Today’s world is more connected than ever in human history. Several factors played an important role in making this a reality. One such factor is international trade, where goods and services are exchanged between countries. The country imports, where they receive goods from abroad, and exports, where they send them across the border. International trade provides endless opportunities for businesses. While it can increase the variety of products made available in the local market, it can also make countries dependent on others. This brings us to the advantages and disadvantages of international trade.
Advantages of international trade
International trade increases global welfare and allows businesses to expand their target market. These are other pros of trading between countries:
1. It lowers the production costs
In international trade, some countries can produce products at a large scale while at the same time keeping their production costs low. This allows them to export these products to different countries. The countries where the cost of domestic products is higher than the imported ones are more likely to choose this option. Additionally, when the demand for the imported product rises, their production increases too. Eventually, the per-unit cost of production falls with the rise in the scale of production.
2. International trade fosters cooperation among nations
The countries involved in international trade co-operate with other countries for promoting their domestic economic prosperity. With this in mind, even when the conflict occurs, they seek cooperation and compromise, avoiding conflicts. Additionally, there is the International Monetary Fund (IMF), a financial institution that encourages international trade by fostering cooperative monetary policies among nations. Moreover, it is observed that partners in international trade are more likely to support each other in economic downturns or financial difficulties. This shows the cooperation between nations that international trade brings.
3. It leads to technological progress
We cannot thank technology enough for making our lives more convenient. Even international trade has a role to play in technological progress. Since many businesses can launch their products in the market, the competition has increased. To stay ahead in the market, businesses invent the best technologies to get a competitive edge. That way, the pool of Research and Development experiments increases, thereby making it easier to choose the best technology and drive technological progress quicker.
4. International trade facilitates large-scale production
The countries across the globe are endowed with different resources. This allows them to make the most out of them and specialize in distinct products. With specialization, countries produce those products on large scale, which are then exported to other countries around the world. The primary reason for them importing specialized products from others is that making those products is more expensive than importing them.
5. It makes a variety of products available to consumers
Most products available in the market are imported. Without imports, the options in products were limited. International trade not only increases the variety of products made available to the consumers but also offers them at cheaper rates. This further allows consumers to purchase more products without having to spend more. In other words, international trade stretches consumers’ purchasing power.
Along with increasing the variety of available products, international trade increases productivity. This happens when domestic businesses are exposed to foreign firms in the market. While it expands the competition, it also gives domestic businesses access to the best resources to use as inputs. Furthermore, it allows them to learn from foreign producers, which further boosts their productivity.
Disadvantages of international trade
The exchange rate risk is associated with international trade, which might lead to potentially serious problems. The following are several downsides of international resource trading:
1. It contributes to the depletion of resources
International trade can easily increase the demand for products. When that happens, more natural resources are used to fulfill the demands. Also, because of it, the global welfare level increases, allowing people to purchase more products. The boost in the consumption level of more goods further contributes to the shortage of resources. Considering some resources are non-renewable, using them for the production process will result in a deficiency. This can impact their production in the future.
2. International trade widens trade gaps
International trade may lead to a trade deficit, in other words, it may broaden the trade gaps. This happens when the value of imports exceeds the value of exports in a country over some time. If a country is unable to increase the value of its exports, it needs to borrow from foreign countries to keep importing products. These foreign products can be essential items used in the everyday life by the population.
The failure to earn from exports will hamper the country’s ability to finance essential imports. For instance, developing countries export primary commodities and import manufactured goods from developed countries. In such cases, the trade gap is large, and the trade balance mostly remains in favor of developed countries.
3. It negatively impacts small local businesses
While international trade is a great opportunity for large businesses, the same is not true for small businesses. Firstly, because of foreign products in the market, small local businesses may lose their competitiveness. Secondly, large companies can expand their territories with international trade, whereas small ones may not have the financial resources to achieve this. Lastly, if more foreign competitors enter the local market and provide better products and rates to the consumers, the small local companies may go out of business in the long run.
4. It makes countries overdependent on others
As we showed earlier, international trade lets countries specialize in distinct products and export them across the globe. When a country imports a lot of specialized products from abroad, it becomes overdependent on others. The countries exporting products can dictate prices and the countries importing them have to pay them. This is especially true when there is a lack of alternatives, forcing countries to abide by the exporters’ decided prices. To clarify, the exporter’s decisions might not be in favor of the importing countries’ national interests.