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Advantages and disadvantages of international trade

What is international trade ?

 

Generally under the name “international trade” when we search we find everything concerning the organization of trade between two or more countries: international logistics, customs techniques, financing solutions (method of settlement of international operations), management of risks linked to this type of exchange (exchange, tax, legal, political risk, etc.).So there are pros and cons to international trade and we will explore them in this post .

 

The advantages of international trade.

 

1. International trade increases product diversity and therefore consumer choice.

By opening its borders to international trade, a country allows its consumers to access foreign goods whose characteristics are often different from locally produced goods. This is the case for exotic fruits and vegetables that can now be found on the  markets, but it is also the case for goods that one might think more standardized like automobiles: for consumers, German and French cars. , Japanese or Italian do not have the same characteristics (quality, design, performance, etc.) and international trade does allow a wider choice of products. There is therefore intra-branch international trade, cross-trade in similar but not identical products: USA thus exports vehicles to Germany ,

This is explained by the taste of consumers: they want to have the choice between several types of goods and services for a given price range. Each consumer can then value a particular variety of a product: he wishes to consume his “ideal product”. Some will prefer the design of German  cars, others will favor the comfort of American  sedans. Thus, international trade increases the well-being felt by consumers.

 

2.  International trade allows economies of scale and therefore production at lower cost.

This is the second justification for free trade in international trade. From this perspective, international trade still makes it possible to increase the productivity of factors, especially that of the capital factor, not thanks to the specialization of economies, but through industrial concentration.

  • Free trade allows companies to sell more, and therefore produce more and take advantage of economies of scale. The opening of borders to international trade (free trade) allows companies to find new customers on foreign markets. If this is the case, companies to sell more will also have to produce more. This increase in production leads, in many sectors and in particular the industrial sectors, to the achievement of economies of scale and therefore lower production costs. These economies of scale can be explained, in particular, in two ways. First of all, expensive capital investments that generate fixed costs, such as an assembly line, are more widely used, which reduces the average unit cost: fixed costs remain… fixed, but are diluted in a larger volume of production. Then, in mass production, we observe learning effects, and productivity increases in general.
  • The fall in prices linked to economies of scale increases the purchasing power of consumers, which again increases the size of the markets. The reduction of production costs in companies thanks to economies of scale allows the sale prices of goods and services to drop. The purchasing power of consumers therefore increases, and they can buy more goods and services (the same or new products). This increased demand means increasing supply, that is to say production, which further strengthens economies of scale and the possible fall in production prices. So we have a “virtuous circle” that is interlocked between international trade and economic growth.

3. Increasing competition

Individual companies that also have no foreign competitors are likely to have more market power. This enables them to charge higher prices for their goods and services than the actual level of competition. Market power up to the formation of monopolies is a kind of market failure. This requires state intervention. Foreign trade, on the other hand, does not allow this market failure to arise. It promotes competition through the additional foreign companies, which ultimately leads to lower prices.

4. Efficient production through specialization

The traditional and main arguments for free foreign trade are the realization of a trade profit and a specialization gain. Both profits apply to the exporting and importing country. The basis for these profits is the concentration of the trading partners on their comparative cost advantages. This changes the production structure in the country. The companies of the two trading partners concentrate on the production of the goods for which they have relatively lower costs (specialization gain). This allows you to export more of the (inexpensive) and at the same time import other goods at a lower price (trade profit, since lower prices in production and import).

5. Attraction of new investors

If we have previously mentioned that international trade means having a bigger showcase, we must also understand that this great showcase can attract new investors. Especially if, by drawing on new international agreements, we improve our competitiveness and increase the value of our product.

6. Stronger flow of ideas

It is assumed that international trade is associated with the transfer of knowledge and ideas. As a result, foreign trade promotes a country’s technological progress. For example, a poorer country imports computers that it has not (so far) manufactured itself. As a result, the country “learns” about this technology and its possibilities. China is an example of progress through trade and imports. It later manufactured products that it had initially imported as consumer goods. This was usually a pure imitation. The country is now able to further develop such goods itself and to produce internationally competitive products.

7. Generation of economic growth

Trade leads to higher production due to the associated specialization. This applies to both the exporting country and the importing country. For poorer countries, higher production through trade can lead to higher economic growth. Ultimately, higher economic growth also increases the standard of living of the population of the national economy.

8. Boosting the global economy

Developing and emerging countries in particular are benefiting from globalization in the form of increased job opportunities. The economic performance of the individual countries is increasing, which also helps to combat poverty in the long term. In contrast to the so-called import substitute, which ultimately boils down to imposing high tariffs on imports in order to promote the domestic economy, globalization and global trade have made it possible for countries such as India or China to boost their economy in the long term. Globalization can therefore have a positive impact on companies as well as on individuals: The opportunity for companies is to expand to new markets and better opportunities to sell their products and do business.

9. The ability to create new technologies .

Example – iPhone was created from Chinese components. Without international trade, there would be no smart phones based on Android, because Apple was the trendsetter for smartphones.

10. Strengthening political ties .

Problems in import-export can adversely affect political relations, especially if they rest solely on a joint economy. A typical example is China’s trade war with the United States or the conflict between Belarus and Russia. In the latter case, problems in trade between countries exacerbated already existing contradictions in politics.

11. Strengthening the national currency .

International trade  forms a positive image of the state among foreign investors who are willing to invest in other projects, which has a positive effect on the economy and, as a consequence, on the exchange rate of the national currency.

12. Increase tax collection

The amount of taxes collected from buyers is increasing . Consequently, the state treasury has more money that can be used to improve public welfare.

The disadvantages of international trade.

1. Spread of diseases

In today’s increasingly interconnected world, new diseases appear in an unprecedented rhythm that in many cases can quickly cross borders and spread. Since 1967, at least 39 new pathogens have been identified, including HIV and the causes of Ebola hemorrhagic fever, Marburg fever and SARS.Source

International trade and travel has literally opened up new vistas for humans, ranging from travel to exotic places to enjoying the products and services of those distant lands. But along with international trade and travel comes the risk of spreading infectious diseases, a growing problem in today’s global economy, says a researcher. Read more on this research .

2. Losers due to increasing competition

Foreign trade means increasing competition. Because in addition to the domestic providers, there are now also foreign providers. As different countries produce cars, for example, domestic producers compete with imported car companies. In this case, the stronger competition is good for consumers. You have a higher choice and lower price. In this example, however, the domestic company may lose through foreign trade if its competitor is more competitive. On the other hand, consumers are also workers. If you now work in the non-competitive company, this will have a negative impact on your wages. Or the company releases workers. This shows that foreign trade not only produces winners, but also losers.

3. Costs derived from licenses and other regulations

Crossing borders also means changing laws and regulations about our products. The fact that we can find a cheaper supplier on the other side of the world does not depend solely on the fact that the proposed cost (added to the added transport) is less than the cost offered by a local supplier. We must also take into account what the local legislation says and what extra cost may lead to our logistics chain.

Knowing how to anticipate these costs to determine where the good business is and where the error can make the difference between our internationalization strategy being successful or the opposite.

4. Job cuts due to low wage competition

This contra-argument received a lot of attention in science and society around 2007. In fact it is the case that in some countries certain products can be produced more cheaply than in Germany, for example. These are goods that require a large number of workers for their production. That is why wages in this area are lower there. If Germany also produces goods in this area, it is not competitive here. These companies have to shut down or shut down their production, leading to unemployment. The increasing fragmentation of production processes (outsourcing) has also led to countries no longer specializing only in the production of individual goods. But also on certain production sections.

As a result, pressure on wages for simple work has increased, particularly in western countries. On the other hand, Germany, for example, has more than just disadvantages. Because it has advantages in the production of goods that require a relatively large amount of capital. It is up to economic policy to ensure that the released workers receive new and well-paid jobs in the competitive sectors.

5. Language can be a trap

Thinking globally also means thinking that there are many other languages  to communicate in the world. It is true that English in the business world opens many doors today, but there are times when not mastering the local language can end up becoming an expensive barrier.

This does not mean that you must be a polyglot to get benefits from international trade, but it must be taken into account and hire the services of a professional to help you avoid the bullet.

6. Decline in social and environmental standards

The argument is often raised that international location competition leads to a decline in social and environmental status and also in wages. A company settles in the location where it has the best prerequisites for its business activities, i.e. low costs and high earnings opportunities. This means that costs caused by wages or environmental and social requirements are actually an important decision-making factor.

On the other hand, “soft” factors such as the level of training of the employees, the quality of the infrastructure and the performance of the public administration also play an important decision-making role. And the stability of the political and social environment must also be taken into account. If cost factors such as taxes, standards or wages are now reduced, this also has a negative effect on the soft factors. The argument of a competitive downward spiral in wages and standards is therefore only correct to a limited extent.

7 . Exploitation of developing countries

The argument here is that developing countries are so poor because they really only receive very little revenue for their export products. The background to this argument is a discussion of the so-called terms of trade.

This argument actually applied earlier. And is still important for individual export goods from developing countries. Overall, however, you have to make it appear very limited. Because the relationship of terms of trades has developed for most export goods in favor of developing countries. Today they receive more industrial products for their important export goods (eg coffee and raw materials) than before. The exchange relationship has improved for them. This is mainly due to the increased labor productivity in the industrialized countries. As well as changes in supply and demand. However, there are also certain agricultural products where the real exchange ratio for developing countries has deteriorated (e.g. sugar or wheat).

8. Social and labor migration

Does foreign trade lead to “huge migratory movements of workers?” In theory, capital is internationally mobile. In contrast, the workforce is only mobile to a limited extent. Language differences and ties to home are some of the reasons why foreign trade cannot lead to an increased migration of workers. Complete mobility can only be observed for certain workers who are particularly well trained and in demand. According to this argument, labor migration is only possible to a limited extent. Experience with the eastward expansion of the EU also showed that the feared migration of Eastern European workers to the old EU countries did not occur at the time. Respectively. turned out to be very moderate. On the other hand, the so-called refugee crisis has shown that global income differentials and political instability intensify migration.

9. Protection of domestic industry from foreign competition

Protection of domestic industry is done through protectionist measures such as customs duties or import restrictions. The argument is often that domestic industries should be protected until they can compete. This approach of an “educational tariff” harbors several dangers: 1. The protected industries continue to lose their competitiveness because they are no longer under pressure from competition. 2. A protectionism spiral can be set in motion so that all countries introduce protectionist measures. And steadily increase it.

10. Pollution of the environment and destruction of ecosystems

Critics repeatedly emphasize the negative effects that international trade has on the environment. In particular, the high degree of specialization means that goods are no longer completely produced and assembled in one place, but instead that individual parts are manufactured all over the world and then transported around the world. Factories with outdated technology that emit high emissions can also increase the greenhouse effect. Added to this are the economic advances of the emerging countries, which further increase carbon dioxide emissions. The international measures for climate protection are not sufficient from the perspective of opponents of globalization. The so-called free trade or special economic zones are also sharply criticized. There are practically no environmental or occupational safety regulations here: The companies can act here at their own discretion. In addition, there is a theoretically unlimited range of goods with limited demand due to globalization. The result is an overproduction and thus the waste of important resources.

Since the late 20st century global trade  has been increasing exponentially, especially  in the tropical regions which supply important agricultural commodities such as rice , sugarcane . soybeans , oil palm and cassava .  These producing countries are destroying ecosystem at a fast rate as the clear land to meet the world demands. Source  .Source

11. International trade make it hard for start up industries

One of the most important arguments against international trade is the Infant Industry argument, which is in line with Friedrich List’s concept of educational tariffs. List demanded protective tariffs against the then overpowering British industry in the penultimate century in order to promote the development of a German, competitive industry. He assumed that it would be difficult or impossible to build a functioning domestic economic structure if it was exposed to foreign competition from the start. The initial costs would be too high due to the lack of experience of managers and workers.

In order to avoid this problem, temporary customs protection should give the local economy the opportunity to acquire precisely this knowledge and experience. After this learning phase, your own economy should be prepared for international competition. It is important with this view that the protected industry concentrates on the production of the goods, where it has comparative cost advantages. If it is not, it will never become internationally competitive.

So the question arises whether such investments should be made at all if there is a risk that they will not pay off. This danger is to be countered with a protective tariff for the relevant sector (see Wagner et al 1995, pp. 77ff .; Maennig et al 1998, pp.187ff).

12. Conflicts between countries over spheres of influence are possible .

It is difficult to ensure fully mutually beneficial trade, so often the side that feels disadvantaged remains. In the desire to get rid of seeming injustice, economic and even military conflicts are possible. For example, one of the countries may start a policy of protectionism, that is, protection of the national producer from foreign competitors. The problem is that during globalization, a country that does not trade with other states is doomed to degradation.

References 

  1. Arkolakis, C., S. Demidova, P. J. Klenow, and A. Rodriguez-Clare (2008, May). Endogenous
    variety and the gains from trade. American Economic Review
  2. Broda, C. and D. E. Weinstein (2006, May). Globalization and the gains from variety. The
    Quarterly Journal of Economics
  3. Chase-Dunn, C., 2002. Globalization: A World-Systems Perspective, in Preyer, G., M. Bös, 2002. Borderlines in a Globalized World: New Perspectives in a Sociology of the World-System. Kluwer Academic Publishers.

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