Unit 1: Introduction to International Trade

Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
 Business: The manufacturing and/or sale of goods or services to satisfy the wants/needs of
consumers to make a profit.
 Transaction: An exchange of things of value
 A domestic business in Canada is:
 owned by Canadians
 relies on Canadian products and services
 sells products and services to Canadians
 International business: transactions conducted between businesses located in different countries
Transactions between two Canadian
The customers of a business who live in the
country where the business operates.
Transactions between a Canadian company
and a non-Canadian company
The customers of a business who live in a
different country than the one where the
business operates.
Five ways for a business to be considered an international business:
1. Own a retail or distribution outlet in
another country
2. Own a manufacturing plant in another
3. Export to businesses in another country
4. Import from businesses in another
5. Invest in businesses in another country
Trading partner
 When a business in Canada develops a relationship with a business in another country, that country
becomes a trading partner with Canada.
International trade takes place between businesses, not countries.
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
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
 Definition: The reliance of two or more nations on each other for products or services.
 Three main areas of interdependence:
1. Primary industries
2. Secondary industries
3. Tertiary industries
Primary industries
 The sector of the economy characterized by the extraction of natural resources from the earth or
 Five major primary industries:
o agriculture
o fishing, hunting, and trapping
o forestry and logging
o energy
o mining
 Industries that
create a
 Secondary
capital goods
(products used
by businesses)
and consumer
purchased by
Employment by Industry
GDP by Industry
Branch plant
A factory owned
by a company
based in another
 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
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
Tertiary industries (service sector)
 Provide necessary services to consumers and other businesses.
 Examples include banking, construction, communications, transportation, and retail sales.
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
Pros and Cons of International Business
International business helps Canadians by:
International business hurts Canadians by:
Current Issue: Foreign Ownership of Canadian Companies
In 2009, 1% of Canadian companies were foreign owned. These firms generated 30% of Canada’s
business revenue.
Reasons for Concern:
 Foreign companies have foreign loyalties
 Lack of research and development
 Reduced exports (in some industries)
 Revenues leave Canada to pay head office costs
 Economic destabilization
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
International Business Practices
Reasons to trade:
Foreign portfolio investment
 Investment in businesses located outside of Canada through stocks, bonds, and financial
 Allows Canadians to spread out their investments, which is less risky than investing in just one area
 Also provides greater choice and opportunity
 To bring products or services into a country, for use by another business or for resale.
 The majority of the goods that Canada imports come from the United States.
 Global sourcing: The process of a company buying equipment, capital goods, raw materials, or
services from around the world.
Top 10 Products/Goods Canada Imports
Top 10 Countries Canada Imports From
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
 To send goods or services to another country, for use by a business or for resale.
 The majority of goods that Canada exports go to the United States.
Top 10 Products/Goods Canada Exports
Top 10 Countries Canada Exports To
Value added
 The amount of worth that is added to a product at each stage of processing. It is the difference
between the cost of the raw materials and the finished goods.
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
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:
o 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.
 An agreement granted to an individual or group by a company to use that
company’s name, services, products, and marketing.
 For a fee, the franchisor provides support to the franchisee in the areas of
financing, operations, human resources, marketing, advertising, quality
control, etc.
Joint venture
 A common type of international business, in which a new company with
shared ownership is formed by two businesses, one of which is usually
located in the country where the new company is established.
Foreign subsidiaries
 Often referred to as a wholly owned subsidiary, a branch of a company that
is run as an independent entity in a country outside of the one in which the
parent company is located.
 The parent company often sets financial targets, and allows the subsidiary to
manage its own day-to-day operations as long as those targets are being
Trade Barriers
 The theory or practice of shielding domestic industries from foreign competition, often through
trade barriers such as tariffs.
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
 The most common type of trade barrier, are taxes or duties put on
imported products or services.
 Tariffs raise the cost of imports, so that locally manufactured
products are less expensive and more appealing to consumers.
Trade quotas
 A government-imposed limit on the amount of product that can be
imported in a certain period of time.
Trade embargo
 A government-imposed ban on trade of a specific product or with a
specific country, often declared to pressure foreign governments to
change their policies.
Trade sanctions
 Economic action taken by a country to coerce another to conform to
an international agreement or norms of conduct.
Foreign investment restrictions
 Canadian law with the greatest impact is the Investments Canada Act
 Ensures that all foreign investments are reviewed to determine how
they will benefit Canada
 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
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
Currency Fluctuations
Exchange rate
 The amount of one country’s currency in relation to the currency of another country.
 The Canadian dollar (CAD) is most often quoted against the U.S. dollar (USD) because the two
countries are the largest trading partners in the world.
Winners of a high Canadian dollar
Losers of a high Canadian dollar
Floating rate
 An exchange rate that is not fixed in relation to other currencies.
 The price at which currency with a floating rate is bought and sold fluctuates according to supply
and demand.
Currency revaluation
 The increase in value of a currency because the demand for that particular currency is greater than
the supply.
Currency devaluation
 The decrease in value of a currency because the supply of that particular currency is greater than
the demand for it.
Factors Affecting the Exchange Rate
 Economic conditions in Canada—inflation rate, unemployment rate, GDP, interest rates
 Trading between countries—the more favourable the terms of trade (comparison of exports to
imports), the higher the currency exchange
 Politics—political tension and instability or the threat of terrorism decreases the demand for a
 Psychological factors—historical significance and stability change the way currencies are viewed
Hard currencies
 Stable currencies, such as the euro, and the U.S. and Canadian dollars, which are easily converted to
other currencies on the world exchange markets.
Soft currencies
 A currency belonging to a country with an economy that is small, weak, or that fluctuates often, and
is difficult to convert into other currencies, such as the Russian ruble or the Chinese yuan.
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Unit 1: Introduction to International Trade
Topic 1: Trade in the Modern World (Ch 1&2)
Current Issue: The Euro
Material adapted from Wikipedia and the BBC
The euro (sign: €; code: EUR) is the currency used by the Institutions of the European Union and is the
official currency of the eurozone, which consists of 17 of the 27 member states of the European Union:
Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta,
the Netherlands, Portugal, Slovakia, Slovenia, and Spain.
The European sovereign debt crisis is an ongoing financial crisis that has made it difficult or impossible
for some countries in the euro area to re-finance their government debt without the assistance of third
A Crisis in Four Graphs
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