Disadvantages of International Business

Management > International Business Management > Introduction to International Business > Disadvantages of International Trade

The disadvantages of international trade are as follows

Impediment in the Development of Domestic Industries:

International trade has an adverse effect on the development of domestic industries. Due to foreign competition, cheaper availability, and unrestricted imports, the domestic industries in the country may collapse.

Difficulties in Times of Need:

Dependence on foreign goods creates difficulties in time of war when the country is cut off by enemy action. The rivalry between gulf nations results in fluctuation of crude oil prices, which impact the economy depending upon the crude oil. It depletes foreign reserves of the country.

Use of Monopoly to Control Price:

The exploitation of the importing country by the exporting country can take place.   For example, crude oil cannot be produced by every country and that is the reason why crude importing countries are at a disadvantage all the time due to the near monopoly of oil exporting nations.

Economic Dependence:

The underdeveloped countries have to depend upon the developed ones for their economic development. Which may lead to economic exploitation of the country. Countries which sell primary commodities and buy manufactured goods in return are the losers and get exploited. The standard of living of the people in such countries remains low. Such conditions may lead to discontent and unrest among undeveloped countries.

Widening Trade Gap:

The gains from trade are not equally distributed. Developing Countries which sell primary commodities and buy manufactured goods in return from the developed countries are the losers.  Thus trade balance remains in favour of developed countries. Thus the trade gap, i.e. the difference between imports and exports is large in the case of developing countries. In such a case, the standard of living of the people cannot improve. It may lead to discontent and unrest.

Over Utilization of Natural Resources:

Excessive exports may exhaust the natural resources (like coal and oil which are irreplaceable) of a country in a shorter span of time than it would have been otherwise. These goods are exported for the sake of profit.  This will cause the economic downfall of the country in the long run. Thus there is a danger to Gulf countries which are solely dependent on the export of crude oil.

Political Risk: 

Different countries provide their own political risks at varying levels, while domestic political changes over time and presents an ongoing challenge. A government can change laws in a discriminatory fashion or create regulations that directly impact a specific organization. E.g. the President of the United States, Donald Trump abruptly changed the trade policies of the US which impacted international trade of many countries, particularly China, India, and the European Union. It may be good to market products to a varying geographic region, rather than a single country, to help balance the political risk.

High Credit Risk:

There is high credit risk in international trade. Credit risks can be managed by obtaining insurance or a letter of credit. Customer finances and credit can impact the number of potential sales that can be received within a market.

Additional Cost of Shipping, Customs and Duties:

One of the disadvantages of international trade is that most of these destination countries’ customs agencies charge extra fees on items shipped to them. Each government determines these assessments of duties and taxes differently, it is typically calculated on the value of the products sent (item, insurance plus shipping). The item description may also affect these fees based on what it is made of or used for. Thus the landed cost of the product depends on shipping charges, customs and duties paid.

Servicing Customers:

It may be comparatively easy to sell in the international market but after sales service is not easy. Language and cultural differences also lead to service problems. In such cases, the company needs to be ready to communicate with these customers in different zones, different time zones, and preferably in their language. Hence the company should be ready to set up 24 x 7 Customer Service Centres.

Import of Harmful Goods:

Another disadvantage of international trade is that sometimes developed countries export harmful products to other countries (generally developing) leading to damage to the environment of importing country and hence international trade poses an environmental hazard for nations doing international trade.

Shortage of Goods in Domestic Market:

Sometimes the essential commodities required in a country and in short supply are also exported to earn foreign exchange. This results in a shortage of these goods at home and causes inflation.  If nations export products in spite of good domestic demand then the scarcity of the product in the domestic market leads to a rise in prices of such products. Such a situation may create frustration in the minds of the general public and anger towards the ruling government and It can lead to domestic turbulence.

Danger to International and Internal Peace:

International trade gives an opportunity to foreign agents, traders, and workers to settle down in the country which ultimately endangers its internal peace. E.g. Many Chinese workers, engineers came to Pakistan for the project, China Pakistan Economic Corridor and settled in Pakistan. There is a cultural difference between the two countries. It is found that Pakistani citizens are exploited by the Chinese. Which may disturb internal peace in Pakistan and as a whole international peace will get destroyed.

Political Dependence:

International trade often encourages slavery. It impairs economic independence which endangers political dependence.

Intellectual Property Theft:

The wider a product is distributed, the more likely that it may be illegally copied by a competitor. This can be in the form of proprietary information or market branding or by reverse engineering. Due to the different legal system in different countries, it becomes very difficult for a company to prosecute. There are international treaties on intellectual property rights. Some countries also have their own separate copyright and trademark protections that can be filed to protect companies selling products in their countries.

These disadvantages of international trade are also the factors affecting it.

Previous Topic: Advantages of International Business

Next Topic: Factors Affecting International Business

Management > International Business Management > Introduction to International Business > Disadvantages of International Trade