5 Harmful Effects of International Trade – Discussed !

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The following five points will highlight the five harmful effects of International Trade. They are: 1. Dual
Economies 2. Not Much Beneficial for Poor Countries 3. Limited Possibility of Gain 4. Adverse Effect on
‘Demonstration Effect’ and 5. Secular Deterioration in the Terms of Trade.

Effect # 1. Dual Economies:

International trade has resulted in creating ‘dual economies’ in underdeveloped countries as a result of
which the export sector became an island of development while the rest of the economy remained
backward.

The effects of foreign factor movements have been that of creating a highly unbalanced structure of
production of these countries. No doubt, the opening up of the export markets gave a fillip to their
export sector which led to the development of this sector while ignoring other sectors of the economy.

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Although export increased but they did not contribute much to the development of the rest of the
economy.

Moreover, excessive dependence on exports leads to cyclical fluctuations in the advanced countries.
During depression, terms of trade become adverse and their foreign exchange earnings fall steeply.
They are also not able to take advantage of world boom because any improvement in their balance of
payment does not lead to increased output and employment due to market imperfections and non-
availability of capital goods.

Effect # 2. Not Much Beneficial for Poor Countries:

The foreign trade has also not been entirely beneficial to poor countries because of the adverse effects
of foreign investments on their economy. It has been maintained that the inflow of foreign capital and
developed a country’s natural resources only for export purposes, to the neglect of production in the
domestic sector.

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In these countries the export sector remains an island of development surrounded by a backward low-
productivity sector. Thus, the inflow of foreign capital in underdeveloped countries has not resulted
either in the development of the domestic sector or of the people in these countries. Despite huge
foreign investments, the people have remained backward in their countries.

Prof. H.W. Singer is also of the opinion that the benefits of technological progress have gone
disproportionately to the advanced countries. According to him, “Benefits of foreign trade and
investment have not been equally shared between the two groups of countries.

The capital exporting countries have received their repayment many times. Thus foreign investment of
the traditional type has formed part of a system of ‘economic imperialism’ and ‘exploitation.’

Effect # 3. Limited Possibility of Gain:

According to Prof. Nurkse the possibility of gain from foreign trade to underdeveloped countries is
restricted or limited. It is simply due to the reason that underdeveloped countries export mainly primary
goods. These exports suffer losses on account of :

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(i) Fall n their demand due to the tendency on the part of developed countries to establish heavy
industries,

(ii) Contribution of services in the aggregate production of developed countries has been increasing,

(iii) Income elasticity of demand for agricultural production is less in developed countries,

(iv) Many developed countries have been adopting policy of protection in respect of agricultural
products,

(v) Use of synthetic goods in place of agricultural products has been on the increase.

On account of these reasons, income of underdeveloped countries from the export of primary products
has been diminishing constantly. Under these circumstances, it is totally wrong to call trade as ‘an Engine
of Growth’.

Effect # 4. Adverse Effect on ‘Demonstration Effect’:

Another harmful effect is that the international operation of the ‘demonstration effect’ has been a
handicap for the poor countries. It has been responsible for reducing the capacity for capital formation.
The desire for luxury, show-off for higher standard of living and patterns of consumption of advanced
countries has been an important factor responsible for low level of domestic savings in underdeveloped
countries.

Higher income groups in these countries are trying to adopt the consumption standards of advanced
countries which have pushed up their propensity to consume and thereby limited capital accumulation
and economic growth. This leads to corruption and black marketing. Thus, these evils have adverse effect
on the economy.
Effect # 5. Secular Deterioration in the Terms of Trade:

Another important criticism of foreign trade has been that it has resulted in an international transfer of
income from the poor to the rich countries through a secular deterioration in the commodity terms of
trade of the poor countries. In the opinion of Prof. Raul Prebisch, there has been a secular deterioration
in the terms of trade of underdeveloped countries.

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How maintains that underdeveloped countries have suffered with fatal effects of a continuous
weakening in their capacity to import. It has lead to the weakening of the capacity of their existing
primary producing industries to support their growing population. It has resulted in a failure to transmit
to them the benefits of technical progress.

This deterioration in terms of trade for underdeveloped countries has been the result of differences in
the distribution of gains from increased productivity, diverse cyclical movements of primary product and
industrial prices, and disparities in the rates of increase in demand for imports between the industrial
and primary producing countries.

As a result, their secular terms of trade have deteriorated, unemployment increased and balance of
payments turned adverse.

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Negative Effects of Free Trade

by Leon Teeboom; Reviewed by Michelle Seidel, B.Sc., LL.B., MBA; Updated February 12, 2019

Negative Effects of Free Trade

Free trade is meant to eliminate unfair barriers to global commerce and raise the economy in developed
and developing nations alike. But free trade can – and has – produced many negative effects, in
particular deplorable working conditions, job loss, economic damage to some countries, and
environmental damage globally. Yet, the World Trade Organization continues to advocate for free and
unfettered trade, much to the detriment of some national economies and millions of workers.

Adverse Working Conditions

As underdeveloped countries attempt to cut costs to gain a price advantage, many workers in these
countries face low pay, substandard working conditions and even forced and abusive child labor. In a
"New York Times" article tellingly titled, "An Ugly Side of Free Trade: Sweatshops in Jordan," Steven
Greenhouse and Michael Barbaro said that apparel manufacturing – "propelled by ... free trade" – was
booming in Jordan and its exports to the U.S. had soared 20-fold in five years. Yet there is a dark side to
this free trade, the paper stated:

"Some foreign workers in Jordanian factories that produce garments for Target, Wal-Mart and other
American retailers are complaining of dismal conditions – of 20-hour days, of not being paid for months,
and of being hit by supervisors and jailed when they complain."

Nevertheless, the WTO says it does not consider a manufacturer’s treatment of workers reason for
countries to bar importation of that manufacturer's products. The WTO notes developing countries insist
any attempt to include working conditions in trade agreements is meant to end their cost advantage in
the world market. When this argument for free trade persists, workers globally pay the price.

Fears of Job Loss

Free trade agreements have also drawn protests from the U.S. public for decades due to feared job loss
to foreign countries with cheaper labor. Yet proponents of free trade say new agreements improve the
economy on all sides. The WTO acknowledges that free trade does indeed lead to job losses. At the 2017
World Economic Forum in Davos, Switzerland, Roberto Azevêdo, the WTO's director-general stated:

"Trade is responsible for two job losses out of ten. What happens is the other eight are lost not because
of trade but they are lost because of new technologies, innovation, higher productivity."

Though Azevêdo was arguing that other factors account for 80 percent of job losses globally, it's notable
that the director of the world's greatest advocate for free trade was acknowledging that 20 percent of all
job losses on the planet are caused by free trade. That would certainly be a strong argument against free
trade, not for it. And, New York Times columnist Paul Krugman argues that free trade deals with
countries like Korea and Colombia aren’t “job creation measures.” This is hardly a ringing tribute to free
trade.

Great Sucking Sound"

During the 1992 presidential election, Ross Perot warned that the then-new North American Free Trade
Agreement (NAFTA) between the United States, Mexico, and Canada would create a "great sucking
sound" as millions of jobs were siphoned out of the U.S. and into Mexico and Canada. And, it looks like
Perot was 100 percent correct, notes "Business Insider" stating:

"The goods balance of trade for the U.S. with Mexico has been negative and steadily growing over the
years. In 2010 it amounted to $61.6 billion, which was 9.5% of the total goods trade deficit (in 2009). "

Unions, understandably, have strongly criticized the free-trade agreement as critically harmful to workers
and the U.S. economy. The AFL-CIO argues that NAFTA has harmed consumers and workers in all three
countries, contributing to a loss of jobs and drop in income while strengthening the clout of
multinational corporations. The unions contend that the increased capital mobility facilitated by free
trade has hurt the environment and weakened government regulation.

Changes Under the Trump Administration

Then-candidate Donald Trump promised during his campaign to end United States participation in
NAFTA. As President, Trump has negotiated a new three-county pact to replace NAFTA and announced,
in October 2018, that NAFTA would be superceded by USMCA – the US-Mexico-Canada Agreement. It
remains to be seen how effective this new agreement will be in softening some of impacts of unfettered
free trade.
Effects on the Environment

Others agree that the environment is another casualty of free trade. Put simply, you can't have free trade
and "save the planet," says Alf Hornborg, a professor of human ecology at Lund University in Lund,
Sweden, noting:

"For centuries world trade has increased not only environmental degradation but also global inequality.
The expanding ecological footprints of affluent people are unjust as well as unsustainable. The concepts
developed in wealthier nations to celebrate 'growth' and 'progress' obscure the net transfers of labor
time and natural resources between richer and poorer parts of the world."

Lund echoes the arguments discussed previously: that free trade causes global inequalities, poor
working conditions in many developing nations, job loss, and economic imbalance. But, free trade also
leads to a "net transfers of labor time and natural resources between richer and poorer parts of the
world," he says. Free trade is driving the growing global problem of greenhouse gases, because workers
in developing nations end up producing goods at a far lower cost and in inferior working conditions,
generally using older, and dirtier, energy sources such as oil and coal, Hornborg argues. This occurs while
the economies globally consume more of the diminishing natural resources on the planet, and fail to
develop clean fuel technology, such as solar and wind power.

Environmental and Social Impacts of Free Trade

by Eric Feigenbaum

Free trade and the free flow of goods and services has broad implications.

Free trade is the idea of trade without restrictions--no tariffs, duties or other governmental taxes on
imports and exports. It also means allowing goods to free flow irrespective of their quality and
specifications. In essence, countries themselves are free trade zones. In international free-trade, the
European Union is a great example of a free-trade zone. When the barriers to trade drop, among other
things, it has dramatic social and economic impacts on ethics, pocketbooks and job security.

Fuel
In a free trade environment, goods from anywhere can go anywhere. So, in the end, more things are
moving to more places. While this can have very positive effects on consumer choice and prices, it
means that there is more transportation involved--which burns more fuel and therefore impacts air
pollution. For example, if a consumer in France used to have only one kind of local lettuce, but now,
under the EU, can choose among five kinds of lettuces from five different countries, a lot more fuel is
being burned per French salad. Because of rising emissions related to agricultural and food transport,
the EU is considering taxes on emissions and freight related to food transport to deal with the growing
environmental impact.

Labor Conditions

When trade between countries at different levels of economic development occurs, there can be serious
impacts. For example, Mexico, Canada and the United States are part of the North American Free Trade
Agreement. In many cases, Mexico can produce manufactured goods, such as clothing, at cheaper prices
than the U.S. or Canada because of its lower labor costs. However, factories are not always safe for
workers, wages can be below poverty level--and there may be cases of child labor. Buying these cheaper
products may support these social ailments. Others argue that purchasing products from Mexico may
have negative social impacts in the short-run, but because the trade fuels Mexico's economic
development, the purchases may, in the end, help Mexico get past these social problems. In return,
unrestricted competition with countries whose material and labor costs are lower than the United
States' costs can have adverse social ramifications. It can lead to the weakening of labor unions and even
retrenchment of jobs in industries that were previously protected by tariffs, duties and other import
restrictions..

Resources

The ability to trade freely can help a country greatly increase its wealth. At the same time, the country
may, in turn, deplete its natural resources. Natural resources can be the primary and most valuable
export in many countries. A few examples include Saudi Arabia and oil, South Africa and diamonds, and
Brazil and lumber. According American University, Brazil's lumber exports equal five percent of the
world's supply and are significantly responsible for the deforestation of the Amazon. Fewer constraints
on trade may lead countries to tap into more of these precious resources.