International trade has plenty of potential drawbacks which need to be considered carefully by businesses and governments.
The potential disadvantages from trading internationally include:
1. Domestic companies going out of business. When domestic companies cannot compete with stronger international rivals, some of them will lose customers. It will result in loss of output produced and the quantity sold, which may consequently result in loss of jobs. International trade might be a serious threat especially to new businesses which may find it impossible to survive against competition from existing importers. This will prevent new industries from growing as well.
2. Putting the country at risk of overdependence. Strategic goods for a country include food and water; transportation; coal and natural gas; or even semiconductors. If the country relies too much on imports of very important strategic goods, in case of any disturbance in supply, or stoppage, this could put the safety and stability of the country at risk. As not enough products would be available for its own citizens in case of any military conflict or natural disaster.
3. Implementation of the comparative advantage principle takes too long. In theory, a country should focus on making goods which the country has a comparative advantage in, or specializes in. However, changing from making goods that cannot compete with imports to those in which the country has a comparative advantage will take a very long time. For example, becoming a global leader in olive oil or wine production, learning about bottling and international sales may take as long as a few generations.
4. Currency depreciation. If the value of imports exceeds the value of exports for several years, it will lead to severe trade deficit. A trade deficit occurs when a country does not produce everything, and needs to buy products from foreign countries. If a country does not have enough earnings from exports, it will need to borrow from other countries to pay for those imports. So, having trade deficit requires financing by foreigners. At some point, the country may end up not being able to finance imports of essential foods to feed its population.
Here is an article ‘Why does a trade deficit weaken the currency?’ from Federal Reserve Bank of San Francisco that explains the connection between trade deficit and currency depreciation.
Indisputably, international trade offers consumers around the world easier access to a variety of products. There are also other benefits of international trade.
When trading internationally causes too many problems, some governments try to control the amount of international trade by using tariffs, quotas and embargoes. When these controls are officially imposed on trade, it is becoming trade protectionism, that may even lead to the trade war.
