AQA Specification focus:
‘The costs of international trade.’
Global trade brings significant opportunities, but students must understand the economic costs it can create for countries, industries, workers, and consumers across the world.
Introduction
International trade allows countries to specialise and exchange goods and services, boosting global efficiency. However, trade can also create significant costs for individuals, firms, and economies.
Structural Unemployment
One of the most important costs of trade is the potential for structural unemployment.
Structural Unemployment: Long-term unemployment arising when workers’ skills no longer match the requirements of the labour market due to changes in trade or technology.
Trade exposes domestic industries to foreign competition, often leading to factory closures and job losses in less competitive sectors.
This diagram depicts the labour market's response to structural changes, such as those induced by international trade. A leftward shift in labour demand shows declining job opportunities, leading to structural unemployment. Source
Workers in declining industries may find it difficult to retrain or relocate, leaving them unemployed.
Example: textile and steel industries in advanced economies shrinking under cheaper imports.
Loss of Domestic Industries
Trade can accelerate the decline of certain infant industries (industries in early stages of development).
Once established, foreign firms benefit from economies of scale, making it difficult for small domestic firms to compete.
This may lead to deindustrialisation in developed economies as production moves abroad.
Deindustrialisation: A sustained decline in the importance of manufacturing in a national economy, often linked to international competition.
Income Inequality
Trade may increase income inequality within and between countries.
In developed countries, highly skilled workers in knowledge-intensive sectors may benefit from trade, while low-skilled workers lose out.
In developing countries, rural farmers may struggle against cheaper imports while urban export workers prosper.
This creates a widening gap between winners and losers of globalisation.
Environmental Costs
International trade has significant environmental implications:
Increased transportation of goods raises carbon emissions.
Countries with weak environmental regulation may become pollution havens, attracting industries that degrade ecosystems.
Overexploitation of natural resources (e.g., deforestation for export crops) can damage sustainability.
Balance of Payments Problems
A country may face a persistent current account deficit due to trade.
Current Account Deficit: When the value of imports of goods, services, and income flows exceeds the value of exports over a given period.
If imports consistently exceed exports, the country risks building up external debt.
This diagram illustrates the components of the balance of payments, focusing on the current account. It shows how a deficit occurs when imports exceed exports, leading to negative balances. Source
This can weaken the currency and reduce investor confidence.
Long-term deficits can lead to reliance on foreign borrowing.
Loss of National Sovereignty
Trade often requires countries to comply with international agreements and organisations (e.g., WTO).
Governments may lose policy freedom, as protectionist measures are restricted.
This can conflict with national goals such as protecting jobs or ensuring food security.
Overdependence on Global Markets
Economies that specialise heavily in a few exports (e.g., oil or coffee) become vulnerable to price fluctuations on global markets.
A fall in commodity prices can damage export revenues, public finances, and development prospects.
Overdependence reduces resilience to global shocks such as recessions or pandemics.
Short-Term Adjustment Costs
Even when trade brings long-term gains, the transition process can be painful:
Workers need retraining and relocation, which requires time and government support.
Firms may face significant investment costs to adapt to new competitive pressures.
Adjustment costs are particularly severe in developing countries with weak social safety nets.
Exploitation of Labour
Trade can encourage the exploitation of cheap labour in some developing countries.
Multinational corporations may relocate production to countries with low wages and poor working conditions.
This may lead to sweatshop labour, child labour, or unsafe environments.
While employment is created, it often comes at the cost of workers’ rights and welfare.
Dumping
Another cost is the practice of dumping, where foreign firms sell goods below cost in overseas markets to gain market share.
Dumping: The practice of exporting goods at a price lower than their normal value, often below production cost, to undercut competitors.
Domestic industries may collapse if they cannot compete.
Governments face pressure to impose protectionist measures, risking trade disputes.
Cultural Impacts
International trade can affect national culture and identity.
Global brands and products may dominate local markets, reducing cultural diversity.
Critics argue this leads to cultural homogenisation, where distinct traditions and practices are eroded.
Key Costs at a Glance
Structural unemployment
Loss of domestic industries
Increased inequality
Environmental degradation
Balance of payments deficits
Loss of sovereignty
Overdependence on global markets
Short-term adjustment costs
Labour exploitation
Dumping practices
Cultural homogenisation
FAQ
Trade can benefit some regions while harming others. Areas with industries exposed to global competition may suffer factory closures and job losses.
By contrast, regions hosting export-oriented or high-tech sectors may thrive. This uneven distribution of trade’s costs can widen regional inequality, affecting income levels, infrastructure investment, and social outcomes.
Firms in developed countries often face higher labour and environmental costs.
International competitors may exploit lower production costs abroad.
Domestic industries may lose market share, struggle to maintain economies of scale, and eventually close.
This erosion of competitiveness can lead to long-term industrial decline, known as deindustrialisation.
Social safety nets such as unemployment benefits, retraining programmes, and relocation support help workers adjust when industries decline.
In countries with strong welfare systems, adjustment costs are less severe, whereas in weaker systems, trade shocks can lead to lasting hardship and inequality.
Yes, if imports become more expensive due to currency depreciation or tariffs, consumers face higher prices.
Firms reliant on imported raw materials also see rising costs, which can feed into broader inflation. The pressure is particularly strong when demand for imports is inelastic.
Countries dependent on commodities like oil, copper, or coffee are highly vulnerable to price volatility.
Falling global prices reduce export revenues, government income, and foreign currency reserves. This can destabilise public finances and hinder long-term development, leaving the economy exposed to external shocks.
Practice Questions
Define the term dumping in the context of international trade. (2 marks)
1 mark for recognising that dumping involves selling goods abroad at a price lower than their normal value or domestic price.
1 mark for stating that this is often below the cost of production in order to undercut competitors.
Explain two costs of international trade for a developed economy. (6 marks)
Up to 3 marks for each cost explained (2 costs required).
1 mark for identifying a cost (e.g., structural unemployment, current account deficit, deindustrialisation, income inequality).
1–2 marks for clear explanation of how this arises due to trade, with developed economy context (e.g., cheap imports leading to job losses in manufacturing industries).
Maximum 6 marks in total.
