Question

What causes a country to have multilateral bilateral trade deficits or trade surpluses? Why should bilateral trade imbalances be viewed with caution? How should we expect tariffs to affect exports, imports, and the trade balance? How does consumption spending affect the trade balance?

Answer 1

A country can have a multilateral or bilateral trade deficit or trade surplus when there the mismatch between the exports and imports. When a country's Export is more than the Imports it has a trade surplus because there is an inflow of money. When a country's Import is more than its export, it has a trade deficit because in this case there is outflow of money. So the main cause of the trade deficit or surplus is the ability to produce and export goods and services.

Bilateral trade balances must be viewed with caution because these are the bilateral trade balances which leads to overall trade balance or imbalance of a country. We cant always balance a bilateral trade but we must keep in mind that if there is a deficit from trade with one country there must be surplus with other country. So in order to maintain the overall trade balance it is important to see bilateral trade with caution.

Tariffs are the taxes imposed on imports and exports of goods and services, tariff effects the import and export by changing the prices of goods and services. It is helpful in maintaing the balance of trade as, when there is trade deficit it means that import is higher than export and hence tariff is imposed on the impoted goods which makes import costlier and hence decreases overall import bringing the deficit at a lower level or zero.

Consumption spending effect the trade balance because when we consume more goods and services produced within the country there is little left for export and hence export decreases, and when we consume more imported goods and services, this increases import and both of these situations leads to trade deficit. Similarly when we decrease our consumption trade may be in surplus.