TOPIC #5

Barriers To International Trade

Barriers to International Business

Purpose of Barriers To help protect domestic businesses and consumers May be used to:
1. help assist a new business getting started 2. protect an existing industry struggling in a competitive global environment. 3. protect consumers from imports with problems or that do not conform to Canadian safety standards.

Barriers to International Business

Barriers include:
1. 2. 3.

4. 5.

Tariffs or Custom duties Non-Tariff barriers Increased costs of importing and Exporting Excise taxes Currency Fluctuations

1. Tariffs

Also called custom duties

One of the most important tools for any government in managing trade with other countries. A form of tax on certain types of imports (goods coming into Canada from other countries)

Companies bringing in the goods from another country to sell in Canada must pay the tariffs.
Tariffs are based on a percentage of the retail value, (i.e. 5% of retail selling price.) or; On another basis (i.e. $6 per kilogram) Money collected goes to the government.

Tariffs
Whose job is it to: 1. monitor Canadian tariff policies? 2. monitor tariff policies of other countries? 3. change Canadian tariff policies to best serve the Canadian economy?

Answer: Finance Canada

Tariffs
Provide an example of when it may be: beneficial for Canada to reduce tariffs on certain goods imported from outside countries? beneficial to increase or create tariffs on certain goods being imported from outside countries?

2. Non-tariff Barriers
Legal and policy standards for the quality of imported goods are set so high that foreign competitors can not enter the market. Examples: A Canadian law forces an international company to apply for a license to do business in Canada (it may be very time consuming and expensive)

Government will allow some goods into the country only after being inspected and having met certain health and safety standards set out by the Canadian Food and Inspection Agency.

Imported Goods That Require Permits, Inspection, or Special Packaging

Imported Goods 1. Endangered animals and plants and products made from them
2. Agricultural and food products 3. Non-food products and clothing precious metals, and radio communications equip.

Government Department__________ 1. Environment Canada

2. Agriculture and Agri-food Canada 3. Industry Canada

4. Fish and fish products

5. Food, drugs, medicines, pharmaceuticals, medical and radiation-emitting devices 6. Hazardous waste, goods that may contain chlorofluorocarbons or lead gas 7. Motor vehicles

4. Fisheries and Oceans Canada

5. Health Canada

6. Environment Canada

7. Transport Canada

3. Costs of Importing and Exporting

Landed Cost The actual cost for an imported purchased item. It is composed of the vendor cost, transportation charges, duties, taxes, broker fees, and any other charges associated with getting the product ready to sell in a foreign market. (another country)
Question If you owned Canadian Tire and had to choose between selling a tool from a Canadian manufacturer or a foreign manufacturer, which one would you select if the quality of both products was equal? a. the foreign tool whose landed cost was greater than the domestic purchase cost or; b. the domestic tool whose cost was cheaper than the landed cost.

Costs of Importing and Exporting

Price of a good sold is based on the following costs among others:

Manufacturing (includes wages); storage; Marketing; Shipping; Advertising Overhead (Equipment, Heating etc, Salaries) % of profit the company wants to make on the sale

Depending on the laws of another country and cultural differences, additional costs may be incurred.

4. Excise Taxes
Excise Tax A tax on the manufacture, sale, or consumption of a particular product produced in your country Governments use excise taxes to: 1. Raise money (i.e tobacco related health care costs) 2. Discourage people from engaging in certain activities 3. Increase the costs of imported goods to encourage consumers to buy Canadian products. Examples of excise taxes: 10 cents per litre on gasoline for the federal government 14.5 cents per litre on gasoline for the provincial government Excise tax on tobacco products varies from province to province

5. Currency Fluctuations

Converting the value of $1 Canadian dollar to US currency and other national currencies.

Examples Nov. 2000 - $100 US $157 Canadian Nov. 2007 - $100 US $98 Canadian
Website to research a history of exchange rates http://www.oanda.com/convert/fxhistory

Factors Affecting Exchange Rates

1. The financial health of Canadas economy versus the US
economy

2. Interest Rates
Example: If the Canadian economy is performing better than the US, the value of the Canadian dollar will increase. The demand for the Canadian dollar rises. Demand > Supply, the value rises. If interest rates are higher than those of other countries while inflation remains fairly stable, the value of the Canadian dollar will increase. Foreigners will be attracted to invest in Canadian funds where banks are providing higher interest rates. Demand > Supply, the value rises.

Information on factors affecting exchange rates: http://www.bankofcanada.ca/en/backgrounders/bg-e1.html

Impacts of Exchange Rates

Canadian economy is largely dependent on the value of imports and exports which can be greatly impacted by the value of the Canadian dollar.

The US is Canadas biggest trading partner.

When Canadian Exports to US > US Imports = Trade Surplus When Canadian Exports to US < US Imports = Trade Deficit
Exports decrease when:
the Canadian dollar increases in value to the US dollar, it makes exports more expensive. the US economy is weak and the CD dollar is increasing, the US will be purchasing less from Canadian businesses

Note: Canadian consumers also tend to purchase more products from the US because the value of the dollar is higher, and goods are often cheaper in the US, thus making imports higher. Result: Less sales revenue for Canadian businesses which in the long run, can end up hurting the Canadian economy. For example, when businesses are earning less revenue, profits decrease and if significant decreases occur, businesses may start laying off employees.