3.3.1
Note

Costs of International Trade

3.3.1 Globalisation & trade

Idea

International trade is not costless. Alongside its benefits, trade can impose burdens that fall on the three economic agents — and these costs supply both the case for protectionism and the evaluative “against” side of any free-trade question. This note is a neutral catalogue and reaches no verdict.

Considerations

  • Unfair trade practices (dumping). Dumping — exporting below marginal cost — can drive domestic competitors out of business, leaving them to shut down and raising demand-deficient unemployment. Consumers enjoy only a temporary price fall: once the foreign firm has monopolised the market, prices are raised sharply and the standard of living falls.

  • Over-reliance on foreign countries. A trade-dependent economy is more exposed to shocks abroad. A recession in a major trading partner cuts export revenue and raises demand-deficient unemployment — as Singapore experienced when the 2008 US subprime crisis cut its partner’s import demand. Reliance on imports also transmits foreign inflation as imported inflation.

  • Structural unemployment. Technological transfer and offshoring continually change the type of labour an economy demands. Occupational and geographical immobility means displaced workers may lack the required skills or be unwilling to relocate, producing a skills mismatch — structural unemployment.

  • Worsening balance of trade. Less developed economies tend to export income-inelastic goods (agricultural products) and import income-elastic goods (electronics). As incomes rise, their import demand grows faster than foreign demand for their exports, worsening the balance of trade.

  • Worsening income disparities. Business owners can expand into foreign markets and raise their incomes, while low-skilled workers are made structurally unemployed — widening the income gap within the economy.

  • Environmental degradation. Expanding output to meet foreign demand raises pollution and depletes non-renewable resources, and offshoring to countries with laxer regulation degrades the environment further. Growth is then achieved at the environment’s expense, so sustainable growth is not attained.

Each cost is a recognised channel of harm; which dominate depends on the economy’s structure, and they are the menu an evaluation draws on to qualify the gains from trade.