# Trade Deficit: Definition, When It Occurs, and Examples

> **Definition**
>
> A trade deficit occurs when a country's imports exceed exports during a specific period.

## What Is a Trade Deficit?

A trade deficit occurs when a country's [imports](https://www.investopedia.com/terms/i/import.asp) exceed its [exports](https://www.investopedia.com/terms/e/export.asp). A trade deficit is also referred to as a negative balance of trade ([BOT](https://www.investopedia.com/terms/b/bot.asp)). The balance can be calculated on different categories of transactions: goods (a.k.a., “merchandise”), services, goods and services. Balances are also calculated for international transactions—current account, capital account, and financial account.

### Key Takeaways

*   Balances are calculated for several categories of international transactions
*   Trade deficits can be shorter or longer term.
*   Implications of a trade deficit depend on impacts on production, jobs, national security and how the deficits are financed.

![Close up on computer monitor showing financial market chart](https://www.investopedia.com/thmb/k2peYsWrCg9AAjYoMZTOvWMjqgc=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/GettyImages-182369493-ab6fd002e31c466ea0aa66fa80b61109.jpg)

*— pidjoe/ Getty Images*

## Understanding Trade Deficits

A trade deficit occurs when there is a negative net amount or negative balance in an [international transaction account](https://www.investopedia.com/insights/what-is-international-trade/). The balance of payments (international transaction accounts) records all economic transactions between residents and non-residents where a change in ownership occurs.

A trade deficit or net amount can be calculated on different categories within an international transaction account. These include goods, services, goods and services, current account, and the sum of balances on the current and capital accounts. The sum of the balances on the current and capital accounts equals net lending/borrowing.

This also equals the balance on the financial account plus a statistical discrepancy. The financial account measures financial assets and liabilities, in contrast to purchases and payments in the current and capital accounts.

## Advantages of Trade Deficits

The most obvious benefit of a trade deficit is that it allows a country to consume more than it produces. In the short run, trade deficits can help nations to avoid shortages of goods and other economic problems.

In some countries, trade deficits correct themselves over time. A trade deficit creates downward pressure on a country's currency under a [floating exchange rate](https://www.investopedia.com/terms/f/floatingexchangerate.asp) regime. With a cheaper domestic currency, imports become more expensive in the country with the trade deficit. Consumers react by reducing their consumption of imports and shifting toward domestically produced alternatives. Domestic currency [depreciation](https://www.investopedia.com/terms/d/depreciation.asp) also makes the country's exports less expensive and more competitive in foreign markets.

Trade deficits can also occur because a country is a highly desirable destination for foreign investment. For example, the [U.S. dollar's status](https://www.investopedia.com/ask/answers/061515/what-happens-us-dollar-during-trade-deficit.asp) as the world's reserve currency creates a strong demand for U.S. dollars. Foreigners must sell goods to Americans to obtain dollars. The stability of developed countries generally attracts capital, while less developed countries must worry about [capital flight](https://www.investopedia.com/terms/c/capitalflight.asp).

## Disadvantages of Trade Deficits

Trade deficits can create substantial problems in the long run. The worst and most obvious problem is that trade deficits can facilitate a sort of economic colonization. If a country continually runs trade deficits, citizens of other countries acquire funds to buy up capital in that nation.

That can mean making new investments that increase productivity and create jobs. However, it may also involve merely buying up existing businesses, natural resources, and other assets. If this buying continues, foreign investors will eventually own nearly everything in the country.

Trade deficits are generally much more dangerous with [fixed exchange rates](https://www.investopedia.com/terms/f/fixedexchangerate.asp). Under a fixed exchange rate regime, devaluation of the currency is impossible, trade deficits are more likely to continue, and unemployment may increase significantly.

According to the [twin deficits hypothesis](https://www.investopedia.com/articles/economics/10/twin-deficits.asp), there is also a link between trade deficits and budget deficits. Some economists believe that the [European debt crisis](https://www.investopedia.com/terms/e/european-sovereign-debt-crisis.asp) was caused in part by some EU members running persistent trade deficits with Germany. Exchange rates can no longer adjust between countries in the [Eurozone](https://www.investopedia.com/terms/e/eurozone.asp), making trade deficits a more serious problem.

## Trade Deficit and Politics

Trade deficits are frequently politicized, serving as ammunition for politicians to advance their agendas. For instance, the trade deficit between the U.S. and China has been a focal point in political discourse and specific reporting. This political narrative surrounding trade imbalances shapes public perception, influences policy decisions, and often underscores broader concerns about globalization and job loss. In summary, trade deficit may dictate how some people vote.

> **Fast Fact**
>
> Consider final figures that demonstrated how America's trade gap increased during Donald Trump's Presidency.

Moreover, trade deficits can strain diplomatic relations between countries. Disproportionate trade imbalances may lead to tensions and disputes, prompting retaliatory measures like tariffs or trade barriers. For instance, consider how sanctions and export control on Russia would have been met by retaliation measures by Russia as part of the Ukraine conflict. In this situation, having a trade deficit may be unfavorable as it may be an indicator of nobody willing to export to them.

## Real-World Example of Trade Deficits

In 2023, the [U.S. trade deficit](https://www.investopedia.com/are-trade-deficits-inherently-bad-11724207) dropped to $773.4 billion from $951.2 billion in 2022. This was due to more exports and fewer imports. The goods deficit fell by $121.3 billion to $1,061.7 billion, while the services surplus rose by $56.4 billion to $288.2 billion. As a percentage of GDP, the deficit decreased from 3.7% to 2.8%.

Exports of goods and services reached $3,053.5 billion, up by $35.0 billion (1.2%). However, goods exports declined by $39.2 billion while services exports increased by $74.2 billion. The drop in goods exports was mainly in industrial supplies and foods, though there were increases in capital goods and automotive items. Service exports rose due to more travel, financial services, and telecommunications. Imports of goods and services decreased by $142.7 billion (3.6%) to $3,826.9 billion in 2023.

## What Is a Trade Deficit?

A trade deficit occurs when a country imports more goods and services than it exports, resulting in a negative balance of trade. In other words, it represents the amount by which the value of imports exceeds the value of exports over a certain period.

## How Is a Trade Deficit Calculated?

To calculate a trade deficit, subtract the total value of exports from the total value of imports for a specific period. The resulting figure represents the net trade balance, with a negative value indicating a trade deficit.

## How Does a Trade Deficit Impact Employment?

A trade deficit can have both positive and negative effects on employment. On the negative side, increased imports can lead to job losses in industries that face stiff competition from foreign producers. However, on the positive side, a trade deficit can also be associated with strong domestic demand, which can stimulate job creation in other sectors of the economy.

## Can Trade Deficits Be Beneficial for an Economy?

While trade deficits are often viewed negatively, they can also have potential benefits for an economy. For example, a trade deficit may reflect strong domestic demand and economic growth, as well as access to a wider range of goods and services for consumers. Additionally, a trade deficit can be financed by foreign investment inflows, which can stimulate domestic investment and economic activity.

## The Bottom Line

Trade deficits occur when a country imports more goods and services than it exports, resulting in a negative balance of trade. They can affect domestic industries, employment, and economic growth, and are influenced by factors such as exchange rates, trade policies, and global economic conditions.

> **Article Sources**
>
> 1.  Bureau of Economic Analysis. "[U.S. Trade With China](https://www.bis.doc.gov/index.php/country-papers/3268-2022-statistical-analysis-of-u-s-trade-with-china/file)."
>     
> 2.  Politico. "[America's Trade Gap Soared Under Trump, Final Figures Show](https://www.politico.com/news/2021/02/05/2020-trade-figures-trump-failure-deficit-466116)."
>     
> 3.  International Trade Administration. "[Sanctions and Export Controls on Russia](https://www.trade.gov/russia-sanctions-and-export-controls)."
>     
> 4.  Bureau of Economic Analysis. "[2023 Trade Gap Is $773.4 Billion](https://www.bea.gov/news/blog/2024-02-07/2023-trade-gap-7734-billion)."