Why does Rudin say "the rational number system is inadequate as a field"?
Rudin isn't questioning $\mathbb{Q}$'s status as a field — he's questioning it's suitability for doing algebra and analysis.
For the purposes of algebra, $\mathbb{Q}$ is not a very nice field to work with: for example, many (most?) polynomials don't even have a root, let alone factor completely, and dealing properly with this deficiency is the subject of the frontiers of mathematical research!
(for comparison, while not every polynomial over $\mathbb{R}$ has a root, it has a very simple relationship with the complex numbers $\mathbb{C}$, a field over which every nonconstant polynomial has a root)
Similarly, for the purposes of analysis, $\mathbb{Q}$ is not a very nice ordered set; for example, they form a totally disconnected space, making them nearly useless for capturing even basic familiar geometric notions such as continuity.
The author means that $\mathbb Q$ as an ordered field is incomplete, i.e. not every Cauchy sequence in $\mathbb Q$ converges in $\mathbb Q$, or equivalently not every nonempty subset of $\mathbb Q$ that is bounded above has a least upper bound in $\mathbb Q$. This makes $\mathbb Q$ "inadequate" for many purposes in analysis, where the least-upper-bound property is required. For example, when $a$ is a positive rational number and $n$ a positive integer, you want the equation $x^n=a$ to have a solution; this does not always happen in $\mathbb Q$.
$\mathbb Q$ can be made complete by enlarging it to the set $\mathbb R$ of real numbers. There are two main ways by which this can be achieved: either by considering equivalence classes of Cauchy sequences in $\mathbb Q$, or by means of Dedekind cuts. It can be shown that $\mathbb R$ as a complete ordered field is unique: any two complete ordered fields are isomorphic.
Your remark “Addition and multiplication of rational numbers are commutative and associative, and multiplication is distributive over addition. Both 'zero' and 'one' exist” is inappropriate. Of course all of this is true because otherwise $\mathbb Q$ would not be a field.
However, as far as Analysis is concerned, $\mathbb Q$ is inadequate because:
- in $\mathbb Q$, a Cauchy sequence is not necessarily convergent;
- a monotonic and bounded sequence of rational numbers doesn't have to converge to a rational number;
- a bounded set of rational numbers doesn't need to have a supremum or an infimum in $\mathbb Q$;
- a continuous function defined on a closed and bounded interval of $\mathbb Q$ may well be unbounded;
- a continuous function from $\mathbb Q$ into $\mathbb Q$ may not have the intermediate value property.
And so on.