Explain the Advantages and Disadvantages of Foreign Trade in Detail

Advantages and Disadvantages of Foreign Trade:- “Foreign trade implies the buying and selling of goods and services among different countries across the world”.  It may consist of export of goods and imports of goods from abroad. Foreign trade is also known as International Trade.

Advantages and Disadvantages of Foreign Trade

Advantages

1. Maximum Use of Natural Resources

Foreign trade helps each country to specialize in the production of those goods, which best suits its environments. It thus leads to maximum use of its natural resources.

2. Availability of Goods

It enables a country to obtain goods by importing which it cannot produce due to higher costs at home.

3. Specialization

Foreign trade leads to specialize in the production of goods. Specialization leads to lowering of costs and improving the quality of goods. The countries, therefore, benefit from international trade.

4. Economics of Large Scale

The expansion of foreign trade leads to the production of goods on a large scale. The economics of large scale production (both external and internal) are thus availed of by the trading countries of the world.

5. Stability in Prices

Foreign trade equalizes the prices of goods throughout the world.

6. Advance Equipment’s

The developing countries can import the latest machinery and know-how from the developed world. They can thus speedily break the vicious circle of poverty.

7. Benefits to Consumers

The consumers are able to get those goods which are not produced in their own countries.

8. Development of the means of Communication and Transport

Different Countries may dispose of those goods which they have in surplus and obtain goods which they are short in supply. The trades between the countries lead to development in the means of communications and transport.

9. Ability to Face Natural Calamities

International trade helps a country to face naturals incidents such as Earthquake, floods etc. The affected countries are able to import goods which they are short in supply.

10. Discouragement to Monopolies

International trade discourages the formation of monopolies in a country. If there is a combination of certain business units and they raise the prices of goods higher than the market, the government imports those goods to reduce the prices in the country.

11. International Co-operation

Foreign trade brings people of different countries close to each other. It can bring better understanding and harmony among the various nations.

12. Better Employment Opportunities

As the Foreign trade expands, it creates jobs and provides better employment opportunities for the people both in and outside the country.

Disadvantages:

1. The threat to infant industries

Due to the import of goods from abroad, the infant industries of a country are not able to grow and survive.

2. Economic exploitation

The underdeveloped countries depend upon the developed countries for the import of machinery, technology etc the developed nations exploit the weaker nations and charge very high prices from them.

3. Endangers independence

Foreign trade encourages slavery. It impairs the economic independence of the poor nations.

4. Misuse of natural resources

If there is an excessive export of natural resources like iron, cool etc of a country, it will be exhausted in a shorter span of time. The country then suffers economically in the long run.

5. Import of harmful goods

The import of harmful goods adversely affects health, well being and economy of the country.

6. World wars

Foreign trade creates rivalry among the competing nations of the world. It leads to ill-will, hatred and eventually to wars among them. This disturbs world peace.

7. Trade and tariff agreements

The developed countries motivate the developing nations to give tariff concessions and reduce restrictions on imports and adopt free trade. If the developing countries are lured and agree to join such agreements, they economically suffer in the long run.

Why Foreign Trade in Necessary

There are various reasons for conduction’s business on an international scale. They are discussed as under:-

• Mutual Advantage

One of the reasons for foreign trade is that it arises mutual advantage between two countries when the trade is made.

• Monopoly

In a monopoly, a country is enjoying the production of various commodities. It helps them an absolute advantage over other countries which don’t have those commodities.

• Comparative advantage

One of the reasons for foreign trade is that it also arise comparative advantage according to the need of other nations by producing essential commodities.

• Climate Conditions

Many countries producing raw material from their climate conditions like tea, rubber etc there is no alternative for the other country but to import them.

• Advanced Technology

One of the reasons for foreign trade is that nowadays goods are produced through various advance technology in many developed countries. A country which does not have any latest technology is import goods from these developed nations.