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 WHY DO
NATIONS TRADE?
WORDLE: Pick a word.

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Topic
Outline
Why nations trade?

Pros and Cons

WHY DO NATIONS
TRADE?
Give answers according to your research (homework).
 REASON FOR TRADE #1: DIFFERENCES IN TECHNOLOGY
Advantageous trade can occur between countries if the countries
differ in their technological abilities to produce goods and services.
Technology refers to the techniques used to turn resources (labor,
capital, land) into outputs (goods and services).

REASON FOR TRADE #2: DIFFERENCES IN RESOURCE ENDOWMENTS

Advantageous trade can occur between countries if the countries differ in

their endowments of resources. Resource endowments refer to the skills and
abilities of a country’s workforce, the natural resources available within its
borders (minerals, farmland, etc.), and the sophistication of its capital stock
(machinery, infrastructure, communications systems).
 REASON FOR TRADE #3: DIFFERENCES IN DEMAND

Advantageous trade can occur between countries if demands or preferences differ between countries.
Individuals in different countries may have different preferences or demands for various products. For
example, the Chinese are likely to demand more rice than Americans, even if consumers face the same
price. Canadians may demand more beer, the Dutch more wooden shoes, and the Japanese more fish than
Americans would, even if they all faced the same prices.

REASON FOR TRADE #4: EXISTENCE OF ECONOMIES OF SCALE IN PRODUCTION

The existence of economies of scale in production is sufficient to generate

advantageous trade between two countries. Economies of scale refer to a
production process in which production costs fall as the scale of production
rises. This feature of production is also known as “increasing returns to
scale.”
 REASON FOR TRADE #5: EXISTENCE OF GOVERNMENT POLICIES

Government tax and subsidy programs alter the prices charged for goods
and services. These changes can be sufficient to generate advantages in
production of certain products. In these circumstances, advantageous trade
may arise solely due to differences in government policies across countries.
PROS AND CONS
of Trading between nations

https://environmental-conscience.com/international-trade-pros-cons/
ADVANTAGES OF INTERNATIONAL TRADE

1. Bigger variety of products for the local population

2. Higher level of competition with decreasing prices
3. Fierce competition leads to high level of technological progress
4. Companies can expand their target market
5. Companies can buy cheap resources from countries with weak currencies
6. Low production costs
7. Supply with important medical equipment
8. Countries can specialize in certain products
9. International cooperation
10. Trade partners can support each other
11. International trade can increase total global welfare
12. Higher tax revenue
13. Access to international industry experts
14. Hedging against business risks in certain markets
15. Countries may refrain from serious conflicts due to economic interests
16. Access to foreign investments

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Advantage 1
BIGGER VARIETY OF PRODUCTS FOR THE LOCAL POPULATION

One important advantage of international trade is that it gives the local population
the opportunity to choose from a bigger variety of different products.
For instance, imagine a world where you can only buy goods that are manufactured
or grown locally. You will notice that the product range would be quite limited and
most of the tasty and convenient things you can buy in our stores would not be
available to you if there was no free trade. Thus, trading with other countries is a
great opportunity to assure a big variety of goods for billions of people on our planet.
Advantage 2
HIGHER LEVEL OF COMPETITION WITH DECREASING PRICES

.Through globalization and the increase in international trade, also the level of global
competition increased significantly.
While in former times, some local companies had almost no competitors and had
been able to charge pretty high prices for their products, those companies are now
often forced to lower their product prices due to fierce global competition.
This may be quite bad for those companies, however, we as consumers can greatly
benefit from an increased level of competition since this implies lower product
prices and we will be able to afford more material goods due to that.
Advantage 3
FIERCE COMPETITION LEADS TO HIGH LEVEL OF TECHNOLOGICAL PROGRESS

International competition not only lowers product prices, it also leads to fast
technological progress since companies around the world try to invent new things in
order to get a competitive advantage over other globally operating firms.
High levels of technological progress not only imply a higher level of competitiveness
for firms, it also benefits our global society since technology often makes our lives
more convenient.
Thus, although firms may only act in a profit-maximizing and selfish manner, this
could still also translate into an increase in the quality of life of many people all over
the world..
Advantage 4
COMPANIES CAN EXPAND THEIR TARGET MARKET

Another advantage of international trade is that it gives companies the opportunity

to expand their target markets.
For instance, imagine you engage in the production of a pretty specialized product
and there is one big competitor in your local market which you will likely never be
able to beat in his game.
However, due to the possibility of international trade, you might be able to target
other regions all over the world instead of focusing on one local market.
Thus, it may no longer be important to beat your big local competitor since you have
plenty of other markets abroad where you can make big profits and you will not be
dependent on the local market anymore..
Advantage 5
COMPANIES CAN BUY CHEAP RESOURCES FROM COUNTRIES WITH WEAK CURRENCIES

Especially for companies that are resource-intensive and need plenty of commodities and other
raw materials on a regular basis, international trade can be quite beneficial since those companies
might be able to buy large quantities of raw materials from foreign countries for a relatively cheap
price.
This is especially true when it comes to buying from companies in countries with pretty weak
currencies. This is especially true for companies operating in the US or in Europe.
Since they both benefit from pretty stable currencies, the currencies of other countries often
greatly depreciate in value and companies in the US and Europe can get their raw materials pretty
cheap from those countries due to the high depreciation rate.
Advantage 6
LOW PRODUCTION COSTS

Companies can also produce their products in low-wage countries like China in
order to save money in the production process.
By doing so, they can offer those products at a pretty low price and can therefore
increase their level of competitiveness compared to companies that want to
produce locally in high-wage countries..
Advantage 7
SUPPLY WITH IMPORTANT MEDICAL EQUIPMENT

International trade is not only beneficial for the mass production of goods for our
daily life, it has also its advantages when it comes to the supply with medical
equipment.
Some countries may have the production capacities to supply other countries with
large numbers of medical equipment so that those countries are prepared in case
they need this kind of equipment in a short period of time.
Thus, international trade can also contribute to a higher level of security regarding
the supply of medical equipment.
Advantage 8
COUNTRIES CAN SPECIALIZE IN CERTAIN PRODUCTS

Due to international trade, it has become more important than ever for countries to
specialize in certain kinds of products.
For instance, countries with quite low wages can specialize in labor-intensive
products and get a competitive advantage in this field since other countries will not
have these low wages and will therefore not be able to compete in the long run.
Therefore, it is crucial to use local advantages in certain areas in order to assure the
competitiveness of industries in the respective country.
This high level of specialization may give companies in those countries a long-term
competitive advantage, which may improve their global market position and increase
profits.
Advantage 9
INTERNATIONAL COOPERATION

International trade also fosters cooperation between countries.

If countries engage in significant trade activities with each other, they are more likely
to cooperate and find compromises regarding certain conflicts of interest.
Thus, international trade can also improve the bonds between companies and states
and may lead to a higher level of competitiveness of companies due to those
cooperations.
Advantage 10
TRADE PARTNERS CAN SUPPORT EACH OTHER

In case of financial difficulties, companies who are trading with each other on a
regular basis as part of a long-term agreement may also be willing to help each other
in case of economic downturns or other financial difficulties.
This may prevent one of those companies from going bankrupt.
Thus, international trade may also give companies a higher level of security against
bankruptcy and other serious financial issues.
Advantage 1 1
INTERNATIONAL TRADE CAN INCREASE TOTAL GLOBAL WELFARE

Since countries can specialize in the things they can produce in the most efficient
manner, global trade can significantly increase the overall welfare levels on our
planet.
This means that we as humanity are able to consume more goods and services on
average compared to a state without international trade.
However, this doesn’t mean that everyone will be able to consume more.
Due to distribution problems, some people might even suffer from international
trade since their countries might lose their competitiveness.
Thus, even though overall global welfare increases due to international trade, some
countries might even end up worse compared to a fictive state where there is no
international trade at all.
Advantage 12
HIGHER TAX REVENUE

Since international trade will increase the overall welfare levels in many countries,
the tax revenue in those countries will also likely increase.
Therefore, this higher tax revenue can be used to improve the local infrastructure.
By doing so, the overall quality of life for the local population can be further
improved.
Advantage 13
ACCESS TO INTERNATIONAL INDUSTRY EXPERTS

Another upside of international trade is that firms get access to industry experts all
over the world.
In certain fields, especially in those areas where technology is not mature yet, there
is often a quite limited number of people who really know what they are talking
about.
In those areas, it is crucial for companies to hire those experts in order to get a
competitive advantage.
Thus, with international trade and globalization, it is much easier for those companies
to hire those experts or at least to manage cooperations with them.
Advantage 14
HEDGING AGAINST BUSINESS RISKS IN CERTAIN MARKETS

Focusing on just one single local market is often quite risky since in times of local
economic downturns or other issues in this region, companies may get in serious
financial trouble.
Thus, by targeting different markets and by engaging in international trade,
companies are less dependent on one single market and they can diversity their
geographic business risk due to that.
Advantage 15
COUNTRIES MAY REFRAIN FROM SERIOUS CONFLICTS DUE TO ECONOMIC INTERESTS

Since international trade is quite important in our nowadays state of the world,
countries may refrain from serious conflicts since they do not want to put their
important trade connections at risk.

Therefore, international trade may also help to avoid conflicts or even wars.
Advantage 16
ACCESS TO FOREIGN INVESTMENTS

International trade also allows investors from all over the world to finance projects in
countries abroad.

This is not only beneficial for the profits of investors, but may also improve the living
conditions of many people in poor countries since through investments in those
countries, the economy will be strengthened and more people may be able to get a
higher income and to provide for their families.
DISADVANTAGES OF INTERNATIONAL TRADE

1. Dependency on other countries

2. Countries may be forced into conflicts
3. Economic interests may lead to injustice
4. Local unemployment
5. Small companies may go out of business
6. High levels of greenhouse gas emissions
7. Negative externalities regarding pollution
8. Resource depletion
9. Cultural differences
10. Big companies may be able to avoid paying taxes
11. Exchange rates greatly vary over time
12. Complying with international laws may be difficult
13. Financial stability of counterparties may be questionable
14. Highly skilled workers may leave their home country
15. Political instabilities may be a challenge

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Disadvantage 1
DEPENDENCY ON OTHER COUNTRIES

From the previous analysis, it has become clear that international trade has many
advantages and can be a major factor in order to improve and assure our global
wealth. However, there are also some issues related to global trade.
One disadvantage of international trade is that it often implies a significant
dependence on countries. For instance, if large amounts of a special commodity are
shipped to another country and the commodity is quite rare, the exporting country
can often dictate prices and the receiving country may have to pay those prices
since there may simply be a lack of alternatives.
Therefore, international trade can lead to an unpleasant level of dependencies on
other countries, which may be pretty economically harmful to certain countries.
Disadvantage 2
COUNTRIES MAY BE FORCED INTO CONFLICTS

Due to economic dependencies from other countries, some countries may also be
forced into conflicts which they actually do not want to be involved in.
For instance, if the economic dependency on trade with another country is quite
strong, countries may be forced to engage in local conflicts and fight for another
country’s interests since they fear to lose their important trade options otherwise.
Disadvantage 3
ECONOMIC INTERESTS MAY LEAD TO INJUSTICE

Even though international trade has the potential to improve the living conditions of
billions of people on our planet due to welfare gains, there is still a significant
distribution problem regarding this gain in wealth.
While some countries in our rich Western world greatly profit from international
trade, other countries may actually suffer since they might not be able to compete
in this fierce global market and the local population may rather suffer than profit
from those trade activities.
Therefore, international trade can even lead to serious global injustice in some poor
countries of our planet.
Disadvantage 4
LOCAL UNEMPLOYMENT

Global trade may also lead to significant local unemployment.

While the economy of some countries may greatly benefit and companies may be
able to create high numbers of jobs, companies in other countries may be
significantly harmed by global trade since they might lose their competitiveness,
which in turn may lead to job losses in those countries.
Disadvantage 5
SMALL COMPANIES MAY GO OUT OF BUSINESS

Companies of different sizes are also affected by international trade in a different

manner.
For instance, while big companies are often able to profit from international trade
since they are able to expand their economic territory, small companies may not
have this opportunity since they have limited financial resources and expanding to
other markets may be costly.
Therefore, especially for those small companies, global trade may lead to serious
financial trouble and many of those small businesses may eventually lose their
competitiveness and go out of business in the long run.
Disadvantage 6
HIGH LEVELS OF GREENHOUSE GAS EMISSIONS

Global trade can also be quite harmful to our environment.

Since global competition increases significantly, companies all over the world have
an incentive to expand as fast as possible.
However, this expansion process often involves the production of high amounts of
material goods, which in turn implies serious levels of greenhouse gas emissions and
eventually contributes to global warming.
Disadvantage 7
NEGATIVE EXTERNALITIES REGARDING POLLUTION

Another problem of international trade is that the related fierce competition will give
companies an incentive to excessively pollute our environment.
For instance, emissions do not stop at country borders but will hurt our whole planet
since they contain harmful greenhouse gases that contribute to global warming.
However, companies will not take those negative externalities into account since
they are not charged for those emissions properly.
Therefore, every company has the incentive to excessively pollute our environment
in order to accomplish higher production levels, even though this will lead to an
unpleasant environmental outcome for everyone in the long run.
Disadvantage 8
RESOURCE DEPLETION

International trade also contributes to the resource depletion problem.

Since our global welfare levels increase on average due to international trade, people are
able to consume more material goods.
For the production of those goods, large amounts of natural fossil resources have to be
used, which may cause serious problems since at one point in time, some of our natural
resources may be entirely depleted and we will no longer be able to use those resources
for production purposes.
This may lead to a variety of problems since we might no longer be able to produce many
important goods due to a lack of commodities.
Disadvantage 9
Cultural differences

Cultural differences may also lead to problems related to international trade.

For instance, if two countries had problems in the past and their cultural values are
also quite different, those countries may not be able to establish fair trading
agreements and for those kinds of problematic relationships, trade will be of no use.
Disadvantage 10
BIG COMPANIES MAY BE ABLE TO AVOID PAYING TAXES

Some big corporations also managed to avoid or at least to greatly reduce their tax
burden through international trade and offshore firms.
Big tech companies often only pay around 2% taxes on their profits while other
smaller companies will not be able to avoid taxes and therefore suffer from a
competitive disadvantage.
This can be considered to be quite unfair since companies who earn the most
should also contribute to tax revenue in an appropriate manner.
Disadvantage 11
EXCHANGE RATES GREATLY VARY OVER TIME

Another disadvantage of engaging in international trade is that there is a significant

exchange rate risk associated with it.
For instance, let’s assume you are a manufacturer of certain components and you
buy your raw materials in a foreign country.
If the currency in the foreign country significantly appreciates, you might be in
serious trouble since you have to spend much more for the same amount of raw
materials now.
Thus, if you do not hedge against those currency risks, you might get in serious
trouble sooner or later.
Disadvantage 12
COMPLYING WITH INTERNATIONAL LAWS MAY BE DIFFICULT

International trade also implies the need to adjust business actions in order to
comply with international and foreign laws.
While companies who only engage in national markets just have to make sure to
comply with local laws, companies engaging in international trades also have to take
into account several other regulatory frameworks, which may be costly since the
help of experts may be needed in order to comply with those international
regulations.
Disadvantage 13
FINANCIAL STABILITY OF COUNTERPARTIES MAY BE QUESTIONABLE

By engaging in international trade, there is also a significant counterparty risk

involved.
For instance, you might not be able to evaluate the financial counterparty in a foreign
country correctly.
If this counterparty goes bankrupt, you may be in serious trouble since you might
not get the money this company might still owe to you.
Therefore, international trade can also significantly increase the counterparty risk for
companies.
Disadvantage 14
HIGHLY SKILLED WORKERS MAY LEAVE THEIR HOME COUNTRY

Globalization and international trade may also lead to a state where highly skilled
workers might leave their home country since they are able to earn much more
money abroad.

However, this leads to serious problems for a country since only low-skilled workers
may be left and not enough mental potential may stay in the country to
economically progress in the long run.
Disadvantage 15
POLITICAL INSTABILITIES MAY BE A CHALLENGE

Some regions may also be politically unstable and revolutions may lead to serious
problems for companies trading with other companies in those regions.

For instance, revolutions often lead to expropriation and your counterparty may go out of
business, which may also lead to a financial loss for you if your counterparty still owes
you money.
Quiz - Essay

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Quiz - Essay
Answer the following questions on your own words. (Minimum of 3
sentences)

1. Why is it important for countries to trade?

2. Choose one negative consequence of trading between countries and
explain it in your own words.
3. How does trading between countries affect you as an individual?
THANK YOU