TOPIC #5

Barriers To International Trade

Barriers to International BusinessBarriers to International Business

Purpose of BarriersPurpose of Barriers

To help protect domestic businesses andTo help protect domestic businesses and consumers consumers

May be used to:May be used to:1. help assist a new business getting started1. help assist a new business getting started

2. protect an existing industry struggling in a2. protect an existing industry struggling in a competitive global environment. competitive global environment.

3. protect consumers from imports with problems or3. protect consumers from imports with problems or that do not conform to Canadian safety standards. that do not conform to Canadian safety standards.

Barriers to International BusinessBarriers to International Business

Barriers include:Barriers include:

1.1. Tariffs or Custom dutiesTariffs or Custom duties2.2. Non-Tariff barriersNon-Tariff barriers3.3. Increased costs of importing and Increased costs of importing and

ExportingExporting4.4. Excise taxesExcise taxes5.5. Currency FluctuationsCurrency Fluctuations

1. Tariffs1. Tariffs Also called Also called custom dutiescustom duties

One of the most important tools for any government One of the most important tools for any government in managing trade with other countries.in managing trade with other countries.

A form of tax on certain types of imports (goods A form of tax on certain types of imports (goods coming into Canada from other countries)coming into Canada from other countries)

Companies bringing in the goods from another Companies bringing in the goods from another country to sell in Canada must pay the tariffs.country to sell in Canada must pay the tariffs.

Tariffs are based on a percentage of the retail value, Tariffs are based on a percentage of the retail value, (i.e. 5% of retail selling price.) or;(i.e. 5% of retail selling price.) or;

On another basis (i.e. $6 per kilogram)On another basis (i.e. $6 per kilogram)

Money collected goes to the government.Money collected goes to the government.

TariffsTariffs

Whose job is it to:Whose job is it to:1. monitor Canadian tariff1. monitor Canadian tariff policies? policies?

2. monitor tariff policies of other2. monitor tariff policies of other countries? countries?3. change Canadian tariff policies3. change Canadian tariff policies to best serve the Canadian to best serve the Canadian economy? economy?

Answer:Answer: Finance CanadaFinance Canada

TariffsTariffs

Provide an example of when it may be:Provide an example of when it may be:

beneficial for Canada to reduce tariffsbeneficial for Canada to reduce tariffs on certain goods imported from outside on certain goods imported from outside countries? countries?

beneficial to increase or create tariffsbeneficial to increase or create tariffs on certain goods being imported from on certain goods being imported from outside countries? outside countries?

2. Non-tariff Barriers2. Non-tariff Barriers

Legal and policy standards for the quality ofLegal and policy standards for the quality of imported goods are set so high that foreign imported goods are set so high that foreign competitors can not enter the market. competitors can not enter the market.

Examples:Examples: A Canadian law forces an internationalA Canadian law forces an international

company to apply for a license to do business company to apply for a license to do business in Canada (it may be very time consuming in Canada (it may be very time consuming

and expensive)and expensive)

Government will allow some goods into theGovernment will allow some goods into the country only after being inspected and having country only after being inspected and having met certain health and safety standards set out met certain health and safety standards set out by the Canadian Food and Inspection Agency. by the Canadian Food and Inspection Agency.

Imported Goods That Require Permits, Inspection, or Imported Goods That Require Permits, Inspection, or Special PackagingSpecial Packaging

Imported GoodsImported Goods Government Department__________ Government Department__________1. Endangered animals and 1. Endangered animals and 1. Environment Canada 1. Environment Canada plants and products made plants and products made from themfrom them

2. Agricultural and food 2. Agricultural and food 2. Agriculture and Agri-food 2. Agriculture and Agri-food CanadaCanada

productsproducts

3. Non-food products and clothing3. Non-food products and clothing 3. Industry Canada 3. Industry Canada precious metals, and precious metals, and radio communications equip.radio communications equip.

4. Fish and fish products4. Fish and fish products 4. Fisheries and Oceans Canada 4. Fisheries and Oceans Canada

5. Food, drugs, medicines,5. Food, drugs, medicines, 5. Health Canada 5. Health Canada pharmaceuticals, medical pharmaceuticals, medical and radiation-emitting and radiation-emitting devicesdevices

6. Hazardous waste, goods that6. Hazardous waste, goods that 6. Environment Canada 6. Environment Canada may contain may contain chlorofluorocarbonschlorofluorocarbons or lead gasor lead gas 7. Motor vehicles7. Motor vehicles 7. Transport Canada 7. Transport Canada

3. Costs of Importing and Exporting3. Costs of Importing and Exporting

Landed CostLanded Cost The actual cost for an imported purchased item.The actual cost for an imported purchased item. It is composed of the vendor cost, transportation charges, It is composed of the vendor cost, transportation charges,

duties, taxes, broker fees, and any other charges duties, taxes, broker fees, and any other charges associated with getting the product ready to sell in a associated with getting the product ready to sell in a foreign market. (another country)foreign market. (another country)

QuestionQuestion If you owned Canadian Tire and had to chooseIf you owned Canadian Tire and had to choose

between selling a tool from a Canadian manufacturer or between selling a tool from a Canadian manufacturer or a foreign manufacturer, which one would you select if a foreign manufacturer, which one would you select if the quality of both products was equal? the quality of both products was equal?

a. the foreign tool whose landed cost was greatera. the foreign tool whose landed cost was greater than the domestic purchase cost or; than the domestic purchase cost or;

b. the domestic tool whose cost was cheaper than theb. the domestic tool whose cost was cheaper than the landed cost. landed cost.

Costs of Importing and ExportingCosts of Importing and Exporting

Price of a good sold is based on thePrice of a good sold is based on the following costs among others: following costs among others:

Manufacturing (includes wages);Manufacturing (includes wages); storage;storage; Marketing;Marketing; Shipping;Shipping; AdvertisingAdvertising Overhead (Equipment, Heating etc, Salaries)Overhead (Equipment, Heating etc, Salaries) % of profit the company wants to make on % of profit the company wants to make on

the salethe sale

Depending on the laws of another country andDepending on the laws of another country and cultural differences, additional costs may be cultural differences, additional costs may be incurred. incurred.

4. Excise Taxes4. Excise Taxes

Excise TaxExcise Tax A tax on the manufacture, sale, or consumption of a A tax on the manufacture, sale, or consumption of a

particular product produced in your countryparticular product produced in your country

Governments use excise taxes to:Governments use excise taxes to:1. Raise money (i.e tobacco related health care costs)1. Raise money (i.e tobacco related health care costs)2. Discourage people from engaging in certain activities2. Discourage people from engaging in certain activities3. Increase the costs of imported goods to encourage 3. Increase the costs of imported goods to encourage

consumers to buy Canadian products.consumers to buy Canadian products.

Examples of excise taxes:Examples of excise taxes: 10 cents per litre on gasoline for the federal government10 cents per litre on gasoline for the federal government 14.5 cents per litre on gasoline for the provincial 14.5 cents per litre on gasoline for the provincial

governmentgovernment Excise tax on tobacco products varies from province to Excise tax on tobacco products varies from province to

provinceprovince

5. Currency Fluctuations5. Currency Fluctuations

Converting the value of $1 Canadian dollar to Converting the value of $1 Canadian dollar to US currency and other national currencies.US currency and other national currencies.

ExamplesExamplesNov. 2000 - $100 US Nov. 2000 - $100 US $157 Canadian $157 CanadianNov. 2007 - $100 US Nov. 2007 - $100 US $98 Canadian $98 Canadian

Website to research a history of exchange ratesWebsite to research a history of exchange rateshttp://www.oanda.com/convert/fxhistoryhttp://www.oanda.com/convert/fxhistory

Factors Affecting Exchange RatesFactors Affecting Exchange Rates

11. The financial health of Canada’s economy versus the US . The financial health of Canada’s economy versus the US economyeconomy

2. Interest Rates2. Interest Rates

Example:Example: If the Canadian economy is performing better than the US, the If the Canadian economy is performing better than the US, the

value of the Canadian dollar will increase. The demand for the value of the Canadian dollar will increase. The demand for the Canadian dollar rises. Demand > Supply, the value rises.Canadian dollar rises. Demand > Supply, the value rises.

If interest rates are higher than those of other countries while If interest rates are higher than those of other countries while inflation remains fairly stable, the value of the Canadian dollar will inflation remains fairly stable, the value of the Canadian dollar will increase. Foreigners will be attracted to invest in Canadian funds increase. Foreigners will be attracted to invest in Canadian funds where banks are providing higher interest rates. Demand > where banks are providing higher interest rates. Demand > Supply, the value rises.Supply, the value rises.

Information on factors affecting exchange rates:Information on factors affecting exchange rates: http://www.bankofcanada.ca/en/backgrounders/bg-e1.htmlhttp://www.bankofcanada.ca/en/backgrounders/bg-e1.html

Impacts of Exchange RatesImpacts of Exchange Rates Canadian economy is largely dependent on the value of imports and Canadian economy is largely dependent on the value of imports and

exports which can be greatly impacted by the value of the Canadian dollar.exports which can be greatly impacted by the value of the Canadian dollar.

The US is Canada’s biggest trading partner.The US is Canada’s biggest trading partner.

When Canadian Exports to US > US Imports = Trade SurplusWhen Canadian Exports to US > US Imports = Trade Surplus When Canadian Exports to US < US Imports = Trade DeficitWhen Canadian Exports to US < US Imports = Trade Deficit

Exports decrease when:Exports decrease when:• the Canadian dollar increases in value to the US dollar, it makesthe Canadian dollar increases in value to the US dollar, it makes

exports more expensive. exports more expensive. • the US economy is weak and the CD dollar is increasing, the USthe US economy is weak and the CD dollar is increasing, the US

will be purchasing less from Canadian businesses will be purchasing less from Canadian businesses

Note: Canadian consumers also tend to purchase more productsNote: Canadian consumers also tend to purchase more products from the US because the value of the dollar is higher, and from the US because the value of the dollar is higher, and goods are often cheaper in the US, thus making imports goods are often cheaper in the US, thus making imports higher. higher.

Result:Result: Less sales revenue for Canadian businesses which in the long run, can end Less sales revenue for Canadian businesses which in the long run, can end

up hurting the Canadian economy. For example, when businesses are up hurting the Canadian economy. For example, when businesses are earning less revenue, profits decrease and if significant decreases occur, earning less revenue, profits decrease and if significant decreases occur, businesses may start laying off employees.businesses may start laying off employees.