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In your case the demand for arms is so low that adding a fully staffed second factory would oversupply the market and so lower the arms price to a value where production is no longer profitable. However your building likely will stop hiring workers before the price drops too much.
You can set up trade routes to export arms to make arms production more profitable, but if arms prices rise your military then will have to pay more for their arms, too. Notice that profit from business goes to private people while army costs, infrastructure costs, etc are paid from your budget.
So in order to salvage it, I would need to, like you say, setup a trade route, but that would be a double-edged sword due to increased military costs.
I think I was just confused as to why the tutorial was having me do something that seems to be mostly negative.
If you want to continue, you can usually choose your time when to do a task ... and I guess you can also reduce the level of the upgraded building back to 1.
Note that there are other nations like Norway in the Swedish Market, so they may also produce arms if there is a deficit.