Competing in Global Markets: International Trade and Canadian Business

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Competing in Global Markets

Introduction

This chapter explores the fundamentals of international trade, focusing on why nations engage in global markets, how trade is measured, and the strategies businesses use to compete internationally. Special emphasis is placed on the Canadian context, including trade agreements, comparative and absolute advantage, and the impact of globalization.

Getting Involved in Global Trade

Exporting and Importing

Exporting is selling products (goods and services) to another country.
Importing is buying products from another country.
Competition in exporting is intense, with Canadian companies facing aggressive global competitors.

The Dynamic Global Market

Canada's domestic market is about 40 million customers, while the global market offers access to approximately 8 billion potential customers in 194 countries.

Why Trade with Other Nations?

No country can produce all the products its people want and need.
Trade allows access to goods not available locally or more efficiently produced elsewhere.
Countries export goods they produce in excess, such as Canadian lumber.
Free trade is the movement of goods and services among nations without political or economic barriers.

Measuring Global Trade

Trade Surplus and Deficit

Trade surplus: When a country's exports exceed its imports (favorable balance of trade).
Trade deficit: When a country's imports exceed its exports (unfavorable balance of trade).

Balance of Payments

The balance of payments is the difference between money coming in from exports and money leaving due to imports.
Goal: More money coming in than going out, similar to managing a bank account.

Canadian International Trade

The United States is Canada's largest trading partner (75–77% of exports, 49–50% of imports).
China and India are growing in importance due to their economic growth, though their current share is small.
Other partners include the UK, Japan, and Mexico (each 1–3% of trade).

Canada's Top Export and Import Industries

Industry	Exports (USD Billions)	Imports (USD Billions)
Mineral Fuels & Oils	~145	~15
Cars	~60	~55
Machinery	~45	~50
Precious Metals	~15	~10
Electronics	~12	~27

About Trade Agreements

Canada is part of 15 trade agreements, both multilateral and bilateral.
Major agreements include:
- Canada-US-Mexico (FTA, NAFTA, USMCA)
- Canada-EU (CETA & EFTA)
- Canada-South Korea (CUKTCA)
- Trans-Pacific Partnership (CPTPP)
Agreements can be free trade (no tariffs or barriers) or fair trade (ensuring fair payment to producers).

Trade Agreements/Unions

European Union (EU): 27 nations, no tariff or non-tariff barriers, common currency (Euro), and Brexit as a recent change.

Theories of International Trade

Theory of Comparative Advantage

Countries should export goods and services they produce most efficiently and import those where they lack comparative advantage.
Many countries use tariffs and duties to protect domestic industries, contrary to this theory.

Example: Canada and Japan

Canada: Forestry products
Japan: Cars, electronics

Theory of Absolute Advantage

A country has an absolute advantage if it can produce a good more efficiently or has a monopoly.
Few absolute advantages exist today due to global competition.

Example: South Africa and Diamonds

South Africa has an absolute advantage in diamond production compared to the rest of the world.

Examples of Absolute Advantage by Country

Country	Product
Saudi Arabia	Crude Oil
Brazil	Coffee
Bangladesh	Textiles
United States	Aircraft
Taiwan	Semiconductors

Porter's Determinants of National Competitive Advantage

Factor Conditions: Resources such as land, labor, infrastructure, and capital.
Firm Strategy, Structure, and Rivalry: Local competition and investment intensity.
Demand Conditions: Sophistication and scale of local market demand.
Related and Supporting Industries: Availability and quality of suppliers and supporting industries.

Government Involvement in Trade: Critical Minerals

Critical minerals are essential for modern technologies and economic security (e.g., lithium, cobalt, rare earths).
Countries negotiate access through trade deals, investments, alliances, and geopolitical bargaining.

Trade on Small Scale (Canada-USA)

De minimis exemption: Low-value shipments (under US $800) are duty-free and require minimal paperwork.
Policy changes can impact small businesses, especially regarding tariffs and customs requirements.

Strategies for Reaching Global Markets

Licensing: Allowing a foreign company to produce goods using a firm's brand for a fee.
- Pros: Low investment/risk; Cons: Loss of control, risk of future competitors.
Exporting: Selling goods/services abroad.
- Pros: Low risk, quick entry; Cons: Logistics costs, tariffs, less marketing control.
Franchising: Selling rights to use a business model/brand in another country.
- Pros: Rapid expansion; Cons: Quality control, cultural adaptation.
Contract Manufacturing: Outsourcing production to foreign firms.
- Pros: Lower costs; Cons: Quality/IP risks, limited market presence.
Joint Ventures & Strategic Alliances: Partnerships for shared projects or long-term cooperation.
- Pros: Local knowledge, shared risk; Cons: Conflict, profit sharing, IP loss.
Foreign Direct Investment (FDI): Buying property/businesses abroad.
- Pros: Full control, higher profits; Cons: High cost, political/economic risk.

Forces Affecting Trading in Global Markets

Social Forces

Culture: Values, beliefs, and practices affect business operations.
Ethnorelativism: Understanding other cultures is essential for global success.

Economic and Financial Forces

No global currency; exchange rates impact trade.
Countertrading: Complex bartering involving multiple countries.

Legal Forces

Businesses must comply with both domestic and foreign laws (e.g., anti-bribery regulations).

Physical and Environmental Forces

Technological differences (e.g., electrical systems) can hinder exports.

Trade Protectionism

Government regulations limit imports to protect domestic industries and jobs.
Protectionism can increase prices and provoke retaliation.

Protectionist Practices

Dumping: Selling goods abroad at lower prices than at home.
Tariffs: Taxes on imports (revenue or protective).
Import Quotas: Limits on the quantity of imports.
Embargoes: Total bans on trade with specific countries.
Non-tariff barriers: Licensing, standards, and paperwork requirements.

International Trade Organizations

World Trade Organization (WTO): Oversees global trade rules and dispute resolution.
General Agreement on Tariffs and Trade (GATT): Predecessor to the WTO, aimed at reducing trade barriers.
International Monetary Fund (IMF): Provides financial assistance to stabilize economies.
World Bank: Funds development projects in less-developed countries.
Producers' Cartels: Groups like OPEC coordinate to influence commodity prices.

Globalization and Your Future

Globalization creates new job opportunities and increases competition.
Outsourcing and offshoring are strategies for competitiveness.
Global challenges include pandemics, cyberterrorism, and trade wars.
China and India are major players in the global economy.

Key Formulas and Concepts

Balance of Payments:
Trade Surplus/Deficit:

Pros & Cons of Free Trade

Pros (Advantages)	Cons (Disadvantages)
Market Access & Growth Lower Consumer Prices Efficiency & Specialization Foreign Investment & Innovation Stronger Political/Strategic Ties	Job Losses in Certain Sectors Pressure on Small Businesses Loss of Policy Flexibility Environmental & Labour Concerns Unequal Benefits

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