Chapter 2 Copyright © 2011 by Nelson Education Ltd. 1 Prepared by Norm Althouse University of Calgary Prepared by Norm Althouse University of Calgary

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Copyright © 2011 by Nelson Education Ltd.1

Prepared byNorm Althouse

University of Calgary

Prepared byNorm Althouse

University of Calgary

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Learning Outcomes


1 Show why global trade is important to Canada, and how it is measured.

2 Explain why nations trade.

3 Describe some of the barriers to international trade.

4 Discuss how governments and institutions foster world trade.

5 List some of the international economic communities.

6 Explain how companies can enter the global marketplace.

7 Explain some of the threats and opportunities in the global marketplace.

8 Discuss some of the advantages of multinational corporations.

9 List some of the trends in the global marketplace.

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GLOBAL COMPETITION


GlobalGlobalVisionVisionGlobalGlobalVisionVision

Recognizing and reacting tointernational business

opportunities

Being aware of threats fromforeign competitors

Effectively using internationaldistribution networks

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The Importance of Global Business for Canada


Offers expanded markets for our products

Enhances the quality of Canadian life Canada exports approximately 45% of what it produces

Approximately 33% of all jobs in Canada rely on exports

Helps to maintain our high standard of living

Exports = 30% of Canada’s GDP

Exports = 76% of Saskatchewan’s GDP

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Key Measures of International Trade


Balance ofPayments

Balance ofPayments

ImportsImportsExportsExports

Balance of Trade

Balance of Trade

ExchangeRates

ExchangeRates

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Measuring devices

Copyright © 2011 by Nelson Education Ltd. 6

Balance of Tradetrade surplus (more exports than imports)trade deficit (more imports than exports)

Balance of Paymentsthe difference between total payments to and

total receipts from other countries

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Value of Currenciesfloating exchange rates price one country’s

currency in terms of another country’s currency

long-term imbalance of trade will tend to stimulate a currency rate correction

Governments can also correct currency exchange rates by buying and selling foreign currency; by changing interest rates; by strict financial controls; and by forced revaluations.

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Canada / U.S. Foreign Exchange Rate


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An underlying cause?


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WHY NATIONS TRADE


Absolute Advantage• A country can produce and sell products

at a lower cost

• A country is the only provider of a product

Comparative Advantage

A country should specialize in the products that it can produce most readily and cheaply, and trade these for goods that foreign countries can produce most readily and cheaply (The textbook’s definition)

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Comparative advantage



A country should specialize in the products that it can produce most readily and cheaply, and trade these for goods that foreign countries can produce most readily and cheaply


A country should specialize in the products that it is the most best at producing, and trade these for those goods that foreign countries are least worst at producing

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Costs and benefits of free trade


Ricardo’s theory of comparative advantage indicates that the standard of living is improved by free trade between countries.

There are several costs however.

Specialization in what you are most best at or least worst at implies that each country will stop producing something that it produced before free trade started. This has two main effects.

First, people who were employed in that sector will no longer be employed . If their skills are very specific, they may be unable to work elsewhere. This is why labour groups are anti-free trade.

Second, each country is now no longer self-sufficient – each is dependent on the other country for the supply of the traded products. This interdependence discourages war, e.g. in the EEC.

Some countries want to remain self-sufficient, and not be dependent on others for strategically important goods. Japan, for example, maintains its own rice growing industry despite the fact that foreign rice is 10 times cheaper.

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BARRIERS TO TRADE


distance, language, culture, legal and regulatory

distance, language, culture, legal and regulatoryNatural BarriersNatural Barriers

import taxes, protective tariffs import taxes, protective tariffs Tariff BarriersTariff Barriers

quotas, embargoes, buy-national regulations, custom regulations,

exchange controls

quotas, embargoes, buy-national regulations, custom regulations,

exchange controlsNon-Tariff BarriersNon-Tariff Barriers

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FOSTERING GLOBAL TRADE


Antidumping Lawsprevent charging a lower price in foreign markets

than in the home market for the same product

Antidumping Lawsprevent charging a lower price in foreign markets

than in the home market for the same product

The Uruguay Roundagreement signed in 1994 by 117 nations to lower trade barriers

The Uruguay Roundagreement signed in 1994 by 117 nations to lower trade barriers

The World Bank and International Monetary Fundlend money to developing nations and troubled nations

The World Bank and International Monetary Fundlend money to developing nations and troubled nations

The World Trade Organizationprovides lower trade barriers among member nations,

and helps resolve trade disputes

The World Trade Organizationprovides lower trade barriers among member nations,

and helps resolve trade disputes

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INTERNATIONAL ECONOMIC COMMUNITIES


North American Free Trade Agreement (NAFTA)

North American Free Trade Agreement (NAFTA)

The European UnionThe European Union

ASEANASEAN

Mercosur

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Current EU Members

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THE GLOBAL MARKETPLACE


Potential for cost savingsPotential for cost savings

Saturated domestic marketsand excess capacity

Saturated domestic marketsand excess capacity

Possess exclusive market informationPossess exclusive market information

Leverage a unique product ortechnological advantage

Leverage a unique product ortechnological advantage

Earn additional profitsEarn additional profits

Why Why “Go Global?”“Go Global?”

Why Why “Go Global?”“Go Global?”

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Entering the Global Marketplace


HighHighrisk/risk/highhighreturnreturn

LowLowrisk/risk/lowlowreturnreturn

Risk

Return

Exporting Licensing

ContractManu-

facturing

JointVenture

DirectForeignInvest-ment

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LicensingLicensing Legal process allowing use of manufacturing/patents/knowledge.

Legal process allowing use of manufacturing/patents/knowledge.

ContractManufacturing

ContractManufacturing

Private-label manufacturing by a foreign country.

Private-label manufacturing by a foreign country.

Joint VentureJoint Venture Domestic firm buys/joins a foreign company to create new entity.

Domestic firm buys/joins a foreign company to create new entity.

ExportExport Sell domestically produced products to buyers in other countries.

Sell domestically produced products to buyers in other countries.

Direct InvestmentDirect Investment Active ownership of a foreign company/manufacturing facility.Active ownership of a foreign

company/manufacturing facility.

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A form of internationaltrade in which part or all of the payment of goods

or services is in the form of goods and services.

A form of internationaltrade in which part or all of the payment of goods

or services is in the form of goods and services.

CountertradeCountertrade

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THREATS AND OPPORTUNITIES


PEST = the Political, Economic, Social and Technological environments that interact with business.

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MULTINATIONAL CORPORATIONS


Corporations that move resources, goods, services, and skills across national boundaries

without regard to the country in which theirheadquarters are located.

Corporations that move resources, goods, services, and skills across national boundaries

without regard to the country in which theirheadquarters are located.

Multinational CorporationsMultinational Corporations

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The Multinational Advantage


Overcome trade problems Sidestep regulatory problems Shift production from one plant to another Tap new technology from around the world Save in labour costs

Social issues Cultural issues Economic and financial issues Legal and regulatory issues Environmental issues

The Multinational Challenges

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Trends in Global Competition


Emergence of China and IndiaEmergence of China and India

Resource acquisitionResource acquisition

Market expansionMarket expansion

Trends inTrends inGlobalGlobal

CompetitionCompetition

Trends inTrends inGlobalGlobal

CompetitionCompetition

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Chapter 2 Copyright © 2011 by Nelson Education Ltd. 1 Prepared by Norm Althouse University of Calgary Prepared by Norm Althouse University of Calgary