Unit 4: The Global Economy: International Trade and Development

Unit 4: The Global Economy:

International Trade and Development

Chapter 12: Trade Theory, Agreements, and PatternsChapter 13: Financing International Trade

Chapter 14: International Trade Issues

Chapter 17: Trade Theory, Agreements, and Patterns

• Overview• The importance of trade• Trade restrictions• Canadian trade patterns and policies• Major international trade agreements

The Importance of Trade to Canadians

• Throughout history, nations have traded with one another• Selling some of their surplus

products• Buying other products that

they need

• Today, international trade is more important that ever and continues to grow rapidly


• If we were to focus only on the foods that Canadians like to consume, the list would include:• Oranges from California and

Florida• Pineapples from Hawaii• Watermelons from Georgia• Grapes from Chile• Bananas from Costa Rica• Sugar from Jamaica• Kiwi and chestnuts from Italy• Lamb from New Zealand• Coffee from Columbia• Tea from India


• We are all largely dependent on imports• Goods and services bought from other nations

• Canadians also sell a large amount of goods and services to buyers around the world• These exports account for ~40% of Canada’s GDP,

amounting to $423 billion in 2000• Almost 1 in 4 jobs in Canada is directly dependent on

exports

• In comparison, exports account for only ~10% of GDP in the US• Only 1 in 12 jobs directly depends on exports

The Case for International Trade

• The volume and value of global trade continue to grow each year• Why do nations prefer to trade instead of

attempting to become more self-sufficient?• Why do they prefer to rely on other nations for

certain goods and services instead of developing domestic industries to provide those same goods?


• Nations buy goods from other nations for the same reasons that individuals buy from other individuals

• No reasonable social being can afford to be totally self-sufficient• The economic costs would be too great

• A person can’t independently produce all the food, clothing, construction materials, machines, medicines, entertainment, and information systems that are needed

• Your productivity and your standard of living are much higher if you can specialize in what you do best and buy the rest of what you need from others who are specialists at different things


• Trade allows industries to specialize• Achieves greater economic efficiency

• Improved productivity and the benefits of operating at a large scale usually improve market prices and living standards for people in both the importing and exporting countries

• The trend towards increased international trade results in a spread of large-scale transnational enterprises with international markets for their goods and services• All party of an economic trends called globalization

Trade Benefits All Parties

• One of the important economic principles of international trade is that both buyer and seller benefit from the transaction

Trade Benefits All Parties

• Specialization is often identified as the most important mutual benefit from international trade• Clear economic advantages to

allowing nations to concentrate their industrial activity on the mass production of goods for which they have the necessary resources

• To truly understand the economic benefits of international trade, we will have to examine two concepts introduced in Chapter 3• Absolute advantage• Comparative advantage

Absolute Advantage• The concept of absolute advantage can be presented

through the following hypothetical situation:• Suppose your neighbor is a highly trained and skilled

car mechanic• Able to tune up a car in 20 minutes• But it takes him an entire day to work a computer

• You are a highly trained and skilled computer technician• Can correct most computer malfunctions in 20 minutes• But it takes you an entire day to tune up your car

Absolute Advantage• You can both accomplish more, with greater

efficiency, if your neighbor were to specialize in auto mechanics and you were to specialize in computer technology• You could pay your neighbor to tune up your car

instead of wasting your valuable time doing it yourself• Your neighbor would gladly pay you to set up the

computer to perform required tasks

• You would both personally benefit from specialization and trade, and your community would become more productive

Absolute Advantage• If an individual, region, or nation can produce something

more efficiently than another (by using fewer resources), it is said to have an absolute advantage in making that product• Saskatchewan has an absolute advantage over BC in wheat

production• BC has an absolute advantage over Saskatchewan in the

manufacture of wood products

• If each province has an absolute advantage producing one item, they should specialize in that product and trade with other provinces• Interprovincial trade would benefit all participants and the

Canadian economy as a whole

Absolute Advantage

• To see if this idea applies globally, we need to use the concept of opportunity cost

• Let’s use a hypothetical case involving two fictional nations called Atlantica and Pacifica• Assume these two countries can manufacture

only two products: computers and cars• Assume that production costs are constant

and there are no transportation costs and no government restrictions on trade

Absolute Advantage• Atlantica can choose to

produce either 200 computers or 5 cars every 10 production days

• Pacifica can produce either 100 computers or 20 cars in 10 production days

• This table clearly outlines the opportunity costs in each nation

Nation Computer Production (in units)

Car Production (in units)

Atlantica 200 5Pacifica 100 20

Table 12.1: Production opportunities: quantity ofcomputers or cars that can be made in 10 production days

Absolute Advantage• In attempting to meet

monthly demand for cars and computers, the two nations are able to produce 300 computers and 50 cars when 10 production days are used to make computers, and 20 days are used to make cars



Atlantica 200 10Pacifica 100 40Total 300 50

Table 12.2: Output of cars and computers per30 day production cycle, without specialization.Each nation manufactures its own products.

Absolute Advantage• In the first 10 production days, Atlantica manages to

produce twice as many computers as Pacifica (200 vs. 100)• Atlantica has an absolute advantage over Pacifica in computer

production

• In the remaining 20 production days, Pacifica manages to produce four times as many cars as Atlantica (40 vs. 10)• Pacifica has an absolute advantage over Atlantica in car

production

• Atlantica should specialize in computer production and trade some to Pacifica for cars• In order to understand why, we must consider opportunity costs

Absolute Advantage

• In one month, Pacifica could produce either 300 computers or 60 cars• 300 computers are as valuable as 60 cars

since they both consume 30 days of production time

• The opportunity cost of producing 60 cars is the 300 computers that must be sacrificed in order to produce them• Each car that Pacifica produces will cost the

nation 5 computers

Absolute Advantage• To Atlantica, 600 computers are as valuable as

15 cars, since either is achieved in the same production time (30 days)

• The opportunity cost of producing 600 computers is the 15 cars that must be sacrificed• Each car Atlantica produces will cost the nation 40

computers

• Clearly Atlantica can’t afford to produce cars because it will be forced to sacrifice far too many computers

Absolute Advantage• As a result of each

nation’s putting its absolute advantage to use, the total production of both cars and computers has increased through specialization

• During the same 30-day production cycle, 300 additional computers and 10 additional cars have been produced



Atlantica 600 0Pacifica 0 60Total 600 60

Table 12.3: Output of cars and computers per30 day production cycle, with specialization.Each nation uses its absolute advantage.

Absolute Advantage• However, there are no new

cars available for purchase in Atlantica and no computers available in Pacifica

• The two nations must arrange to trade some cars for computers in trade terms that are acceptable to both nations• Acceptable trade terms

generally requires the benefits of specialization to be shared by both partners

• The two nations agree to trade 200 computers for 15 cars



Atlantica 600 – 200 = 400

0 + 15 = 15

Pacifica 0 + 200 = 200

60 – 15 = 45

Total 600 60

Table 12.4: Output of cars and computers per30 day production cycle, after specialization andtrade.

Absolute Advantage

• Clearly the productive efficiency of both nations has been improved by specialization and trade• More computers and cars are available each

month to consumers in both trading nations

• Over time, it’s likely the quality and price of both products will also improve as a result of specialization and trade

Comparative Advantage

• Do specialization and trade continue to provide similar economic benefits when one nation has an absolute advantage in the production of both goods being traded?• The answer is, surprisingly, yes

• To understand why, we must explore the concept of comparative advantage• First outlined by David Ricardo (Chapter 3) almost 200 years ago

• Even if one nation has an absolute advantage in every field of production, chances are that it will have a greater advantage in some fields than in others• These differences in relative efficiencies, or comparative

advantage, are all that is required to make specialization and trade economically beneficial for individuals, regions, and nations


• Suppose you are one of the best world processors and lawyers in the community

• Since you can earn more money as a lawyer, you would be wise to concentrate on law and hire someone else to do your word processing• An hour spent word processing can’t be spent in the courtroom• The opportunity cost of word processing is too high for you to

attempt to be self-sufficient in both areas

• You have a comparative advantage (relative to others) in the practice of law

• You also have a comparative advantage (relative to others) in word processing


• Let’s illustrate this principle with another series of hypothetical production tables

• The nation of Floren has an absolute in the production of both cars and computers• Its advantage over Guilder in

computer production is at the ratio of 2:1

• Its advantage over Guilder in car production is at the ratio of 4:1

• Floren has a relatively greater absolute advantage (or comparative advantage) in car production

Nation Computer Production (units produced in the first 10 days)

Car production (units produced in the remaining 20 days)

Floren 200 40Guilder 100 10Total 300 50

Table 12.5: Output of cars and computers per30 day production cycle, without specialization.Each nation manufactures its own products.


• In one month, Floren could produce either 600 computers or 60 cars• 600 computers are as valuable as 60 cars since

they both consume 30 days of production time

• The opportunity cost of producing 600 computers is the 60 cars that must be sacrificed in order to produce them• Each computer that Floren produces will cost

the nation 0.1 of a car


• To Guilder, 300 computers are as valuable as 15 cars, since either is achieved in the same production time (30 days)

• The opportunity cost of producing 300 computers is the 15 cars that must be sacrificed• Each computer Guilder produces will cost the nation 0.05 of a

car

• Based on opportunity costs, Guilder has a comparative advantage in the production of computers• Fewer cars are being sacrificed

• Both nations would benefit from specialization and trade if each nation uses its comparative advantage


• As a result of specialization, total production in the two nations has improved

• There are just as many computers as before (300 units produced each month), but 10 additional cars are now produced each month

• Using the principle of comparative advantage, the productive capacity of the two nations has been expanded by introducing greater efficiency

Nation Computer Production (units produced in 30 days)

Car production (units produced in 30 days)

Floren 0 60Guilder 300 0Total 300 60

Table 12.6: Output of cars and computers per30 day production cycle, with specialization.Each nation uses its absolute advantage.


• If Guilder were to trade 200 computers for 15 cars, it would have an extra 5 cars available per month• Concrete proof that specialization

and trade with Floren continue to provide economic benefits

• Floren, with 45 cars now available per month, would be able to show an identical benefit of 5 extra cars

• Using the principle of comparative advantage, both nations continue to benefit from specialization and trade

Nation Computer Production (units produced in 30 days)

Car Production (units produced in 30 days)

Floren 0 + 200 = 200

60 - 15 = 45

Guilder 300 - 200 = 100

0 + 15 = 15

Total 300 60

Table 12.7: Output of cars and computers per30 day production cycle, after specialization andtrade.


• Comparative advantage originates from local, regional, and national variations that exist in the distribution of productive resources• Referred to as relative factor endowment• Represents what a community, province, or nation is naturally

given to work with

• Comparative advantage also results from the efficiency, effectiveness and scale of operations• Referred to as relative factor intensity• Represents how a particular resource endowment is put to use

• Variations in factor endowment and factor intensity create local, regional, and national conditions of comparative advantage that promote cooperation and trade

Terms of Trade• The rate at which a country’s exports

are exchanged for its imports is known as the terms of trade• Establish an international price for one

product in terms of another product

• This price depends partly on the domestic opportunity costs experience in both trading nations prior to trade• Traders must, at the very least,

recover the opportunity costs that apply in domestic transactions in order to make international trade worthwhile

Terms of Trade• Let’s return to our example of Floren and Guilder• Before trade…• The opportunity cost of producing each car in Floren is 10

computers• The opportunity cost of producing each car in Guilder is 20

computers

• If Guilder can acquire a car from Floren for less than 20 computers, it would make economic sense to do so

• If Floren can acquire 200 computers from Guilder for less than the 20 cars it would be forced to sacrifice in order to produce its own computers, again, it would make economic sense to do so

Terms of Trade• If Guilder attempts to sell 200

computers to Floren for 20 cars, all the benefits of the trade would be assumed by Guilder

• These terms of trade would not be acceptable to Floren

• Fair negotiations should allow both trading partners to share the economic gains realized through specialization and trade

Terms of Trade• Over a period of time, market prices in the two nations

would also be affected by a trade agreement between Floren and Guilder

• In Guilder, given the opportunity cist, the price of a car should be 20X the cost of a computer• Since cars are available from Floren at the cost of 13.3

computers per unit, the price of cars relative to computers (in Guilder) will be reduced over time

• In Floren, given the increase in the monthly supply of cars, the price of cars should also fall over time

• Imports should help keep car prices competitive in both nations

The Case for Trade Restrictions

• The gains from trade normally benefit both trading partners

• However, historically, arguments have been made for the restriction of trade

• Arguments usually focus on:• The protection of domestic industries

from foreign competition• The protection of the domestic economy

from foreign influence and control

• The following arguments are used to support national policies that restrict international trade

Economic ArgumentsProtection of domestic employment

• Importing goods, without increasing exports, results in the exporting of jobs

• As imports flow into a nation, money must flow out to pay for them• The demand for domestic products is reduced and production

levels decrease• Lower demand and production can slow down economic growth

and create unemployment

• On the other hand, a reduction in imports can stimulate economic activity in a nation and provide more jobs for domestic workers, at the expense of foreign workers

Economic Arguments• Imports produced by…• Low-cost labour in less developed economies• Government-subsidized production in other industrialized nations• …must be restricted from entering an industrialized nation in

order to protect the jobs of domestic workers

• Ex: In 2001, US President George W. Bush imposed ~30% taxes on softwood lumber imports from Canada, in order to protect jobs in the US softwood industry

• Critics are quick to point out that jobs in inefficient industries may be protected at the expense of consumer prices, aggregate productivity, and ultimately, living standards

Economic ArgumentsRetaliation

• When a trading partner adopts a strategy of import reduction to combat domestic unemployment, it is effectively exporting some of its unemployment to the other nation’s economy

• This other nation may try to recapture some of the lost jobs by imposing new import restrictions of its own

• This generally leaves both partners worse off by reducing the benefits of specialization and trade

• Domestic producers often argue that we should not let foreign goods into our country if our goods are excluded from their markets

Economic ArgumentsProtection against dumping

• Sometimes foreign competitors attempt to dump production surpluses abroad to protect domestic prices• Dumping refers to the deliberate practice of selling a product abroad at

a price lower than the domestic price

• Ex: A shirt that sells for $100 in the country in which it was made might be sold to foreign buyers for $50 in order to unload large quantities of stock without affecting the $100 selling price at home• Dumping makes it very difficult for shirt producers in the second nation to

compete• They may not be able to sell their shirts for $50 without incurring heavy

losses

• Trade restrictions can help reduce the frequency and limit the impact of dumping

Economic ArgumentsDiversification

• Trade restrictions can help to diversify an economy whose prosperity is closely tied to the export of a few products or to a single nation• Extreme reliance on a few export products or on a single

trading partner can leave an economy vulnerable to market fluctuations abroad

• Trade restrictions allow for the development of new domestic industries and export markets

• The more a national economy is diversified, the more self-sufficient it will be in times of conflict or crisis

Economic ArgumentsProtection of “vital” industries

• Trade restrictions can also be used to protect national security and public health

• For example, the uncontrolled export of military equipment, biotechnology, and nuclear technology can compromise national and global security if these resources fall into the wrong hands

Economic ArgumentsProtection of developing industries

• Trade restrictions can be used to protect developing, or “infant”, industries from foreign competition

• Because of their recent origin and small size, newer domestic industries may lack the efficiency and economies of scale needed to compete head to head with established foreign producers

• The problem with this argument is the difficulty in determining the point at which a developing industry had had sufficient time to stand on its own against foreign competition

• Critics argue that, under protection, there is no incentive to maximize efficiency, and, therefore, protected “infant” industries never mature

Economic ArgumentsImprovement of terms of trade

• When a nation’s volume of trade is large enough to affect global markets, it can use trade restrictions to improve its terms of trade

• For example, by restricting its exports of petroleum, the world’s largest oil-exporting nation could affect the global market price for crude oil by producing a supply shortage

• By imposing restrictions on its imports, the world’s largest importer of newsprint could decrease the global demand for that product enough to lower the market price

• On a smaller scale, trading partners can impose temporary trade restrictions to help negotiate more favorable terms of trade

Economic ArgumentsProtection of environmental and safety standards

• In order to protect workers and the natural environment, many governments impose industrial standards• These standards vary greatly

• When a nation imposes high standards, this results in increased production costs for domestic industries• These increased costs are generally passed on to the

consumer in the form of higher prices

• Nations with lower environmental and safety standards effectively reduce the operating expenses and product prices of domestic industries

Economic Arguments• If trade restrictions are not imposed on products

coming from nations with lower standards…• Increased globalization will be accompanied by more

incidents of environmental damage and worker injury• Firms will be able to profit from practices that fall well

below the standard of good corporate citizenship

• In a global economy, firms may choose to relocate to countries with lower standards in order to gain a competitive advantage and improve profits

Economic ArgumentsProtection from foreign influence and control

• Trade restrictions can be used to protect key domestic industries from foreign control

• Increased imports results in a net flow of money out of the country• Domestic currency in the hands of foreign investors can

be used to purchase control of chief domestic industries rather than to purchase consumer goods

• Governments may seek to control the flow of currency out of a country by setting restrictions on imports

Economic Arguments

• Cultural industries can be protected from foreign domination

• Two such industries are:• Broadcasting (protected by restricting the

imported content of radio and tv programming)

• Publishing (protected by restricting the use of foreign textbooks in schools)

Economic Arguments

• There are many arguments in favour of restricting trade

• Generally speaking, at the heart of most arguments is the trade-off between global economic efficiency and the political and economic pursuits of a nation

• As the forces of globalization prevail, national agendas will continue to diminish in importance

Impediments to Trade

• At the present time, the volume of international trade is restricted by the 7 impediments outlined in the handout provided

Canadian Trade Patterns

• In order to understand the magnitude and scope of international transactions, we need to clarify further the terminology of trade

• Goods that are grown, extracted, or manufactured in one country and sold to another form part of the global merchandise trade• Also referred to as visible trade because of the tangible nature of

the goods

• The exchange of service, tourism, investment incomes, and other transfers of funds is known as non-merchandise (or invisible) trade• Consists of money flows often without tangible products flowing in

return• More difficult to document and measure statistically due to its

intangible nature


• On a global scale, the volume and value of imports must always equal the volume and value of exports• One country’s imports are, automatically, another country’s

exports

• The difference between the value of merchandise exports and merchandise imports is called the balance of merchandise trade• Will not necessarily be at equilibrium at any given time for

individual nations• A nation is said to have a favourable balance when the value

of exports is greater than the value of imports• A nation is said to have an unfavourable balance when imports

exceed exports


• Most years, the Canadian economy generates a favourable balance of merchandise trade

• However, Canada’s non-merchandise trade typically generates a negative balance• Driven by interest and dividend payments made to foreign

investors, this deficit has been increasing steadily in recent years

• The Canadian economy is extremely dependent on foreign capital to support domestic industrial activity and to carry the large public/government debt

• In 2000, export of travel, transportation, commercial, government, and financial service totaled %58 billion while imports of these services totaled $64 billion



• If we study the major categories of Canada’s merchandise imports and exports for 2000, we can see that almost 50% of our exports are natural resources• Forest products (primarily newsprint, wood pulp, and lumber) and

industrial materials (including chemicals, fertilizer, iron, steel, aluminum, nickel, copper, and precious metals) account for 25% of total exports

• Energy materials (primarily natural gas and petroleum) and food products (including wheat and fish) make up the remaining portion of the resource products group

• The remaining 50% of our export business is primarily made up of manufactured goods, such as motor vehicles and parts, aircraft and parts, communications and electronic equipment, and industrial machinery


• The majority of our merchandise imports in 2000 were manufactured goods• Industrial materials, food products, and energy accounted for less than one-

third of our merchandise imports

• Critics have argued that Canadians tend to sell the world inexpensive, semi-processed natural resources, then buy back these resources once they’ve been processed into final goods by workers in foreign economies• It is claimed domestic jobs are lost because of this practice• It is also claimed that we are risking our future by exporting large quantities

of finite natural resources each year

• This pattern has been improving in recent years• In 2000, almost 50% of Canadian merchandise exports were resource

products• In 1990, it was 68%

Development of Canadian Trade Policy

• During the past 150 years, trade restrictions (most often in the form of protective tariffs) have generally decreased globally, with a few notable exceptions

• The US has greatly influenced the evolution of Canada’s national trade policy• Not surprising given its

historic role as our country’s major trading partner

Fluctuations in Tariff Rates: Highlights

Reciprocity Treaty

• In 1854, the British and US governments signed the Reciprocity Treaty• Established a free trade relationship between what

was then called British North America and the US

• By 1866, this reciprocal agreement had fallen victim to political and economic pressures

• It was canceled, and trade tariffs rose sharply prior to and immediately after Confederation in 1867


National Policy

• In 1879, Canada’s first prime minister, Sir John A. Macdonald, succeeded in passing the National Policy into law

• The main components of this policy were:• The imposition of high tariffs on imported manufactured

goods to help develop and protect domestic industries• The building of a transcontinental railroad (Canadian Pacific)

to open the west for settlement and to promote a strong east-west trading pattern within Canada

• The promotion of Prairie settlement through the provision of free land to settlers


• This “tariff wall” persuaded many US manufacturers to open branch plants on the Canadian side of the border• Could continue selling in Canadian markets without

facing tariffs

• Tariff rates peaked around 1890, after which the prevailing trend was to slowly reduce trade tariffs• This liberalizing trend was primarily driven by the

general economic prosperity of the times and lasted into the 1930s


Great Depression and Second World War

• During the Great Depression of the 1930s, Canada attempted to combat rising domestic unemployment by raising protective tariffs

• Governments in most industrialized nations increased tariffs• Partially to stimulate domestic employment• Partially to retaliate against restrictions imposed on their

products in foreign markets

• In the end, this general decline in world trade hurt the economics of all industrialized nations


• By 1939, the economic crisis of the Great Depression had been effectively addressed• In most industrialized nations, Canada

included, tariff rates had been once again reduced to promote higher levels of world trade

• With the outbreak of the Second World War in 1939, world trade was once again adversely affected• Canadian tariff rates were quickly increased

during the early 1940s


General Agreement on Tariffs and Trade

• Since the global failure of protectionist trade policies during the 1930s, the prevailing trend has been to liberalize trade though a general reduction in tariffs

• In 1947, Canada, the US, and 21 other nations (representing well over 90% of the world’s trade) signed the General Agreement on Tariffs and Trade (GATT)• An international agreement designed to reduce trade barriers

among member nations• Tariffs in member nations fell from an average of 40% in

1947 to an average of 5% in 1988, while the volume of international merchandise trade increased 20X


• The 132-member World Trade Organization (WTO) institutionalized, strengthened, expanded, and ultimately replaced the GATT in 1995• Since then, 12 more

members have joined• Average tariffs

continued to fall

Major International Trade Agreements: GATT/WTO

• Multilateral trade negotiations involve simultaneous agreements among a number of nations

• Bilateral negotiations produce agreements between two nations

• When a nation acts alone, in matters that also involve other nations, the nation is said to be taking a unilateral action


• The most inclusive, sustained, and successful multilateral negotiations to promote global trade were the 8 rounds of GATT meetings that eventually culminated with the establishment of the international institution known as the World Trade Organization (WTO) on Jan 1, 1995


• Like the GATT of 1947, the WTO Agreement operates according to the following 4 essential principles:• Trade must be conducted on the basis of non-discrimination. No

member can give special trading advantages or deny equal treatment to another member

• Once imported products are admitted into a domestic market, they can’t be treated differently than similar domestic products, such as being subjected to more onerous internal taxes

• Where it is given to domestic industry, protection should be extended through clear and quantifiable customs tariffs instead of through fees and charges

• Any country wishing to join the WTO must submit a listing of all presently negotiated tariff levels with member countries and all non-tariff trade restrictions. Thereafter, only reductions can be negotiated


• The WTO’s institutional commitment is to liberalize world trade further through multilateral negotiations

• Where member nations find themselves in dispute over existing trade practices, the WTO Dispute Settlement Body has the sole authority to:• Establish expert panels to consider each argument• Render a ruling• Review appeals to the ruling• Monitor implementation of the ruling• Authorize retaliation when a member nation doesn’t

comply

Regional Trade Agreements

• Given the increased number of nations participating in recent WTO talks, the negotiation process has become far more complex

• Some observers believe that the new trend may be toward more specialized regional trade agreements, such as the Free Trade Agreement between Canada, Mexico, and the US

• These regional agreements, negotiated outside the WTO, are called trading blocs• The WTO recognizes these agreements as complements (rather than

alternatives) in the pursuit of more open trade

• There are presently 3 types of trading blocs• Free trade areas• Customs unions• Common markets


• Within a free trade area, trade between member nations is conducted without tariffs

• Members are allowed to impose separate tariffs on imports from non-member nations

• The North American Free Trade Agreement (NAFTA), which came into effect in 1994, established a free trade area that includes the nations of Canada, Mexico, and the US


• A customs union represents a stronger degree of regional integration

• Includes not only free trade among its members, but also a common set of trade restrictions imposed on the rest of the world• However, restrictions on the movement

of capital and workers among member nations remain in force

• The 12-member Caribbean Community and Common Market (CARI-COM) is an example of a customs union


• A common market is the strongest form of regional integration

• Common market agreements include:• Free trade of goods and services within

the bloc• Free movement of capital and labour

within the bloc• Imposition of a common set of trade

restrictions on non-members

• The European Union (EU) is the largest and most powerful common market• In population and productive capacity,

the EU rivals the economy of the US


• On Jan 1, 1999, the EU took regional integration a bold step further• Introduced a common

currency for 11 of its member nations

• The currency, the euro, has been doing well in foreign money markets since its introduction

The Road to NAFTAAuto Pact, 1965

• Before 1965, a 15% tariff was imposed on American cars imported into Canada• To avoid the tariff, US auto makers opened branch

plants in Canada

• Given the relatively small size of the domestic market, Canadian plants were unable to benefit from economies of scale• As a result, production as less efficient, car prices were

significantly higher, and Canadian auto workers earned less than their American counterparts

The Road to NAFTA

• The Canada-US Automotive Products Agreement (or Auto Pact) was signed in 1965• Established free trade in automotive vehicles

and parts between the two nations

• This integration and rationalization of the auto industry increased efficiency in both nations, protected jobs, increased wages of Canadian auto workers, and reduced the relative price of automobiles

The Road to NAFTA

Free Trade Agreement (FTA), 1989

• After the recession of 1982…• The rising tide of protectionism in the US threatened

to restrict Canadian exports from its major market• Americans were also growing disenchanted with the

Auto Pact, which appeared to have shifted in Canada's favour by the mid-1980s

• In order to improve access to US markets, the Canadian government negotiated a free trade agreement with the US

The Road to NAFTA• The Free Trade Agreement (FTA), which came into effect on Jan

1, 1989, had such provisions as:• Phasing out of tariffs and most trade barriers within 10 years• Freer trade in services• A binding mechanism to settle trade disputes• Retention of the Auto Pact provisions• Elimination of restrictions on the import of used cars into Canada• No export subsidies permitted on trade between Canada and the

US• Elimination of restrictions on energy imports and exports• Easing the restrictions on US investment in Canada (except in

cultural industries such as the media) so that takeovers of Canadian firms with assets less than $150 million are no longer subject to Canadian government approval

The Road to NAFTA• As a benefit of this agreement, trade between the partners

has increased significantly, but there has been costs• Workers in some formerly protected industries lost their jobs

• Trade theory suggests that, in the long term, jobs lost in declining industries should be replaced by expanded employment opportunities in competitive export industries• However, with the global recession of the 1990s and the high

unemployment rates that persisted during the recovery that followed, the hardships imposed on displaced Canadian workers and their families can’t be taken lightly

• Critics argue that an important second cost of free trade is Canada's increased dependence on the US economy and increased US ownership and control of Canadian industry

The Road to NAFTANorth American Free Trade Agreement (NAFTA), 1994

• Signed into effect on Jan 1, 1994, NAFTA established a free trade area with 360 million people and a combined economic output of US$6 trillion• This compares favourably in scale to the 326 million people and

US$5 trillion output of the European Union

• For all intents and purposes, this agreement extends most of the provisions of the FTA to include Mexico• Although Mexico has never been one of Canada’s major trading

partners, imports from Mexico doubled from 1990 to 1996• Unfortunately exports to Mexico remained unchanged• This was much more favourable for the US, since Mexico is its 3rd

largest trading partner, after Canada and Japan

The Road to NAFTA• Advocates of NAFTA are quick to point

out that the Canadian economy could ill afford to stay outside a trade area projected to include most of the Americas by the time it’s complete

• Critics of the NAFTA point to the potential loss of jobs that may occur if businesses relocate to Mexico to take advantage of lower wages and of lower worker safety and environmental standards

• In both Canada and Mexico, the potential for loss of control in cultural industries and the potential for increased US ownership in general continue to raise concern

Documents

Unit 4: The Global Economy: International Trade and Development