The Other side of the Trade Deficit | Trade Samaritan

The Other side of the Trade Deficit

Trade deficit in its simplest form is the value of goods and services exported minus the value of goods and services imported. United States Current Account balance as of 1st quarter 2013 is at -$106.1 billion which is approximately 4% worse than the 4th quarter 2012.

Trade deficit in its simplest form is the value of goods and services exported minus the value of goods and services imported.  It is a myth that Trade deficit is an adversity. We are going to prove our statement with a very simple and a popular example.

United States Current Account balance as of 1st quarter 2013 is at -$106.1 billion which is approximately 4% worse than the 4th quarter 2012. At first glance one is likely to believe that a trade deficit to the tune of $106.1 billion is detrimental to the economy as it indicates that imports have exceeded exports by $106.1 billion. Balance of Payments of United States has been in negative for over 3 decades. And here’s the data for the period 2001-2011. (In millions of U.S. dollars, 2011). As we can see that the Trade deficit is not only negative but it is worsening every year. Whenever U.S. reports a trade balance it is a negative balance.

Year US Merchandise Exports US Merchandise Imports Trade Balance/Deficit
2001 731.2 1152.5 -421.3
2002 697.4 1171.9 -474.5
2003 729.8 1270.2 -540.4
2004 822 1485.5 -663.5
2005 911.7 1692.4 -780.7
2006 1039.4 1875.1 -835.7
2007 1164 1982.8 -818.9
2008 1307.5 2137.6 -830.1
2009 1069.7 1575.5 -505.8
2010 1288.9 1934 -645.1
2011 1497.4 2235.8 -738.4

The above Trade deficit of the United States with its worsening trend ceases to look detrimental if we look at it along with the improving trend of Gross Domestic Product. (In Trillions of U.S. dollars, 2013)

Year GDP(US Trillion)
2001 11.37
2002 11.59
2003 12.04
2004 12.39
2005 12.74
2006 13.04
2007 13.33
2008 12.88
2009 12.87
2010 13.18
2011 13.44
2012 13.67
2013 13.75

Trade Deficit needs to be viewed along with the aggregate net worth or House hold Net worth which is yet another indicator used to gauge the financial well-being of the country. Between 2000 and 2011, United States aggregate net worth increased from $28.9 trillion to $40.2 trillion.

There are many positive factors associated with the negative Trade deficit.

On the imports side, most developed economies efficiently use their resources in developing a product/idea, manufacturing it outside and bringing the product back in the country. In such a scenario the imports will go up and there will be a Trade Deficit however this isn’t an adversity. Another pro-import scenario is the rise in the house hold net worth, which in turn facilitates disposable income for imports. The significant contributor to imports is the GDP growth, as it needs to be supported with Raw Material and Services, if the domestic supply is inadequate, countries go in for imports. Low imports may indicate what economists call ‘demand destruction’. It can be an indicator of a weak economy.

Steep exports may also mean that the country is utilizing all of its natural resources on exports to survive thereby making the same goods unavailable or expensive for its own natives/citizens. Why would an economy leave its own citizens high and dry? Onions and Mangoes both are locally grown in India, however today both these commodities are very expensive in India! Such an acute shortage especially of basic or staple necessities further leads to malpractices such as hoarding and black marketing. Export oriented countries tend to reserve the best of their produce for exports and the rejects or the defective produce is sold in the local market. Countries tend to adopt an intense export oriented outlook without gauging the domestic demand vis-a-vis the supply. In developing countries, goods meant for exports are of a much higher quality than the ones which are locally sold. Conventionally ‘Export Quality’ or ‘For Exports Only’ meant goods of a superior quality which are not available for local sale and are manufactured for exports only. Why can’t the same good quality be made available in the local market? Higher exports must not be construed as a sign of economic well-being; it needs to be analyzed with various other factors.

Thus, Trade deficit (Negative Current Account Balance) can reflect competitiveness and could be a sign of growth and prosperity.

Placed below is a tabular presentation of Trade Deficit and GDP of Canada, Egypt and Greece.

Year Canada Egypt, Arab Rep. Greece
Current Account Balance GDP Current Account Balance GDP Current Account Balance GDP
2005 21,576,655,512 1,133,759,985,476 2,102,800,000 89,685,724,889 -18,233,177,668 240,075,690,332
2006 17,931,696,702 1,278,610,846,645 2,635,400,000 107,484,034,648 -29,565,324,184 261,713,232,776
2007 11,360,592,838 1,424,065,729,448 411,600,000 130,477,817,194 -44,587,281,268 305,431,771,155
2008 1,788,555,276 1,502,678,437,547 -1,414,600,000 162,818,181,818 -51,312,803,251 341,593,975,533
2009 -40,587,990,192 1,337,577,639,752 -3,349,300,000 188,984,088,127 -35,912,575,298 321,016,154,721
2010 -58,413,258,758 1,577,040,082,218 -4,503,800,000 218,887,812,550 -30,273,985,654 292,304,602,599
2011 -52,845,667,624 1,777,788,888,889 -5,483,900,000 236,000,735,704 -28,582,720,075 289,627,362,871
2012 -66,998,343,092 1,821,424,139,311 NA 257,285,845,358 -8,624,494,503 249,098,684,277

Greece; numbers and the trend is worrisome as its GDP is falling and the Current account balance continues to be in negative; EU and IMF have stepped in for their rescue and the current account balance drop stands arrested thereafter.

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Comments:

  • Killian Foley

    I know this post is 3 years old, but if you could, would you please tell me where you found the US Real GDP figures. I can’t find the data anywhere. I only have up to 2011 yearly Real GDP data but I’d really like to have the Quaterly Real GDP data and up to date.