What is Integration of markets and economies?
Also known as Globalization. Integration of world economies is the presence of
trade blocs reflects the accelerating pace with which nations are integrating their
economies. For example, NAFTA is a free-trade bloc consisting of Canada, the
United States and Mexico. The EU groups 25 countries, while APEC (Asian Pacific
Economic Cooperation) consists of 21 nations forming a free-trade zone around
Integration of world markets is the notion that consumer preferences are
converging around the world. Organizations are increasingly marketing their
goods and services worldwide. Though local modifications may be made to tailor
the product to the local consumer, there is a push toward global products. On the
other side, production is increasingly becoming a global affair. Businesses will
set up operations wherever it is least costly to do so.
Globalization can be considered a process that is expanding the degree
and forms of cross-border transactions among people, assets, goods and
Globalization refers to the growth in direct foreign investment in regions
across the world.
Globalization reflects the shift toward increasing economic
interdependence: the process of generating one, single, world economic
system or a global economy.
What is free flow of goods/services, capital and labour?
Free flow of goods/services, capital and labour refers to the removal of trade
barriers. Trade barriers are government-induced restrictions on international
trade. For example, tariffs, taxes, import/export licenses, subsidies, embargo, etc.
When these are remove, which they have been in some parts of the world (i.e.
NAFTA), this is refers to as free flow of goods/services, capital and labour. This is
done to increase foreign countries to do business easier with the country
without trade barriers. Free trade is based on the objective of open markets,
where a level playing field is created for businesses in one country to compete
fairly against businesses in other countries for the sale of their products or
What is a Multinational Corporations?
A multinational corporation is a type of global business, which engages directly
in some form of international business activity, including such activities as
exporting, importing or international production. A business that has direct
investments (whether in the form of marketing or manufacturing facilities) in a
least two different countries is specifically referred to as a multinational
corporation. In other words, MNCs are business enterprises that control assets,
factories, etc., operated either as branch offices or affiliates in two or more foreign countries. An MNC generates products or services through its affiliates in
several countries, and it maintains control over the operations of those affiliates,
and manages from a global perspective.
What are some benefits and threats?
Encourages economic development
Offers management expertise
Introduces new technologies
Provides financial support to underdeveloped regions of the world
Encourages international trade through a company’s access to different
markets: it is relatively easy to produce goods in one country and
distribute them in another country through a subsidiary or foreign
Brings different countries closer together
Facilitates global co-operation and worldwide economic development
MNCs do not have any particular allegiance or commitment to their host
Profits made by an MNC do not necessarily remain within the host
country but may be transferred out to other locations depending on
where the MNC feels the funds are most needed
Decision making and other key functions of MNCs may be highly
centralized in the home country, so that even though other operations are
performed in the host country, they do not necessarily include things like
research and development and strategic planning
Difficulty in the ability to control and hold MNCs accountable can create
serious ethical concerns for the host country.
What is International Trade?
International trade essentially involves the purchase, sale or exchange of goods
or services across countries. This can be distinguished from domestic trade,
which involves trade between provinces, cities or regions within a country.
What is Mercantilism?
(The trade theory underlying economic thinking from the period ranging from
about 1500 to 1800 is referred to as mercantilism). Mercantilism, essentially, is
the economic policy of accumulating this financial wealth through trade
surpluses. Trade surpluses come when a country’s exports exceed its imports,
which lead to more money entering the country than leaving. What is Protectionism?
Trade protectionism is about protecting a country’s domestic economy and
businesses through restriction on imports. Why might imports be a threat to a
country’s business and economy?
1. Low-priced foreign goods that enter the country could compete with
goods already produced here and, in effect, take business away from
domestic producers. The ultimate consequence may be loss of sales and
loss of jobs for domestic industries that are unable to compete with these
2. A country that imports more than it exports will have a negative balance
of trade, or a trade deficit, which often results in more money flowing out
of the country than flowing in.
What are Tariffs?
A tariff is essentially a tax placed on goods entering a country. Specifically,
protective tariffs are intended to raise the price of imported products in order to
ensure that they are not less expensive than domestically produced goods.
Three situations in which governments often impose tariffs:
To protect fledgling domestic industries from foreign competition.
To protect aging and inefficient domestic industries from foreign
• To protect domestic producers from dumping by foreign companies or
governments. Dumping occurs when a foreign company charges a price in
the domestic market, which is "too low". In most instances "too low" is
generally understood to be a price, which is lower in a foreign market
than the price in the domestic market. In other instances "too low" means
a price, which is below cost, so the producer is losing money.
What is an import quota?
Import quota is a trade barrier, which limits the amount of a product that can be
imported. The reasons for this restriction are the same: to help ensure that
domestic producers retain an adequate share of consumer demand for this
What are subsidies?
A subsidy is an assistance paid to a business or economic sector. Most subsidies
are made by the government to producers or distributed as subventions in an
industry to prevent the decline of that industry (e.g., as a result of continuous
unprofitable operations) or an increase in the prices of its products or simply to
encourage it to hire more labor (as in the case of a wage subsidy). What are the problems with protectionism?
Restrictions on imports can be self-defeating, given that other countries will act
in a similar manner and reduce their imports. Consider the case of Canada,
where large portions of our raw materials are exported. Can it restrict imports
from countries that are similarly purchasing our products?
Trade Agreements and International bodies
One of the most ambitious programs designed to encourage free trade was
established way back in 1948 with the founding of GATT (the General Agreement
on Tariffs & Trade), which was an agreement among approximately 100
countries to reduce the level of tariffs on a worldwide basis. And it did encourage
a gradual reduction in trade barriers. In 1995 the WTO, in effect, took over the
management of the global trade system from GATT. Its mandate is, essentially, to
develop and administer agreed-upon rules for world trade, and discourage
protectionist laws that restrict international trade. Other organizations exist
whose purpose is also to assist nations or the global economy. For example, the
International Monetary Fund (IMF) was established after World War II to
provide short-term assistance in for of low-interest loans to countries
conducting international trade and in need of financial assistance. The World
Band was established at the same time to provide long-term loans to countries
for economic development projects. Typically they would borrow funds from the
more developed countries and offer low-interest loans to underdeveloped Third
Regional Trading Blocs (EU, APEC, ASEAN)
The three major regional trading blocks are the European Union (EU), Asia-
Pacific Economic Cooperation (APEC), and Association of South-East Asian
NAFTA is a trade agreement with objectives to remove trade barriers between
Canada, the United States and Mexico.
Aimed to produce a common market among the members.
Increase the level of trade between Canada and the United States. Canada
and U.S. trade increased by about 75% since the establishment of FTA.
NAFTA’s Impact on Trade
Increase the level of trade between Canada and the United States. Canada
and U.S. trade increased by about 75% since the establishment of FTA. Canada’s merchandise trade with the US increased by 80% in the first five
years of the NAFTA, and Canada’s trade with Mexico increased by 65%,
reaching 271.5 billion dollars and 1.4 billion dollars.
Exports of Canadian goods to the US were approximately 17% of GDP in
the 1980s, prior to NAFTA
Exports grew from 25.7% to 43.2%, while imports grew from 25.7% to
NAFTA helped transform the three economies while creating synergies that go
far beyond economic prosperity. The agreement produced real net benefits for
workers and consumers of the three countries. The total merchandise trade
between the US and Canada has grown by over 120% and when you include
trade in services, the growth has been closer to 140%.
On the other hand, critics of free trade have said:
Any trade improvements witnessed over the last decade may be more
attributable to Canada’s then relatively low dollar than due to results of
NAFTA has encouraged us to become too dependent on trade with the US
Canada needs to expand trade with other nations rather than relying
solely on NAFTA.
NAFTA’s Impact on Canadian Employment and Business
Foreign competition forces domestic businesses to improve their
operations and improve their products and services
Protecting domestic business amounts to discouraging competitiveness
and innovation and, ultimately, will lead to job losses, given the inability
to remain competitive in world markets
Free trade encourages countries to abort inefficient operations and focus
on the relatively stronger commodities or services in which they have a
competitive or comparative advantage
Many Canadian manufacturers cannot compete with the US imports, and
are forced out of business
Jobs losses arise from US companies deciding to shit down their Canadian
subsidiaries and exporting their tariff-free goods to Canada
Many manufacturing jobs are lost in Mexico, given that country’s
relatively cheaper labour and, hence, lower-priced goods NAFTA’s Impact on Canadian Culture
The agreement is not signing away Canada’s cultural heritage, any more
than the European Community forced European nations to lose their
Free trade will encourage the destruction of a unique Canadian culture
Increasing foreign domination of the Canadian economy will transform
Canada into a pure economic subsidiary of the US
Publishing and broadcasting industries are threatened by American
competitors and the increasing presence of American-based media.
The presence of the US in areas like the Canadian entertainment industry
would pose a serious threat to the transmission of Canadian culture.
NAFTA’s Impact on Canadian Competitiveness and the Canadian Consumer
One of the central objectives of the FTA was to encourage Canadian
business to become more competitive through exposing Canadian
businesses to greater competition from American business.
Canadian consumers are given more choice and are exposed to
competitive products with free trade
Canadian companies that require inputs from US businesses can now
obtain them more cheaply, and pass these savings to the consumers
Canada cannot afford to ignore the US market
NAFTA has not encouraged any increase in productivity. Canadians have
been able to match US productivity rates for the past 20 years, and have
produced at rates that are equal to about 80% of the output of workers in
the United States
NAFTA has not reduced the productivity gap between Canada and the US
Our good record of exports has come about largely because the relatively
low value of the Canadian dollar has med our goods cheaper in the past.
What are revenue taxes?
The intent of revenue taxes is to collect money in order to help fund government
services and programs. Revenue taxes include individual taxes as well as
corporate income tax, along with property tax and sales tax.
What are restrictive taxes?
Restrictive taxes are primarily aimed at controlling or curbing the use of specific
products or services. Crown Corporations
A Crown Corporation or public enterprise is an organization accountable,
through a minister, to parliament for its operations. Crown corporations may be
federal (e.g., Canada Post) or provincial (e.g., the Liquor Control Board of Ontario
Why do we have them?
To implement public policy that includes protecting or safeguarding
To protect industries deemed to be ital. to the economy (i.e. the Canadian
Radio Broadcasting Commission was established by the Canadian
government in 1932 to administer a national broadcasting service in
order to prevent Canadian broadcasting becoming inundated with
material originating in the US.
To provide special services that could not otherwise be made available by
private business. For example, Trans Canada Airlines (Air Canada) was
established in 1930s, after observing that no private business was willing
or able to provide domestic air services.
To nationalize industries that were considered to be “natural
monopolies,” including the generation and distribution.
Benefits and Disadvantages of Crown Corporations
Crown corporations can be both good and bad. Yet there are more positive than
negative effects of crown corporations. For example, crown corporations provide
high quality services such as public health care and free education. If these
sectors were to be privatizing there would not be any public health care or free
education. However, crown corporations are not only good, as they don’t face
competition, which is one of the main sources of success.
Which sectors of the economy should be controlled by the Government and
which should be left to the private sector?
In my opinion the health care, education, and military/defense sector should all
be controlled by the government as it is the fundamentals of the country.
Furthermore, these are sectors that almost define a country and are very
important to a country. In countries such as Canada should keep it the way it is
with a mixed economy as it has been proven to be the most effective way. Yet, in
Third World countries privatization of crown corporations would have an
positive impacts as it would increase the competition.
Regulations Government economic regulation has been defined as “the imposition of
constraints, backed by the authority of a government, that are intended to
modify economic behavior in the private sector significantly.”
Perfect competition describes markets such that no participants are large
enough to have the market power to set the price of a homogeneous product
Imperfect competition is the competitive situation in any market where the
conditions necessary for perfect competition are not satisfied.
One of the central objectives of government regulation is to protect the public
interest. Instead of having established its own public enterprise, government can
control the operations of a private enterprise through regulations. Consequently,
what we see in some areas of business in government regulation of business
through commissions, tribunals, agencies and boards. The government has also
established a competition policy to control the nature of competition in the
business sector. This is intended to stimulate open competition and eliminate
any restrictive business practices with the aim of encouraging maximum
production, distribution and employment opportunities.
The term “bailout” refers to government assistance given to prevent an
organization or industry from financial collapse. A bailout is when a bankrupt, or
nearly bankrupt, business is given more “liquidity” in order to meet its financial
A government would usually enter into a bailout if the failing company is very
large company and consequently whose failure would cause negative
repercussions for the economy.
Government assistance to business in form of subsidies has significant
implications in the global business context. Subsidies have been identified as
either cash payments, low-interest loans or potentially reduced taxes. Subsidies
are usually given to assist domestic industry to compete against foreign
I believe that large corporations that have large impacts on the countries
economy should be government subsidize if needed. However, I don’t believe
that foreign countries such as in the case of GM where Canada gave GM 10 billion
dollars. I believe so because subsidies should only be given to domestic corporations that would decrease the current net income of a country if they
would go bankrupt.
I also believe that the government should be allowed to bail out large
corporations that are failing if the cost won’t be too large (general public having
to pay for it). However, if the general public suffers or looses in the long-run
because of the bail out then it should not be done. There should be a method of
evaluating whether a bail out will be profitable in the long-run or not and the
government should make their decision from there.
Government Subsidies in a Global Context
1. Nurturing Young Industries
a. The infant-industry argument asserts that government should help
a young industry to grow and develop by ensuring that the
industry maintains a dominant share of the domestic market until
it is mature enough to compete against foreign competition.
i. Such protection can discourage domestic industry from
increasing competitiveness and engaging in innovation
2. Encouraging Direct Foreign Investment
a. The action of reducing foreign imports may result in the foreign
business directly investing in the target country instead. That is, a
foreign company can decide to set up business in the targeted
country if it wishes to gain access to that country’s consumer
market and it is unable to achieve that with imports
3. Maintaining Favorable Balance of Trade
a. Trade surpluses come about when a country’s exports exceed its
imports; more money is entering the country than leaving.
4. Protecting Domestic Business from Unfair Competition
a. There is a concern among some businesses that foreign
competitors will offer their products at extremely low prices as a
means of monopolizing their share of the target country’s market.
b. A foreign competitor who manages to export the products at such
low prices may be accused of dumping – which is pricing the
product below the cost or below the cost of the target country’s
5. Maintaining Adequate Levels of Domestic Employment
a. A government knows that society holds it responsible for ensuring
the unemployment rates are not high. Imports that come to
dominate an industry bring the threat of causing domestic
industries to go bankrupt. Consequently, where businesses claim
they are under threat of bankruptcy due to foreign competition, the government is forced to consider what action it can take to
combat this threat.
6. Offering Subsidies to Compete Globally
a. Whether it is for the purpose of maintaining employment levels or
of assisting businesses in the global marketplace, the issue of
government subsidies to business has become much more
controversial in the context of globalization.
Should the Canadian government protect Canadian corporations from
foreign ownership? (See Toronto Star Article handout)
Core assets and industries should be protected
National security, cultural industries, servicing unprofitable and remote
Head offices in Canada will ensure that jobs, R&D, spending on suppliers
and related services (law, consltg & acctg firms, IBs…) also remains
Corporations are driven by profit not nationalistic motives
Protected firms are less efficient, productive, innovative, competitive…
and costs to consumers are likely increased
Violates spirit and letter of free trade laws and agreements and may invite
More competition, lower prices, better service…