Business Creation in Canada Research Paper

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Canada International Trade

International trade accounts for a dominant share of the Canadian economy, led by exports of natural resources. Exports accounted for approximately 25% of Canada's GDP in 2010. Agricultural, energy, forestry and mining exports accounted for about 58% of total exports. Machinery, equipment, automotive products and other manufactured goods accounted for a further 38% of exports. The United States is by far its largest trading partner, accounting for about 75% of exports and 51% of imports (followed by China 11% and Mexico 5%.) Canada's combined exports and imports ranked 8th among all nations. Canada recorded a positive balance of trade overall in 2010: exports C$407B and imports C$ 406B. Canada enjoyed a substantial positive balance of trade with the United States in 2007 and 2008, but slipped into the red in 2009 and 2010. (See Exhibit 1) (CIA, 2010)

Among the world's wealthiest nations, Canada has the ninth largest economy, and is a member of the Organization for Economic Co-operation and Development (OECD) and Group of Eight (G8). The Canadian economy is dominated by the service industry (71%), which employs about three quarters of the working population (2010 estimate: 19 million people). Canada's unemployment rate in 2010 was 8% of the workforce, compared to 9.7% in the United States. Canada is unusual among developed countries in the importance of the primary sectors, with logging and oil extraction being the two most significant. These primary industries are dwindling in importance to the overall economy. Only about 4% of Canadians are employed in these fields, and they account for 6.2% of GDP. Canada is alone in the world of rich nations as a net exporter of energy. (CIA, 2010)

Government Influence on Trade

The Canadian government supports the expansion of foreign trade through international treaties and agreements. In 1989, Canada and the United States signed the Free Trade Agreement (FTA) which eliminated many tariffs and taxes on goods that were traded between the two nations. As a result, trade increased by 50% before NAFTA superseded the FTA in 1994. (Encyclopedia of the Nations, 2010)

Owing to the success of the FTA and NAFTA, Canada entered into similar agreements with other nations, namely Costa Rica, Israel, and Singapore. In 1997, it initiated a version of the FTA with Chile. This agreement was designed to prepare Chile for eventual entry into NAFTA. Canada is a member of a number of international economic organizations including the WTO, the Free Trade Area of the Americas, and the Asia-Pacific Economic Cooperation (APEC) forum. (Encyclopedia of the Nations, 2010)

Canada v. United States

Although generally friendly on the trade front, the United States and Canada have disagreed on a number of areas. When disputes arise between the two nations, they are usually submitted to international bodies for resolution, usually the WTO and NAFTA. A major fisheries dispute, centered on the Gulf of Maine, was settled by the International Court of Justice in 1984. In 1990, the United States and Canada signed the Fisheries Enforcement Agreement that was designed to discourage illegal fishing. This was followed by the 1999 Pacific Salmon Agreement that settled disagreements over salmon fishing. (Encyclopedia of the Nations, 2010)

The Canadian government has erected significant barriers to free trade in the form of restrictions on the ownership of companies headquartered in the country. Foreign individuals and companies are limited to 25% ownership in Canadian airlines and 20% ownership of telecommunications companies. They are also restricted to 49% stakes in commercial fishing ventures. (Encyclopedia of the Nations, 2010)

Owing to the potential dominating influence of American culture, Canada tries to preserve its traditions from being overwhelmed by the United States. For instance, the Canadian government kept cultural industries such as movies, music, or literature out of the NAFTA agreement. In addition, the provincial government of Quebec requires that all products marketed in the province be labeled in French, and throughout Canada both French and English are used in packaging and labels. While 90% of all imported goods enter Canada without any form of tax or tariff, certain products face tariffs that range from 0.9% to 13%. The highest level of tariff is applied to goods such as vegetables, cut flowers, sugar, wine, dairy, poultry, textiles, clothing, footwear, and boats. These tariffs apply to 35 different countries. (Encyclopedia of the Nations, 2010)

Free Trade Agreement

Daniel Trefler, of the University of Toronto (1999), has assessed the impact of the Canada-U.S. Free Trade Agreement on Canadian manufacturing during the period 1989 -- 1996. For the most impacted industries, the tariff eliminations reduced employment by 18%, output by 12% and the number of firms by 12%. For all manufacturing the respective numbers were four percent, two percent, and four percent. The tariff cuts raised labor productivity at a compounded rate of 3.2% per year for the most impacted industries and at 0.6% per year for all manufacturing. Trefler concluded that "the effects of the FTA tariff concessions are smaller than one would imagine from the heat of the debate." (Trefler, 1999)

Impact of NAFTA

The North American Free Trade Ageement (NAFTA) is a trilateral free trade deal that came into force in January 1994, supplanting the FTA. Lee Teslik (2009) of the Council on Foreign Relations saw that the main theme of the agreement to be the elimination of the vast majority of tariffs on products traded among the United States, Mexico, and Canada. The terms of the agreement called for these tariffs to be phased out gradually, and the final aspects of the deal weren't fully implemented until January 1, 2008. The deal swept away export tariffs in several industries: agriculture was a major focus, but tariffs were also reduced on items like textiles and automobiles. NAFTA also implemented intellectual-property protections, established dispute-resolution mechanisms, and put into place regional labor and environmental safeguards. Trade relations among Canada, Mexico, and the United States have broadened substantially since NAFTA's implementation, though experts disagree over the extent to which this expansion is a direct result of the deal. According to data from the office of the U.S. Trade Representative (USTR), the United States' chief negotiator in foreign trade and a major booster of NAFTA and other free trade accords, the overall value of intra-North American trade has more than tripled since the agreement's inception. The USTR adds that regional business investment in the United States rose 117% between 1993 and 2007, as compared to a 45% rise in the fourteen years prior. Trade with NAFTA partners now accounts for more than 80% of Canadian and Mexican trade, and more than a third of U.S. trade. (Teslik, 2009)

Canada has experienced economic growth since NAFTA's implementation. In fact, Canada has seen the strongest gains of the three partners, though Teslik finds it difficult to attribute direct causation, particularly given that Canada and the United States had the FTA before NAFTA. Canada's GDP has grown at a faster rate than either Mexico's or the United States' since 1994. Between 1994 and 2003, Canada's economy showed average annual growth rates of 3.6%, compared to 3.3% in the United States and 2.7% in Mexico. Canadian employment levels have also shown steady gains in recent years, with overall employment rising from 14.9 million to 15.7 million in the early 2000s. Even Canadian manufacturing employment held steady, despite the "productivity gap" between the Canadian and U.S. economies. U.S. labor productivity has consistently outpaced Canada's, and the gap has broadened since NAFTA was put in place. (Teslik, 2009)

The Foreign Affairs and International Trade Canada team offers another view of the impact of NAFTA. They note the already impressive growth of Canadian exports since the FTA came into effect on January 1, 1989. But then, Canadian exports to the United States increased by 80% in the NAFTA's first five years, rising from $151 billion in 1993 to $271 billion in 1998. As shown in Exhibit 1, in 2010, Canada exported $361 billion to the United States, down from the $438 billion in 2009. Trade in machinery and transportation equipment continues to be at the core of the commercial relationship between Canada and the United States. Since the FTA and subsequently the NAFTA were implemented, Canadian exports to the United States for manufactured and industrial goods, with their higher value -- added components, have steadily increased. Similarly, Canada continues to be the main destination of exports from the United States, with Canadian imports from the U.S. reaching $365 billion in 2010, having increased 78% during the first five years of the NAFTA. (Foreign Affairs, 2011)

Factor Mobility

Labor Mobility

Steven Globerman of Western Washington University (April 1999) discussed and evaluated the relationship between trade liberalization and the migration of skilled professional and managerial workers in the Canadian context. In particular, he considered whether and how the Canada-U.S... Free Trade Agreement (FTA) and the North American Free Trade Agreement (NAFTA) may have affected bilateral flows of permanent and non-permanent immigrants between Canada and the United States. (Globerman, 1999)

Globerman referenced classical economic theory, which predicts that trade and…[continue]

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