Business and Canadian Government Policy: International Trade Policy - Term Paper Example

Business and Canadian Government Policy - International Trade Policy Table of Contents Introduction 3 Thesis ment 3 Rationale and Supporting Evidence 4 Normative Analysis 5 Positive Analysis 5 Economic Analysis 7 Impact on business in Canada 8 Conclusion and Recommendations 9 References 10 Dicken, P. (2003). Global shift: reshaping the global economic map in the 21st century. London, UK: Sage. 10 Kennedy, P. (November 22, 2010). Canadian stock exchanges eye expansion in China. Stock House. Retrieved November 23, 2010, from http://www.stockhouse.com/community-news/2010/nov/22/canadian-stock-exchanges-eye-expansion-in-china 10 Nickel, R. (November 19, 2010). Canada: China inflation fight wont hit farm trade. Reuters: U.S. Edition. Retrieved November 23, 2010, from http://www.reuters.com/article/idUSN1918271220101119 10 Westhead, R. (September 24, 2010). Canada moves towards freer trade with India. The Canadian Press. Retrieved November 23, 2010, from http://www.thestar.com/news/world/article/891659--canada-moves-towards-freer-trade-with-india 10 Appendix 12 Introduction Prospects of globalisation around the world have seen the rising of many low-income nations over time. Countries that were perceived as being underprivileged or deprived had emerged as potential global powers within a very short span of time. Such a development has been possible only due to complete or partial dissolution of trade barriers binding the movements of goods and services between national boundaries. In addition, the nations no longer need to suffice their fundamental needs all by themselves, post globalisation. In fact, they can specialise in producing goods where they enjoy a comparative advantage over others; such a stance can lead to efficient allocation of resources that facilitates cost efficiency as well. Quite surprisingly South-East Asian nations, which had primarily resorted to agriculture as their forte, emerged as global powers engaging themselves in industrial production as well. Such was their evolution in the area that they soon gained a comparative advantage over many chronically known industrial economies, hence capturing a chunk of the market share. Gradually, their potentials came to the forefront and many developed nations, awed by their reserve stocks, decided to enter into pacts with them. Such a nation is Canada that recently has been considering prospects of entering into coalition with South-East Asian nations like China and India. This coalition will target primarily upon digging up new investment prospects in these developing economies. Given the availability of cheap factors of production (that leads to comparative advantage) possibilities of reaping a fat profit margin is supposed to be an almost obvious phenomenon. However, extensive research is necessary prior to taking a step ahead in the area, especially since it involves the future of a nation. Thesis Statement The purpose of the present paper is to evaluate the precision of Canada in its decision of pursuing new trading partners, such as China, India and other emerging economies to enhance economic growth. Rationale and Supporting Evidence Recent political developments between developing nations like India and China with Canada have reported proceedings about Free Trade Agreements between the economies. The US financial crisis has taught Canada a lesson in a hard way about not to depend much upon its neighbour; Canada initially had 60% of its imports and 85% of its exports shipped from and to USA owing to the pact underlying the signing of NAFTA. Post crisis, Canada has decided to switch over its attention to developing economies such as India and China. Moreover, the latter nations too have decided to reduce their dependence on USA, out of fear of losing projects being outsourced from USA that account for an immense proportion of their jobs. In fact, Canada already had indulged in a significant trade partnership with China; China imports a considerable proportion of farm products such as beef from Canada that forms a major fraction of the latter’s export revenues. Its urge to pair up with India is a new one. While China already had been a part of international trade volume of $29 billion to and from Canada, that in case of India had been a meagre $4.2 billion. However, either nations are trying hard to develop their economic ties, as is evident from the statements made by the Canadian Minister of Trade, Peter Van Loan during his recent visit to India – “We have in common a Commonwealth heritage, a language heritage, a similar rule of law system where contracts are respected and you can rely on the courts if you need to, and as many people say, of course, in Canada, you don’t even need to – because you can take a businessman’s word as his bond.” According to Van Loan, India’s possible benefit out of this partial free trade agreement will amount to $12 billion while that of Canada will amount to $15 billion (Westhead, 2010). On the other hand, Canadian Agriculture Minister, Gerry Ritz in his recent visit to China, assessed his intentions of raising the total volume of trade with China to $60 billion by the end of 2010-11 (Nickel, 2010). The primary objective of Canada is to import cheap goods from either of these nations and sell them at Canadian stores. Basically Canada is interested at investing in garments, metals, gems and stones and electrical parts from India, all of which are available in abundance in the latter, accounting for their cheaper rates. India and China aim at spurring up the volume of trade between them from an existing $4.2 billion to almost $12.5 billion over a span of five years (Indo-Asian News Service, 2010). Moreover, such a pact is considered to be of growing importance for the Canadian financial sector as well, that aims at capturing a market share in the transition economies of India and China. In fact, China today is considered as a lucrative market for Canadian financial houses which have commenced their expansion plans in the former (Kennedy, 2010). Normative Analysis Developed nations around the world have shifted their attention towards developing nations. Such a shift of focus is considered to be a wise decision mainly owing to the rich stock of reserves of the latter. Developed nations like Canada had previously been involved in trade with nations which belonged to a similar societal stratum. However, post financial crisis, those very nations realised the need to divulge their attention to the more stable than conceived developing nations. Not only can these nations produce commodities at cheap factor costs, the quality of their produce too, is by no means inferior to those from the ones yielded in developed nations. The main point is that, the developing nations of yesteryear are vying hard to capture a major fragment of the international market, which requires them to improve upon their quality of products. Moreover, given their new entry among the international community, these nations will try hard to compromise as little as possible in quality while keeping their products cost-efficient simultaneously. This is the reason why developed nations like Canada must invest in these nations, significantly. Furthermore, as The Canadian Press has stated, “… in so many corners of India nowadays, even in the midst of a contentious corporate controversy, a promising business opportunity seems to present itself” (The Canadian Press, 2010). Positive Analysis Canada had solely depended upon United States as its potential trading partner, accounting for 65% of the nation’s total imports and being destination to 80% of Canada’s exports. In addition, according to reports presented by Statistics Canada, USA had been the largest investor in Canada with its total investment amounting to $138.8 billion in 2001, almost 72% of total FDI entering Canada. Furthermore, Canada too had been the third largest foreign investor in USA. While USA had primarily been interested in the mining and smelting, petroleum and chemicals industries in the second largest nation in the world, Canada basically targets the manufacturing, trade real estate and financial industries of USA (USA International Business Publications, 2007, p. 26). However, even though Canada still has managed to retain its position as an ideal market for USA, the latter has failed to hold on to its previous name following the recent financial recession. The financial meltdown with its epicentre in USA itself had left the economy distraught with a poor rate of economic growth and a simultaneous deterioration of future prospects. In contrast, the situation had been much under control for many developing nations, especially India and China which contain cheap factors of production. However, either of these nations had initially supported a policy of protectionism that targeted at nurturing domestic industries from foreign competition. Once the doors were opened to the foreigners, both these nations assumed high economic growth rates which had stayed unperturbed ever since apart from a few regional discrepancies. One such financial crisis which engulfed the South East Asian region was the Asian financial crisis of 1997, though the impact had been rather low upon the twin nations of India and China. After the advent of the new millennium when China incorporated a wider range of goods in its export basket, the economic growth rate of the nation leapt up to 10% and stayed so between 2003 and 2007. However, the economic growth rate nominally depreciated to 9% post the financial recession which did not spare even nations remotely located from USA. This growth again had largely been contributed by the international trade regime of the economy; China actually assumed the position of being the third largest exporter in the world in 2006 (Gaub, 2009). India too realised the importance of international trade in materialising its prospects of multiplicative rate of economic growth. Today, the national authorities count the importance of foreign direct investment very highly, to pick up a high rate of growth. The realisation is evident from the enactment of the Competition Act of 2002 which supported the fundamentals of liberalisation (Henry, 2008, p. 7). The adjoining graph shows the trends in foreign direct investment (FDI) inflows and outflows in India. According to the pattern of the graph, investment trends (both inflow and outflow) had sharply increased post 2006, reaching a peak in 2007-08. The figures for 2008-09 however, are incomplete. Similarly, the data for the extent of international trade that the nation had engaged in is found to have soared high as well, over the years. The graph below displays rising trends in India’s exports and imports with a CAGR equalling to 27.8% between 2002 and 2008. To be precise, the rate at which India’s international trade prospects have been improving over time, despite there being a recessionary phase in between, there perhaps lies no misgivings in the nation’s potentials. Economic Analysis Most of the developing nations in the world today have attracted the attention of the developed world due to an increasing concern about the innate potentials of these nations. Moreover, economies which are already developed no longer can produce goods and services at former cheap rates given a hike in their respective standards of living, consequently pushing up the rise in the general price level. This is the reason why the rates of exchange of currencies belonging to the developed nations are found to be higher than those for the developing economies. Hence, at times of a financial crunch, no nation can afford importing goods from a developed nation that still maintains a comparatively higher rate of exchange. In sharp contrast, the developing nations with their huge population base and striving to narrow down their rate of unemployment can produce those very goods at a far lower cost. Cheap costs of labour added with a low rate of exchange is one of the reasons why importing from those nations are far more profitable than that from developed nations. A 2001 report by the World Trade Organisation depicts a global map showing the degree to which developing economies are involved in exports compared to the developed nations. It clearly shows the increasing importance of developing economies in this perspective over time, with a special emphasis on the South East Asian nations (Dicken, 2003, p. 39). The appendix to the paper shows the trends in the movements of the rates of exchange of Chinese Yuan and Indian Rupee against Canadian Dollars. Trends in the movements of US Dollars have also been included for comparative purposes. Though all three currencies are found to have gone cheaper over time, US Dollars have continued to stay higher in value than Canadian Dollars. Impact on business in Canada The impact of entering into international ties with India and China upon Canadian business is perceived to be a good one and one that has the capability of boosting future prospects as well. According to the predictions being made by the Canadian Cabinet as well as national authorities of India, either nation will be benefited out of a partial free trade pact. To put the values in figures, India is perceived to gain close to $12 billion and Canada is supposed to profit by $15 billion out of the agreement if formed. Moreover, Canadian financial houses also claim to benefit out of any such pact if formed with India and China. The main reason being that either of the two nations are the centres of a shifting global economic power; in such a scenario, it will be a wise step to make expansion in the South East Asian region through either of these nations. Hence, there lie scores of future opportunities for Canadian financial houses as well. Conclusion and Recommendations The present paper discussed about the prospects of Canada in its initiative to enter into trade agreements with developing economies like India and China. Canada had for long been dependent solely upon the neighbouring economy of United States for its international trade purposes. The nation used to make 60% of its imports from USA and exported 85% of its produce to the latter. However, following the financial crisis originating in the USA, its total demand for imports from the nation reduced considerably. Similarly, USA did not have ample funds or reserves to produce excess commodities ready for exports, which is why Canada could not import much from USA as well. Such was the sufferance of Canada that the nation decided to shift its focus from USA that seemed to be highly vulnerable to financial crises. Instead the developing economies of India and China, which too had long entered into international agreements with many a developed economy, though not much of Canada, were the ones that now Canada shifted its focus to. These future pacts are believed to be full of promises for either nation, as India and China take another step in approaching the global market and with Canada accounting for similar footsteps. Moreover, given the gradually shifting epicentre of global powers all around the world, such agreements are perceived to be beneficial for the financial houses of Canada as well that aim at expanding to the South-East Asian market of transition economies. However, there are many more arenas that the nations need to cover up prior to entering such pacts. In most of the cases, it is found that the developed nation takes an upper hand in any agreement entered into with developing nations as its co-members. Both India and China need to keep these points in their minds prior to entering into a pact. On the other hand, Canada, which is typically used to consuming goods being imported from developed nations, must watch the traits of consumer demand. Many people might not be comfortable with the idea of consuming products being imported from less-developed or low-income nations. In such cases, Canada needs to prepare the mindset of its population so as to keep the demand for these goods high. In fact, such a measure will reap better results if residents are being properly informed beforehand. References Dicken, P. (2003). Global shift: reshaping the global economic map in the 21st century. London, UK: Sage. EXIM Bank (2009). India’s International Trade and Investment: An Overview (PDF). Retrieved November 22, 2010, from http://www.eximbankindia.com/fore-trade.pdf Gaub, P. (2009). International Trade China: Coal, Oil and Gas. Norderstedt, Germany: GRIN Verlag. Henry, L. (September, 2008). India’s International Trade Policy.(PDF) Retrieved November 22, 2010, from http://www.ifri.org/files/centre_asie/AV9.pdf. Indo-Asian News Service (November 13, 2010). India, Canada start FTA talks. The Tribune: Online Edition. Retrieved November 23, 2010, from http://www.tribuneindia.com/2010/20101114/biz.htm#1 Kennedy, P. (November 22, 2010). Canadian stock exchanges eye expansion in China. Stock House. Retrieved November 23, 2010, from http://www.stockhouse.com/community-news/2010/nov/22/canadian-stock-exchanges-eye-expansion-in-china Nickel, R. (November 19, 2010). Canada: China inflation fight wont hit farm trade. Reuters: U.S. Edition. Retrieved November 23, 2010, from http://www.reuters.com/article/idUSN1918271220101119 OANDA Corporation (2010). Average Exchange Rates. Retrieved November 23, 2010, from http://www.oanda.com/currency/average. USA International Business Publications. (2007). Canada Business and Investment Opportunities Yearbook. Washington, D.C.: International Business Publications. Westhead, R. (September 24, 2010). Canada moves towards freer trade with India. The Canadian Press. Retrieved November 23, 2010, from http://www.thestar.com/news/world/article/891659--canada-moves-towards-freer-trade-with-india Appendix Source: OANDA Corporation, 2010 Read More