Question

You continually hear in the news about the U.S. running huge trade deficits with the rest of the world, while other nations are running huge trade surpluses against the US. It is often commented in the news that we need to change this situation and start running a surplus. Is running a trade deficit a bad or good practice and why? Can all nations run trade surpluses, what does this tell you?

Answer 1

1.a. A trade deficit can confer both positives and negatives for a country. It all depends on the circumstances of the country involved, the policy decisions that have been made and the duration and size of the deficit. Often times the observed data and the underlying economic theory don't line up.

b. A trade deficit exists when a country spends more money annually on imports than it receives from its exports. The United States and many other countries, including Spain, the United Kingdom, Australia, Mexico, Turkey and Brazil, are experiencing deficits. Meanwhile, other countries export more than they import and enjoy trade surpluses. China and Russia both have large surpluses

For the past several years, the United States has been running trade deficits. Some people have reacted to this fact with doom and gloom, while others chalk it up to certain foreign governments not playing fair in U.S. markets and international trade. Running Trade Deficit is not a bad practise due to the following reasons:

- When a country persistently experiences a trade deficit there are predictable negative consequences that can affect economic growth and stability. If imports are more in demand than exports, domestic jobs may be lost to those abroad. While theoretically, this makes sense, the data suggests that unemployment levels can actually persist at very low levels even with a trade deficit and high unemployment may occur in countries with surpluses.

-The United States, is in a unique position of being the world's largest economy and its dollar the world reserve currency. As a result, the demand for U.S. dollars has remained quite strong despite persistent deficits. Surplus countries like China who do not utilize a floating currency regime, but rather keep a fixed pegged exchange rate versus the dollar, benefit by keeping their currency artificially high.

-A persistent trade deficit can often have adverse effects on the interest rates in that country. In order to combat inflation, the central bank may be motivated to enact restrictive monetary policy tools that include raising interest rates and reducing the money supply.

Trade deficits are not ever harmful in the long run because the currency will always come back to the country in some form or another, such as via foreign investment.

2. It is not possible for all the nations to have trade surpluses, this will affect the economy of entire world as a whole. Every import is someone else’s export. Every export is someone else’s import. Trade deficits and surpluses don’t matter, rather it is the total level of trade that is beneficial. In the balance of payments records of each countries, all imports are recorded as debits while all exports are recorded as credits. So to have a trade surplus, your credits must be greater than your debits. In other words, a country's value of exports must be larger than its value of imports to have a trade surplus. This itself makes it obvious that it is not possible for all countries to have a surplus. One country's surplus means it is exporting more than it imports and hence the importing country is going to face a trade deficit. So in conclusion, one country's surplus is another's deficit.