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.

Key Takeaways

  • 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.
  • While 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.
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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.

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.

Arguments for Balanced Trade

The proponents of balanced trade claim that it is simple to measure and administer because it does not require complex calculations and valuations relating to the exports and imports of an economy. They 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.

Arguments Against Balanced Trade

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 counterweight 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.