. Think of
the food, electronics,
clothing, cars,
appliances, and
services around you.
Using a presentation
software tool,
present your findings
to the class and
conclude with a
statement in favour
or not in favour of
globalization. You
might find it useful
to make a chart like
this one to organize
your information.
In your own
words, define
globalization:
A
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1
2
3
Group
conclusion on
globalization:
PAGE #50
Business
Skills
First
Impressions
“You never get a
second chance to
make a first
impression!”
Back in the 1980s,
shampoo brand Head
& Shoulders used
this tag line in its
advertising, but it
still holds true
today—especially in
international
business! When
meeting someone for
the first time, it is
important to present
yourself well.
Employers, coworkers, and
customers form a
first impression of
you quickly—about
three to five seconds
after meeting you.
Why are first
impressions so
important? If you
make a positive one,
it can:
 Create
opportunities for
you
 Enhance your
likeability and
manage what
others think about
you
 Build trust and
responsibility in
your professional
relationships
 Display your
confidence in a
positive way
Use the following
tips to create a
positive first
impression, whether
in a class
presentation,
meeting someone for
the first time,
attending a job
interview, or dealing
with a customer.
Tip 1 Attitude
 Don’t try to be
someone you’re
not. Don’t fake
answers to
questions you
don’t know.
 Put your phone,
tablet, and
electronics away.
Turn off the
phone’s ringer and
vibration.
 Give your full
attention to the
person you are
meeting.
Tip 2 Verbal
Communication
 Check the basics:
Do you speak too
softly or too
quickly? Are you
talking too much
or not enough?
What language
and vocabulary are
you choosing to
use?
 Be aware of your
pitch and tone.
 Avoid using filler
words such as
“um,” “uh,” and
“like.”
 Practise
beforehand and
think of what you
will say.
PAGE #51
Tip 3 Nonverbal
communication
 Sit straight and
avoid slouching.
 Take interest and
make eye contact.
 Listen and pay
close attention.
 Avoid crossing
your arms.
Tip 4 Appearance
and attire
 When deciding
what to wear to an
interview or
meeting, try to
match your clothes
(formal or
business casual) to
the person or
business you are
meeting with. Be
sure to check the
dress code before
your interview,
and if you’re not
sure, lean toward
more formal
business attire.
 Decide what to
wear a few days
before the meeting
and get a second
opinion.
 Avoid showing
piercings and
tattoos unless you
know that it’s
widely accepted
within the
company.
 Hair and nails
should be neat and
clean; any makeup
and jewellery
should be simple.
 For more on
appropriate
business attire, see
the Business Skills
section at the end
of Chapter 3.
Activity
Create a Venn
diagram on first
impressions at
school, at work, and
at both school and
work. What do they
have in common,
and what is unique to
each situation?
1.1
An introduction to business and trade
A business is defined as an organization that produces a good or offers a service
in exchange for money with the goal of making a profit. To conduct business, a
company completes various transactions. A transaction is an exchange of things
of value.
A domestic business is one 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 primarily on products and services made in Canada,
and sells the products it makes and services it provides to people who live in
Canada.
Today, it is difficult to be a totally domestic business. Canada relies heavily on
imports for much of its machinery and products, so Canadian companies that
appear to be purely domestic could be making non-domestic transactions.
International business
International business is the economic system of transactions conducted
between businesses located in different countries. This term is also used to refer
to a specific company or corporation that conducts business between countries.
Any business that conducts financial transactions outside of its native country
is an international business. If you live in Canada and buy from a Canadian fruit
distributor, it is a domestic transaction, even if the fruit came from Mexico. The
transaction type depends on the businesses involved, not the product. Domestic
transactions are made between two Canadian companies. An international
transaction involves a Canadian business and a non-Canadian one.
International businesses can be companies, government organizations, or
even non-profits that mix both domestic and international transactions. There
are five main ways for a business to be considered an international business. A
business could:
1. Export to businesses in another country. Canada Goose is an
international business because the company manufactures its
products in Toronto and Winnipeg and sells its Canadian-made
jackets to more than 50 countries.
2. Import from businesses in another country. Canadian Tire is an
international business because it sells products made by
companies in other countries at its stores in Canada.
3. Invest in businesses in another country. In 2014, Italian car
manufacturer Fiat merged with Chrysler, which was struggling at
the time. The new company, Fiat Chrysler Automobiles (FCA),
provided Fiat an opportunity to expand in North America by selling
the Fiat brand in Chrysler dealerships.
4. Own a retail or distribution outlet in another country. Amazon, the
world’s largest online retailer, opened Canada’s first-ever Amazon
high-tech robotic distribution centre in Brampton, Ontario. Today,
it is searching for more warehouse locations in North America.
5. Own a manufacturing plant in another country. Magna, a world
leader in automotive products, is an international business because
the company has manufacturing plants all over the world.
Similarly, Honda and Toyota are both Japanese automakers with
manufacturing plants in Ontario.
Why trade?
Throughout history, individuals, groups, states, and countries have traded with
their neighbours. Buying, selling, or exchanging goods and services is known
as trade.
Why do people trade? They trade in order to get the goods they do not have in
exchange for the goods they have. Both parties expect to be better off following
this exchange. The reliance of people on each other for goods, services, or ideas is
known as interdependence.
Trade is everywhere, and it occurs locally, regionally, and internationally. Just
look around and you will see how this is true. What did you decide to wear
today? There is a good chance your clothing was made in India, China, or
Bangladesh. What was the last meal you ate? If you had coffee this morning, the
beans probably came from a country in South America (perhaps Colombia or
Brazil). The oranges and orange juice you enjoyed? Likely from the United States,
in Florida or California. Those earbuds your friend just bought? Probably made
somewhere in Asia. What about the plastic and metal in the smartphone you love
so much? It’s likely that the copper was mined in Chile or Peru and the oil used
for making the plastic might have come from the Middle East, Africa, South
America, the United States, or even Canada. At a domestic level, farmers in
Ontario can sell apples to a grocery chain in Quebec, while consumers in Alberta
can purchase wine made in British Columbia.
Where does our stuff come from? Identify possible sources of materials in the items shown
here. How do your own things compare?
Although trade is often described as “between countries,” it is really people who
trade. Therefore, when you hear that Canada does most of its trade with the
United States, what it means is that Canadians trade mostly with Americans. A
family trip to Disney, a weekend sports tournament across the U.S. border, or
that online music purchase are all examples of Canadians trading with
Americans.
It’s important to note that the term trade is often used interchangeably with
the term business. Foreign trade or international trade means the same thing as
international business. When a business in Canada develops a relationship with a
business in another country, that country is considered a trading partner with
Canada.
Balance of trade
Imports are products or services brought into a country for trade. Exports are
products or services sent from one country to another. The difference between a
country’s exports and imports is known as its balance of trade. A country that
exports more goods and services than it imports has a trade surplus—that is, it
sells more than it buys. Similarly, a country that imports more goods and services
than it exports has a trade deficit—that is, it buys more than it sells. The
following summary makes it easy to remember:
exports > imports = trade surplus
exports < imports = trade deficit
Canada had a trade surplus with the United States in 2017 of more than $126
billion ($414.7 billion in exports and $288 billion in imports). And as you can see
from Figure 1-1, Canada’s balance of trade fluctuates at various points through
each year.
Figure 1-1 Canada’s Balance of Trade from 2008 to 2018
SECTION REVIEW
1. What is the difference between a domestic business and an
international business? Name an example of each.
2. What does interdependence mean?
3. What are imports and exports?
4. What does the term balance of trade refer to?
5. Explain the difference between a trade surplus and a trade deficit.
1.2
History of Canadian trade
The Canada we know today exists because of trade. After Columbus’s success in
exploring the “New World” and exploiting its riches, other explorers set out from
Europe to find what lay across the ocean. In the 1600s, ships from France and
England landed in what is now Canada, sailing up the St. Lawrence River to
Quebec. There they traded with First Nations peoples for fur and food, and sent
their treasures back to their home country. This international business was so
prosperous that settlers from France and England soon moved to Canada to
establish colonies and trading outposts (e.g., the Hudson’s Bay Company and the
North West Company).
Many First Nations traded with the Europeans. Representatives from the
Ojibwa and Cree Nations would often bring the furs (mainly beaver pelts) that
they had trapped to European trading posts and exchange them for rifles,
blankets, and other goods they needed. First Nations also acted as
intermediaries, trading furs for prized European manufactured items, and then
trading these items for more furs from nations much farther west. The traders
would bring the recently acquired furs to the trading posts and strike new deals.
Trade with Europe
Once permanent settlements were established in Halifax, Montreal, Quebec,
Ottawa, Kingston, and Toronto during the 1700s, trade grew very quickly. Little
manufacturing took place in Canada, so finished goods came from British or
French businesses overseas. In turn, the demand in Europe for raw materials
from Canada (especially beaver pelts, fish, and lumber) grew rapidly.
During this time, France and England were fighting the Seven Years War in
both Europe and North America. The defeat of the French led to a greater
reliance on trade from England and less on trade from France, and allowed
Britian to expand into the rest of Canada. Canada’s historical connection to
Britain and Europe remains strong, as can be seen in its majority language
(English) and currency laws, which are British in origin. All of the goods required
for settlement came from Europe by ship. The same was true for the United
States, as their cities, too, developed near the Atlantic seacoast and inland
waterways such as the Great Lakes. The United States was building its trade
economy at the same time that Canada was, and because of the proximity of their
cities to our cities, it was only a matter of time before the two countries became
trading partners.
Figure 1-2
Total Canadian Exports and Imports with the European Union, 2017
Total Exports to the European Union (Millions Total Imports from the European
of $)
Union (Millions of $)
41,580
66,248
Today, Europe remains a major trading partner with Canada, and this trade is
expected to grow. In 2017, Canada signed CETA, the Comprehensive Economic
and Trade Agreement, with the European Union (EU). This agreement will
remove 99 percent of duties (taxes) on traded goods between Canada and EU
member countries. Made up of 28 member countries, the EU remains the largest
free trade zone in the world and Canada’s second-most important trading
partner after the United States. You will learn more about CETA and trade with
the EU more extensively in Chapter 6.
Among Canada’s current exports to Europe are propellers and aircraft, like the one shown
here. This Bombardier 415 water bomber is shown collecting sea water off the coast of
Spain, and is used to fight fires.
Trade with the United States
The United States declared its independence from Britain in 1776, having fought
for that independence in the American Revolutionary War. As a result, U.S. trade
with Britain suddenly decreased, and the United States had to become selfreliant. This need for independent sources of manufactured goods coincided
almost perfectly with the Industrial Revolution.
The early manufacturing lead that America took over Canada is still obvious
today. In the United States, more industrial jobs were created through
manufacturing than in Canada, and American plants and factories expanded
rapidly. During this time, Canadian businesses were mainly resource-based,
producing coal, lumber, oil, and agricultural products.
The first American manufacturing plants in Canada were newsprint mills.
Although these American companies would have preferred to import the
Canadian lumber for their paper businesses, the provincial governments in
Canada (scared of losing jobs and hurting the Canadian economy) insisted that
the U.S. companies build local mills. Canada accounted for about 65 percent of
global newsprint exports by 1929. The discovery of minerals such as gold, nickel,
and zinc created a mining industry in Canada. American mining companies began
setting up businesses in Canada, bringing with them knowledge, skills, and the
financial capital required to extract these mining resources.
The United States, with a population of over 320 million, continues to be our
largest trading partner, and American brands can be found everywhere in
Canada. The United States also has the largest consumer market in the
world:―consumer spending is three times that of China, the second-largest
consumer market. In 2014, the United States was home to 128 of the world’s
largest companies, ranked by sales, according to Fortune Global 500.
The United States still relies upon Canada’s raw materials such as oil, lumber,
and water. Canada’s exports to the United States in 2017 amounted to $414.7
billion, and our imports from the United States were just short of $288 billion
(see Figure 1-3). Further, opportunities for trade to exist for Canadian businesses
across sectors, for example, in aerospace, automotive, oil and gas, and
information and communication technology.
Figure 1-3
Total Canadian Exports and Imports with the United States, 2017
Total Exports to the United States (Millions of Total Imports from the United States (Millions of
$)
$)
414,737
287,989
Lumber remains one of Canada’s most significant exports to the United States.
Trade with Asia
In 2017, more than 75 percent of Canada’s total trade with Asia was done with its
top three Asian trading partners: Japan, China, and South Korea. Let’s look at
these three countries, as well as India.
JAPAN
Canada started trading with Japan after World War II, in the late 1940s, when
Japan’s industries were rebuilt after being destroyed by Allied bombing. Japan’s
economy grew rapidly. Japan’s modern factories began to produce high-quality
electronic products such as radios, televisions, cameras, and computers.
Toward the end of the twentieth century, Japan also became known for its
automobiles and high-tech equipment. With highly skilled workers, excellent
infrastructure, and low corruption, Japan remains one of Canada’s most
important partners. Over 100 Canadian companies have a permanent presence in
Japan, and the country has an excellent international business environment.
After China, Japan is Canada’s largest trading partner in Asia. Canadian
businesses imported $17.5 billion worth of goods from Japan in 2017, and
exported $11.8 billion in goods to Japan in the same year (see Figure 1-4).
Figure 1-4
Total Canadian Exports and Imports with Japan, 2017
Total Exports to Japan (Millions of $)
Total Imports from Japan (Millions of $)
11,830
17,521
Panasonic employees in Japan assemble Organic Light Emitting Diode televisions,
introduced in 2017.
CHINA
In the past 30 years, China has emerged as a major economic force. Liberalization
of communist economic policies has led to free enterprise being promoted in
several Chinese districts. Cheap and abundant labour has encouraged businesses
from the West to develop partnerships with Chinese firms. Two-thirds of China’s
exports are from factories that foreign investors own, either outright or in
partnerships with Chinese firms. Chinese products are well made and
inexpensive; as a result, they have become very popular with North American
retailers.
Chinese businesses have also invested in Canada. For example, China National
Offshore Oil Corporation (CNOOC) Limited, headquarters in Beijing) purchased
Calgary-based Nexen in 2012 for $15.1 billion in cash. While China was looking
to gain an entry in the Alberta oil sands, falling oil prices and production issues
on the Canadian side meant that Canada welcomed this investment, especially
following a recession in Alberta’s economy. China remains one of Canada’s top
five trading partners, accounting for $70.9 billion in imports and $23.6 billion in
exports in 2017 (see Figure 1-5).
Figure 1-5
Total Canadian Exports and Imports with China, 2017
Total Exports to China (Millions of $)
Total Imports from China (Millions of $)
23,611
70,928
In 2012, CNOOC Limited purchased Calgary-based Nexen for $15.1 billion, securing a
significant investment in Canada’s oil industry.
SOUTH KOREA
Canada’s trade with South Korea is a recent development. This country of 50
million people serves as a key market for international business and investment
by Canadian companies looking to expand into Asia. South Korea’s key industries
include agriculture, auto manufacturing, media and entertainment, oil and gas,
and telecommunications. With its strong focus on infrastructure, South Korea is
one of the most favourable business destinations in all of Asia. A highly educated
and skilled labour force makes this an emerging economy for international
businesses.
Figure 1-6
Total Canadian Exports and Imports with South Korea, 2017
Total Exports to South Korea (Millions of $)
Total Imports from South Korea (Millions of $)
5,306
8,711
On January 1, 2015, Canada entered its first free trade agreement in the AsiaPacific region. The Canada-Korea Free Trade Agreement (CKFTA) agreement
provides Canadian exporters with preferred access to the world’s eleventhlargest economy and the fourth-largest in Asia, with an annual GDP of almost
$1.8 trillion. Since this agreement was signed, Canadian exporters have seen
gains in trade in various sectors, compared to 2014, most notably in agriculture,
fish and seafood, and forestry products.
International Blunders
Hyundai in Quebec
Following the success of Japanese automakers in the 1970s and 1980s, South
Korean automaker Hyundai began exporting cars to Canada. After some initial
success, the company decided to build a plant in Bromont, Quebec, at a cost of
$400 million to produce the Hyundai Sonata. However, the factory closed within
two years.
Why did this venture fail? First, because few South Koreans spoke French and
vice versa, communication was difficult. A second mistake was importing car
parts to Canada at a time when the Canadian dollar was weak, which made
imported parts more expensive. Hyundai no longer operates a plant in Canada.
Hyundai learned from its mistakes, and today it builds vehicles in Alabama and
operates car plants in China, Brazil, India, and Turkey. Following the Hyundai
takeover of KIA in 2007, both Hyundai and KIA have continued to import their
vehicles into Canada.
INDIA
India has a population of 1 billion, second only to China. It has become a major
centre for outsourcing services and manufacturing, and is one of the world’s
fastest-growing economies. India’s workforce is young (the average age is 27)
and well-educated. As an emerging market, India seems poised to take on China.
It continues to attract foreign investment due to its competitive labour costs,
lucrative domestic market (the in-country market), and skilled workforce.
Figure 1-7
Total Canadian Exports and Imports with India, 2017
Total Exports to India (Millions of $)
Total Imports from India (Millions of $)
4,278
4,159
In 2010, Canada started discussing a free trade agreement with India.
However, there are a number of challenges for international businesses in India.
Its infrastructure (roads, electrical, waste management, water supply, and so
forth) are underdeveloped and pose challenges to foreign companies. India also
lacks a strong rule of law, and working with government offices can be a slow
process. For international businesses to succeed in India, they need to develop an
understanding of the local culture and build relationships. (This topic is explored
in more detail in Chapter 4.) It is likely that Canadian businesses will continue to
work with Canada’s federal government to pursue a free trade agreement with
India.
Canadian Prime Minister Justin Trudeau speaks with ICICI Bank CEO Chanda Kochhar
during the 2018 Canada–India Mumbai Business Forum in Mumbai, India. Canada and India
continue to actively explore investment opportunities and develop greater trade
partnerships that benefit both countries.
Trade with Mexico
Canada’s trade with Mexico has grown because of the North American Free
Trade Agreement (NAFTA), signed in 1993. The agreement allows goods made in
Mexico and the United States to enter Canada duty-free. A duty (or a tariff) is a
tax most countries place on imports in order to make the price of domestic goods
competitive. Duties increase the price of foreign imports.
Imports from Mexico have greatly increased since NAFTA was signed, rising
from $13 billion in 2004 to almost $18 billion in 2008 to $35.5 billion in 2017.
However, exports from Canada to Mexico remain somewhat soft. They increased
from just over $3 billion in 2004 to just under $6 billion in 2008 and as of 2017
were just under $8 billion (see Figure 1-8).
Figure 1-8
Total Canadian Exports and Imports with Mexico, 2017
Total Exports to Mexico (Millions of $)
Total Imports from Mexico (Millions of $)
7,849
35,492
Since 2011, Canada had an increasing trade deficit with Mexico, importing far
more from Mexico than it exports. Mexico has become one of Canada’s top five
trading partners within the last decade.
Cars manufactured in Mexico, ready to be loaded on ships for export from the port of
Veracruz.
Trade with South America
BRAZIL
Brazil is the most important South American economy for Canadian companies
and the top export market in the continent for Canadian businesses. In 2017,
Canada exported more than $1.7 billion worth of goods and services to Brazil.
Meanwhile, Canadians imported over $4.7 billion of goods and services from
Brazil (see Figure 1-9). The Canadian government is exploring the possibility of a
free trade agreement with Brazil through the Mercosur regional trading bloc
(Argentina, Brazil, Paraguay, and Uruguay).
Figure 1-9
Total Canadian Exports and Imports with Brazil, 2017
Total Exports to Brazil (Millions of $)
Total Imports from Brazil (Millions of $)
1,712
4,713
A potash mine in Saskatchewan. Potash is used to make fertilizers, which make up about 30
percent of Canada’s exports to Brazil.
VENEZUELA
Venezuela’s economy has shattered and is on the verge of economic collapse.
Although Venezuela has the world’s largest oil reserves, it is in a severe
recession—in part due to lower oil prices between 2015 and 2017. Many
Canadian and American companies have ceased business operations in
Venezuela. Air Canada, for example, suspended all flights to Venezuela in March
of 2017 over safety concerns due to the civil unrest. American Airlines, a U.S.
corporation, ceased operations in Venezuela of June the same year. Other
international businesses have also left the once prosperous country. General
Motors, an American international business, had its factories and plants taken
over by the Venezuela’s government after 69 years of business in Venezuela.
Figure 1-10
Total Canadian Exports and Imports with Venezuela, 2017
Total Exports to Venezuela (Millions of $)
Total Imports from Venezuela (Millions of $)
197
18
The people of Venezuela face high inflation (rising prices) and extreme
scarcity of basic necessities. In 2016, prices rose by 800 percent, and shoppers
were forced to wait in long lines to buy basic necessities in stores where they
often found empty shelves. It is likely that Canadian and international businesses
will continue to refrain from doing business in Venezuela until the country’s
political and economic situation becomes stable.
CHILE
Canada has a well-established trading and investment relationship with Chile.
The Canada-Chile Free Trade Agreement came into force on July 5, 1997. Chile is
also the top direct investment destination for Canadians in South and Central
America; 60 percent of its GDP (gross domestic product) is dependent on
international trade. Since free trade was introduced, trade between Canada and
Chile has tripled—in 2017, nearly $2.9 billion of merchandise trade occurred.
Chile’s economy is politically and economically stable and offers Canadian
companies many opportunities. Startup Chile, a program aimed at attracting
foreign entrepreneurs, offers $40,000 USD to attract business people the world
over to establish a business in Chile. Chile is the world’s largest exporter of
copper, followed by China and Peru, far surpassing Canada in copper exports.
Figure 1-11
Total Canadian Exports and Imports with Chile, 2017
Total Exports to Chile (Millions of $)
Total Imports from Chile (Millions of $)
885
2,013
COLOMBIA
Canada has established free trade agreements with many countries in South
America. The Canada-Colombia Free Trade Agreement came into effect on
August 15, 2011. This agreement has offered Canadian exporters and investors
lower trade barriers to a non-traditional market. In 2016, Colombia was Canada’s
second-largest export market in South America, following Brazil. Despite its 50year civil war and decades of violence due to the drug trade, Colombia is quickly
gaining a good reputation for foreign investment. According to the World Bank’s
Doing Business ranking (a measure of the ease of doing business in a specific
country because of its regulations), Colombia ranked second in Latin America,
behind Mexico.
Figure 1-12
Total Canadian Exports and Imports with Colombia, 2017
Total Exports to Colombia (Millions of $)
Total Imports from Colombia (Millions of $)
746
983
Figure 1-13
Top 10 Copper-Producing Countries in the World, 2017
Rank
Country
Copper Production
(in thousands of tonnes)
1
Chile
5,330
2
Peru
2,390
3
China
1,860
Rank
Country
Copper Production
(in thousands of tonnes)
4
United States
1,270
5
Australia
920
6
Democratic Republic of Congo
850
7
Mexico
755
8
Zambia
755
9
Indonesia
650
10
Canada
620
Trade with emerging markets
Canada’s trade with emerging markets has shaped our economy. Japan was an
emerging market in the early 1950s, and Mexico was one in the 1980s. Trade
with China and South Korea has been growing in the 2000s. New markets are
emerging as trading partners for Canadian businesses to trade with.
TRADE WITH THE MIDDLE EAST
Several problems in the Middle East restrict the trade Canadian businesses can
do in this region. Most of the Middle East is situated in a desert, which is not
suitable for growing crops. Also, the majority of the countries that comprise the
area are not yet industrialized. As a result of the Israeli-Arab conflict in the
region, widespread anti-American feelings, conservative religious leadership, the
recent Syrian conflict, and the war on terrorism, the Middle East is politically
unstable. However, it is mostly the volatility of the oil market that prevents many
of the countries in the Middle East from becoming long-term economic leaders.
Figure 1-14
Total Canadian Exports and Imports with the Middle East, 2017
Total Exports to the Middle
East (Millions of $)
Total Imports from the Middle
East (Millions of $)
6,171
7,290
In 1960, Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela were the five
founding members of the Organization of the Petroleum Exporting Countries
(OPEC). OPEC is an oil cartel (a group of independent producers who try to
control the supply of oil, fix oil prices, or use other restrictive supply tactics).
OPEC has lost primary control of global oil prices as competition from non-OPEC
countries, such as the Canadian oil sands and the U.S. shale industry, have
reduced oil prices. OPEC countries that have relied primarily on oil revenue to
purchase food and other necessities have few established industries to replace
lost revenue from lower oil prices.
The German automaker Volkswagen announced it would return to Iran in 2017 after a 17year absence. Volkswagen started selling cars in Iran in the 1950s, but withdrew when
world sanctions against the country were imposed in the 1990s.
Saudi Arabia has opened its doors to foreign investment as it tries to modernize
its economy and move away from its dependence on oil. In June 2015 Saudi
Arabia allowed foreign investment by large international financial companies for
the first time (while still restricting individual investors). The country is also
seeking investment from Asian businesses in China and Japan through Saudi
Vision 2030—a plan to move away from oil and develop other sectors of its
economy such as tourism, health care, and education. Recent tensions with its
neighbour Qatar threaten to destabilize this plan for improving Saudi Arabia’s
economy.
However, the UAE (United Arab Emirates), Israel, and Egypt have established
trading relationships with Canadian businesses that do not depend on oil. Dubai
has become the real estate, tourism, and financial centre of the Middle East,
showing phenomenal growth throughout the first decade of the twenty-first
century.
The UAE has a stable economy with a modern political system and a high per
capita income. Canada has a strong trade relationship with the UAE, and
Canadian companies have been successful in many sectors such as oil and gas
resources, power, infrastructure, and information and communication
technology (ICT). The UAE is Canada’s largest export market in the Middle East
and continues to attract international business with its free trade zones that offer
zero taxes and 100 percent ownership by foreigners.
Israel and Canada have signed a free trade agreement, and Israeli businesses
shipped almost $1.3 billion worth of medicine, diamonds, engines, shoes, and
numerous other products to Canada in 2016.
Figure 1-15 Total Canadian Exports and Imports with Select Countries in the
Middle East, 2017
Exports
(Millions of $)
Imports
(Millions of $)
United Arab Emirates
1,603
189
Saudi Arabia
1,453
2,619
Turkey
1,265
1,785
Israel
450
1,287
Egypt
291
991
TRADE WITH AFRICA
Many African countries have unstable or corrupt governments. There are
enormous social, health, and economic problems throughout the continent. Most
African countries have major infrastructure problems and rural economies.
Manufacturing industries in most areas are scarce; however Africa, like Canada,
produces an abundance of raw materials. The continent’s exceptionally rich
resources are one factor that has contributed to Africa’s many problems.
Traffic passes two large oil platforms in the port of Lagos, Nigeria. The city has been ranked
one of the most expensive in the world, but many people live in slums with no piped water
or toilets.
Many countries in Africa face what is known as the “natural resources curse,”
whereby a country focuses all of its energies on a single industry and neglects the
other major sectors. As a result, the country becomes dependent on the price of
that particular resource, and the economy becomes unstable. Corruption in
government and uneven distribution of wealth may follow (also known as the
“paradox of plenty”). The income from natural resources such as oil, diamonds,
or timber is mismanaged by leaders instead of supporting growth and
development. Nigeria is an example of a country in Africa that is rich in oil
resources but plagued by corruption.
There are, however, countries that are starting to recognize Africa as an
opportunity rather than just a destination for foreign aid. Several countries, such
as South Africa and Morocco, are key trading partners with Canada. Other African
countries are following these models and offering opportunities for international
business.
Women sort cocoa beans in front of a public notice against child labour in Duekoue, Ivory
Coast.
Canada Imports
CHOCOLATE
According to Fairtrade Canada, the annual chocolate consumption by Canadians
is an average of 5.5 kilograms. Chocolate is made from the dried seed of the cocoa
pod (sometimes referred to as the cacao pod), which grows in tropical
environments. The ideal climate for growing cocoa is hot and rainy, with lush
vegetation to provide shade for the cocoa trees. Africa, Asia, and Latin America
are the primary growing regions.
The Olmecs (1500–400 bce) were likely the first humans to consume
chocolate and cultivate cocoa in Mexico. They crushed the cocoa beans, mixed
them with water, and added spices, chilies, and herbs. Over time, the Mayans and
Aztecs developed methods for cultivating cocoa as well. At one time, the cocoa
bean was used as a form of money.
In the seventeenth century, cocoa began arriving in ports throughout Europe
and chocolate beverages first appeared in England, coinciding with the arrival of
tea from China and coffee from the Middle East. As chocolate consumption
rapidly expanded with the Industrial Revolution, Africa led the world in cocoa
production. It became the biggest cocoa producer in the twentieth century.
Today, Africa’s Ivory Coast is the primary source of all cocoa production,
accounting for 40 percent of the global supply, followed by Ghana, which
produces an additional 20 percent of cocoa globally.
The retail chocolate market has been growing in North America and around
the world as chocolate catches on with consumers in Brazil, Russia, and China.
Initially, increased demand resulted in higher prices. However, chocolate
production has increased to such an extent that chocolate prices are now falling.
Currently, the only barrier to chocolate production is the dwindling supply of
cocoa butter.
According to Fairtrade Canada, 90 percent of the world’s cocoa is grown on
small family farms by about 6 million farmers. Pests, fungal infections, and
climate change are damaging cocoa trees around the world. As well, the number
of farmers is falling because the benefits are so poor that few young people want
to stay in the profession. Farmers do not benefit directly from rising prices or
increased production the way multinational companies do. They remain in
poverty as their incomes fail to keep up with rising production costs and
household expenses. By contrast, multinational chocolate companies make
billions in profits because labour costs are kept low.
Child labour in West African cocoa farming has been a concern since around
the turn of the century when journalists focused the world’s attention on
children trafficked to Ivory Coast to farm cocoa. According to Ivory Coast
statistics, 1.2 million children were engaged in cocoa production in the country
between 2013 and 2014. Poverty played a major role in child labour, with many
farming families struggling on an income of less than a dollar a day. Multinational
chocolate companies such as Nestlé, Mondelēz, and Hershey’s have created or
expanded programs to deal with child labour issues and improve the incomes of
cocoa farmers.
Check Your Understanding
1. According to Fairtrade Canada, how much chocolate do Canadians
consume each year, on average?
2. How do you think your annual chocolate consumption compares
with the Canadian average?
3. What kind of climate is required for cocoa? Which region is the
leader in cocoa production?
4. Which two countries produce the most chocolate? How much of the
world’s supply does each produce?
5. Describe the conditions of cocoa farming. Research some of the
programs from large international businesses (such as Nestlé,
Mondēlez, and Hershey’s) that are dealing with improving the
conditions of cocoa farmers.
The Nelson Mandela Bridge in Johannesberg, South Africa, crosses over 40 railway lines
and links two major business areas of the city centre.
TRADE WITH SOUTH AFRICA
Canada has a strong trade relationship with South Africa, a resource-rich country
with strong institutions and opportunities in several sectors, including mining,
power, infrastructure, rail, aerospace, agriculture, and light manufacturing. South
Africa benefits from a developed financial sector and modern infrastructure,
making it an important destination for Canadian companies. The country also
acts as a gateway to other countries in Africa that Canadian companies hope to
enter.
Figure 1-16
Total Canadian Exports and Imports with South Africa, 2017
Total Exports to South Africa (Millions of $)
Total Imports from South Africa (Millions of $)
354
917
Figure 1-17
Total Canadian Exports and Imports with Morocco, 2017
Total Exports to Morocco (Millions of $)
Total Imports from Morocco(Millions of $)
422
396
TRADE WITH MOROCCO
Morocco has one of the most advanced and developed business environments in
Africa. It is politically stable with a strong banking system. Canada’s top export to
Morocco is wheat; its top import from Morocco is citrus fruit, including mandarin
oranges, which often appear in Canada’s supermarkets during November and
December. Canada went from a trade surplus (exporting more than importing)
prior to 2014 to a trade deficit with Morocco of $104 million CAD in 2015.
However, since 2017 (see Figure 1-17), Canada is back to having a trade surplus.
SECTION REVIEW
1. What does CETA stand for, and why is it important?
2. Who are Canada’s two most important trading partners?
3. What has happened to manufacturing jobs in Canada and the
United States?
4. What happened in 2012 between CNOOC and Nexen?
5. What does CKFTA stand for, and why is it important?
6. Why do countries impose duties on imported products?
7. What is the state of Venezuela’s economy? How are international
businesses responding?
8. What is OPEC?
9. How is Saudi Arabia’s economy changing? What does that mean for
international business?
10.
What does the “natural resources curse” refer to?
1.3
Advantages of international trade
Canadian businesses and consumers benefit from trade with other countries. The
world is our marketplace, which means Canadian factories, distributors, services,
and retailers have access to any product or service available anywhere in the
world. This provides Canadians with a wide variety of products to choose from.
Canadian businesses export worldwide, opening up new markets for their
products and services and creating new jobs at home. Foreign investors provide
capital for expansion, innovation, and exploration. New technology invented in
other countries becomes available in Canada for use in our hospitals, factories,
and other enterprises.
Doing business internationally means that Canadians can choose from a wider
variety of products, and Canadian businesses can access new markets and
expand, have greater opportunities to attract capital investment, and share in the
new discoveries of other countries.
Variety, prices, and foreign markets
International business allows Canadians to enjoy products from foreign
countries that cannot be produced in Canada or that consumers would prefer to
buy from another country. International business provides the opportunity to
choose from an assortment of styles, models, and price ranges of various
products.
For example, Canada imports bananas from Costa Rica and Colombia and
avocados from Mexico, which cannot be produced in Canada. Many Canadians
also prefer foreign-produced cars such as a BMW or Mercedes Benz over
domestically produced vehicles from North American automakers such as
General Motors or Ford.
LOWER PRICES
Workers in many developing countries, such as China and India, are paid lower
wages and expect to make less than Canadian workers. As a result, the companies
that employ them can spend significantly less money on wages by operating
factories in those countries rather than in Canada. Small appliances, glassware,
linens, and countless other products are much cheaper today than they once
were. This keeps prices low for Canadian consumers. At one time, the low prices
of these products would have indicated that they were lower quality than those
made in Canada or the United States. This is no longer true. Factories and offices
can also take advantage of lower-priced goods from other countries.
NEW MARKETS
There are more than 36 million people in Canada. By contrast, there are more
than 320 million people in the United States, more than 500 million people in the
European Union, and more than 1.3 billion people in China. If you were to make a
product or provide a service that the people in the United States and/or China
liked, your sales would grow incredibly. The same is true of other Canadian
businesses whose products have become popular in foreign markets (out-ofcountry markets). For example, Jamieson Vitamins is one of 30 Canadian
companies selling its products directly to 400 million Chinese consumers online
via Alibaba’s online stores. Freshii’s founder and CEO, Matthew Corrin, opened
the first Freshii location in Toronto in 2005. Raising $96 million in an initial
public offering (IPO) in January 2017, the fast-casual food chain has grown to
244 locations in 15 countries, rapidly expanding globally in the healthier, fastcasual food market.
Canada and the auto industry
In 1904, the first large-scale Canadian production of automobiles took place
at the Walkerville Wagon Works factory near Windsor, Ontario. Driven by the
demands of World War I, Canada’s auto industry was the second largest in the
world by 1923. The signing of the 1965 Automotive Products Trade Agreement
with the United States represented the single most important factor in making
the Canadian automotive industry what it is today. During the 1970s, the global
auto industry changed significantly for two reasons:―the global oil crisis and the
rise of Japan as a major automotive producer. These factors presented significant
challenges to the North American auto industry. However, in the last 30 years,
Canada’s auto industry has emerged as a globally competitive and able to take on
not only Japan but also other newly emerging economies such as South Korea
and Mexico. Canada’s auto industry remains the largest sector in the country and
has a significant positive impact on the Canadian economy.
Figure 1-18 Vehicles manufactured in Canada, as of December 2017
Company
Location
Fiat Chrysler
Canada
Brampton, Ontario Chrysler 300, Dodge Challenger, Dodge Charger
Ford of Canada
Products
Windsor, Ontario
Dodge Grand Caravan, Chrysler Pacifica, Pacifica Plugin Hybrid
Oakville, Ontario
Ford Edge, Flex, Ford GT (limited edition), Lincoln MKT,
MKX
Company
Location
General Motors of Oshawa, Ontario
Canada
Products
Chevrolet Impala, Light Duty Chevrolet Silverado, Light
Duty GMC Sierra, Cadillac XTS
Ingersoll, Ontario
Chevrolet Equinox
Honda Canada
Alliston, Ontario
Honda Civic, Honda CR-V
Toyota Canada
Cambridge North,
Ontario
Toyota Corolla
Cambridge South,
Ontario
Lexus RX350, Lexus RX450h Hybrid
Woodstock, Ontario Toyota RAV4
The Canadian-made Ford GT supercar on display at the 87th Geneva International Motor
Show.
Canada Exports
AUTOMOTIVE PRODUCTS
The automotive industry, which provides high-wage, high-skilled jobs, is one of
the most important sectors of Canada’s economy. It is also Canada’s largest
industry and the biggest contributor to its manufacturing GDP. It is estimated
that one in seven Canadians is either directly or indirectly employed in the
automotive industry. Canada is home to many international automotive
businesses such as Ford, Fiat Chrysler, General Motors, Honda, and Toyota.
Canada’s auto sector also includes parts, accessories, and software.
Multimatic is a Canadian automotive business that makes parts such as door
hinges, tire jacks, and other technology that most customers simply see as part of
their vehicle. In the 1950s, Tony Czapka started the original Multimatic with
partner Frank Stronach. The company would later change its name to Magna and
become the top auto-parts supplier in North America, and one of the top three
suppliers in the world. When Peter Czapka (Tony’s son) left to start his own
company, he named it Multimatic. Multimatic was selected by Ford Motor Co. to
produce the highly anticipated and limited edition 2017 Ford GT in Markham,
Ontario. Meanwhile, Ontario-based Magna International Inc. has 159,000
employees working in 29 countries, 321 manufacturing operations, and 102
sales centres around the world.
Check Your Understanding
1. How important is the auto industry to Canada’s economy?
2. How large are Magna International’s global operations?
3. Which automakers have production plants in Canada?
4. Why is Canada’s auto sector more than just cars and trucks?
5. Describe the history between Magna International and Multimatic.
6. Which vehicle is being produced at Multimatic’s facility in
Markham, Ontario?
Cultural development
International business fosters exchange of culture and ideas between countries
and promotes diversity. Cultural customs can be adopted from other countries or
blended with local culture, resulting in fresh new ideas, looks, tastes, or sounds.
Canadian musicians such as Justin Bieber, Drake, Alessia Cara, Nelly Furtado,
and The Weeknd collaborate with other international artists, bringing new
sounds to Canada while finding success in the global music industry. This success
is largely made possible through the Internet, another tool of cross-cultural
pollination. Collectively, Bieber, Drake, and The Weeknd have “clocked over 20
billion streaming spins combined, more than any other triumvirate,” according
to Forbes Magazine.
Food is another area where local trends are going global. Jollibee is a Filipino
fast-food company that is expanding globally. Called the McDonald’s of the
Philippines, Jollibee opened its first restaurant in Winnipeg, Manitoba, in
December 2016, and more are scheduled to open in Toronto for a total of five
Canadian locations. Jollibee has more than 1,000 restaurants around the world in
countries such as the United States, Singapore, Kuwait, and Canada. Canadians
are now able to experience dishes such as sweet spaghetti topped with hot dogs
and cheddar cheese or Jollibee’s popular peach-mango pie.
MORE JOBS
By expanding into global markets, Canadian companies create more jobs at
home. Canadian banks and financial companies, such as TD Bank and Bank of
Montreal (BMO) have increased their sales by expanding internationally,
especially in the United States. Although it is a common perception that Canada is
becoming more controlled by international businesses, Canadian businesses
have been buying more foreign firms than the reverse. Aside from additional
profit, the major benefit has been the hiring of more Canadian workers to service
global markets.
Canadian musicians such as Drake (left), Alessia Cara (middle), and The Weeknd (right)
have collaborated with other international artists and are finding success in the global
music industry.
Foreign investment
There are two ways that non-Canadians can invest in Canadian
businesses: foreign direct investment (FDI) to control some or all of a business’s
operations, and portfolio investment, which is the purchase of stocks, bonds, and
other financial instruments issued by Canadian firms. Foreign direct investment
in Canada has grown from just over $450 billion in 2009 to $825 billion in 2016.
This investment money will often help start a new business in Canada or save
a failing one. French’s, for example, moved all of its ketchup manufacturing from
the United States to its Canadian plant in North York, Ontario. The company was
taking advantage of a made-in-Canada trend for its product. In the meantime
Heinz, which also made ketchup, closed its Leamington, Ontario, plant in 2014,
costing the community almost 800 jobs. When French’s in Canada started using
the same tomatoes and the same tomato-processing plant formerly owned by
Heinz, Heinz faced a backlash on social media for its decision to leave. Many
Canadian ketchup consumers switched over to the French’s brand.
Figure 1-19 Canada’s Foreign Direct Investment Position
THE INVESTMENT CANADA ACT
The Investment Canada Act was created in the 1980s to provide investment,
economic growth, and jobs for Canada. The purposes of the Investment Canada
Act are “to provide for the review of significant investments in Canada by nonCanadians in a manner that encourages investment, economic growth and
employment opportunities in Canada and to provide for the review of
investments in Canada by non-Canadians that could be injurious to national
security.”
This means that non-Canadian businesses wishing to establish a new business
in Canada need to seek approval from the Government of Canada. The
Investment Canada Act also requires the Government of Canada to review
mergers and purchases of existing Canadian businesses by non-Canadians.
Foreign takeovers of Canadian companies reviewed under the Investment
Canada Act have almost always received approval. There have been two
exceptions in recent years:


Australian company BHP Billiton withdrew its $40-billion takeover
bid for the Potash Corporation of Saskatchewan in November 2010.
MacDonald, Dettwiler and Associates Ltd., the Canadian space and
satellite technology company that developed the robot arm for the
space station, was the target of a $1.3-billion takeover attempt by
Alliant Techsystems of Minnesota. The federal government blocked
the sale of the company.
Figure 1-20 Foreign Buyers of Canadian Firms and Canadian Buyers of Foreign
Firms; Mergers and acquisitions by industry, 2004–2013
Figure 1-21 Foreign Takeovers by Canadian Businesses
Date
Canadian Business Acquiring
2/2017Calgary-based Enbridge Inc.
3/2016TransCanada Corp. of Calgary
6/2015Canada Pension Plan Investment
Board
2/2016Fortis, headquartered in St. John’s,
NL
Foreign Business Being Acquired
Value in
USD
$28 billion
$13 billion
Houston-based Spectra Energy
Houston-based Columbia Pipeline
Group
Antares Capital from General Electric $12 billion
Co.
U.S. transmission utility ITC Holding $11.3
Corp.
billion
Date
Canadian Business Acquiring
Foreign Business Being Acquired
9/2003Manulife Financial Corp.
John Hancock Financial
9/2015Halifax-based utility company
Emera
Florida-based TECO Energy
Value in
USD
$11.1
billion
$10.4
billion
NEW PROCESSES AND TECHNOLOGIES
With the click of a mouse, Canadian businesses can research other firms around
the world that may have more modern, more efficient, or more economical
machinery for their business. Domestic companies that partner with foreign
businesses can learn new technology and make contacts with potential
customers, suppliers, creditors, and distributors in foreign countries.
In addition, businesses that operate internationally can exchange
technological know-how that enables underdeveloped and developing countries
to establish new industries with the assistance of foreign aid. Foreign deals,
contracts, invoices, shipping manifests, product inquiries, financial transfers, and
other business activities can occur in real time using the Internet or cellular
communication devices. The ability to process transactions in almost any country
in the world has transformed the globe into one market and has encouraged
corporations to expand into remote parts of the world where business costs are
reduced.
Manufacturing businesses use the Internet to source parts, ingredients, and
other supplies from around the world—to inform importers in other countries
about their product selection and to sell online to anyone on the planet. Service
industries book flights and accommodations for tourists and business travellers,
arrange and track shipments, pay bills, and connect with potential customers
online. In a business sense at least, the world is united.
SECTION REVIEW
1. Describe four ways in which international business helps
Canadians.
2. What happened to the auto industry in the 1970s?
3. What does FDI stand for? How is it different from portfolio
investment?
4. Describe the role of the Investment Canada Act plays with
businesses in Canada.
1.4
Disadvantages of international trade
The benefits of international business come at a cost to Canadians. No other
country has as large a foreign economic presence as Canada does with the
economic influence of the United States. American dominance of Canada’s
economy affects us economically and culturally.
Loss of culture and identity
If you watch American sports, watch Hollywood movies, listen to musical artists
from New York, play American video games, or read books by U.S. authors, you
are a consumer of American culture as well as (or instead of ) your own. It is very
difficult to live in Canada and avoid American culture. Almost 90 percent of
Canadians live less than 160 kilometres from the U.S.–Canada border.
For example, prior to 2017, Super Bowl commercials were blocked in Canada.
In order to protect Canada’s broadcasters, a Canadian commercial would be
shown instead of the U.S. advertisement. This angered many Canadian viewers
who went to YouTube to see the U.S. Super Bowl ads. In 2017, the Canadian
Radio-television and Telecommunications Commission (CRTC) changed its 40year rule and allowed U.S. Super Bowl television ads to be broadcast to Canadian
viewers watching Super Bowl 2017.
It is difficult to assess the influence of American culture on Canadian identity.
In some respects, many Canadians define themselves as “not American.”
Certainly there are fewer Canadian movies and television shows than American
ones shown in Canada. American movies and television programs tell American
stories that feature American culture. Canadians do not typically see a reflection
of their history or identity on the screen—or may perceive that it has been
distorted or minimized.
The Canadian government recognizes the cultural importance of Canadian
broadcasting, and protects the Canadian radio and television industries. The
CRTC established a system of quotas to regulate the amount of Canadian
program content broadcast in Canada. The resulting Canadian content rules,
which came to be known as “Cancon,” were devised to stimulate Canada’s
cultural production by ensuring greater exposure for Canadian artists in the
Canadian marketplace.
The Canadian music industry has been given quite a boost because of these
rules. In most cases, 35 percent of all music aired on Canadian stations must have
Canadian content. To qualify as such, music must conform to at least two out of
the four conditions in the Music, Artist, Performance, and Lyrics (MAPL) system,
which was first adopted in 1971.
Arcade Fire is an example of a band that has widened its exposure within Canada thanks to
the MAPL system.
Canadian radio stations look for Canadian groups or artists who have talent and
popular appeal and give these artists lots of airplay to comply with the Cancon
regulations. By contrast, in the past, musical acts with major American labels
dominated the Canadian music scene.
Figure 1-22 The MAPL System
Music
Composer of the music must be Canadian
Artist
Music and/or the lyrics are performed principally by a Canadian
Performance
Musical selection consists of a performance that is
(i) recorded wholly in Canada, or
(ii) performed wholly in Canada and broadcast live in Canada
Lyrics
Lyrics are written entirely by a Canadian
Increased foreign ownership of companies in Canada
Even though foreign direct investment in Canada is now 30 times higher than it
was in 1950, only 1 percent of the approximately 1.3 million corporations in
Canada are foreign-owned. This 1 percent, however, accounts for 30 percent of
Canada’s business revenue. Every foreign company, however, is required to pay
both federal and provincial taxes on their profits to the Canadian governments,
and foreign-owned businesses provide jobs for Canadians. So how does foreign
ownership hurt Canada?
JOB LOSS
Managers of foreign companies operating branch plants in Canada want to please
the executives and investors at home. Branch plants are plants belonging to one
country and headquartered in another. Their first priority is their native country.
If the Canadian branch plant shows less profit than the head office wants, it will
be closed. General Motors, for example, moved the production of the Chevrolet
Camaro from Oshawa, Ontario, to Lansing, Michigan. GM hoped to reduce costs
and improve production efficiency by moving assembly to the Lansing plant.
A similar deal occurred with the $12.5-billion merger of Burger King with Tim
Hortons, executed by the Brazilian private-equity firm 3G Capital. As a result of
the deal, job cuts occurred at the Tim Hortons offices in Canada. Other retailers
that have permanently closed in Canada include Target, Mexx, Sony, and Sears,
leaving many Canadians jobless.
REVENUES LEAVE CANADA TO PAY HEAD-OFFICE COSTS
The money earned by the branch plant in Canada helps pay the salaries of headoffice staff, including the executives. Administration costs of the business
operations at head-office level are also apportioned to the Canadian subsidiary. A
portion of the revenue also subsidizes the advertising, accounting, and marketing
expenses the head office incurs. This reduces the profit that the Canadian
division realizes and, therefore, the taxes that the business needs to pay the
Canadian government. It also provides more employment for advertising
agencies, accounting firms, and marketing departments within the home country.
A worker on an assembly line at the Honda plant in Alliston, Ontario.
RESEARCH AND DEVELOPMENT CHALLENGES
Research and development (R&D) is essential to the growth of a manufacturing
firm, and to the efficiency and increased profitability of a processing or service
business. New product development, new technology, new approaches to the
marketplace, better efficiencies, and other innovations are usually conducted at
the head office in another country.
The automotive industry, for example, is so important to the Canadian
economy that the federal government introduced the Automotive Innovation
Fund (AIF). This program provided car manufacturers in Canada with $250
million over five years for research and development projects that support
innovative, greener, and more fuel-efficient vehicles. In January 2017, Honda
Canada Inc. announced that its plant in Alliston, Ontario, would be getting a
nearly $500-million upgrade. Honda stated it would invest $400 million on the
plant, with the federal and provincial government providing an additional $83
million. A part of these funds are for updating its paint facility in the hopes of
reducing its greenhouse gas emissions by 44 percent.
Most foreign-owned firms in other industries, however, staff their R&D from
their home country, and the ideas they produce lead to more jobs and greater
profits domestically, not in Canada.
REDUCED EXPORTS
One of the main purposes of foreign branch plants in Canada is to service the
Canadian marketplace as a subsidiary of the parent company. Exports to other
markets are usually not part of the subsidiary business plan. There is no reason
for the branch plant to consider selling products to other countries, as that is the
mandate of the parent firm. As a result, Canadian foreign-owned businesses do
not enjoy the benefits associated with exporting, such as greater employment
opportunities and bigger markets for Canadian goods.
ECONOMIC DESTABILIZATION
Canadians rely so heavily on foreign businesses that any major alteration in the
global marketplace can adversely affect the Canadian economy. The province of
Alberta was hurt by the fall in oil prices between 2014 and 2017 as many foreign
oil companies laid off their workers, leading to a provincial recession.
SECTION REVIEW
1. What are the two main ways international business hurts
Canadians?
2. Why is American culture so dominant in Canada? Provide two
reasons.
3. What does the MAPL system refer to, and what percentage of music
played on Canadian radio stations must have Canadian content?
4. What does R&D stand for?
5. Why is it important to retain an R&D department in Canadian
businesses?
6. List five problems associated with foreign ownership of Canadian
businesses?
1.5
Globalization
Modern globalization began shortly after World War II with the establishment of
the United Nations and the fostering of trade relations between countries. Since
then, international business transactions have grown enormously, as have the
economic size, reach, and power of major corporations that conduct business on
an international scale. This is due, in large measure, to globalization.
Globalization is a process whereby national or regional economies and
cultures become integrated through new global communication technologies,
foreign direct investment, international trade, immigration, and the flow of
money. One reason globalization has occurred is that trade barriers across
national borders have been reduced or removed. In recent times, globalization is
seen as freer trade across borders.
As the economic ties between countries strengthened, tax treaties were
negotiated between countries, tariffs and financial controls were abolished, and
global corporations began to develop. The pace of globalization has increased
dramatically because of several changes that have taken place within the past
few decades.
It is now relatively easy for companies with sufficient resources to expand
into countries where labour, materials, office space, and manufacturing facilities
are inexpensive and plentiful. This allows companies to open up new markets
and reduce production costs. The rules and regulations for setting up a business
in Canada are more restrictive than they are in, for example, India or Mexico.
Figure 1-23 Top 10 Fortune 500 Companies, 2017
Rank Company
1
Walmart
2
State Grid
3
Sinopec Group
4
China National Petroleum
5
Toyota Motor
6
Volkswagen
7
Royal Dutch Shell
8
Berkshire Hathaway
9
Apple
10
Exxon Mobile
Country
United States
China
China
China
Japan
Germany
Netherlands/U.K.
United States
United States
United States
Industry
Retail
Power
Petroleum
Petroleum
Automobiles
Automobiles
Petroleum
Insurance
Technology
Petroleum
Revenue in USD
$466 billion
$315 billion
$268 billion
$263 billion
$255 billion
$240 billion
$240 billion
$224 billion
$216 billion
$205 billion
Facebook and Amazon are two of the top growing global brands and are each unique
examples of globalization in action.
Figure 1-24 The Top Growing Global Brands, 2016
Walmart is well-known for its low prices, which are driven by keeping its own costs low.
Operational and overhead costs are held to a minimum, and suppliers are expected to keep
prices low.
Positive effects of globalization
There are many positive effects as a result of globalization. These include:
1. Outsourcing. Other countries present opportunities to access
cheaper raw materials and labour. These lower costs allow
companies to be more competitive and, therefore, offer customers
lower prices.
2. Lower prices. Increased competition from foreign firms causes
domestic companies to be more competitive and decrease prices to
attract customers.
3. Decrease in poverty. There has been significant progress on
reducing poverty over the past few decades. According to the most
recent estimates by the World Bank, 10.7 percent of the world’s
population lived on less than US$1.90 a day in 2013—that’s down
from 35 percent in 1990.
4. Innovation. Businesses that operate internationally can exchange
technological know-how. Open borders allow ideas to flow from
one country to another, stimulating creativity.
5. Optimal use of resources. When countries produce the products in
which they have a comparative advantage (see Chapter 5) their
productivity rises. Increased productivity leads to an improved
standard of living.
6. Better jobs. Export jobs usually require higher education and a high
skill level; therefore, these workers are paid more.
7. Increased capital flow. Being connected to foreign countries allows
companies, especially those in smaller countries, to borrow money
from financial institutions in other countries.
Globalization has integrated sales, finance, global monetary markets,
manufacturing, transportation, and communication around the world. It is
important to note, however, that globalization is not synonymous with
international business. Thousands of businesses that are not global in scope
operate internationally.
Factory workers in China make toys for inclusion in McDonald’s Happy Meals.
Negative effects of globalization
Globalization also means that the whole world’s economy may be affected by
events that happen in one place. Criticism of globalization has increased for
many reasons. Some of the many negative effects of globalization include:
1. Lost jobs. Many Canadians have lost their jobs to outsourcing. The
jobs that they find to replace them often have lower pay.
2. Fear of job loss. Many Canadians work with the fear that they may
soon lose their jobs to countries with cheaper labour sources.
3. Loss of Canadian productivity. Some Canadian companies will lose
their comparative advantages to countries with cheaper labour.
4. Exploitation of cheap labour. Children, prisoners, and the
uneducated are forced to work in substandard conditions.
5. Increased pollution. Companies move their factories to countries
with limited pollution regulations so they can cut costs.
6. Safety concerns. Many of the products sold by international
businesses have an adverse effect on citizens’ health. Businesses in
other countries do not work under the same strict regulations as
Canadian companies.
7. Spread of disease. Diseases such as Ebola and Zika virus are
contracted by travellers and taken back to their home countries.
8. Increase in income gap. The gap between the rich and the poor is
widening. The erosion of the “middle class” is a common concern in
many countries.
9. Influence of multinational corporations (MNCs) on
governments. Powerful MNCs can manipulate global politics.
The global demand for goods and services is growing rapidly as countries
such as India and China (each with populations of over a billion people) develop
their economies. Multinational corporations see opportunities, and the emerging
markets see the investment potential. Rich companies create jobs in poor
countries, raise the standard of living there, and create new consumers (as well
as increase the tax bases in these countries through property and wage taxes).
Workers with incomes then demand a voice in the political system.
Social and political issues of globalization
Almost 10 years after the Great Recession of 2008, many countries are still
struggling to recover with only modest economic growth. Many people lost their
jobs in the recession and have been unable to find permanent, meaningful work.
The work they do find might pay little and be part time without job benefits.
Prices and the cost of living have continued to rise and many citizens have
become angry with the growing gap between the rich and poor.
In 2013, headlines of the largest data leak in history fuelled a rise in criticism
of globalization. The Panama Papers made news around the world. More than 11
million files from Mossack Fonseca, a Panamanian law firm that provides its
clients with offshore accounts, were leaked to the media. Politicians, celebrities,
and corporate executives were among some of the names listed. Offshore
accounts are used to avoid paying taxes but can also be used for criminal
activities such as money laundering, arms smuggling, and drug dealing.
Since the global financial crisis, cash-strapped governments have been trying
to collect billions in potential tax revenue hidden in offshore accounts. Google
was taken by France and Italy to court over accusations it avoided paying taxes
by illegally moving money to its European headquarters in Ireland. In 2017,
Google won its fight against a 1.12 billion euro ($1.6 billion CAD) French tax bill
after a court rejected claims the search engine giant abused loopholes to avoid
paying its fair share. European Union authorities had been trying to claim some
of the billions of euros of profit at Google. However, in 2017 Google struck a deal
of €306 million ($440 million CAD) to settle a 14-year dispute with tax
authorities in Italy.
Protestors in London demand that former Prime Minister David Cameron close tax
loopholes after it was revealed he profited from his father’s offshore account.
The rise in populism
Populism is rising among many countries, such as the United States, United
Kingdom, France, the Philippines, and Canada. Populism has different definitions
but it is usually defined as an ideology with a concern for “the common” citizen at
its core, and often promotes protectionism in trade policies. Protectionism is an
economic policy that aims to restrict imports through tariffs, quotas, and
regulations in an effort to boost domestic industry. (This concept is discussed
further in Chapter 10.)
Donald Trump was elected in November 2016 as president of the United
States with a pledge to bring back manufacturing jobs to the United States.
During the French presidential election in 2017, centrist Emmanuel Macron
overwhelmingly defeated Marine Le Pen, a right-wing populist who had
nevertheless made it to the second round. In 2017, citizens of the United
Kingdom voted to leave the EU (a movement better known as Brexit, a short way
of saying Britain exiting the EU). Closer to home, Doug Ford’s rise to take the
leadership of the Progressive Conservative Party of Ontario in 2018 is also seen
as a triumph for populist politics.
With the rise in populism, free trade agreements and partnerships are being
challenged and rewritten. The Trans-Pacific Partnership, also known as the TPP,
is a proposed free trade agreement discussed originally between 12 countries,
including Canada, the United States, China, Australia, and Vietnam. Upon entering
office, Donald Trump withdrew the United States from the TPP, but the
remaining countries are continuing discussions. Canada’s future as a member of
the TPP is uncertain without the United States’s involvement in this trade deal.
In 2017, the United States administration informed Mexico and Canada that it
would be renegotiating NAFTA (North American Free Trade Agreement). The
European Union now faces a test of survival as Brexit unfolds. Changes to NAFTA
and the EU will undoubtedly impact Canada’s economy as both deals represent
the top trading partners for Canadians. It is likely that both events will take years
to settle, and the full impact on the Canadian economy, positive or negative, will
be felt for years to come.
SECTION REVIEW
1. What does outsourcing mean?
2. According to the World Bank, what percentage of the global
population lives on less than US$2 a day? Is poverty increasing or
decreasing?
3. What were the Panama Papers?
4. What are some of the problems facing large international
businesses like Google with regard to globalization?
5. What is populism? How does it affect international business?
6. What does the term Brexit refer to?
7. What does TPP stand for? Which country withdrew from the TPP?
ANNOTATE