Comparison of Canada and Mexico's International Trade

International Trade

Canada & Mexico

Absolute advantage & Comparative advantage

Absolute advantage gives a country an ability to produce goods at low cost in comparison to another country. Canada has an absolute advantage in agricultural production and mining activities due to low cost land. Due to availability of vast land and natural resources Canada also has absolute advantage on gold and crude oil. “Canada remained the largest exporter of total petroleum to the United States in May; exporting 3,265 thousand barrels per day.” (US Dept. of Energy). However, even with having such a competitive advantage natural resources and agriculture. Canada seems to have a major stake in exporting natural resources and agriculture. They are one of the top suppliers for maple syrup and fresh vegetables and grains. Mexico has absolute advantage in production of corn and beans , while it’s comparative advantage is in Horticulture, tropical fruits and vegetables.

Export/Import/ trading partner

Canada major exports are Cars (17%), Planes, Helicopter and/ or Spacecraft (2.6%), Coal Briquettes(2.4%), Potassic Fertilizer (2.3%), Wheat (2.2%), Raw Aluminum (2%). Canada’s Major imports are Cars( 7.4%), Crude Petroleum (4.4%), Delivery Trucks (3.7%), Computers (2.9%), Gold (2.8%), Packaged Medicaments (2.3%). Canada exports its products mainly to the United stated due to proximity and free trade agreement(FTA), accounting for about 79% of exports in 2008. Other major export destinations are China(7%), Japan(3.6%) UK (2.7%) and Mexico (2.5%). Similarly, Canada imports most of the products from the United states(54%), followed by China(14%), Mexico (4.5%), Japan(4.1%) and Germany (3.8%). Mexico major imports are Electronic equipment worth $85.1 billion that accounts for 21.3% of total import; Machines, engines, pumps ($65.6 billion, 16.4%); Vehicles ($35.7, 8.9%); Oil ($33.2 billion, 8.3%); and Plastics ($22.3 billion, 5.6%). Mexico mainly imports items from US that amount to $195.9 billion, China ($66.3 billion), Japan($17.5 billion), Canada($10 billion), and South Korea($13.8 billion).

Mexico major exports are Vehicles($86 billion) that account for 21.6% of total exports ; Electronic equipment’s($80 billion, 20.1%), Machines engines , pumps($60.3 billion, 15.2%); Oil($42.2 billion, 10.6%) ;and Medical; technical equipment’s($14.$ billion ,3.6%).

Mexico top trading partners are U.S, Canada, Brazil, Japan, China, and Spain. Mexico exports approx. $330 Billion worth of goods to US which accounts for 80.3% of its overall exports, $10.7 billion to Canada, $6 billion to China,$ 3.5 billion to Germany, $2.6 billlion to japan, $4.7 Billion to Brazil .

Trade deficit or trade surplus

Trade deficit of Canada in January 2015 was recorded 2451 CAD million due to decline in exports while imports remained unchanged. “Canada’s trade gap increased to CAD 644 million in November of 2014 from a revised CAD 327 million in the previous month as exports declined more than imports. Additionally Canada’s trade surplus narrowed to CAD 99 million in October of 2014 from revised CAD 307 million in the previous month. Exports edged up 0.1% to CAD 44.9 billion while imports increased by 0.5% to CAD 44.8 billion” (Trading economics, 2014).

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Trade deficit of Mexico in Jan 2015 was recorded USD 3248 million from a USD 3182 million shortfall a year earlier due to slow down in export. The cause of decline in export was due to high oil prices . “Mexico’s trade surplus decreased to USD 254 in 2014 from USD 1626 million surplus from previous year due to drop in oil sales”(Trading economics, 2015).

Free trade zone

Canada does not have any Foreign Trade Zones as such like other countries, instead they have programs which offer some of the traditional FTZ benefits to importesr and exporters . There is no physical location where tradition FTZ benefits are offered that not available elsewhere. “Theoretically, all locations have equal access to the range of federal programs that make up Canada’s FTZ-like package. This package includes a series of programs that seek to replicate the benefits of actual FTZs without any of the locational constraints.”

Trade embargo

Canada has placed sanctions against number of countries and even against specific individual and entities that are supporting any kind of terrorist activities. Canada maintains its own list ofbanned terrorist entities, including al-Qaeda, that are subject to specific Canadian restrictions, including a freeze on their assets and a ban on all fundraising activities. Canadian sanctions are imposed under the United National Act or Special Economic Measures Act for countries including Belarus, Burma, Central African Republic, Cote d’ Ivoire, Democratic Republic of the Congo, Egypt, Eritrea, Iran , Iraq, Lebanon, Liberia, Libya, North Korea, Russia, Somalia, South Sudan, Syria, Tunisia, Ukraine, Yemen and Zimbabwe.

Tariffs , quota, voluntary export restrains or any other restriction

Canada mostly uses ad valorem tariffs with a duty valuation of Free on Board (FOB). “Import duty is calculated exclusively on the value of the imported goods… In addition to duty, imports may be subject to other taxes such as GST (General Sales Tax), PST (Provincial Sales Tax), or a combination of both known as HST (Harmonized Sales Tax) depending on the type of importer and province”(Imported Duty & Tax). The duty rate are between 0% and 35%, the average rate imposed is 8.86%. Canada’s average tariff rate on non-agricultural products will be 4.9 percent somewhat higher rates than those of Japan, the United States, and the EU. Canada’s APEC “Individual Action Plan” provides that Canada will phase in reductions in effective tariff rates on 714 items by 1999 and another 64 items by 2004. Canada had quantitative restrictions. Canada was among many countries that restricted raw log exports (Rytkönen 2003). Canada imposes tariff rate quotas in agricultural products. As per Export and Import Act, Canada control imports of textiles and clothing, steel, wheat, barley and their products, supply-managed farm products (dairy, chicken, eggs, turkey), firearms and suchlike, and a few miscellaneous items. Other control products includes Agriculture, Firearms, Logs, Military and strategic goods and technology, softwood lumber, steel , textiles an d clothing, united states origin and miscellaneous exports. Canada also imposes restriction on investment on certain service sectors such as telecommunication, transport services, broadcasting, and financial service.

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Even though Mexico has an agreement with the U.S. and Canada, many businesses in Mexico trade with other countries internationally for a cost. According to the International Trade Organization (2012), “Products from the United States that do not qualify under the NAFTA rules are subject to Mexico’s MFN rates of duty…Mexico applies percent ad valorem duties on the c.i.f. (cost, insurance and freight) value of imports” ((OTEXA) Market Reports/Traiffs, 2012). For example, textile tariffs range from 0-30%, while the overall “average duty rate at 13.97%” (Import duty & taxes when importing into Mexico – DutyCalculator Help Center).

Mexico prohibits imports of certain items as well as imposes quota on agricultural products such as sugar corn , wheat , etc. Mexico also applies specific tariff quota for toys, games and sports items. “ Companies under the PROSEC program enjoy a preferential tariff of 0-5% when importing goods or specific raw material from non NAFTA countries. Mexico prohibits the export of certain goods including product of animals origin, plants, narcotics and archeological goods” (Foreign Market Access Report 2010). Mexico government requires import and export license prior to any kind of tax exemption or preferential tariff. “The foreign investment law of Mexico prohibits foreign investment in 11 Industries including petroleum, petrochemicals, electricity, nuclear power generation radioactive minerals, telegrams and postal service. Mexico limits foreign equity ownership to 25% in transportation services and up to 49% ownership in insurance, bond , financing institute and franchised companies”(Foreign Market Access Report 2010).

Specific industry give protects

Canada being the second largest country area wise, its economy heavily depends on agricultural and natural resource. The Canadian Agricultural and Fishing Industry produce a wide range of products including: “grains, wheat, red meats, dairy, poultry and horticulture, both domestically and for export. Agricultural and fishing industry government receives government subsidy and support. These government programs provide anywhere from $390 to $5,000,000 in funding for small businesses”(canadagovermentgrants.org).

Mexican government offers export subsidies on certain agricultural products such as sugar. “In addition to the export subsidy, Mexican producers also benefit from preferential government loans coupled with debt restructuring and forgiveness, government cash infusion to cover operating shortfalls, and government grant programs to finance inventory, exports and inputs”(Hayes, 2014)

Special taxes or subsides on foreign investment

Canada offers incentive programs to promote FDI. Canada is the most cost effective place to do business because they have low corporate income tax rate, which is about is 13% yet below what rate is charged in the US. Canada and its province support various industries and offers incentive “through outright grants, interest-free loans, risk-sharing arrangements, and various investment tax credits. Each province has the jurisdictional responsibility for human resources development, and training subsidies are made available through the various provincial agencies”(Area Development.com,2012)

After implementation of NAFTA, Mexico gives favored nation treatment to the U.S and Canada for setting up operation or acquiring firm in Mexico. “ U.S and Canada companies have the right under NAFTA to international arbitration and the right to transfer funds without restrictions.”

Does the country have a floating exchange rate, fixed rate or pegged exchange rate

Canada has a flexible/floating exchange rate system that offers greater independence in the conduct of monetary policy and better insulation from external shocks. “There is no set (fixed) value for our currency in terms of any other currency. The exchange rate for the Canadian dollar against the U.S. dollar, and indeed against any other currency, floats and is determined by the demand for and supply of Canadian dollars in the foreign exchange market” (Bank of Canada, 2012). “Banks don’t intervene in foreign exchange markets except in very exceptional circumstances”. Before 1994, Mexico had predetermined/fixed exchange rate controlled by the central government in order to stabilize inflation rate . However financial crisis of 1994-95, forced Mexico to adopt floating exchange rate due to pressure in the foreign exchange rate market.

Immigration policy

Canada old immigration system was more controlled and policies were not in favor of applicants whose ethic origins were not European. However, Canada’s new immigration system emphasis on employer led system and selection is merit point system that rewards applicants with education level, fluency in English or French and work experience. . “The government tried to please employers by sharply increasing the number of foreign workers allowed in temporarily” ( The Economist,2015)). It’s a way to fill low and semi skills jobs where Canadian is least interested to take. Express Entry Program is another way an immigrants can become permanent resident quickly , which is point based where “those with the highest scores will be quickly invited to apply for permanent residency under one of three economic entry programs” (The Economist, 2015). Immigrants can also get temporary or permanent residency under family reunification category. Besides that Canada has refugees program and several temporary work program including those for seasonal agricultural workers, live-in caregivers, and construction workers that allows admission immigrants to Canada . Recently lifted its target for new permanent residents from 265,000 a year to 285,000( The Economist, 2015).

Mexico immigration policy has become bit liberal in 2011 when Mexican government passed a Migrator act that guaranteed the equal treatment of migrants and protection of migrant human right, simplified entrance and residency requirements, established family based temporary or permanent residency . Under Mexican Law , the punishment of illegal entry reduces from up to 10 yrs in to maximum fine of 5000 pesos.