What Is Balanced Trade?
Balanced trade is a condition in which an economy runs neither a trade surplus nor 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.
- A balanced trade model is one in which imports of a country are equal to its exports.
- Implementation of balanced trade can be achieved through inflation control and by imposing tariffs or other barriers, such as import certificates, on a country-by-country basis.
- Proponents of balanced trade point to its role in protecting growth, jobs, and wages in an economy that runs a trade deficit.
- Opponents say it will cause inflation and imposition of tariffs, and duties might spark a trade war.
- The specific strategy regarding balanced trade may vary from one country to the next or may vary over time within one country's borders.
The Balance of Trade
Understanding 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. Under free trade, the total value of imports might not always equal the total value of exports, leading to a trade surplus or deficit.
The idea of balanced trade originates from an essay entitled "Balanced Trade: Toward the Future of Economics" posted on a leftist political and economic blog, known as The Mike P. McKeever Institute of Economic Policy Analysis, in 2004. In his essay, McKeever disputes several commonly accepted economics concepts and theories related to international trade, such as David Ricardo's concept of comparative advantage, and recommends balanced trade as an alternative.
Under balanced trade, national governments should operate their domestic economies as free markets, where businesses may be private or government-owned and are under heavy regulation to boost worker incomes and protect the environment. Governments should then allow as much international trade as possible but closely regulate the flows of money into and out of the country to prevent the accumulation of a trade deficit or surplus. Rather than limit the trade of goods, they would limit financial flows.
The United States has historically operated in a net deficit by importing more than it exports. In the first quarter of 2023, the U.S. imported $268 billion more than it exported.
Achieving Balanced Trade
To achieve balanced trade, a country could use tariffs or other barriers to trade to try to adjust the total amount of imports and/or exports to be even, 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 the 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.
The United States has consistently experienced a trade deficit for decades.
Proponents and Opponents of Balanced Trade
The topic of balanced trade is highly subject to opinion. There is sufficient data to support one's position in favor of or in opposition of balanced trade. Below are some of the primary arguments made for either position. Be mindful to recognize that what may be best for one country may be entirely different than another. In addition, be aware that a single country's trade position may ebb and flow over time as it is most beneficial to its specific economic environment.
Arguments for Balanced Trade
Below is a list of arguments that support balanced trade.
- Economic Stability: By avoiding trade imbalances and the danger of unsustainable deficits or surpluses, maintaining balanced trade can help to maintain the economy's stability. Balanced trade helps prevent abrupt and disruptive changes in exchange rates and trade flows. For example, consider how volatile exchange rates and dependency on foreign countries for goods may cause undue strain on one's economy.
- Jobs and Domestic Industries: Balanced trade may benefit both jobs and domestic industry. It contributes to the protection of domestic industry from unfair competition and potential job losses by preserving a fair balance between imports and exports. It promotes the preservation of jobs across a range of industries and enables local businesses to compete on an even playing field.
- National Security: Balanced trade is frequently regarded as crucial for national security concerns. A nation may become vulnerable to interruptions in the global supply chain if it depends too much on imports, especially for necessities and vital technologies. This is especially true for goods imported from locations with high geopolitical concerns.
- Global Equity: Those in favor of balanced trade claim balanced trade promotes fairness and reciprocity. Balanced commerce between trading partners lessens the possibility of one country getting unfair advantages or economically exploiting the other. This may help create a more fair international trading system.
- Long-term Sustainability: Balanced commerce is frequently thought to be more long-term sustainable. Trade imbalances and distortions can result from ongoing deficits or surpluses in international trade. Countries can encourage sustainable economic growth, prevent an excessive reliance on debt to finance trade imbalances, and foster a more stable and resilient economy by aiming for balanced trade.
Arguments Against Balanced Trade
There are arguments to be had against a country striving for balanced trade. Some counterpoints against balanced trade includes:
- Comparative Advantage: Critics claim that emphasizing balanced trade may compromise the concept of comparative advantage. In theory, countries can gain from increased production and efficiency by specializing and trading in accordance with their advantages, which will promote general economic growth.
- Adaptability Constraints: A nation's capacity to react to shifting economic conditions may be constrained by a rigid pursuit of balanced trade. Temporary trade imbalances can be caused by economic swings, changes in consumer preferences, or technological breakthroughs.
- Economic Development: Developing nations frequently rely on trade to promote economic expansion and development. Advocates claim that in order to import the equipment, know-how, and money essential to increase their productive capacity, these nations may need to temporarily run trade deficits.
- Consumer Benefits: Lower prices for consumers are not a given when trade is balanced. Restrictions put in place to create balance may diminish consumer choice, raise prices, and restrict access to a wide range of goods.
- Global Interdependence: Strict adherence to balanced trade may not be consistent with the reality of complex supply chains and global value networks in a globally integrated economy. Today, many items are put together utilizing parts and raw materials acquired from several nations. In these conditions, attempting to attain balanced trade can disturb these complex industrial processes and obstruct global economic integration.
What Are the Main Factors Contributing to Trade Imbalances?
Trade imbalances can arise from various factors including differences in productivity levels, exchange rates, tariffs and trade barriers, domestic saving and investment rates, and consumer preferences. Variations in resource endowments and comparative advantages between countries also play a significant role in shaping trade imbalances.
Is It Realistic for Every Country to Aim for Balanced Trade?
While aiming for balanced trade is a reasonable goal, achieving perfect balance in every instance may not be realistic or desirable for every country. Factors such as differing levels of economic development, structural characteristics, and varying stages of industrialization contribute to imbalances. A more nuanced approach acknowledges the benefits of specialization, comparative advantage, and the importance of flexibility in response to changing economic conditions.
Is There a Correlation Between Balanced Trade and Sustainable Economic Growth?
There is a correlation between balanced trade and sustainable economic growth, but it is not a deterministic relationship. Balanced trade can contribute to economic stability, reduce vulnerabilities, and promote efficient resource allocation.
However, sustainable economic growth depends on various factors such as investments in human capital, technological innovation, infrastructure development, and sound macroeconomic policies, in addition to achieving balanced trade. Balancing trade alone is not sufficient to guarantee sustainable economic growth.
How Do Trade Imbalances Affect Developing Countries?
Trade imbalances can have both positive and negative effects on developing countries. Persistent trade deficits can strain foreign exchange reserves, lead to debt accumulation, and create vulnerabilities in the economy. However, trade imbalances can also serve as a source of financing for investments and imports necessary for economic development.
The Bottom Line
A country is said to have balanced trade when its exports and imports are about equal. Its objectives include preserving trade flow equilibrium, minimizing trade imbalances, and fostering economic stability. Advocates contend that by lowering reliance on imports, balanced trade can strengthen domestic industries, protect jobs, and improve national security. Those against balanced trade state countries must sacrifice advantages and and potentially stunt economic growth in favor of balance.