Canada's economy has historically had a foundation in international trade. The U.S. remains the country's strongest and most familiar partner, but in the last few years, Canada has focused on growing its trading partnerships, looking to Europe and Asia with a focus on China.
In September 2019, Canada exported nearly $50 billion in goods.1 While the outlook on the global economy softens due to trade embargoes, growth in Canada continues to hover at 2% with the Bank of Canada choosing to keep its key interest rate at 1.75%. The unemployment rate remains low, wages have increased in some sectors and the housing market (while it has its challenges) is still strong, all pointing to a still-resilient economy. In addition, the Canadian dollar has been sitting between 74-77 cents against the U.S. dollar, which is seen as an advantage for Canadians looking to sell their goods abroad.
Bolstered by a sturdy domestic economy, entrepreneurs are in a favourable position to expand their businesses internationally. In this post, we take a look at the features and advantages of international trade for Canadian entrepreneurs, the importance of international trade on Canada's economy and factors that could affect this growing aspect of business.
Features of international trade
International trade, like the name implies, is the trade of goods and services across different countries. There are several multilateral characteristics that lead to the rise of international trade.
- Geography-based resources and industries. Thanks to the location of various countries, their strata and climate, as well as technological advancements and innovations, labour strengths and entrepreneurial skills, specific countries or regions may excel in certain areas of production. Examples of this in Canada are oil and natural gas, machinery, gems and precious metals and lumber.
- National policies and treaties, including government intervention. This includes policies on taxes, manufacturing, imports, exports, quotas on productions of various industries, tariffs applied to imports and exports and even whether certain industries are naturalized or privatized.
- Currencies. Certain currencies are stronger or weaker than others, which can affect the risk involved in trading. But can also become an advantage. For example, the lower value of Canada's dollar against the U.S. dollar means it's often advantageous for Canada when it comes to exports. Currency exchange fluctuations can also have a big effect on international transactions and a business' ability to operate efficiently on a cross-border basis.
- Balance of payments. This is the record of all international trade made by a country. Developing countries, for example, may import goods and services to improve their infrastructure. If they can't balance their imports with exports and have to borrow to continue importing goods, they are said to be in a balance surplus. If they export more than they import, the country has a balance of payments surplus. This is good because a surplus supports economic growth and the exporting of goods usually means the manufacturing ecosystem is doing well, which could lead to ongoing job creation.
Factors affecting international trade
Countries participate in international trade because there are significant advantages to their international and domestic economies, as well as for their citizens.
- Subsidies for importers. Some governments subsidize domestic companies, which helps them produce goods at a lower cost than their competitors. As the cost of the product is low, they create a higher demand for them. The Canadian government offers logistical and financial support to businesses that are looking to expand their international trade.
- Tariffs. Along with subsidies, some governments impose restrictions on imported goods, more commonly known as tariffs. This was seen in 2018 with the U.S.' tariffs on Canadian steel and aluminum. The idea behind tariffs on imported goods is to protect a country's internal production of similar or the exact type of goods. The tariffs inflate the cost of importing goods so customers would buy the lower-priced, locally made goods instead, supporting the industry.
- Income. There is a formula known as the "import function," which essentially means that the larger the size of a country's national income and the more open it is, the more imports come in due to demand from citizens who can now afford to make such purchases. As incomes rise, the consumption of goods does the same, which usually means an increase in the demand for imported goods.
- Currency and exchange rates. Since currencies have different values against each other (U.S. vs. Canadian dollars, for instance), it can be advantageous for the lower valued currency because it can sell more products. However, when it comes to importing products, the lower rate means spending more.
- Transportation logistics. International trade often means delivering physical products via air, land and ocean freight. Many companies must enlist the services of an international logistics partner in order to effectively manage the planning and execution of delivering goods from one location to another.
Scope and importance of international trade
Despite the growing movement toward nationalization and protectionism, international trade is important to companies and, as such, to the economy. One of the biggest advantages is that international trade helps an economy grow stronger, reducing poverty levels and offering better standards of living to its residents, that includes more and better employment, as well as the ability to purchase goods that may not be locally available due to climate and geography.
The effects of international trade are both micro and macro. Companies benefit from it, and the effect ladders up to the economy at scale.
- Maximizing use of raw materials. From lumber, oil, gas and more, Canada has an abundance of raw materials for which there is international demand. Countries that need these products will import them, creating a demand for exports. This is known as the Heckscher–Ohlin model (H–O model), which states that countries will produce and export the goods that use "abundant local factor endowments."
- More choice for consumers. When it comes to goods and services, international trade has given consumers greater choice and variety. Clothes made from all over the world, from all price points, are available in local stores, and the demand for foreign cars means there are plants in Canada set up to produce them, leading to increased employment of the local populace. The demand for oil, one of Canada's top exports, means high employment in that and related sectors.
- Greater efficiency and specialization with economies of scale. New trade theory states that it's more important to pursue specialization. This specialization leads to economies of scale (higher output leading to lower production costs, which can lead to lower costs to consumers). Because of specialization, China is the go-to country for iPhone manufacturing and exports.
- Development of related industry sectors. No industry is an island, it's more like an archipelago, with one industry often spawning other industries that support it. The oil and gas industry has service industries that support it, for instance, such as housing, insurance and transportation.
The two viewpoints of international trade
International trade certainly has its benefits and proponents but as with all grand theories, there are detractors and opposing viewpoints. Several of these views rest on the level of control that should exist on international trade. This often boils down to free market or trade vs. protectionism.
- Free market takes the laissez-faire approach, letting the market make its own adjustments automatically based on supply and demand. The idea behind this is that the automatically supply and demand of goods will ensure production is efficient. This doesn't take factors like labour and safety into consideration.
- Protectionism removes the laissez-faire approach and applies more regulation to international trade. The belief is that regulations can help remove market inefficiencies. Protectionism can be seen with tariffs, quotes and subsidies.
There is no right or wrong answer about international trade. It's vital to weigh all aspects of your company and industry when it comes to developing your business and growing it beyond your country's borders.
Learn more about how businesses are dealing with international trade challenges with the support of American Express
This article is intended for general informational purposes only and does not constitute legal advice or an opinion on any issue. It should not be regarded as comprehensive or a substitute for professional advice.