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Is the U.S. Trade Imbalance a Bad Thing?

Does Trade Between Countries Have to Balance?

Since the Presidential election, there has been a lot of talk about trade. Does a trade trade imbalance between two countries really matter? And is it a good or bad thing?

The trade of goods and services from one country to another is a simple idea. In balanced trade, my country would sell you a hammer for $10 and I would buy a box of nails from you for $10. Our trade balance would then be equal. However, should you buy the hammer from me for $7 and I buy the nails from you for $10, my country is now running a trade deficit of $3 and you are running a trade surplus of $3.World Trade

For the year 2015 (twelve months), the U.S. is running trade deficit (in-the-hole) with all 5 of it’s top major trading partners;

    • Canada – $575 billion in trade with a $15.5 billion deficit.
    • China – $600 billion in trade with a $367 billion deficit.
    • Mexico – $532 billion in trade with a $60.6 billion deficit.
    • Japan – $194 billion in trade with a $68.6 billion deficit.
    • Germany – $175 billion in trade with a $74.9 billion deficit.

The largest deficit is with China at $367 billion in 2015. Another way to look at it is that we sell China $1.00 worth of goods and they buy only $0.39 cents of our products. Though Germany is not far behind as we buy $1.00 of German products and they only buy $0.57 cents of American goods.

Though the U.S. is running a trade imbalance with the top 5 countries, what about in total? With the rest of the world? Well, the total U.S. trade deficit with ALL countries (including the top 5) was over $40 billion for November 2016 with an expected trade deficit for the completed year of 2016 to be near $500 billion.

Is a trade deficit a bad thing? In simple terms, yes. After a certain period of time, all things being equal, the country with the deficit will effectively “run out of money” and no longer be able to buy products from another country. Though since the U.S. is the reserve currency of the world, and is currently running large budget deficits (printing and spending more money than what is being taken in), this is not a problem quite yet.

Additionally, many economists believe a goods trade imbalance is ok as one needs to also add in the U.S. services trade surplus. Yes, the U.S. runs a trade surplus of almost $250 billion a year in regards to services; such things as managerial expertise, legal & financial work, entertainment, technical design and other non-goods services. However, added to the goods deficit of $750 billion, the net is still a negative of $500 billion.

Trade between countries is a difficult and confusing topic. Taken as whole, the world has seen poverty decrease by over 1 billion people over the last decade or two, thanks mainly to trade. However, as with all things economic, there are always winners and losers. Many economists will argue that trade is good as it has risen so many people from poverty, made many people wealthy and enriched many corporations. Though trade has also exposed a dark side; one of abandoned factories, unemployed workers and growing poverty and income inequality – for those on the deficit side of trade.

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