What Is a Trade Deficit?
A trade deficit is an economic measure of international trade in which a country's imports exceed its exports. A trade deficit represents an outflow of domestic currency to foreign markets. It is also referred to as a negative balance of trade (BOT).
Trade Deficit = Total Value of Imports – Total Value of Exports
How Trade Deficits Are Tracked
Nations of the world record trading activity in their balance of payment (BOP) ledgers. One of the chief data silos in this item is the "current account," which tracks goods and services leaving (exports) and those entering (imports). The current account shows direct transfers such as foreign aid, asset income such as foreign direct investment (FDI), as well as the BOT.
A trade deficit typically occurs when a country fails to produce enough goods for its residents. However, in some cases, a deficit can signal that a country’s consumers are wealthy enough to purchase more goods than their country produces.
- Some of the biggest influencers on the balance of trade include currency exchange rates, the availability of raw materials, as well as bilateral and unilateral taxes.
- In the 50 years ending in 2018, the United States has shown a trading surplus in just five of those years: 1969, 1998, 1999, 2000, 2001, while it has shown a trading deficit for all remaining years.
Possible Silver Linings of Trade Deficits
When production cannot meet demand, imports from other nations increase. A trade deficit is not necessarily detrimental, because it often corrects itself over time. An increase in imported goods from other countries decreases the price of consumer goods in the nation, as foreign competition increases. The lower price tags help reduce the threat of inflation in the local economy, and an increase in imports also increases the variety of goods and services available to a nation’s residents. A fast-growing economy might import more, as it expands, so its residents may consume more than the country can produce. Consequently, a trade deficit may indicate a growing economy.
How Trade Deficits Can Affect the Job Outlook
In the long run, however, a trade deficit may lead to fewer jobs. If the country is importing more goods from foreign companies, prices will decline, and domestic companies may be unable to produce items that compete with lower costs. Manufacturing companies are usually hit the hardest when a country imports more than it exports. This impact results in fewer jobs or lower incomes for employees, due to the competition from imports. Fewer jobs mean fewer products are produced in the economy which, in turn, leads to even more imports and a greater deficit.
The U.S. deficit has been growing for the past few decades, which worries some economists. A substantial amount of U.S. dollars is held by foreign nations, who could decide to sell those dollars at any time. A sharp increase in dollar sales could devalue the currency, thus making it costlier to purchase imports.
Real World Example
The U.S. holds the distinction of owning the world's largest trade deficit since 1975. In 2013, the deficit in goods and services was more than $472 billion, mainly because the country imported and consumed significantly more electronics, raw materials, oil, and other items than it sold to foreign countries.