Chapter 2 Copyright © 2011 by Nelson Education Ltd. 1 Prepared by Norm Althouse University of Calgary Prepared by Norm Althouse University of Calgary

Chapter 2 Learning Outcomes Copyright © 2011 by Nelson Education Ltd. 2 1 Show why global trade is important to Canada, and how it is measured. 2 Explain why nations trade. 3 Describe some of the barriers to international trade. 4 Discuss how governments and institutions foster world trade. 5 List some of the international economic communities. 6 Explain how companies can enter the global marketplace. 7 Explain some of the threats and opportunities in the global marketplace. 8 Discuss some of the advantages of multinational corporations. 9 List some of the trends in the global marketplace.

Chapter 2 GLOBAL COMPETITION Copyright © 2011 by Nelson Education Ltd. 3 Global Vision Recognizing and reacting to international business opportunities Being aware of threats from foreign competitors Effectively using international distribution networks

Chapter 2 The Importance of Global Business for Canada Copyright © 2011 by Nelson Education Ltd. 4  Offers expanded markets for our products  Enhances the quality of Canadian life  Canada exports approximately 45% of what it produces  Approximately 33% of all jobs in Canada rely on exports  Helps to maintain our high standard of living Exports = 30% of Canada’s GDP Exports = 76% of Saskatchewan’s GDP

Chapter 2 Key Measures of International Trade Copyright © 2011 by Nelson Education Ltd. 5 Balance of Payments Imports Exports Balance of Trade Exchange Rates

Chapter 2 Measuring devices Copyright © 2011 by Nelson Education Ltd.6 Balance of Trade trade surplus (more exports than imports) trade deficit (more imports than exports) Balance of Payments the difference between total payments to and total receipts from other countries

Chapter 2 Measuring devices (continued) Copyright © 2011 by Nelson Education Ltd.7 Value of Currencies floating exchange rates price one country’s currency in terms of another country’s currency long-term imbalance of trade will tend to stimulate a currency rate correction Governments can also correct currency exchange rates by buying and selling foreign currency; by changing interest rates; by strict financial controls; and by forced revaluations.

Chapter 2 Canada / U.S. Foreign Exchange Rate Copyright © 2011 by Nelson Education Ltd.8

Chapter 2 An underlying cause? Copyright © 2011 by Nelson Education Ltd.9

Chapter 2 WHY NATIONS TRADE Copyright © 2011 by Nelson Education Ltd. 10 Absolute Advantage A country can produce and sell products at a lower cost A country is the only provider of a product Comparative Advantage A country should specialize in the products that it can produce most readily and cheaply, and trade these for goods that foreign countries can produce most readily and cheaply (The textbook’s definition)

Chapter 2 Comparative advantage Copyright © 2011 by Nelson Education Ltd.11 Comparative Advantage A country should specialize in the products that it can produce most readily and cheaply, and trade these for goods that foreign countries can produce most readily and cheaply Comparative Advantage A country should specialize in the products that it is the most best at producing, and trade these for those goods that foreign countries are least worst at producing

Chapter 2 Costs and benefits of free trade Copyright © 2011 by Nelson Education Ltd.12 Ricardo’s theory of comparative advantage indicates that the standard of living is improved by free trade between countries. There are several costs however. Specialization in what you are most best at or least worst at implies that each country will stop producing something that it produced before free trade started. This has two main effects. First, people who were employed in that sector will no longer be employed. If their skills are very specific, they may be unable to work elsewhere. This is why labour groups are anti-free trade. Second, each country is now no longer self-sufficient – each is dependent on the other country for the supply of the traded products. This interdependence discourages war, e.g. in the EEC. Some countries want to remain self-sufficient, and not be dependent on others for strategically important goods. Japan, for example, maintains its own rice growing industry despite the fact that foreign rice is 10 times cheaper.

Chapter 2 BARRIERS TO TRADE Copyright © 2011 by Nelson Education Ltd. 13 distance, language, culture, legal and regulatory distance, language, culture, legal and regulatory Natural Barriers import taxes, protective tariffs Tariff Barriers quotas, embargoes, buy-national regulations, custom regulations, exchange controls quotas, embargoes, buy-national regulations, custom regulations, exchange controls Non-Tariff Barriers

Chapter 2 FOSTERING GLOBAL TRADE Copyright © 2011 by Nelson Education Ltd. 14 Antidumping Laws prevent charging a lower price in foreign markets than in the home market for the same product Antidumping Laws prevent charging a lower price in foreign markets than in the home market for the same product The Uruguay Round agreement signed in 1994 by 117 nations to lower trade barriers The Uruguay Round agreement signed in 1994 by 117 nations to lower trade barriers The World Bank and International Monetary Fund lend money to developing nations and troubled nations The World Bank and International Monetary Fund lend money to developing nations and troubled nations The World Trade Organization provides lower trade barriers among member nations, and helps resolve trade disputes The World Trade Organization provides lower trade barriers among member nations, and helps resolve trade disputes

Chapter 2 INTERNATIONAL ECONOMIC COMMUNITIES Copyright © 2011 by Nelson Education Ltd. 15 North American Free Trade Agreement (NAFTA) The European Union ASEAN Mercosur

Chapter 2 Copyright © 2011 by Nelson Education Ltd.16 Current EU Members

Chapter 2 THE GLOBAL MARKETPLACE Copyright © 2011 by Nelson Education Ltd. 17 Potential for cost savings Saturated domestic markets and excess capacity Possess exclusive market information Leverage a unique product or technological advantage Earn additional profits Why “Go Global?”

Chapter 2 Entering the Global Marketplace Copyright © 2011 by Nelson Education Ltd. 18 Highrisk/highreturn Lowrisk/lowreturn Risk Return Exporting Licensing Contract Manu- facturing Joint Venture Direct Foreign Invest- ment

Chapter 2 Entering the Global Marketplace Copyright © 2011 by Nelson Education Ltd. 19 Licensing Legal process allowing use of manufacturing/patents/knowledge. Contract Manufacturing Private-label manufacturing by a foreign country. Joint Venture Domestic firm buys/joins a foreign company to create new entity. Export Sell domestically produced products to buyers in other countries. Direct Investment Active ownership of a foreign company/manufacturing facility.

Chapter 2 Entering the Global Marketplace Copyright © 2011 by Nelson Education Ltd. 20 A form of international trade in which part or all of the payment of goods or services is in the form of goods and services. A form of international trade in which part or all of the payment of goods or services is in the form of goods and services. Countertrade

Chapter 2 THREATS AND OPPORTUNITIES Copyright © 2011 by Nelson Education Ltd. 21 Economic Environment Cultural Differences Politics Global Marketplace Threats and Opportunities PEST = the Political, Economic, Social and Technological environments that interact with business.

Chapter 2 MULTINATIONAL CORPORATIONS Copyright © 2011 by Nelson Education Ltd. 22 Corporations that move resources, goods, services, and skills across national boundaries without regard to the country in which their headquarters are located. Multinational Corporations

Chapter 2 The Multinational Advantage Copyright © 2011 by Nelson Education Ltd. 23  Overcome trade problems  Sidestep regulatory problems  Shift production from one plant to another  Tap new technology from around the world  Save in labour costs  Social issues  Cultural issues  Economic and financial issues  Legal and regulatory issues  Environmental issues The Multinational Challenges

Chapter 2 Trends in Global Competition Copyright © 2011 by Nelson Education Ltd. 24 Emergence of China and India Resource acquisition Market expansion Trends in Global Competition Trends in Global Competition