A trade deficit occurs when the value of a country’s imports exceeds the value of its exports.
Let’s start by looking at the trade deficit in more detail. In 2013, Americans exported (sold) to China $122 billion worth of goods, and they imported (bought) from China $440 billion in goods. The difference between what Americans exported to China and what they imported from China, –$318 billion, is called the U.S. trade deficit with China.
The U.S. trade deficit with China is controversial. In response to the trade deficit, some politicians have called for a tariff on all imports of Chinese goods. To understand this debate, it will be useful to begin with some trade deficits closer to home, namely your trade deficit with your local supermarket.
Do you shop at Giant, Safeway, or the Piggly Wiggly? If you do, you run a trade deficit with those stores. That is, you buy more goods from them than they buy from you (unless, of course, you work at one of these stores or sell them goods from your farm). We too, the authors of this book, run a trade deficit with supermarkets. In fact, we have been running a trade deficit with Whole Foods for many years. Is our Whole Foods deficit a problem?
A trade surplus occurs when the value of a country’s exports exceeds the value of its imports.
Our deficit with Whole Foods isn’t a problem because it’s balanced with a trade surplus with someone else. Who? You, the students, whether we teach you or whether you have bought our book. You buy more goods from us than we buy from you. We export education to you, but we do not import your goods and services. In short, we run a trade deficit with Whole Foods but a trade surplus with our students. In fact, it is only because we run a trade surplus with you that we can run a trade deficit with Whole Foods. Thanks!
The lesson is simple. Trade deficits and surpluses are to be found everywhere.
The fact that the United States has a trade deficit with one country is not, taken alone, special cause for worry. Trade across countries is very much like trade across individuals. Not every person or every country can run a trade surplus all the time. Suddenly, a trade deficit does not seem so troublesome, even though the word “deficit” makes it sound like a problem or an economic shortcoming.
What if the United States runs a trade deficit not just with China or Japan or Mexico but with the world as a whole, as indeed it does? Is that a bad thing?
This will require some deeper investigation. So far we have looked at only the flow of goods from the grocery store to you or from China to the United States, but for every flow of goods there is a corresponding and opposite flow of money or financial claims. When China sells us goods, we pay for those goods in dollars. At the present time, China and other countries are not using all of those dollars to buy U.S. goods and thus the United States is running a trade deficit on net. What is China doing with the dollars and is this cause for concern? We need some more tools and a few more terms to answer these questions.
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