What is a Trade Deficit Between Countries?
By: Driton Ibishi
Tags: Trade, International Trade, Economics, International Relations, Currency

In times of massive trade and integration of new products in the global market, countries take advantage from trade which allows them to concentrate their productive efforts on producing a certain amount of products or services. Through trade, countries obtain the missing goods.

It is easily understandable that currency is the main ingredient in making these processes flow and it definitely plays a crucial role in the trade balance between countries.

But what is a trade deficit?

The trade deficit is an economic measure of international trade in which the value of the goods imported in a country exceeds the exported value.

Trade deficit = Total Value Imported — Total Value Exported

All the trading events between countries are recorded on the so called the balance of payments, also known as BOP. The BOP is a financial statement on a macroeconomic perspective that keeps track of all the transactions between agents (residents, entities and the government) in a country and the rest of the world over a fixed period of time which is usually one year. The BOP’s activities (transactions) include the import and export of goods, services, transfer payments, capital flows and remittances.

The data recorded in the balance of payments is very important when designing economic policies. Depending on the positioning of the economy and macroeconomic objectives of the country, policymakers address certain parts of the BOP such as foreign direct investments which are the investment made by a company or individual who has a controlling ownership in a business located in another country.

No two economies are the same, therefore, economic policymakers might want to formulate policies to keep the currency at a low level in order to stimulate the export of goods and services or encourage foreign investments to improve economic growth and create more jobs.

Simply put, the trade deficit means that e.g. USA buys more from China than China buys from USA. So, USA has a trade deficit with China.

A trade deficit does not necessarily mean that the economy is totally unhealthy. Likewise, a trade surplus country could have an unhealthy economy. There isn’t an agreed-upon rule of what scenario is right or wrong in terms of trade balance. It all depends from the position of the economy. The trade balance (BOP) has two accounts — current account and financial account.

When people refer to a trade deficit, they’re usually referring to a current account deficit. Meaning that the country imports more goods from abroad than it exports. But on the other hand, the financial account might cover the negative balance of the current account. What some people generally don’t mention is that a current account deficit means the country is necessarily running a financial account surplus: the country exports more financial assets than it imports.

However, in terms of inflation and strong currencies a trade surplus would be generally advantageous.

Trade deficits might cause inflation since imports are made in foreign currencies and the demand for foreign currencies would rise. As a result, it would depreciate the importing country’s currency. Meaning that the price of goods in importing country’s currency become more expensive and this creates further inflation.

So, a more favorable outlook would be that the value of exported goods exceeds the value of imported goods. Germany has a positive trade balance which means they have a trade surplus. In 2017, Germany’s trade surplus amounted to around 281.33 billion U.S. dollars.