Barriers to International Trade

Tariffs A tariff is a tax imposed by the local government on goods or services coming into a country. Tariffs increase the price of the imported product. This protects local businesses from low-priced products in other countries.

Jogging Pants Let’s say you could buy jogging pants from a Canadian producer at $15 a pair. You could import a similar pair from China for $5. If the government put a tariff of $10 on each pair of imported jogging pants – which you have to pay when importing them – it would now cost you $15 even for the imported ones.

Encouraging trade We protect jobs in our country when we encourage Canadians to buy locally produced items. A tariff put on imported items does that. Conversely, lowering a tariff can motivate and encourage trade on certain products and with certain countries. What if there was a tariff of $100 on all television sets, except ones from Korea?

Currency Fluctuations Every nation or group of nations have their own currency. The rate given by one country for another country’s currency is called the exchange rate. The rates are set when major transactions take place. (Often when large amounts of currency are traded between the major banks.)

The fluctuating value of currency can be a major barrier to trade. Let’s say a company decides to buy $2,000,000 CAD worth of wine from Italy. If the rate of the Euro shifts 4 cents (it now cost 4 cents extra to buy a Euro) – the company will have to pay an extra $80,000 to get their wine! That may have been the expected profit for the whole order!

Devalued Currency When a currency of a nation devalues, it is worth less than it was before in comparison to other currencies. This stimulates other countries to buy from that nation. If their currency could buy $100 worth of goods from a country – when that country’s currency devalues – one could now buy $120 worth of goods.. (but still pay the same price)

$100 (exchange rate of 100% or 1.0) $ 110

CurrencyExchange rate Canadian Dollar 0.9984 USD US Dollar 1.0016 CAD Euro 1.3106 CAD British Pound 1.5675 CAD Japanese Yen 0.0128 CAD Feb 14, 2012 01:55 PM ET http://www.cbc.ca/news/business/

Activity Download and print from our class website ‘Exchange Rates and International Education’ – Complete these two sheets. Also read ‘6 Factors that Influence Exchange Rates’ – Online at http://www.investopedia.com/articles/basics/04/050704.asp#axzz1l2riuGhW