Disadvantages of Free Trade
International trade also involves some risks for a country because the international market conditions are out of the control of any government and are often unpredictable and liable to fluctuation. As the terms of trade change, a particular industry in a country can fall into decline, resulting in factory closures and unemployment. The labor market is not fully flexible, and workers may have difficulty retraining for other industries or moving to other locations to find work. Structural unemployment may therefore cause problems for a country’s economy.
A country may become too dependent on the export of a particular commodity; this leaves the economy vulnerable to fluctuations in the price of that commodity. This is often the case with former colonies that were compelled to cultivate a limited number of crops such as cereals or mine for a particular metal. The price of agricultural products or minerals on the global market fluctuates greatly with changes in international supply and demand which are outside the control of the producer countries.
The distribution of income between countries may be more uneven as a result of international trade, because some countries will be able to take advantage of natural resources, skilled workforce or economies of scale to sell their goods and services internationally on favorable terms. Within each particular country, international trade may increase the gap between rich and poor because those who benefit most from international trade may be the rich elites who own the main assets of the country.
For individual firms trading internationally, the business risks are increased. They are exposed to the risk of falls in demand as a result of changes in taste or fashion and problems resulting from the introduction of new technology or more efficient processes by their international competitors. Credit risks can be high and the cost of borrowing may increase unexpectedly, making such firms uncompetitive.
Countries often need to become part of a larger trading bloc to obtain favorable terms of trade internationally, but such economic benefits may come at the cost of a loss of sovereignty, as important decisions affecting the national economy are made by the international trading bloc rather than by its individual members. The inflow of international goods into a country may cause other problems such as an erosion of the national culture.