Research Paper: Canada International Trade

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[. . .] On the other hand, Globerman said, the modern theory of the multinational corporation stresses the potential need for factor movements, especially the relocation of managers and technical experts, to expedite production rationalization... Since the overwhelming bulk of international trade is carried out by multinational companies (MNCs), foreign direct investment theory suggests that freer trade between Canada and the United States may have increased economic incentives for the cross border movement of skilled labor. (Globerman, 1999)

Globerman observed that laws and regulations that establish criteria and quotas for permanent and temporary immigration would have an important influence on actual immigration patterns. He discussed major changes in immigration laws and regulations implemented by the U.S. And Canadian governments. He reasoned that the net impact of those changes would be to make permanent bilateral immigration more difficult but to lower the costs and difficulties associated with temporary immigration. He then went on to consider the following issues: 1) Has there been a significant increase in bilateral temporary immigration between Canada and the United States? 2) Was any such increase primarily the result of & #8230;increased trade, investment and factor mobility, or did it primarily reflect other factors, such as better earnings prospects in the other country? (Globerman, 1999)

Globerman's examination of the data showed that patterns of permanent bilateral migration had been fairly constant over the past two decades, suggesting that trade liberalization in fact had little impact on permanent immigration. On the other hand, temporary migration under the new visa arrangement introduced by the FTA (the TC visa) and continued under the NAFTA (the TN visa) had increased consistently since the implementation of the FTA. In particular, the migration of Canadians to the United States using the TC/TN visa increased by approximately 3,000 to 4,000 (visas granted) per year. Globerman also noted that the number of American professional workers immigrating temporarily to Canada had also increased consistently since 1989, although at a substantially slower rate than comparable migration of Canadian TC/TN visa holders. Globerman concludes that the increase in temporary migration reflects the adjustments of North American MNCs to trade liberalization. This observation is also consistent with increased bilateral flows of intra-company transferees. (Globerman, 1999)

Globerman concluded his report with a brief assessment of the policy implications of his main findings. While he did not feel that they led to strong or unambiguous conclusions, he felt that they leaned against a growing perception that Canada was suffering a substantial and economically damaging "brain drain." Firstly, the number of temporary migrants had been small, absolutely and relatively. Secondly, some (unknown) portion of temporary migration had been a function of increased integration with the U.S. economy, and that, he reckoned, was a benefit to Canada. Also, some temporary Canadian immigrants had acquired managerial and technical skills in U.S. companies that provided benefits to the Canadian economy when those immigrants returned to Canada. At the same time, the data provided some grounds for concern to policymakers about the labor market environment for highly skilled workers in Canada. In particular, higher after-tax incomes in the United States were an incentive for skilled Canadians to migrate. Leaving aside further discussion of tax reforms, Globerman concluded that the temporary migration of Canadians would be of net benefit to the Canadian economy as a whole. (Globerman, 1999)

Capital Flows

Mack Ott, (2008), Library of Economics and Liberty, has provided a tutorial on international capital flows. The most general description of a country's balance of trade, covering its trade in goods and services, is called its current account balance. If the country has a surplus or deficit on its current account, there is an offsetting net financial flow consisting of currency, securities, or other property claims. This net financial flow is called its capital account balance. (Ott, 2008)

When a country's imports exceed its exports, it has a current account deficit. Its foreign trading partners who hold net monetary claims can continue to hold their claims as monetary deposits or currency, or they can use the money to buy other financial assets, real property, or equities in the trade-deficit country. Net capital flows comprise the sum of these monetary, financial, real property, and equity claims. Capital flows move in the opposite direction to the goods and services trade claims that give rise to them. Thus, a country with a current account deficit necessarily has a capital account surplus. (Ott, 2008)

Canada recorded a positive balance of trade overall in 2010: exports C$407B and imports C$ 406B, and so its capital account was essentially flat. Canada enjoyed a substantial positive balance of trade with the United States in 2007 (C$52B) and 2008 (C$50B), but slipped into the red in 2009 (-C$5B) and 2010 (-C$4B). While the current account and capital account with any given country will not necessarily balance, Canada's capital account with the United States was -- C$16B in 2007, and jumped to +C$60B in 2010.

Capital Markets

Canada and the United States have been walking hand-in-hand in the capital markets for the past four years or more. The Toronto Stock Exchange index and the S&P 500 index in the U.S. have moved in the same direction with the S&P only slightly more volatile on the down side. Both suffered substantial losses in 2008 and 2009, and enjoyed double digit gains in 2010. (See Exhibit 1)

The monetary authorities in both countries have been working from the same playbook. The Canadian real interest rates were: 2007 (2.5%), 2008 (0.8%), 2009 (0.4%) and 2010 (-0.9%).

For the same years the U.S. real rates were: 2.2%, -0.9%, -0.8% and -0.9%. (See Exhibit 1)

Exchange Rate Determination

T. Dung (1998) has presented the following brief on the theoretical determination of exchange rates between any two countries. Long run exchange rates are best explained by factors including real income differentials, inflation rate differentials, productivity changes, and the like. In the short run, exchange rates respond to real interest rate differentials, news about market fundamentals, and speculative opinion about future exchange rates. The nominal interest rate refers to the interest rate unadjusted for inflation. The real interest rate equals the nominal interest rate minus the inflation rate. International investors are especially concerned about the real interest rate. An overvalued currency tends to lead to a balance-of-payments deficit for the home country, while an undervalued currency leads to a balance-of-payments surplus. For the past four years, real interest rates and the exchange rate between Canada and the United States have been essentially at par. (See Exhibit 1)

Exhibit 1

CANADA INTERNATIONAL TRADE

(C$ millions)

2007

2008

2009

2010

Current Account

Exports Canada - USA

427,911

438,852

328,877

361,368

Imports USA - Canada

376,087

388,657

333,591

365,261

Balance of Payments

51,824

50,195

-4,714

-3,823

Capital & Finance Account

Net Flows

-16,083

51,344

60,126

Commodity Price Index

Consumer Price Index

Bank Rate %

4.61

3.21

0.65

0.85

Inflation %

2.14

2.37

0.31

1.78

Real Interest Rate %

2.46

0.84

0.35

-0.93

Toronto Stock Exchange Index

13,700

12,446

10,230

12,091

% Change

-9

-18

18

United States

Fed Discount Rate %

5

3

0.5

0.75

Inflation %

2.85

3.85

-0.34

1.64

Real Interest Rate %

2.15

-0.85

-0.84

-0.89

S&P 500 Index

1,477

1,243

1,129

% Change

-16

-24

20

C$ / U.S.$

1.08

1.07

1.14

1.03

References

CIA World Fact Book, (2010). Retrieved March 17, 2011 from https://www.cia.gov/library/publications/the-world-factbook/

Dung, T., (1998), "Exchange Rate Determination" Wright State University. Retrieved March 17, 2011… [END OF PREVIEW]

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