The following five points will highlight the five harmful effects of International Trade. They are: 1. Dual Economies 2. Not Much Beneficial for Poor Countries 3. Limited Possibility of Gain 4. Adverse Effect on ‘Demonstration Effect’ and 5. Secular Deterioration in the Terms of Trade.
Effect # 1. Dual Economies:
International trade has resulted in creating ‘dual economies’ in underdeveloped countries as a result of which the export sector became an island of development while the rest of the economy remained backward.
The effects of foreign factor movements have been that of creating a highly unbalanced structure of production of these countries. No doubt, the opening up of the export markets gave a fillip to their export sector which led to the development of this sector while ignoring other sectors of the economy.
Although export increased but they did not contribute much to the development of the rest of the economy.
Moreover, excessive dependence on exports leads to cyclical fluctuations in the advanced countries. During depression, terms of trade become adverse and their foreign exchange earnings fall steeply.
They are also not able to take advantage of world boom because any improvement in their balance of payment does not lead to increased output and employment due to market imperfections and non-availability of capital goods.
Effect # 2. Not Much Beneficial for Poor Countries:
The foreign trade has also not been entirely beneficial to poor countries because of the adverse effects of foreign investments on their economy. It has been maintained that the inflow of foreign capital and developed a country’s natural resources only for export purposes, to the neglect of production in the domestic sector.
In these countries the export sector remains an island of development surrounded by a backward low-productivity sector. Thus, the inflow of foreign capital in underdeveloped countries has not resulted either in the development of the domestic sector or of the people in these countries. Despite huge foreign investments, the people have remained backward in their countries.
Prof. H.W. Singer is also of the opinion that the benefits of technological progress have gone disproportionately to the advanced countries. According to him, “Benefits of foreign trade and investment have not been equally shared between the two groups of countries.
The capital exporting countries have received their repayment many times. Thus foreign investment of the traditional type has formed part of a system of ‘economic imperialism’ and ‘exploitation.’
Effect # 3. Limited Possibility of Gain:
According to Prof. Nurkse the possibility of gain from foreign trade to underdeveloped countries is restricted or limited. It is simply due to the reason that underdeveloped countries export mainly primary goods. These exports suffer losses on account of :
(i) Fall n their demand due to the tendency on the part of developed countries to establish heavy industries,
(ii) Contribution of services in the aggregate production of developed countries has been increasing,
(iii) Income elasticity of demand for agricultural production is less in developed countries,
(iv) Many developed countries have been adopting policy of protection in respect of agricultural products,
(v) Use of synthetic goods in place of agricultural products has been on the increase.
On account of these reasons, income of underdeveloped countries from the export of primary products has been diminishing constantly. Under these circumstances, it is totally wrong to call trade as ‘an Engine of Growth’.
Effect # 4. Adverse Effect on ‘Demonstration Effect’:
Another harmful effect is that the international operation of the ‘demonstration effect’ has been a handicap for the poor countries. It has been responsible for reducing the capacity for capital formation. The desire for luxury, show-off for higher standard of living and patterns of consumption of advanced countries has been an important factor responsible for low level of domestic savings in underdeveloped countries.
Higher income groups in these countries are trying to adopt the consumption standards of advanced countries which have pushed up their propensity to consume and thereby limited capital accumulation and economic growth. This leads to corruption and black marketing. Thus, these evils have adverse effect on the economy.
Effect # 5. Secular Deterioration in the Terms of Trade:
Another important criticism of foreign trade has been that it has resulted in an international transfer of income from the poor to the rich countries through a secular deterioration in the commodity terms of trade of the poor countries. In the opinion of Prof. Raul Prebisch, there has been a secular deterioration in the terms of trade of underdeveloped countries.
How maintains that underdeveloped countries have suffered with fatal effects of a continuous weakening in their capacity to import. It has lead to the weakening of the capacity of their existing primary producing industries to support their growing population. It has resulted in a failure to transmit to them the benefits of technical progress.
This deterioration in terms of trade for underdeveloped countries has been the result of differences in the distribution of gains from increased productivity, diverse cyclical movements of primary product and industrial prices, and disparities in the rates of increase in demand for imports between the industrial and primary producing countries.
As a result, their secular terms of trade have deteriorated, unemployment increased and balance of payments turned adverse.