WASHINGTON, July 21 – The numbers are stark: the United States holds a trade deficit of $1.15 trillion, the largest of any nation on earth. For policymakers and economists tracking global flows, that figure sits at the center of a longstanding debate over what a trade deficit actually means. The balance of trade is the difference between the monetary value of a nation’s exports and imports of goods over a certain time period.
The official International Monetary Fund definition only considers goods, though services are sometimes included. It is a flow variable, and exports and imports are not necessarily ‘in balance’ with each other.
A trade surplus occurs when exports exceed imports; a trade deficit occurs when imports exceed exports. As of 2016, about 60 out of 200 countries have a trade surplus. The world’s largest trade surpluses are held by China ($823 billion), Germany ($226 billion), and Singapore ($154 billion).
The largest trade deficits are held by the United States ($1.15 trillion), United Kingdom ($271 billion), and India ($241 billion).
What Economists Say
Economists reject the idea that a trade deficit is inherently detrimental to a nation’s economy, and also reject the notion that a bilateral trade deficit is inherently bad. The trade balance forms part of the current account, which includes income from the net international investment position and international aid. A current account surplus increases a country’s net international asset position; a deficit decreases it.
The trade balance equals the difference between a country’s output and its domestic demand (excluding money re-spent on foreign stock and imports for domestic production).
Problems with the Numbers
Measuring the trade balance is problematic due to data recording issues: when all countries’ official data are summed, exports exceed imports by almost 1%, which is impossible since every transaction has equal credit and debit. This discrepancy is attributed to money laundering, tax evasion, smuggling, and other visibility problems. Most of the discrepancy occurs between developed countries with otherwise trusted statistics.
Factors affecting the trade balance include production costs, raw material costs, currency exchange rates, tariffs and trade restrictions, non-tariff barriers (environmental, health, safety standards). The availability of foreign exchange, domestic prices, and the business cycle also play roles.
In export-led growth economies, the trade balance tends toward exports during expansions; in domestic-demand-led economies, it tends toward imports. The monetary balance of trade differs from the physical balance of raw materials. Developed countries often import raw materials and export finished products—a pattern that shapes the deficit in goods terms even as it reflects a different underlying economic reality.
As the numbers continue to roll in, the debate over what the deficit really says about the American economy shows no signs of cooling.
Sources
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