Advantages and Disadvantages of International Trade

Advantages of International Trade

International Trade - Advantages & Disadvantages

International Trade – Advantages & Disadvantages

1. Advantages of specialization and division of labour

It is beneficial in several respects. Important advantage is the division of labour and the consequent specialization. Different regions are endowed with different types of productive agents. It is to the advantage of each nation or region to specialize in the production of those goods for which their factor equipment is most suited.

For example: Britain — rich in iron ores and coal. Middle east countries — oil resources, South east countries — Tin and rubber, India and Sri lanka – Tea.

So countries which have a special advantage of one article can specialize in the production of that article and exchange it for another from another country which is eminently suited. Import which is cheaper than producing that.

2. Availability and cheapness of commodities

Because of international trade the consumers can get access to foreign goods at lower prices. Normally foreign goods are imported because of their relative cheapness in comparison with the prices of domestic goods.

3. Large scale production

Due to specialization, factors of production are put to the best use. Specialization followed by large scale production and introduction of machinery will result in greater output. It also results in stimulating their consumption and demand which cause further specialization which lower the prices of goods and services all over the world.

4. Creation of industrial society

International trade through specialization of large-scale production, usage of machinery and exploitation of natural resources has resulted in the creation of a new industrial society.

5. Stabilization of internal price

With the help of international trade the surpluses of the country could be exported to the other country and the deficits of one country may be made up by imports. This will ultimately lead to stabilization of internal price level.

6. Availability of commodities whose costs of production are high

With the help of international trade, the countries are able to acquire commodities which they cannot produce locally due to the nonavailability of factors of production, insufficient quantity, and due to high costs of production. Europe and Africa could get tea and penicillin, respectively, only because of international trade.

7. Improvement in transport

International trade has resulted in the improvement in the means of transport in all parts of the world.

8. Sovereign remedy in times of war and famine

During times of famine, scarcity and war, international trade enables the people of a country to maintain themselves through import of food, cloth and medicine from abroad.

9. Development of backward nations

With the help of international trade, the economically backward and under-developed countries are able to import machinery and capital goods in exchange for their raw materials, agricultural products and food stuffs.

10. Reduces monopolistic exploitation

The sense of competition enables the domestic producers keep up the standard in the methods of production. There is no fear of monopoly and competition makes the producers keep the prices at a lower rate.

11. Transfer of payment

Foreign trade makes it possible to effect transfer of payments from debtor country to creditor country. The debtor country exports goods to pay for its debts to the creditor country.

12. National well-being

For many nations, international trade is literally matter of life and death. For example: for UK and Japan, it is impossible for them to feed, cloth and house their present population, without imports from other countries. The survival of these countries depends on the exports of their manufactured goods. Costs of self sufficiency will be very high when compared to importing. For Americans, the morning cup of coffee would become a luxury without international trade.

13. Changes in the quality of labour and capital

International trade brings about fundamental changes in the quality of labour and capital in trading countries. Trade changes the quality of the people teaches them to consume new things also use old things in new ways, change in technical knowledge results in specialization etc.

14. Poor and backward nations can become rich and forward

This is possible only due to international trade. Example: OPEC nations [Organization of the Petroleum Exporting Countries] have developed. The vast petrol reserves would have remained unexploited and Middle East Countries would have remained world’s poorest desert countries. Due to international trade, they have become world’s richest nations.

15. Facilitates debt payment

International trade depends on the multi-lateral payment system which makes it possible to effect payments from debtor to creditor countries by enabling the former [debtors] to create the necessary amount of export surplus in the Balance of Trade. Thus there are numerous advantages arising from the exchange of goods between individuals living in different countries.

Disadvantages of Internal Trade

1. Exhaustion of Essential Materials

International trade may result in the exhaustion of essential materials and minerals of a country. Most of the minerals were exported to other countries. If they had been preserved they would have brought better returns to the country.

2. Affects Domestic Industries

International trade may adversely affect the consumption pattern of a country due to the import of cheaply manufactured and at times harmful commodities. Indian handicrafts suffered a severe set back through free trade and unrestricted imports of English textiles.

3. Lopsided Economic Development

Due to the operation of comparative costs, international trade leads to specialization and one sided economic development which is not conducive to the prosperity of the country.

4. Evil Effects of Dumping

Sometimes, certain countries use international trade to dump their goods on other countries with a view to cheapen the value of the latter goods.

5. Dependence on other Nation

Though it ensures higher standard of living for a nation, it makes the countries dependent on foreign markets not for raw materials but also for selling the finished products. This dependence should be reduced or eradicated.

6. Against national Defence

It is argued that a nation which depends on foreign sources of supply lacks defence during the war. Eg: England – during the two world war is cited as a proof. England was blocked by German submarines, which completely blocked the imports of goods and essential raw materials.

7. Instability and Economic Planning

It is a source of economic instability and it stands in the way of national economic planning for development and growth.