International trade is a productive practice that allows individuals, organizations, and countries to flourish economically. It is the scientific way of saying “commerce” or “buying and selling.” The advantages and disadvantages of international trade create risk and reward opportunities for both businesses and countries.
It opens foreign markets, increases competition, and diversifies the services and products for customers. Exporting is beneficial for countries. In trade, a country is exporting to make profits and improve the economic situation. It also improves the quality standards at affordable prices. Now let’s get on a concise summary of the advantages and disadvantages of International Trade.
Advantages of International Trade
Establish customer base in international markets
International trade creates an opportunity to expand the market of potential customers. It’s helpful for small businesses to establish a customer base and grow more. If they had giant competitors in the local market, they could get more targeted consumers by expanding their product and service base.
As you are targeting other potential regions in international trade, you will no longer worry about big competitors in the local market. As you expand internationally, more loyal customers join you to increase your profits.
Benefit from exchange rate fluctuations
Exchange rate fluctuations can increase risk and rewards. If you are expanding to a first-tier country with a base in a 3rd tier country, then the profits boost. You enjoy the perks of exchange rate fluctuations with additional profits.
Let’s say you are an eCommerce seller on the Amazon US marketplace with a base in Malaysia. Now with other profit factors, customer base expansion, you are also getting additional profits from the currency conversion rates. Now, if you are operating in the United Kingdom and the United States, you have also spread the risk of exchange rate fluctuations in the pound and US dollar.
Encourage competition to improve quality and affordability
International trade remains competitive as there is always potential for new brands to enter foreign markets. Thanks to technological development, now it’s easy to enter into international trade, especially for eCommerce businesses. It creates a competitive environment to sell only top-notch quality products and services at the most reasonable prices.
Many brands and businesses compete with one another in the global marketplace. If a brand wants to succeed, it must focus on its competitiveness by observing trends for quality design improvements and product development changes so it can remain profitable throughout all markets worldwide. Mostly there is nothing like the only big giant when you’re trying your best at being everywhere!
Lowers risk and increases rewards
Organizations benefit from the security that international trade provides. With diversification, they can survive any financial or natural disaster inside their home market without facing bankruptcy; even if it is unstable, there’s still potential for growth via export markets like China and India.
By expanding markets, you get more consumers for your product or services. It increases your rewards and lowers the risks as you don’t have to worry more about the domestic competition. Even if there is instability in one country, your business remains stable and grows with international trade. Though you cannot eliminate all risks with ongoing contracts, financial instrument trading, and insurance, you can protect your revenue streams.
Foundation to grow your business
As global competition increases, companies are finding that they need to consider expanding into other markets for sustainable revenue growth. It can be difficult for businesses with a single home market because it requires them to diversify their portfolios of customers instead of relying solely on sales from this one location alone.
Businesses assert in foreign trade to increase profitability. It allows them to grow the returns on investment they receive with research & development. You can rotate products or services through global markets, even if a domestic market isn’t interested anymore. And it is often true for many of these types of brands/businesses due to changes within their home country’s economy over time anyway!
Low production, material, and operational costs
International trade creates competition and sets high-quality standards. To compete and grow, you have to optimize your business operations continuously. Consider what if a business is doing domestic production with average quality, while foreign brands enter the same market with more affordable prices. The existing brand will have to forecast the effect and work on making their products exclusive or lowering the process.
Today the best example is China. Most brands prefer getting high-quality products from China as they have cheap labor rates to mass production at the most affordable rates. Production in low-cost countries lets the businesses generate more profits and survive competition in high-tier countries.
Employment opportunities and economic boost
Instead of a small domestic market share, international trade brings more opportunities on a plate. You have the opportunity to make more profits by finding marketplaces with low competition and more demand. Employment opportunities are created as your business grows, or you shift the operations to low-cost countries.
According to The Balance, two million jobs in the United States depend on international trade. When there are more exports in a country per year, they require employees to help produce them, creating job positions.
Disadvantages of international trade
Problems created due to Cultural differences
Understanding the cultural differences and their impact on business dealing is the most important factor in international trade. Knowing a foreign language never means you know their attitudes, culture. E.g., thumbs-up signs have different meanings in different countries.
In business dealings, if you don’t consider cultural differences with the other party, it may damage the reputation and lead to unforeseen mistakes.
Political Risk Factors
Political risks are the risks faced due to the changes in the political situation, as there can be chances that new policies will be formulated. It might have some advantages or disadvantages for the international trade carried out by a country/organization/firm. For example, a firm exporting products may face problems if a new policy related to alteration tax structure is formed under which high.
You know, in the Donald Trump era, a statement changed market direction. Each country was taking measures after analyzing the risk factors and ongoing situations. As a business making international trade, you have to study the political risk factors for efficient decisions.
Fluctuations and Exchange rate issues
Most businesses opt for emerging potential markets to sell services and products for a greater productive lifespan. It would be best to study and analyze the exchange rate fluctuations and related profitability issues.
The notable aspect is difficulty in finance forecasting due to wild exchange rates fluctuation in emerging markets. The assets and liabilities value present in those foreign currencies also fluctuates. Due to these factors, if financial forecasting is done correctly, then you may face immediate steep revenue losses due to exchange rate fluctuations.
Cyber security and information theft
As you get into international trade, the competitors may try to steal your information or damage the brand identity. Cyber security is important to avoid any online hacking or information stealing attempts.
Managing Credit Risk
Forecasting credit risk can save non-payment and bad debt problems. And most businesses, as they get into international trade, overlook the credit risks. Here the best approach can be to get a letter of credit or insurance. It is like a hit-or-miss situation without knowing the credit risks for B2B or B2C international trade.
High Tax rates and Intellectual property theft
The wider a brand expands, the more possibilities arise of intellectual property theft. Here the best option is to apply for a trademark and get copyrights in every market you enter. Today eCommerce sellers always get patents and register trademarks before product launch to avoid such intellectual property theft.
Tax theft and excess tax are other issues arising from international trade. On the one hand, big corporations build offshore assets to save tax. It’s considered unfair as companies earning more shall pay higher tax. On the other hand, sometimes you get double taxed. Once in the foreign marketing, you are doing business, and then your business profits go back to your homeland. Mostly in these situations, the best approach is to consult a tax expert for tax optimization.
Unemployment and bankruptcy
International trade may lead to local unemployment and inflation. Different tier companies get different impacts from international trade. Big companies expand while the small companies may get bankrupt if they don’t operate wisely with a perfect strategy. Unemployment and bankruptcy due to international trade can happen even to the most established companies. When it does, it’s important to understand why and how it happened.
International trade has both advantages and disadvantages for the type of business. It has become an increasingly important part of the global economy. The globalization of trade and the rise of trade and investment across borders affect every country’s economy and society. Trade and investment can be a success or a disaster depending on whether or not they succeed in meeting the needs and interests of the countries involved.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.