DEFINITION of 'Balanced Trade'

Balanced trade is a condition in which an economy runs neither a trade surplus or a trade deficit. A balanced trade model is an alternative to a free trade one, because a model that obliges countries to match imports and exports to ensure a zero balance of trade would require various interventions in the market to secure this outcome.

BREAKING DOWN 'Balanced Trade'

A balanced trade model differs from a free trade model, in which countries utilize their resources and comparative advantages to buy or sell as many goods and services as demand and supply allow. A country would use tariffs or other barriers to trade to try to achieve balanced trade, which might be either on a country-by-country basis (zero balance on a bilateral basis) or for the overall trade balance (where a surplus with one country might be offset by a deficit with another). There have been various proposals in addition to tariffs.

If a particular country is believed to be manipulating flows, countervailing duties against imports from that country or even a fixed (at different from market) exchange rate have been proposed to try to balance bilateral trade. Another suggestion, which does not target specific countries or industries, is a system of traded "import certificates"; exporters would receive these for exports and importers would need them to be able to import, thus theoretically limiting the value of imports to that of exports. (Warren Buffet is a supporter of such certificates but acknowledges that they are equivalent to tariffs.) International trade organizations, such as the World Trade Organization (WTO), typically limit tariffs and trade barriers, so attempting to enter into a balanced trade agreement would run afoul of membership agreements.

Arguments Against Balanced Trade

The proponents of such a model have argued from the perspective of protecting growth, jobs and wages in an economy that runs a trade deficit, on the (implicit or explicit) assumption that imports equate to sending jobs abroad. There is little incentive for a trade surplus economy to move to balance, as it would conversely experience lower jobs and growth.

Some criticisms of this model include:

  • it interferes with the free market, reducing overall efficiency in the economy
  • it seems to ignore the rest of the balance of payments. Capital flows act as a counter-weight to trade flows; capital controls would thus be needed to make the system work
  • attempts to limit trade often result in circumventions of those restrictions (for example, under-invoicing imports)
  • domestic prices are likely to rise
  • imposing tariffs and duties might spark a trade war
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