The Trade Balance
The Trade Balance

The trade balance for any country is the difference between the total values of its exports and imports in a given year. When a country’s total annual exports exceed its total annual imports, it is said to have a trade surplus.

The figure below depicts the course of U.S. exports and imports over the past half-century, demonstrating quite clearly that, although exports increased from 1995-2000, imports increased more, producing a sizeable trade deficit by the end of the decade (US Census, 2012).

 

When imports exceed exports, a country has a trade deficit.  Recent history has shown the United States has recorded the largest trade deficits that the world has ever seen. The U.S. trade deficit declined between 2011 and 2012 from $559.9 billion to $540.4 billion (Scott, 2013). After recording relatively large trade deficits during the 1980s, U.S. trade deficits declined substantially during the first half of the 1990s. At the end of the twentieth century, however, the deficit began increasing again, and peaked in 2005. A drop in the trade deficit in 2013 has pointed towards an economic recovery for the U.S. This is a result of a boom in oil exports from increased exploration (Deseret, 2013).

 The figure below focuses on the annual changes in the U.S. trade balance during the past half-century. It illustrates the sharp increase in the U.S. trade deficit around 2000 (US Census, 2012). This was a result of China’s booming economy which grew at a pace of 10 percent each year, increasing exports to consumers in the U.S.

 

U.S. Trade Data Available Online

The U.S. Census Bureau monitors trends in foreign trade, such as historical data by product category, U.S. trade balance by country, and trade of different products by country.

Significance of the U.S. Trade Deficit. For decades, economists and citizens in the U.S. and other countries have debated the significance of trade balances. Many argue that it is better for countries to have trade surpluses— to export more than they import—than to have deficits. They believe that trade deficits are harmful for a number of reasons:

  1. Trade deficits are often interpreted as a sign of a nation’s economic weakness. They are said to reflect an excessive reliance on products made by others, and to result from deficiencies in the home country’s economic output. In the eyes of many labor supporters, an excess of imports over exports comes at the expense of domestic production and jobs. Some people argue that the loss of millions of manufacturing jobs in the United States over the past several decades is due to the trade deficit.
  2. Trade deficits represent a sacrifice of future growth. Because a nation with a trade deficit is purchasing more than it produces, investment in future growth is being traded for consumption in the present.
  3. Large trade deficits create an environment conducive to financial crises that could damage the U.S. economy.
    U.S. Trade Deficit Review Commission:

    In order to understand the nature, causes and consequences of the U.S. trade deficit, Congress established the U.S. Trade Deficit Review Commission [http://www.ustdrc.gov/] in 1998. The commission ultimately could not reach a consensus on the significance of the U.S. trade deficit nor what to do about it. Nonetheless, the Commission’s final report, “The U.S. Trade Deficit: Causes, Consequences, and Recommendations for Action,” offers valuable background material on the importance of trade to the U.S. economy and on the two main opposing perspectives on the significance of the trade deficit.

    According to this view, when the United States runs a large trade deficit, foreign sellers of goods and services simultaneously accumulate large amounts of U.S. dollars. These dollars cannot be spent inside their own countries, so they need to be invested somewhere. Much of this trade deficit-driven accumulation of dollars is used to purchase American stocks and bonds, pieces of American companies, and other U.S. assets.

    The potential for instability arises if foreign investors in U.S. assets begin to worry that a persistent trade deficit is going to make the U.S. dollar less valuable relative to currencies in other countries. If this concern prompts a lot of foreign investors to sell their U.S. assets at the same time (in the hope of reinvesting the proceeds somewhere else), then the value of the U.S. dollar could fall substantially in a short period of time.

Others doubt the importance of these risks, and counter that:

  1. Consumers, particularly in the United States, can enjoy a higher living standard than they would if limited to domestically produced goods and services;
  2. Trade deficits have rarely sparked financial crises in advanced industrial countries; and
  3. Trade deficits can be a sign of economic strength; as imports tend to increase rapidly during times of economic growth when consumers and firms have more money to spend on foreign as well as domestic goods.

This argument is consistent with the experience of the United States during the second half of the 1990s, when a booming economy and rising employment were accompanied by record import levels and trade deficits.

Questions for Discussion:

  1. What is the current U.S. trade balance?
  2. You have just read arguments for and against sustaining a trade deficit—which do you find more persuasive and why? Does your answer change depending on the country you think about (i.e. would you give one answer for the United States, another for Japan, and another for Peru?).
  3. What is the relationship between trade deficits and the potential for financial crises?
  4. How can trade deficits have a positive economic effect in a country? Again, does a state’s ability to sustain trade deficits depend on the size and/or strength of its economy?

 

 

  

Next: Primer II: Government Regulation Of Trade