International trade and multinational

Running head: INTERNATIONAL TRADE AND MULTINATIONAL BUSINESS
Title of assignment: Country Case Study on Trade Theories and Patterns
Choice of country/case study: Canada
Student Number
Module Name and Number
Word Count

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Introduction
Canada is one of the highly developed economies of the world. Its GDP in 2018 was
$1.71 trillion USD (Statista 2020). The total natural resources of Canada has been estimated to
$33.2 trillion USD in 2019, with the third highest reserve of petroleum reserve. That makes
Canada world’s fourth largest exporter of petroleum and natural gas (Wits.worldbank.org 2020).
Canada holds 13th exporter rank and 12th importer rank out of 119 countries, and in the list of
trade balance, it holds the rank of 97 (GlobalEdge, 2020). In 2018, the country’s total export was
$449.14 billion USD and total import was $458.78 billion USD. Its top five trade partners are the
USA, China, the UK, Japan and Mexico (GlobalEdge, 2020). This essay aims to conduct a
discussion on the trade pattern of Canada by applying different trade theories to examine the
suitability of the trade theories in explaining the trade data and trade pattern of Canada. It will
also present a discussion on the trade partners of Canada and the major trade products or services
to highlight the explanatory power of the trade theories in regards to the existence and growth of
international trade in Canada.
Trade data of Canada
In the past decade, the trade performance of Canada has shown fluctuations. According to
World Integrated Trade Solution (WITS) (2020), during the period of 2008-2018, the trade
volume of Canada fell significantly in 2009 as an effect of the global financial crisis. Although,
the export and imports recovered in 2010-11 and since then, it remained mostly in between $450
billion and $475 billion. The trade volume dropped again in 2015-2016 due to a large fall in the
commodity prices during this time, which rose again during 2016, helping the resource exporters
and importers. However, during this period, service trade recorded expansion, with export of
services grew 4.8% and imports grew 2%. Among the commercial services, the biggest absolute
increase happened in the exports of telecommunications, and computer and information services,
reflecting an optimistic development for the industry. Thus, in 2016, the trade deficit for
products widened while the deficit for services narrowed (Global Affairs Canada 2020).
Figure 1: Imports and Exports of Canada, 2008-2018

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(Source: Wits.worldbank.org 2020)
According to the data by WITS (2020), the top trading partners of Canada are the United
States, China, Japan, Mexico, UK, and Germany, among which, maximum export and import
transactions occurs with USA. Canada is the member of North American Free Trade Agreement
(NAFTA), due to which the trade volume with the other member countries, that is, the USA and
Mexico are very high.
Figure 2: Top 15 trade partners of Canada
(Source: Wits.worldbank.org 2020)
It shows that maximum trade occurs with the USA. Apart from that, the import volume is
higher than export from China, Japan, Mexico and Germany. The following table shows the
export and import volume as a percentage of total export and import of Canada.
Partner Countries Export (% of GDP) Import (% of GDP)
United States 75.10% 51.10%
China 4.75% 12.70%

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United Kingdom 2.80% 1.54%
Japan 2.22% 2.83%
Mexico 1.41% 6.18%
South Korea 1.01% 1.59%
Netherlands 0.82% 0.75%
Germany 0.81% 3.20%
India 0.72% 0.86%
Hong Kong 0.67% 0.06%
Belgium 0.62% 0.75%
France 0.59% 1.21%
Italy 0.52% 1.51%
Norway 0.41% 0.38%
Brazil 0.38% 0.92%
Table 1: Top 15 trading partners of Canada
(Source: Wits.worldbank.org 2020)
It can be seen that 75% of the total export goes to the USA, while 51% of the total import
originates in the USA. While 4.7% export goes to China, it imports 12.7% from China.
The major products that are exported and imported are shown in the chart below.
Figure 3: Top products for import and export of Canada

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(Source: Wits.worldbank.org 2020)
It can be seen the highest exports are done for oil and mineral fuels, followed by motor
vehicles and parts, and industrial machinery. On the other hand, the major imports are the motor
vehicles and parts, industrial machinery, electrical machinery, plastics, pharmaceuticals, and
precision instruments.
The products as a percentage of the total export and import volume is shown in the table
below.
Major products for trade Export (%) Import (%)
Oil & Mineral Fuels 22.10% 8.02%
Motor Vehicles & Parts 13.50% 16.40%
Industrial Machinery 7.68% 15%
Items nesoi 4.55% 2.13%
Precious Stones & Metals 3.93% 1.91%
Wood 3.18% 0.67%
Plastics 3.03% 3.71%
Electrical Machinery 2.98% 9.79%
Aircraft 2.37% 1.83%
Aluminum 2.23% 0.98%
Paper 1.78% 1.24%
Pharmaceuticals 1.75% 2.73%
Ores 1.75% 0.70%
Oil Seeds 1.68% 0.24%
Wood Pulp 1.68% 0.09%
Iron & Steel 1.63% 1.73%
Cereals 1.60% 0.20%
Precision Instruments 1.57% 2.74%
Furniture 1.29% 2.04%
Fertilizers 1.23% 0.30%
Iron & Steel Articles 1.21% 2.36%
Table 2: Top Export and Import products (% of total)
(Source: Wits.worldbank.org 2020)
Analysis of trade theories
From the presentation of the trade volume, trade partners and the major trade products
and services, it can be said that Canada has specialized in exporting those goods in which they
have comparative advantage, such as, petroleum and natural gas, motor vehicles and parts, items
nesoi, precious stones and metals, while it imports those products in which Canada does not have
comparative advantage, such as, motor vehicles and parts, industrial machinery, and electrical
machinery. According to the Mercantilism theory of trade, the government regulates the
economy and international trade for promoting the domestic industry at the cost of the trade

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benefits of other countries. It is often associated with strict import restriction policies, increasing
gold stock and protecting the domestic industries (Weingast 2018). It is often contradictory to
free trade. However, Canada is not only a member of NAFTA, but also has FTA with Israel
(CIFTA), Chile (CCFTA), Costa Rica (CCRFTA), European Free Trade Association (CEFTA),
Peru (CPFTA), Korea (CKFTA), Ukraine (CUFTA), Honduras, Panama, Jordan, Columbia and
EU (CETA) (Government of Canada 2020). It has been observed that Canada has liberal trade
policies promoting international trade. Hence, it does not follow mercantilism.
Theories of absolute and comparative advantage in trade indicates the production
efficiency of a country and gain competitive advantage on the basis of that. According to David
Ricardo, A country gains absolute advantage in a good when it uses less resources for producing
the good than other countries and it is often the outcome of the natural endowment of a nation.
On the other hand, comparative advantage is gained when a nation can produce a good at lower
cost in terms of other goods, that is, opportunity cost (Morales Meoqui 2019). A country should
produce goods in which it has absolute advantage, which in case of Canada is the petroleum and
mineral gas products, and those goods, in which its opportunity cost is the least. Using these two
concepts help increasing international trade among countries, which contributes in economic
growth and well-being of people (Levchenko and Zhang 2016). Thus, from the trade data and
pattern of Canada, it can be seen that over the years, the trade volume has increased significantly
and it exports 22.1% of Oil & Mineral Fuels, indicating its absolute advantage. Canada has
comparative advantage in items nesoi, precious stones and metals, and wood products, and
hence, export percentage of those goods is higher.
The Heckscher-Ohlin (HO) model explains that international trade is the outcome of the
difference between the countries in terms of relative factor endowments and difference between
the commodities in their relative factor intensities (Cavusoglu 2019). Endowments of the factors
of production, that is, land, labour and capital, create comparative advantage for a country, and
based on that the nations are categorized as labour abundant or capital abundant. Similarly, the
products and services are categorized as labor intensive or capital intensive based on their factor
intensities. Hence, if a country is labour abundant, it should produce labour intensive products to
gain comparative advantage by producing cheaper products and trading those (Zhang 2017). In
case of Canada, it is a capital intensive county, and the major export product portfolio contains
capital intensive industrial products.
New Trade theory (NTT) explains that the patterns of international trade is highly
dependent on the substantial economies of scale and the network effects between the major
industries. These two factors can outweigh the effect of comparative advantage. The theory is
particularly useful when there is not much distinct difference between two economies in terms of
opportunity cost, however, a country can gain economies of scale and other types of network
benefits in a particular good or service from the specialization (Yamarik 2018). Secondly, it also
says that, the firms that can enter early in the market, can become a dominant player due to
substantial economies of scale, and this can lead to monopolistic competition. This theory can be
used to explain Canada’s higher import volume for the motor vehicles and parts and industrial
machinery (de Lange, Walsh and Sheeran 2018).
Intra-industry trade theory explains the trading of similar type of products and services
which belong to the same industry (Madeira 2016). In international trade, it is often observed

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that same or similar products are both exported and imported, as seen in case of the top export
and import products of Canada. This type of trade occurs due to inter-industry specialization.
The Gravity model of international trade explains the bilateral trade flows are dependent
on the economic sizes and the distance between two countries. Jan Tinbergen in 1962 proposed
that current GDP and economic proximity are two major factors that often determines the trade
costs and volume of bilateral trade. It can explain why some countries have large bilateral trade
volume with neighboring countries or with countries with similar GDP level (Kuik, Branger and
Quirion 2019).
Conclusion: Discussion on which trade models/theories are the most and the least successful
in explaining the data
From the evaluation of the above mentioned trade theories and the trade data of Canada,
it can be said that the theories of absolute and comparative advantage, Heckscher-Ohlin (HO),
Intra-industry trade theory and the gravity model of international trade are the most appropriate
models for explaining the trade data of Canada. The major export occurs in the product, in which
it has natural endowment and other products are capital intensive, depicting the capital
abundance of the country. The top imports and exports of similar products can be explained
through intra-industry trade model, and the gravity model is suitable for explaining the top
trading partners of Canada. Highest volume of bilateral trade of Canada occurs with USA, which
is the neighboring country of Canada, and also has one of the largest GDP’s of the world. The
second major bilateral trade partner is China, which is again one of the largest in terms of GDP
and has economic proximity.
On the other hand, mercantilist theory and new trade theory are not suitable to explain the
trade pattern of Canada, as the country is a member of numerous FTA, which is quite an opposite
concept of the mercantilist theory and the trade data also does not reflect the existence or
dominance of economies scale in the products that are traded.

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References
Cavusoglu, N., 2019. The chain version of Heckscher-Ohlin theory correctly predicts US trade
flows!. International Economics, 157, pp.170-178.
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