Trade Surplus and Trade Deficit

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Trade Surplus and Trade Deficit

What It Means

The balance of trade for a country is the difference between the monetary value of the country’s exported products (goods and services) and of its imported products over a certain period of time. If the balance of trade is positive (that is, if the country exports more than it imports), it has a trade surplus. On the other hand, if the balance of trade is negative (if the country imports more than it exports), it has a trade deficit, or trade gap. Because the values of a country’s exports and exports are not likely to be exactly the same, most countries operate with a trade imbalance.

Countries trade goods and services with one another because it helps them expand their markets. For instance, when American rice brokers import rice that is grown in Indonesia, the American rice market becomes more diverse, and American consumers who buy rice are provided with more choices. Every country that trades goods and services internationally must manage the inflow and outflow of the products so that the overall economic effects on the country of trading are beneficial. This management is highly complex. A country may have trade surpluses with some countries and trade deficits with others.

The United States trades goods and services with most of the world’s other countries, and the flow of products between countries is continually changing. For example, in May 2005 the United States had the greatest trade surpluses with The Netherlands, Hong Kong, Australia, the United Arab Emirates, and Singapore. By January 2006 this top-five list had shifted to Canada, Mexico, China, Japan, and Germany. And by July 2006 the list was made up of Hong Kong, Australia, the United Arab Emirates, The Netherlands, and Panama.

When Did It Begin

Countries and territories have bought and sold each other’s products for thousands of years. Although modern theories of trade surpluses and trade deficits have evolved out of sophisticated economies, the basic concepts behind them are old.

An example of an ancient system that promoted trade between distant peoples is the Silk Road, a 5,000-mile-long network of trade routes through southern Asia, the Middle East, and Europe that was used by traders and travelers from 200 BC to the Middle Ages. The Silk Road connected China with civilizations in the West such as Greece and Rome. The route was originally established to carry Chinese silks from China to the West. In addition to silk, Europeans began to rely on the Silk Road for other Asian goods including porcelain, spices, and eventually gunpowder and paper. Over time, Chinese consumers also developed an interest in goods from the West, including cosmetics, silver, and perfume.

Even during ancient times, Chinese goods were heavily exported. Chinese goods have historically been relatively cheap to manufacture and sell abroad, and China has sold more to other countries than it has bought from them, resulting in consistent trade surpluses. During the days of the Silk Road, ancient Rome eagerly bought large amounts of Chinese silk, although China wanted little of Rome’s products except glass.

More Detailed Information

Global pricing is one of many factors that affect the movement of products between countries and the surpluses and deficits that countries experience. For example, if the global price of crude oil drops, any country that is exporting oil sees the value of its product go down. The country’s trading partners will pay less for the oil, which shifts the balance of trade with them and potentially contributes to a trade deficit in the oil-producing country. Some factors that can shift trade surpluses and deficits are seasonal. Each year the Christmas retail season in the United States, for example, promotes an increase in exports of certain popular products from China and other countries having strong, low-cost manufacturing bases. Another factor that can alter the balance of trade for a country is a growth in the rate of consumption of domestically produced products. Using more products made at home will reduce the country’s reliance on exports and potentially contribute to a trade surplus.

Trade surpluses are not necessarily indicators of a country’s strong economic health, and trade deficits are not necessarily indicators of industrial decline. Many economists hold that the freedom of the country’s consumers to experience a choice among quality goods and services in the market, the level of an economy’s efficiency, and the openness of the country to international trade are more reliable indicators of the prosperity of the country’s economy. For example, even though the United States has run a trade deficit with the rest of the world since 1976, its economy has grown steadily. Some economists argue that trade deficits may be a positive sign for a country’s economy because they show that foreign investors have confidence in the country. Trade deficits also can indicate growth in domestic consumption because, in a country that is exporting more than it is importing, consumers may be buying goods faster than the country can produce.

China has experienced rapid economic growth in the late twentieth and early twenty-first centuries, and it also has run a trade surplus. A trade surplus can be an indication that a country’s economic policies are more supportive of demands from foreign consumers than from the country’s own consumers; such policies depress living standards within the country. China has long had a practice of keeping manufacturing costs low for exported goods, and its lowered living standards contribute to its ability to maintain these low costs.

Recent Trends

Globalization is a process involving the merging of economies, governmental policies, political movements, and cultures around the world. Beginning in the last decades of the twentieth century, globalization has had the effect of increasing the interconnectedness of the separate markets of individual countries and accelerating their transformation into a single global market. Goods have come to be traded across borders in greater volume and greater diversity than ever before. In fact, the level of trade between countries (international trade) has grown at a much faster rate than has the world economy. The rampant growth of international trade has resulted in an opening of trading practices and a general reduction in tariffs (taxes placed on imported goods).

One result of the growing global market is an increase in outsourcing, a practice in which companies reduce costs by paying an outside producer to take on a specified portion of work that would otherwise be done internally. When companies outsource to foreign operations, it is called offshoring. Some American computer companies, for example, buy computer components from countries where labor costs are lower than in the United States, thereby reducing their own production expenses. Critics of offshoring claim that the ultimate costs of sending work to a foreign manufacturer are greater than the savings in production costs. For example, in addition to taking jobs away from domestic workers, offshoring can discourage the domestic labor force from developing or maintaining important skills.