What is a trade deficit between countries

Trade Deficit - Overview, Definition & Factors


Basic information on the trade deficit

Importance: Imports of goods in an economy exceed exports of goods

Causes: The causes are complex; possible factors are an overvalued currency, rapid economic growth, high per capita income, especially in connection with a preference for foreign goods

Consequences:Foreign debt & the associated interest burden of a nation are increasing

Situation in Germany: Constantly high trade surpluses

Countries with high trade deficits: USA, UK, France

Statistics: The Federal Statistical Office calculates the trade balance


Germans only know about a trade deficit from hearsay, for the USA the continuous import surplus is already becoming a problem. The planned countermeasures have recently resulted in several political crises and a simmering trade war with China.

What is the trade balance?

The interdependence of the German economy with the economic systems of other countries is complex. They are therefore in the National accounts (VGR) mapped on several levels. The highest level of aggregation is the Balance of paymentsthat takes into account all economic transactions between residents and foreigners.

The balance of payments is subdivided into the following partial balances:

  • Current account
  • Balance of asset transfers (balance of donations)
  • Financial account
  • Foreign exchange balance
  • Remaining stock

The trade balance is part of the current account and counts as its most important sub-balance. As part of a statistical analysis, the exports of goods abroad are compared with the imports of goods from abroad. The trade balance therefore represents an important trading segment between Germany and other countries and outlines essential parts of German foreign trade relations. The observation period is usually that Calendar year. In order to make international comparisons easier, the flow of goods is usually shown in U.S-$ rated.

The first scientific approaches to this topic date back to the 17th century, when most European states were still led absolutist and mercantilism was the predominant economic ideology. In this epoch, trade was already considered a source of national prosperity, as a result of which the relationship between imports and exports came to the fore for the first time. The first trade balances were developed.

Today the trade balance, which is also called Foreign trade or goods balance is known, mostly shown in scale form or in T-account form, so in the same way as it was usual for accounts in financial accounting until they were digitized. On the left side, in debit, the exports and in credit the imports are shown. The balance, i.e. the difference between the two sides, decides whether the trade balance is balanced or whether a surplus or a deficit has been generated.

When is there a positive trade balance?

We speak of a positive or active trade balance when the Exports are larger than imports or a nation sells more goods to other states than it gets from there. A positive trade balance always goes with you Capital import This means that the domestic claims against the foreign country are higher than the liabilities.

A trade surplus has a number of advantages for the economy that generates it. The high foreign demand takes care of full order booksThis increases the demand for labor and, as a result, domestic income, while unemployment and the associated costs for the welfare state decrease. However, this also increases under this premise Addiction the domestic economy from the economic policy measures of other countries and the global economy.

In addition, countries with permanently high surpluses, such as Germany or Japan and, more recently, China, are also often accused of acting “unfairly” and growing their economies at the expense of other countries.

When is there a balanced trade balance?

The trade balance is balanced when the Balance between assets and liabilities is zero is, so the level of exports and imports corresponds to each other. A zero balance does not occur in practiceHowever, there are certainly countries with an almost balanced balance of goods, but these are mostly poor or very small states. The latter included San Marino in 2018 with a surplus of just € 5 million, a result that is typical for the miniature state.

A balanced current account has long been an important economic policy goal internationally. In Germany it was even anchored in the Stability and Growth Act in 1967 and formed together with the other three cornerstones Price level stability, high employment and steady economic growth the so-called "magical square". After the law came into force, Germany did not even come close to achieving this goal.

Note

The “Law for the Promotion of Stability and Growth of the Economy (StabG)”, which is usually only referred to as the Stability Act, specifies the economic objectives of our constitution (Article 9 of the Basic Law).

It was enacted in 1967 and postulates a balanced trade balance as a meta-goal of economic policy - a situation that never occurred in Germany after the law came into force.

The last foreign trade deficit was realized in 1951 and amounted to the equivalent of € 76 million. This year it was possible to speak of an almost balanced trade balance.

What about Germany's trade balance in 2019?

Germany is not considered to be for nothing leading export nation. In a comparison of the countries with the highest trade surpluses, it ranked second in 2018 with US $ 275 billion, behind China (US $ 351 billion). However, the Germans again had the highest in 2018 with US $ 294 billion Current account surplus generated, were thus the overall most successful economy in foreign trade and thus once again the world export champion. The Japanese follow in second place (US $ 174 billion), followed by Russia in third place (US $ 114 billion).

The final figures for 2019 are not yet available, but it is expected that exports will develop weaker than domestic demand and that both the trade surplus and the current account will decline slightly. However, no other nation will dispute the top position in exports for the Germans in 2019.

Which countries have a large trade deficit?

Trade deficits are often with economically weak regions connected. That tends to be true, but also among theG-7 countries find each other numerous candidateswho import more goods than export. The list of the nations with the worst balance of trade is regularly made by the world's largest economy, the United States, listed. The country had a gross domestic product (GDP) of more than US $ 20 trillion in 2018. Number two, China, only managed a good $ 13 trillion.

The huge GDP of the Americans contrasts with a veritable trade deficit of $ 950 billion. Second place is occupied by their former colonial masters. The British also imported more than exported in 2018. Their deficit was just under $ 188 billion. Another former member of the Commonwealth landed in third place. The emerging economy India has already overtaken Italy in the GDP ranking and is now number 7 among the greats. However, the performance has not yet been sufficient for a balanced trade balance. The deficit was $ 185 billion. Follow in fourth and fifth place France and Hong Kongwhose negative balances were $ 190 and $ 58 billion, respectively.

What are the reasons for the US trade deficit?

Donald Trump regularly blames the Chinese for the American trade deficit. That is not entirely wrong, but it is a bit too short. As shown above, they are economic mechanisms of actionthat affect the balance of goods are very complex. To the main factorsContributing to America's foreign trade deficit include the following:

  • High economic growth:The US economy has grown much faster than that of its trading partners over the past few decades. So the Americans had more money available for the demand for foreign goods than the other way around.
  • Strong dollar:The US dollar remains the dominant global reserve currency. This is accompanied by two effects that have a negative impact on the trade balance. For one thing, dollars accumulated abroad are often not invested in American goods, but rather flow back into the USA as loans. As a result, the US trade deficit and foreign debts are steadily increasing. The central position of the dollar as the key and reserve currency has also led to an overvaluation of the currency, which makes exports more expensive from a foreign point of view and depresses the demand for American products.
  • High preference for foreign products:The fact that the Americans import significantly more than they export has another, comparatively trivial reason. US citizens simply have a pronounced preference for foreign products and often prefer them to domestic products.

Stock trading: what is the importance of the trade balance for investors?

The Dow Jones Industrial Average (DJIA) - also short Dow Jones Index called, the leading American index, rose in recent yearscontinuously, parallel to the US trade deficit. Import surpluses do not necessarily have to have a negative impact on the development of share prices.

This is especially true when the trade deficit is relatively insignificant in relation to the overall economic performance of a country. Investors who want to base their investment decisions on macroeconomic figures are therefore better guided by the Development of the gross domestic product. If the growth here turns out to be lower than expected, this is also reflected in the stock exchange prices.

Definition: what is a trade deficit?

A trade deficit exists when the balance of goods has aDebit balance identifies. In schematic representations, the balance is then given a Minus sign prefixed. In the case of a passive trade balance, imports of goods from abroad are greater than exports of goods. At the same time, a state then has liabilities to other countries that are higher than its claims. So there is a net outflow of funds.

What are the effects of a negative trade balance?

If a state continuously runs trade deficits, it has the consequence that its Foreign debts are growingwhat also to oneRise in debit interest leads. The reason for the growing indebtedness can be traced back to the fact that the income from exports is insufficient to cover the expenses for the higher imports in terms of value.

Thereby the domestic demand for foreign currencies increaseswhile global demand for the domestic currency declines. The domestic currency loses value as a result. But that in turn has a positive impact on exports. From a foreign point of view, domestic goods are becoming cheaper due to the now more favorable exchange rate, so that goods exports are increasing again.

In classic economic models are Trade deficits therefore always of a temporary nature. However, these models are only partially suitable for explaining the processes in real economies, since the influencing factors here are much more complex than the model assumptions. There are therefore even numerous countries that have a permanently negative trade balance.

What factors affect the trade balance

The economic relationships at the macroeconomic level are very complex. So there is one Variety of factors that affect a country's trade balance.

The most important are:

  • World economy
  • Economic policy of important trading partners
  • national competitiveness
  • Development of real income
  • Domestic demand
  • Exchange rates
  • exogenous shocks

The factors listed above can vary both positive and negative affect the trade balance. Which effect occurs depends on the direction in which a variable develops and whether the associated effect is reinforced or compensated for by other factors.

Trade deficit: Negative factors influencing the trade balance

  • Is the Mood on the world markets pressed, this usually also has a negative impact on exports, as there is less demand for goods abroad. At the same time, however, the domestic market participants' demand for imported goods is also falling. If exports fall more sharply than imports, this favors a trade deficit.
  • In recent times, the US has made headlines again and again because it is with Import duties, among other things for German cars, threatened to support the domestic economy. If the foreign trade policy of important economic partners changes and becomes more restrictive, this also worsens the result of the trade balance, as important export markets collapse.
  • The balance of the trade balance is also very much influenced by your own competitiveness. The high deficits of the developing countries are not least due to the fact that these countries hardly produce goods that are of interest on the world market. So there is already a lack of export potential here. However, even successful industrialized countries are coming under increasing international competitive pressure.
  • That too Real income has an impact on the trade balance, but the effect here is very ambivalent. If domestic real income rises faster than foreign income, this can lead to imports growing faster than exports. Inevitably, however, this is not the case. Instead, consumers can also have a disproportionately high demand for local products. The trade balance would initially benefit from this as imports decline. The effect can, however, become so strong that domestic demand reduces the goods available for export and the effect is overturned.
  • The influence of Exchange rates is easier to estimate here. The sharp drop in exchange rates that the euro has experienced over and over again for a good ten years now regularly puts the EU to the test. The export-oriented German economy has mostly benefited from the weak euro. In the USA and China in particular, two particularly important trading partners, German products will be cheaper when the euro weakens. Rising euro rates have the opposite effect on foreign demand and the trade balance.
  • Occasionally, phenomena that economists as exogenous shocks denote, paralyze foreign trade. These include, for example, wars, political unrest, environmental disasters or shortages of raw materials. However, such factors have hardly played a role in recent times.

Where do the figures from the trade balance actually come from?

The foreign trade balance is calculated by the Federal Statistical Office, which is based in Wiesbaden. The data it needs for this comes from two sources. On the one hand, customs records the cross-border movements of goods with third countries (Extra trade) and reports this directly to the Federal Office. The legal basis for this is provided by Regulations (EC) 471/2009, (EU) 92/2010 and (EU) 113/2010 as well as the Federal Statistics Act, the Foreign Trade Statistics Act and the Foreign Trade Statistics Implementation Ordinance.

The Intra-trade statistics maps the intra-community movement of goods between Germany and the other EU member states. The reporting companies must report the data for this directly to the Federal Statistical Office. The IDEV online reporting procedure was set up for this purpose. All companies that exceed the reporting thresholds according to the Federal Statistics Act are required to report.

Tip for founders and small businesses

The reporting obligations under the Federal Statistics Act are often ignored, especially by young and small companies. The reporting thresholds are very low at EUR 500 thousand (exports) and EUR 800 thousand (imports).

Those affected can find detailed information in the guidelines for intra-trade statistics.

Conclusion

The trade balance represents the Imports and exports of goods in an economy across from. Trade deficits are often associated with economic weakness, but this does not necessarily have to be the case.After all, the USA, the most productive economy in the world, is also the world champion in imports.

In the long term, however, a negative balance of goods causes a increasing national debt abroad, since import surpluses are offset by corresponding capital exports. Governments are therefore trying to reduce an excessively high or permanent trade deficit. For this reason, the Americans reintroduced the import tariffs that had long been frowned upon.


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