1. Global Trade Environment
Global Marketing

2. Global Financial System
Exchange rate = the price of a currency in terms of another currency
1. Gold standard system: Before World War II. the price of each currency was expressed in gold. Each currency was convertible to gold
2. Fixed ER System, Bretton Woods, USA, 1944
International Monetary Fund was created
The price of IMF member country’s currencies to be “pegged” or valued against the US $. Only the US $ was convertible to gold
Crisis of the 1960s-1970s: high inflation, Vietnam War
1971: President Nixon suspends the US $’s convertibility
3. Floating Exchange Rate System, since 1976
Jamaica Agreement: currency prices are determined by supply and demand in foreign exchange markets

3. Rule: $1 should buy the same product in all countries
Purchasing Power Parity (PPP) Theory: The Big Mac Index by The Economist
Rule: $1 should buy the same product in all countries
The Big Mac PPP provides us a theoretical Exchange Rate assuming that a Big Mac would cost the same in the US vs. in Canada
Compare the actual exchange rates with PPP rates

4. Trade theories
Free Trade: the government does not attempt to influence what its citizens buy from another country or what they produce and sell to another country
Benefits? Free trade should allow a country to specialize in manufacturing and exporting products that can be produced most efficiently in that country
The patterns of international trade have been explained different ways

5. Trade Theories: 1. Mercantilism
France in the 1600s – 1700s: first classic trade theory
A nation’s wealth equals its accumulated treasures
Gold and silver are the only currencies of trade
Each country strives for a trade surplus
Maximize exports through subsidies
Minimize imports through tariffs and quotas

6. Trade Theories: 2. Absolute Advantage
Adam Smith: Wealth of Nations – 1800s
Countries naturally have different resources, so they differ in their efficiency of producing different goods
Countries should produce goods where they are more efficient than their partner
They should import goods where they are less efficient than the trading partners
Canada: export wood, import bananas
Then trade between countries may be mutually beneficial

7. Trade Theories: 3. Comparative Advantage
David Ricardo – 1800s
Involvement in international trade may be beneficial even if country A is more efficient in producing all goods than country B
Ex: Canada should export wheat where its comparative (relative) advantage over the USA is greater than the average advantage it has over the USA
Canada should import soybeans where its comparative (relative) advantage is below its average advantage

8. Trade theories: 4. Heckscher-Ohlin Theory
Swedish economists, 1930s
Countries tend to export goods that intensively use the production factor (labor, capital, land) which is abundant in your country
Ex: Canada should export wood or oil…
Patterns of trade are determined by differences in factor endowments – and not by productivity measures

9. Free trade? Not really… New Trade Theory
Other theories, like the International Product Life Cycle theory have also failed to explain trade patterns
“New Trade Theory:” some kind of intervention is still necessary and beneficial to the country. Why?
Protecting jobs and industries (ex: biotechnology)
Increasing exports (ex: with a “weak” Canadian $)
Protecting national security (ex: Bombardier)
Trade retaliation (ex: beef, softwood lumber trade)
International market domination (ex: Airbus developed jointly by EU countries vs. Boeing)

10. GATT General Agreement on Tariffs and Trade
treaty among nations to promote trade among members
series of multilateral negotiations significantly reduced tariffs globally
GATT handled trade disputes between nations
However, it lacked enforcement power
GATT has been replaced by World Trade Organization in 1995

11. WTO World Trade Organization, since 1995
Provides forum for trade-related negotiations among 141 members
based in Geneva
serves as dispute mediators
empowered with ability to enforce rulings
Countries found in violation of WTO rules are expected to change policies or else face sanctions
WTO has enforcement power, however, it doesn’t seem to have significant power to regulate the strongest economies: USA, EU, Japan, China

12. Preferential Trade Agreements: 1. Free Trade Area
Two or more countries agree to abolish all internal barriers to trade amongst themselves
Reducing tariffs or non tariff barriers among member countries

13. 2. Customs Union Evolution of Free Trade Areas
Includes the elimination of practically internal barriers to trade (as in FTA)
PLUS

14. 3. Common Market
Includes the elimination of internal barriers to trade (as in free trade area) PLUS
Establishes common external barriers to trade (as in customs union) PLUS

15. 4. Economic Union
Includes the elimination of internal barriers to trade (as in free trade area) PLUS
Establishes common external barriers to trade (as in customs union) PLUS
Allows for the free movement of factors of production, such as labor, capital, and information (as in common market) PLUS

16. NAFTA Became a law on January 1,1994 Over a 15 year period:
Tariffs to be reduced (for 99% of goods traded)
NTBs also reduced, investment opportunities increased
Protection of intellectual property
Applies national environmental standards

17. Free Trade Area of the Americas (FTAA)
An agreement to form a regional trading zone stretching from Point Barrow, Alaska to Patagonia, Argentina.
US$ as the currency of Canada?

18. EU Initially began with the 1958 Treaty of Rome
Initially began with the 1958 Treaty of Rome
Objective to harmonize national laws and regulations so that goods, services, people and money could flow freely across national boundaries
1991 Maastricht Treaty set stage for transition to an economic union including a common central bank and single currency (the Euro)