Question

Is it always true that trade increases the welfare of a nation? Under what conditions would the concentration of industries in one country leave another country worse off when trade starts between them? Explain with a concrete example

Answer 1

Trade is considered to be good for the world economy as it increases the competition among the countries and lowers the world prices which give benefits to the consumer. Due to this, the consumer surplus will increase. However, it can also have a bad effect on the country. Below are some of the reasons why trade can be considered bad for a nation:

1) Trade can destroy domestic industries: The foreign industries can have a harmful impact on the domestic industries

2) Infant- industry argument: The small industries which have just started taking baby steps can be badly affected by the big giants from foreign lands as the small countries did not have big pockets to compete with them.

3) Unemployment: The level of unemployment can increase in the domestic country as people will buy products from foreign companies. The demand for domestic products will be less due to which the domestic companies will cut down the cost and they will end up firing people. As a result level of unemployed increases.

4) Dumping: It occurs when manufacturers export a product to another country at a price below the normal price with an injuring effect.

Now take example of China, country exports most of the finish products to the world economies like the USA and Europe. China is a market leader in production. Most of the manufacturing units lie in that country due to which the other Asian countries are worse-off and couldn’t enjoy the benefits from this trade.