International Trade

1. International Trade Chapter 4

2. Nature of International Trade • The global marketplace exists because countries need to trade with one another • New global marketplace allows for all people and business to become both potential customers and employees/employers • International Trade – The exchange of goods and services among nations • Imports – Goods and services purchased from other countries • Exports – Goods and services sold to other countries

3. Interdependence of Nations • You have likely noticed that most products you purchase are not made in Canada. • This is because nations trade goods from other countries as each country possesses unique resources and capabilities. • This principle is fundamental to marketing in a global environment.

4. Absolute Advantage & Comparative Advantage • Any nation that takes part in international trade strives for economic advantage over its trading partners • Absolute Advantage – When a country has natural resources or talents that allow it to produce an item at the lowest cost possible. • (China produces 80% of all silk thus has absolute advantage) • Comparative Advantage – Value a nation gains by selling what it produces most efficiently. • (USA produces high-tech products most effectively and thus has a comparative advantage over other nations)

5. Benefits of International Trade • Consumers, producers, workers and nations in general benefit from international trade in different ways • Consumers – competition encourages production of high quality goods with lower prices and increase in variety of goods or services. • Producers – can expand business by conducting operations in other countries • About one-third of the profits of U.S businesses come from international trade and foreign investment • Workers – increased trade can lead to higher employment rates both at home and abroad • Toyota, a Japanese company has generated 500,000 jobs in the U.S

6. Benefits of International Trade Cont. • Nations as a whole benefit from international trade. Increased foreign investment in a country often improves the standard of living for that country’s people. • Economic alliances often solidify political alliances that foster peace also.

7. Government Involvement in International Trade • All nations control and monitor their trade with foreign businesses • Customs division of U.S Treasury monitor all incoming imports • All countries usually check incoming goods to make sure they meet standards • All U.S citizens must meet the customs requirements of foreign countries when visiting or when exporting goods

8. Balance of Trade • Nations must also keep track of their international trade to be aware of their economic status • Balance of Trade – The Difference in value between exports and imports of a nations • A positive balance of trade (trade surplus), occurs when a nation exports more than it imports. • A negative balance of trade (trade deficit), occurs when a nation imports more than it exports

9. Balance of Trade Cont. • The United States is the worlds largest exporter but, surprisingly, their trade deficit is very high • Analysts say this happens because Americans buy more goods/services than citizens of other countries. • A consequence of this trade deficit is that it reduces a nations revenue greatly. • Because of this debt, the U.S must survive by relying on foreign investors whom buy U.S. securities • Another effect of a trade deficit is increased unemployment • People will lose their jobs as foreign businesses take away from domestic firms • If these domestic firms do not become competitive, they will likely fail

10. Trade Barriers • Most countries around the world favour and practice the concept of free trade where there are no restrictive regulations to international business • However, some nations choose to impose trade barriers (restrictions) when they wish to limit trade • Three types of barriers are: • Tariffs – • A tax on imports usually used to produce revenue for a country (sometimes called a duty) • Another type of tariff is protective where its purpose is to increase price of imported goods so that domestic goods can compete (protects domestic jobs from foreign takeover)

11. Trade Barriers Cont. • Quotas – • Limits either quantity or monetary value of a product that may be imported (sometimes put on exports to improve relations with countries) • Japan placed quotas on its exports in the 1980s to improve relations with the U.S. • Embargoes – • A total ban on specific goods coming into and leaving a country. • Governments usually impose these for health reasons • Embargoes can also be used for political reasons (war, negative relations etc.)

12. The U.S has held an embargo against Cuba for around 50 years because they became a communist state. Many of Cuba’s poverty problems are blamed due to this embargo as the U.S would be Cuba’s main source of food products.

13. Protectionism • Trade regulations can have several political and economic consequences • Protectionism – A governments establishment of economic policies that systematically restrict imports in order to protect domestic industries. • Protectionism is the opposite of free trade • Imposing tariffs and quotas are examples of practicing protectionism

14. Protectionism and Subsidies • Instead of imposing these tariffs and quotas, a government just accomplish the same effect by subsidizing domestic industries, thus allowing them to be more competitive against foreign competition. • U.S and Europe subsidize farms so that they can overproduce products that they can sell or donate overseas (All excess can be sold for very low prices). • This displeases foreign competitors as they cannot compete with these prices. • Sometimes, when a country imposes a tariff/quota, the other country retaliates. • In 2003, the U.S imposed a new quota on Chinese dressing gowns, knitwear and bras in order to protect domestic firms. China retorted by cancelling a trade mission to buy farm products such as cotton, wheat and soybeans.

15. Trade Agreements and Alliances • Governments have made agreements to establish guidelines for international trade and to set up alliances • Some of the major milestones of these agreements include the World Trade Organization (WTO), North American Free Trade Agreement (NAFTA) and the European Union (EU). • World Trade Organization – • A coalition of nations that makes rules governing international trade. The WTO had 148 members as of October 2004 • WTO was created to police the agreements and resolve disputes among nations • In 2004, the WTO ruled in favor of Brazil, which alleged that US cotton subsidies violated international trade rules and hurt Brazilian farmers. • WTO also responsible for managing world trade by studying important trade issues and evaluating the health of the world economy

16. Trade Agreements and Alliances Cont. • North American Free Trade Agreement (NAFTA) – • An international trade agreement among the USA, Canada and Mexico. • Introduced on January 1st, 1994, it’s main goal is to get rid of all trade barriers and investment restrictions among the 3 countries • European Union (EU) – • Europe’s trading bloc • Introduced in 1992 to establish free trade among the member nations, as well as create a single European currency (the Euro) and a central bank. • Other treaty provisions relate to fair competitive practices, environmental and safety standards and security matters

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