Question

What measures can a country take to deal with its balance of trade deficit?

Answer 1

The United States is running a trade deficit, not because of poor trade agreements, but because its people are paying more than they receive and covering the international currency gap. In 2016, the U.S. families, companies, and government gained $18.6 trillion but invested $19.1 trillion on products and services, generating a $500 billion gap.

Consume less save more If US households or the government decrease consumption (businesses invest more than they spend), imports decrease and less foreign borrowing is required to pay for consumption. That means sales taxes — like that that nearly all other countries around the world have — could help minimize the deficit by preventing spending, growing investment, and that policy deficits. By comparison, an unfunded tax cut, such as the one introduced by the administration, would increase the deficit because the government would spend more than its revenues.

Depreciate the exchange rate. Trade deficit reversals are typically driven by a considerable real depreciation of the exchange rate. A weakened dollar makes imports more competitive and exports cheaper, thus increasing the balance of trade. Provided that the dollar is the reserve currency of the planet, and often regarded as the best currency for creditors, it continues to run faster than other currencies. So as foreign policymakers deliberately drive the dollar up to maintain their surpluses, the US might combat interference by selling dollars and purchasing foreign currencies

Tax capital inflow.Some of the reasons the US maintains a trade deficit is that it's inexpensive and easy to borrow from abroad. Unless it became more costly, there would be less spending between US residents and the government. A levy on (non-foreign direct investment) capital inflows that decreases with the inflow scale may limit unsustainable demand borrowing and help close the policy deficit. While others warn about the likelihood of capital controls distorting stock markets and could spending, they may also curtail unsustainable foreign activity, as occurred prior to the financial crisis.