Reasons why Canadian
Companies Trade
• Growth of the company
• Entry into new markets
• Expanded customer base
• Increased profits
Importing
• Bringing products or services into Canada
• Goods (products)
– B2B goods ex capital goods such as machinery
– Consumer goods for resell
• Services
– Ex - Contracting a foreign firm to build the Ottawa
light rail system
Canada’s Top Importing Countries
2010 Rank
Country 2010 Value in $
billions CAGR* 2001-2010 % Change 2009-2010
% of 2010 Total Imports
1 United States 203.3 -0.8% 8.8% 50.4%
2 China 44.5 14.9% 12.2% 11.0%
3 Mexico 22.1 6.9% 33.7% 5.5%
4 Japan 13.4 -0.9% 8.9% 3.3%
5 Germany 11.3 3.9% 5.9% 2.8%
6 United Kingdom 10.7 -1.0% 13.9% 2.7%
7 South Korea 6.1 3.3% 3.7% 1.5%
8 France 5.4 -0.2% -3.6% 1.3%
9 Italy 4.6 1.6% 4.5% 1.2%
10 Taiwan 4.0 -1.2% 18.7% 1.0%
Top Ten 325.5 1.1% 10.4% 80.7%
Other Countries 78.0 5.8% 10.8% 19.3%
Canada’s Top Exporting Countries
2010 Rank
Country 2010 Value in $
billions CAGR* 2001-2010 % Change 2009-2010
% of 2010 Total Exports
1 United States 299.1 -1.8% 10.7% 74.9%
2 United Kingdom 16.4 14.0% 35.7% 4.1%
3 China 13.2 13.4% 18.7% 3.3%
4 Japan 9.2 1.1% 10.6% 2.3%
5 Mexico 5.0 6.9% 4.3% 1.3%
6 Germany 3.9 3.3% 5.3% 1.0%
7 South Korea 3.7 7.0% 5.2% 0.9%
8 Netherlands 3.2 8.5% 17.8% 0.8%
9 Brazil 2.6 11.6% 60.4% 0.6%
10 Norway 2.5 11.1% 43.4% 0.6%
Top Ten 358.9 -0.7% 12.2% 89.9%
Other Countries 40.5 6.2% 1.1% 10.1%
Canada’s Dilemma with exports/imports
• Most of Canada’s exports $ are generated from
sales of raw materials.
• We import finished goods that sometimes are
made from our own raw materials. Ex. Our tar
sands bitumen shipped to US for processing in
finished petroleum products that we import.
• We lose out on the value added. Therefore
International Business Arrangements
• Licensing Agreements – where a company has permission to use a product, brand name, or patent in exchange for a fee or royalty. Ex Bell Canada has a licensing agreement wit Virgin Mobile.
• Exclusive distribution rights – allows a company to be the only
distributor of a product in a specific country or region. Ex Rogers had the exclusive rights to the Iphone in Canada when it first launched in 2008
• Franchising – the use of a company’s name, services, products, brand name, and marketing for a fee an/or royalty. Ex McDonald’s
• Joint Ventures – two or more businesses form a business
arrangement/new company, typically one is domestic. Ex Barrick Gold Corporation
Barriers To Trade
• Protectionism is the shielding against foreign competition
• As a rational economic student you understand that
trade is good – big picture
• However, at the individual level there will be winners but
also losers when you liberalize trade among countries.
Types of Trade Barriers
• Tariffs
• Trade Quotas
• Trade Embargoes
Types of Trade Barriers
• Tariffs
– A tax or duty imposed on imported products or
services. The result is that it increases the
price of the imputed item.
– Purpose is to protect local providers by
making their imported competitor more
expensive.
Tariffs - Pros and Cons
Pros
• Additional government revenues
• Encourages production of domestic products – resulting in self reliance independence • Encourages domestic
entrepreneurship
• Contributes to domestic employment
Cons
• Decrease competition which results in customers
– paying higher prices
– potentially buying inferior quality
– having less choices
• For the domestic business it discourages
– looking for productivity improvements
– investment in new technologies
Types of Trade Barriers
• Trade Quotas
– A government imposed limit on the amount of product
that can be imported in a certain period of time
– Represents another form of protectionism, ie to
protect domestic businesses.
– Since the effect is to restrict the supply, ultimately it
results in higher prices to the customer
Types of Trade Barriers
• Trade Embargoes and Sanctions
– Government imposes a trading ban on one or more
products/services with a specific country.
– Reasons include
• Safety, ex restricting importation of beef from a country that has had an outbreak of a disease
• National security, ex technology or software that may be used for military purposes by an unfriendly government regime ex trade embargo of nuclear technology with Iran • Apply political pressure on another country to change its
Types of Trade Barriers
• Trade Sanctions
– Government imposes a full trading ban on all
products and service with a specific country
– Reasons include
• Safety, ex restricting importation of beef from a
country that has had an outbreak of a disease
• Apply political pressure on another country to
Foreign Investment Restrictions
• Investments such as a foreign company buying a domestic company can be viewed positively by some and negatively by others.
• The positives include influx of capital and money for the business. The benefit is potential jobs. The negatives include decrease of domestic influence and control by government. Issues
regarding economic independence, control of key national resources, and loss of culture are often cited.
• For example, in Canada FIRA (Foreign Investment Review Agency) was seen as restricting and discouraging foreign investment. The new government agency, investment Canada, is seen to encourage foreign investment.
• Investment Canada, however still determines if a foreign investment will be beneficial to Canada. Ex, PotashCorp
• Canadian wishing to invest abroad must deal with similar review processes by foreign governments
http://www.ctv.ca/CTVNews/Canada/20110626/potash-revenue-tax-110626/
Currency Exchange
• An exchange rate is the amount of currency in relation to the currency of another country. Ex the currency exchange on Aug. 15 was
Currency Can $
U.S. $
Euro €
U.K. £
Can $
1.0000
1.0126
0.7106
0.6222
U.S. $
0.9874
1.0000
.7016
0.6143
Euro €
1.4069
1.4249
1.0000
0.8753
U.K. £
1.6072
1.6277
1.1424
1.0000
Currency Exchange & Trade
• Importers must pay in the country of origin currency (or US$). Canadian importer must purchase foreign currency.
• Canadian Exporters want payment in CAD$ (or US$). Exporter must purchase CAD$.
• Some countries have fixed exchange rates. They are pegged to the US$ or basket of other currencies or to gold. Ex. Barbados peg
their $ to the US$.
Factors affecting Currency
Exchange Rates
• Demand for currency due to trade factors. Ex increase in Canadian exports will increase the demand for CAD$
• Interest rates. Ex. if interest rates increase in Canada, Foreign investors will want to buy Canadian bonds
• Economic expectations. Ex. if people believe the Canadian
economy will perform better than others, foreign investors will be attracted to Canadian investments.
• Economic, political stability, psychological factors. Ex. Canada has historically been a politically stable country that has paid is debt obligations. Combined with the expectation of a strong economy, foreign investors will therefore be attracted to buy $CAD.
Canadian Dollar
• We are often perceived as a petro currency. For a combination of reasons previously mentioned, when the price of crude oil goes up, so does the exchange rate.
• The Canadian dollar’s exchange rate has ranged from $0.63 to $1.10 to 1US$ during the last 10 years.
• When the Canadian dollar was around $0.63, it was good for
– Canadian exporters
– Canadian tourism at home – Canadian retailers
– (increase productivity
• When the Canadian dollar was $1.10, it was good for
Currency Exchange Implications for
International Business
• Additional costs incurred in converting currencies.
• Uncertainty and risks factors.
• To minimize risks, businesses may cite prices and
transactions in a hard currency such as US$ or Euro.
Other Factors
• International Standards will help increase trade.
ISO is an effort to agree on common standards.
Having different standards adds additional costs
or hampers international trade. Ex
• Electrical voltage • TV
• Left or right driving
• Metric, British imperial and US measurements • Accounting GAAP or IS
