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International Trade Balance, Imbalance, and Deficit

The balance of trade refers to the relationship between the monetary value of a nation's imports and exports. As put forth by mercantilist writers starting in the 16th century, a favorable balance of trade was seen to be one in which the exports of a country exceed its imports thereby increasing its inflow of gold and silver, and thus its wealth.

Even though rebutted as early as Adam Smith and David Hume, the idea that a trade deficit is detrimental to a nation's economy persists. In particular, Keynesian economists emphasize the balance of trade and the long-term negative effect of trade imbalance on economies. They assume that nations should adjust toward a state of balance.

On the other hand, free market economists maintain that trade deficits in and of themselves are not problematic. Discussions of the U.S. trade deficit tend to focus on the difference between its imports and exports of goods and services. But that is not the only way in which trade occurs. Money that flows out of a country to pay for foreign imports can return in the form of investments--stocks, bonds, real estate, treasury bills, businesses--into its capital markets. Hence, its trade deficit also means that the U.S. has been enjoying a capital account surplus, which suggests that it has a comparative advantage over other countries in terms of better investment opportunities.

This topic provides a definition and theories concerning balances of trade as well as opinions regarding the consequence of trade deficits from various perspectives.

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Quotes on the trade deficit and international trade balance from leading economists and politicians.

Commentary or Blog Post

Despite predictions, both the broad trade-weighted dollar and the dollar exchange rate against other major currencies such as the yen and the euro have been remarkably stable.

Contrary to the general perception, the existence of a current account deficit is not in itself a sign of bad economic policy or bad economic conditions.

Even though the Oracle of Omaha occasionally becomes the Prophet of Impending Doom, the U.S. economy probably merits its annual scold from billionaire clairvoyant Warren Buffett.

"In a tit-for-tat move, China Wednesday warned that it will probe illegal EU subsidies to counter Brussels' reported decision to launch anti-dumping cases against Chinese telecom firms for receiving subsidies.

With the European Union reportedly poised to launch trade cases against telecom equipment makers in China, accusing them of getting subsidies, Beijing is investigating if the EU...

But perhaps most worryingly, societies that embrace excessive indebtedness as a way of life eventually begin to deceive themselves.

Just because the United States has its largest trade deficit ever doesn't mean that we're living beyond our means.

The International Monetary Fund meeting in Singapore last month came at a time of increasing worry about the sustainability of global financial imbalances.

If a trade deficit is determined solely by rates of savings and investment, then the U.S. trade deficit will be impervious to a get-tough trade policy.

Trade statistics obscure reality. Individuals exchange only when each expects to benefit. If they didn't expect it, they wouldn't trade. That's true even if one party is American and the other Chinese. Trade is trade.

Microeconomic policy tools such as tariffs are ineffective in reducing macroeconomic trade deficits. Countering such misguided protectionist arguments thus requires a solid understanding of the facts about the U.S. trade deficit and its impact on the U.S. economy.

Harvard economist Greg Mankiw takes the middle road on the trade deficit. While he criticizes those who claim the trade deficit means lost American jobs, he accepts that it might not be a bad idea to lower it.

A promising aspect of the global trade agenda that was launched at Doha last November was the agreement to revisit the rules about when countries may slap on temporary protection against imports. The World Trade Organisation allows several types of protection: safeguards against import surges, countervailing duties against subsidised goods, and duties against foreign products deemed to have...

Trade deficits do have their bad side for some people, but they also have good side for the overall economy.

The current-account deficit is not synonymous with debt.

One may take the perspective, drawing on the theories of Ludwig on Mises and F.A. Hayek from the Austrian School of Economics, that the US trade deficit is merely a reflection of the competitive advantage that the United States has been enjoying over the past decades.

Goods and services from China accounted for only 2.7% of U.S. personal consumption expenditures in 2010, of which less than half reflected the actual costs of Chinese imports.

"Solar companies Suntech Power Holdings Co Ltd (STP.N) and Trina Solar Ltd (TSL.N) said their first-quarter margins were squeezed as they set aside money to offset anti-dumping tariffs imposed by the U.S. government on solar panel imports from China.

The U.S. Commerce Department set punitive tariffs last Thursday after ruling in favor of the local firms that said Chinese exporters were...

"The US has imposed a preliminary anti-dumping duty on import of certain types of steel pipes from India, about a month after New Delhi lodged a complaint with WTO against the US for imposing anti-subsidy duties on import of certain Indian steel products.

The US Department of Commerce said it has 'preliminarily determined' that Indian firms were selling the pipes -- circular welded...

Chart or Graph

The first thing to note is that the deficit is indeed huge.

Figure 2 shows the share of U.S. PCE [Personal Consumption Expenditures] based on where goods were produced, taking into account intermediate goods production, and the domestic and foreign content of imports.

Since 1979, the value of world exports has risen by an average of 7.1 percent annually. During that same period, world income has skyrocketed.

Figure 1 plots the total and Chinese import content of U.S. PCE [Personal Consumption Expenditures] over the past decade.

Table 1 shows our calculations of the import content of U.S. household consumption of goods and services.

U.S. current account balance tends to shrink during times of recession and grow during economic expansions.

America's experience in both the 1980s and the 1990s refutes any connection between trade deficits and a loss of industrial might.

In reality, larger trade deficits correlate positively with falling unemployment.

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers.

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers—increased to $109.0 billion in the first quarter of 2010, from $100.9 billion.

The goods and services deficit increased $9.7 billion from July 2009 to July 2010. Exports were up $23.7 billion, or 18.3 percent, and imports were up $33.4 billion, or 20.5 percent.

The first graph shows the monthly U.S. exports and imports in dollars through October 2010. The second graph shows the U.S. trade deficit, with and without petroleum, through October.

Analysis Report White Paper

America's annual trade deficit, already large by historical standards, could reach a new record in 1998, fueling protectionist sentiment in Congress. Political fallout from the trade deficit numbers could impede efforts to reduce barriers to trade in the United States and abroad.

"The European Union's move last week to apply antidumping duties on U.S. biodiesel is particularly riling to Americans, coming as it did just hours before Gordon Brown's lecture to the U.S. Congress about resisting protectionism. World leaders have renounced trade barriers. But the EU is not practicing what it preaches. In the present crisis, measures such as antidumping duties may not attract...

The purpose of this paper is to lay simple yet elegant, formal microeconomic foundations for the theory that monetary policy is a principal determinant of international trade imbalance.

Unsound economic ideas, like cats, seem to have several lives. Errors which have been laid to rest in past decades and even centuries are often resurrected, and once dusted off and dressed in new apparel, they haunt humanity yet again.

The United States is obsessed with its ever-growing trade deficit. Yet trade is no longer a valid measure of global competitiveness. Today U.S. firms compete in the world marketplace through foreign-affiliate sales instead of exports -- and they do so with unparalleled success.

Based on a version of the IMF’s global economy model set up to analyze macroeconomic interdependence between the United States and the rest of the world, this paper asks to what extent accelerating productivity growth in the United States may have contributed to the US real exchange rate appreciation and the trade balance deterioration witnessed in the second half of the 1990s.

This working paper focuses on the impact that the US external deficit and a possible 'hard landing' for the US and world economies will have on developing countries. Cline finds that these countries are at risk since they have relied heavily on a continuing expansion of trade surpluses with the United States as a source of demand.

Our current approach to measuring the current account and the impact on the United States of such international activity does not show the benefits to the United States of sales of foreign affiliates.

"The currency exchange trade is the term used to describe the trading of foreign currencies (or forex) on the foreign exchange market. The foreign exchange market is the world’s largest financial marketplace, with over 3.2 trillion US Dollars in trading taking place on average each day. To put this into perspective, the New York Stock Exchange has an average trading volume of only 55 billion...

Video/Podcast/Media

Don Boudreaux, of George Mason University, talks about the ideas in his book, Globalization. He discusses comparative advantage, the winners and losers from trade, trade deficits, and inequality with EconTalk host Russ Roberts.

Griswold points out that the trade deficit is a misunderstood concept. He argues that trade deficits do not reflect unfair trade, but national levels of savings and investment.

A video to explain the structure of the UK balance of payments current account structure with example figures to indicate surplus and deficit.

President Obama announces the National Export Initiative, a single, comprehensive strategy to mobilize the Federal Government to promote increased American exports, level the playing field for American companies, and create new jobs for American workers.

Fred Bergsten of the Peterson Institute for International Economics and by Carl Weinberg of High Frequency Economics provide analysis of the US trade deficit with China.

Rick Sanchez talks to the US Comptroller General about the serious problem of growing US Debt.

Primary Document

This economic classic is noted for providing us with terms for and expositions of such key economic ideas as the division of labor, "invisible hand," self-interest as a beneficial force, and freedom of trade.

"Binding tariffs, and applying them equally to all trading partners (most-favoured-nation treatment, or MFN) are key to the smooth flow of trade in goods. The WTO agreements uphold the principles, but they also allow exceptions — in some circumstances. Three of these issues are:

  • actions taken against dumping (selling at an unfairly low price)
  • subsidies and special '...

Since the trade deficit is an excess of imports over exports and obviously hurts some people, it would seem on the surface to be a problem of international trade that might be fixed or alleviated by the tools of trade policy.

But there still prevails, even in nations well acquainted with commerce, a strong jealousy with regard to the balance of trade, and a fear, that all their gold and silver may be leaving them.

In the letter, Keynes gives advice to the U.S. President regarding such issues as exchange rate and balance of payment.

In his speech, President Barack Obama addressed the trade deficit and demonstrated goals of boosting US export.

In the section, The Balance of Trade, Bastiat argues that that trade deficits actually are a manifestation of profit, rather than loss.

While admitting the existence of a large U.S. trade deficit, Milton Friedman, using the case of California, defends the virtue of free trade and points out the positive effect of foreign capital inflow into the U.S. economy.

To assess the significance of the trade balance for the economy as a whole, economists generally employ a broad measure known as the current-account balance--the sum of the balances on the trade of goods and services, income flows from foreign investments, and unilateral current transfers. A diverse set of interrelated factors in the United States and abroad influences the current-account balance.

I have called this book the General Theory of Employment, Interest and Money, placing the emphasis on the prefix general.

The goods and services deficit increased $9.7 billion from July 2009 to July 2010. Exports were up $23.7 billion, or 18.3 percent, and imports were up $33.4 billion, or 20.5 percent.

The U.S. current-account deficit—the combined balances on trade in goods and services, income, and net unilateral current transfers—increased to $109.0 billion (preliminary) in the first quarter of 2010, from $100.9 billion (revised) in the fourth quarter of 2009.

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