The bookkeeping of exports and imports is a zero-sum a game. If you were to keep an account of every nation’s trade with every other nation’s the numbers ought to balance. Say you were to subtract each country’s imports from its exports. Who would be on top? Who would be on the bottom? And what would that tell us?
Trade balance is one of the most cited metrics intended to measure national financial strength. The idea, which makes some sense on the surface, is that a country that exports a lot is successful at producing goods and services other countries want. So a country that exports little, e.g. North Korea at $158 per capita, can barely produce enough to meet internal demand, let alone find many buyers in the world market. Meanwhile, Liechtenstein averages over $100,000 in exports per capita, which might lead you to believe that the tiny principality is the most adept nation in the world at providing goods people want.
Exports Good, Imports Bad. Wait, What?
On the flip side, then, imports must be negatively correlated with self-sufficiency, right? The more you have to bring in, the less competent you are at developing your own resources, no? By that logic, San Marino is the least competent country in the world (over $82,000 in imports per capita per year), while the Central African Republic has almost perfected the art of producing everything it needs ($73 in imports per capita).
Already this is insane. As a rule, landlocked European countries enjoy a far higher standard of living than landlocked African ones do. But perhaps the export and import figures will make sense when we look at the differences between them. Surely the country with the most net exports (or to use the industry term, “positive trade balance”) is rich, while the country with the largest negative trade balance must be destitute.
Enough suspense. The world’s largest net exporter is Germany, a nation with a robust economy that’s the envy of many of its highly-developed country peers. Now the numbers are starting to make sense. On the other end of the spectrum, with a trade deficit of more than half a trillion dollars, and therefore the world’s largest economic basket case, is…the United States of America. It’s not close, either. The US’s trade deficit is not only larger than Germany’s surplus, it’s larger by an amount greater than the next largest trade deficit in the world, that of the UK.
Different Kinds of Deficits
How can the world’s most prosperous economy also be its most sputtering? It can’t, and it isn’t. What the measure of balance of trade fails to take into account is that every export, and every import, is exchanged for something with an exact dollar value: dollars!
That sounds facile, but it isn’t. A large trade deficit means that that nation’s citizens are so wealthy that they can afford to purchase what other nations have to offer. In that respect, it isn’t necessarily desirable nor even fair to compare exports to imports, let alone to consider them to be two sides of the same coin. Besides, as large as American imports are, the United States still exports more than any country, except China. The world wants what we’re selling. And vice-versa. This is something to be commended, not criticized. A trade deficit merely means that as much of our homemade stuff that other countries want, we want even more of theirs.
This is the point where stupid or willfully ignorant politicians moan about “energy independence” and the like, as if buying more oil than we sell somehow enslaves us to the nations we’re buying it from. America shouldn’t focus on being energy independent any more than it should worry about being food independent or car independent or cobalt and nickel independent.
If you examine trade deficit per capita, the normalized numbers look less overwhelming. (The United States is, after all, the third-most populous country in the world.) And were you to look at trade deficit with respect to gross domestic product, the United States’ raw $500 billion becomes underwhelming. It’s barely 2% of GDP. To put that in perspective, the Central Intelligence Agency World Factbook's estimates sandwich the US among Egypt, the Ivory Coast, France, and Poland. Any economic indicator that ranks those five nations in sequence is of limited value.
The Bigger the Trade Deficit, the Better?
Some countries, limited by size or inaccessibility, necessarily import a lot. Singapore takes up less real estate than Lexington, Kentucky, and is thus not exactly teeming with amber waves of grain and vast coal deposits. Kiribati is home to 100,000 people spread out over a swath of ocean the size of the eastern United States. That’s why those two are among the handful of countries that import more than they produce. They have little choice in the matter.
Using the words “surplus” and “deficit” here is part of the problem, given those words’ connotations. Having a net trade deficit means that on average, we’re paying out dollars and getting stuff in return. Germany is doing the opposite, shipping out stuff and getting currency in return. The stuff is at least as valuable as the money in both cases, or nobody would be trading. If trade deficits were instead known as “net importation” or even “foreign enterprise difference,” we wouldn’t be having this discussion.
The Bottom Line
When you hear timely reminders of the United States’ “weak” economy, take them in context. Yes, unemployment is a couple of percentage points higher and annual growth a few tenths-of-points lower than we’d like to see. But the ability to trade as both a high-volume sender and receiver of goods, on a multi-billion dollar scale, is something other countries should aspire to. Trade is beneficial. More trade is more beneficial than less trade. And a $505 billion trade “deficit” is beneficial indeed.