Disadvantages of Trade

Trade, or the transfer of ownership of goods and services from one person/entity to another, is a concept that has been around since prehistoric times. It dates its origins from circa 150,000 years ago. Trade has come quite a long way since then, expanding across regional and national boundaries. It has become one of the major components of global commerce and an integral part of every individual’s life.

Ever since Mercantilism as a school of thought came to prominence in the 16th century, there has been an increasing focus on trade as a way of governance and means to further the national economy. The mercantilists believed that government control over foreign trade was the path to bring about prosperity in the nation and exert their financial dominance over the world. They promoted the accumulation of gold reserves (often referred to as ‘bullionism’) and followed an aggressively export oriented trade policy. Through trade subsidies and import duties, it was the cause of frequent European wars. Though this school of thought lost popularity towards the end of the 18th century with free trade and classical economics emerging as the new favourites, some elements of mercantilism can still be found in the governance and policy making style of many a country. China for instance imposes considerable trade barriers to the inflow of foreign products while simultaneously providing export subsidies to promote their export oriented industries. This is corroborated by the fact that its current account surplus in 2007 was 10.6 % of its GDP in 2007, maintaining its steady value until it fell to 5.2% of the GDP in 2010 as a consequence of the global recession. 

Though trade has brought an astounding degree of comfort and convenience in our everyday lives, there are some notable disadvantages of trade. These issues while in no way suggest that trade should be curtailed, do show how and to what degree things can go wrong if we indulge in excesses. Some of the major drawbacks and problems that have arisen as a result of foreign and domestic trade are expressed in the following paragraphs.

Threat to indigenous products

Trade between states and countries eventually begins to dissolve boundaries and integrate economies. However, whether this is beneficial or not depends on the perspective that it is looked at with. For the local artisan whose survival depends on the popularity and sale of his goods, the mass flooding of domestic markets with cheap, foreign substitutes is not a welcome change. The ease with which trade makes the exchange of goods possible has an expansionary effect on some markets while making some others collateral damage. As an example, the East India Company, the first British company to start trade with the East, established trading channels with India. They took with them cotton, silk, spices and other raw materials from India and used India as a market for their finished products as well. This ‘dumping’ of cheap, foreign goods in the Indian markets discouraged the local, indigenously produced goods from finding a substantial market.

In addition to seizing the livelihood of hundreds of local artisans and merchants, trade also brought about much imbalance within the nation as local farmers started producing cash crops like spices and indigo specific to the requirements of the foreign traders, neglecting the essential food crops in the process. Thus trade can result in structural unemployment due to the inability of the local workforce to find employment in growth industries, making government assistance necessary.

This leads up to the next segment which concentrates on the unevenness caused by excessive trade practices. International trade has made scarce commodities more accessible in countries across the globe. Europe, the world’s biggest importer of food is said to impose productivity restrictions due to the easy availability of imported food. This suppresses agricultural production in Europe and increases its dependency on imports.In the long run this could seriously compromise the food security of the European nations. This event has an overall butterfly effect as increasing demand for food crops in Europe compels farmers in the exporting (mostly developing) countries to utilise forest areas and other protected zones for the purpose of farming. Thus it brings about an adverse environmental and physical effect in developing countries.

Unfair Advantage

Providing an "unfair advantage to some" is also a disadvantage of trade, lets look this in detail. As pointed out earlier in this article, some countries stay true to the mercantilist school of thought and prefer to maintain positive balance of payments and import substitution. Though most countries have adopted a free trade and anti-protectionist policy, developing countries continue to support their need to protect certain industries and incentivise production within them in order to promote economic growth. Thus countries such as Brazil, India and China offer various advantageous policies on production in specific industries such as hardware manufacture in China, cotton production in India and coffee production in Brazil. However, all countries partaking in free trade would like to have a level playing field for their products. The shielding of specific industries and devaluing the domestic currency to promote exports as is being done in China, makes their goods cheaper giving them an unfair advantage in the international markets. This causes much friction within the international community. It is for this reason that international regulatory bodies and watchdog agencies such as the World Trade Organisation have been established. Free trade, or rather, the notion of free trade has brought in its wake a number of complications which strain foreign relations among countries (as has been most recently demonstrated by the loggerheads situation that China and USA are in).

Money Matters

Developing countries regard their balance of payments or current account deficits as a highly representative index of their economic progress. Thus it is natural that they would like to manipulate their domestic currencies and assets to their advantage. This culminates in measures such as devaluation of domestic currency so as to provide an impetus to exporters to increase production. It also discourages imports allowing the balance of payments to remain in the favourable positive direction. However artificially controlling the value of currency and allocating majority of the national resources only to specific sectors does not

give a good estimate of which direction the economy is headed in. Not allowing market factors to follow their natural course ultimately causes disequilibrium in the economy which displays itself through phenomena such as recession.

Also, current account deficits and financing required to maintain imports, causes nations to borrow heavily. This results in long term debt which is not easily repayable. Direct subsidies and exchange rate manipulation puts excessive pressure on the government further leading to international debt.

Thus in conclusion, we note that indeed there are some disadvantages of trade. Trade has a number of economic, political and social ramifications which need to be considered carefully before undertaking a trade agreement. It is not necessary to mention the benefits that international trade has brought about; however a strict watch on policy needs to be kept to ensure that no section of society is unduly harmed in the process. In the words of Edmund Burke – “Free trade is not based on utility but on justice”.