Balance of Trade

What Is a Trade Surplus/Deficit, and Which Is Better?

A trade surplus is a situation in which a country’s export value is higher than its imports. A surplus in trade is an economic indicator of a positive balance of trade. On the other hand, a trade deficit signifies a negative trade balance. It occurs when a country’s import value exceeds its exports.

On the surface, a trade surplus seems better as it indicates a high employment rate and can strengthen the currency. However, it doesn’t necessarily translate to a strong economy. For instance, Japan and Germany both have a significant trade surplus but low economic growth.

On the other hand, a trade deficit doesn’t necessarily spell doom for a nation’s economic growth. For instance, the US has experienced economic growth during periods of high trade deficit.

Whether a surplus is better than a deficit will depend on several factors, such as a nation’s investment decisions.

What Are the Consequences of Trade Deficit?

A trade deficit can lead to a reduced income for domestic workers, causing a low savings level. This situation can make countries subject to external economic factors such as reversals of capital inflows.

A trade deficit also hurts employment rates. According to the Economic Policy Institute, the US lost $3.7 million in jobs between 2001-2018 due to its high trade deficit with China. 75.4% of these jobs lost were in the manufacturing sector.

Why Does the US Have Such a High Trade Deficit?

US trade deficit results from its high consumption of imported goods and services compared to its export rate. The country’s imports in November 2020 were $252.3 billion while exports were $184.2 billion, making the deficit $68.1 billion.

While the United States can make most of what it needs, consumers will have to pay higher prices for such goods. However, some other countries can make the same products for lower costs, making more sense to import from them. As such, the trade deficit is unlikely to change.

Top countries that the US has a high negative trade balance with include China, Mexico, Vietnam, and Switzerland, with China holding over 42% of the deficit.

Additionally, the United States is a desirable destination for foreign investment. There’s a massive demand for US currency, and foreigners must sell goods into the country to obtain US dollars.

Is Trade Deficit a Good or Bad Thing?

A negative trade balance is neither entirely good nor bad. There are several ways a deficit can be advantageous or disadvantageous and reflect the good or bad aspects of a nation’s economy.

Under certain conditions, a trade deficit can be a source of strong economic growth. With high export rates, countries can avoid a shortage of goods and services, and there’ll be a wide variety of products in the market. Since imported goods and services are at lower prices, it can reduce the inflation rate.

However, a large deficit can lead to implications related to high foreign capital inflows. When a country continually runs in deficit, foreign investors will keep on buying up its funds and eventually own most of its resources or assets. This situation causes vulnerability to external economic factors, which hinders long-term economic growth.

Many small nations often experience a higher risk of foreign inflows.

Why Do Economies Have Such a Huge Trade Deficit?

Economies record large trade deficits because their imports vastly outnumber their exports. Since many countries can’t manufacture all the goods and services they require, they’ll rely on other nations for such products. As such, their trade deficits will be high.

When Does a Trade Deficit Occur?

A trade deficit occurs when a country buys more goods and services than it sells during a given period.

Do Any Countries Have a Trade Surplus with China?

A few countries have a positive trade balance with China. However, for some, the trade balance fluctuates over a given period. One such nation is Russia.

A country like South Korea has recorded a consistent trade surplus with China for some years now. In 2019, the trade surplus was $25.24 billion. Taiwan also has a positive trade balance with mainland China and Hong Kong, with a surplus of $73.7 billion in 2019.

The US only records a trade surplus with China in services. The services trade surplus for 2019 was $36.4 billion.

Is Negative Trade Balance Bad for the Economy?

As stated earlier, a negative trade balance, otherwise known as a trade deficit, can be bad for the economy, depending on market factors. A country that’s heavily dependent on imported goods can experience economic colonization in the long run.

Additionally, high deficits can affect a currency’s exchange rates, leading to low demand for a country’s money in the international market. Among others, these consequences signify that a negative trade balance isn’t favorable to economic growth.

While the theory regarding trade deficit and a weak economy is pretty straightforward, real-life scenarios sometimes prove otherwise. A typical example is the US, with the world’s highest trade deficit, but runs a good economy. Some economists say that the reason is the opening up of its markets resulting from a high import demand.

How Do Countries Overcome Trade Deficit?

In 2018, President Trump tried to reduce the US’s massive deficit with China by imposing tariffs on Chinese imports. The result was a reduced deficit from $418.9 billion in 2018 to $345.2 billion in 2019. However, Trump’s action sparked a trade war, which hurt two-way trade between both nations.

A better way to overcome trade deficit is to enhance productivity. A nation that invests in productivity growth, such as infrastructural developments, can boost its economy, thereby improving its trade balance. The US employed this strategy to develop economically in the 1800s by investing in railroads and other public infrastructure.

Depreciating the exchange rate is another effective method of reducing the trade deficit. A weaker currency makes imports more expensive and exports cheaper, which reduces the demand for imports. With less foreign buying, the trade balance will improve.

While this method might be excellent for many countries, it may not be beneficial to the US. Since the dollar is the dominant currency, a weaker dollar reduces the US’s power in the international market.

Sometimes, a trade deficit corrects itself over time. In countries with floating exchange rates, a trade deficit makes their currency less valuable. As such, consumers will shift their attention away from more expensive imports to cheaper domestic products.

What Is Balance Trade?

Balance of trade is the difference between a nation’s export value and its import value over a given period. Countries calculate trade balances on different categories such as goods, services, and goods and services.

What Is the Importance of the Balance of Trade?

The balance of trade provides vital information for analyzing and understanding international trade. It’s similar to an income statement, and it helps countries discover whether a deficit or surplus is in play. It also shows them how they stand in the global market.

How to Improve Balance of Trade?

Improving the balance of trade means having a consistent trade surplus rather than a deficit. Besides the different methods of overcoming the trade deficit discussed earlier, countries can apply export-orientation to improve the trade balance. It involves increasing the country’s export potentials.

For export-orientation to occur, domestic manufacturers will need to spring up, and tax policies will have to be flexible for locally made products. This strategy is more sustainable than imposing tariffs and quotas on imports, termed import-substitution.

Is Trade Among Countries Good or Bad?

Trade among countries is a welcomed activity. Through international trade, new markets open, and countries gain exposure to goods, services, and technology unavailable in their nation.

The only significant disadvantage with international trade is that it hurts domestic manufacturers that can’t compete with cheap exports. As such, citizens might lose jobs.

Do Trade Deficits Increase the National Debt? If So, How?

No, trade deficit doesn’t increase the national debt. The national debt is a result of a continuous budget deficit or government debt.

How is The Budget Deficit Related to the Trade Deficit?

A budget deficit is a result of the government spending more than it earns in tax revenues. For instance, the US government consumption is higher than its income, it then has to finance the difference with foreign credit.

Trade deficit involves a negative balance of exports and imports and doesn’t directly correlate with budget deficits. However, a higher budget deficit can increase foreign-held debt, which might impact the trade deficit.

How Does the Government Finance a Trade Deficit?

Governments finance trade deficits by borrowing from foreign lenders (foreign debts) or accepting foreign investments, otherwise called foreign direct investment (FDI).

Which Countries Have the Best Balance of Trade?

A trade surplus is considered a better balance of trade than a deficit. While several countries record trade surplus each year, the top five countries with positive trade balance for 2019 includes:

  • China: $421.9 billion
  • Germany: $254.94 billion
  • Russia: $164.74 billion
  • Saudi Arabia: $126.7 billion
  • Netherlands: $73.26 billion

Is a Trade Surplus Good or Bad?

A trade surplus indicates a high demand for a country’s goods and services in the international market, which can strengthen its currency. It can also increase employment and economic growth.

Does the Balance of Trade Include Trade in Service?

Trade balance usually includes calculations for goods and services. The analysis for both categories can be separate or together. When calculated independently, the report will indicate the class.