Global Trade Environment Global Marketing

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

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

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

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

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

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

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

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)

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

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

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

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

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

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

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

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?

EU Initially began with the 1958 Treaty of Rome http://www.euro.ecb.int/en/another/play.html 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)