National economies are quite complex and somewhat fragile. In the global world in which we now live, economies are heavily influenced by the flow of goods and services across borders. It is all about imports, exports, and their effects on national economies. Those effects are by no means minor.
For the record, imports are those goods and services that come into the country from international trade partners. Exports are just the opposite. They are the goods and services that leave the country of origin to be shipped elsewhere.
Also note that when politicians and economists talk about trade deficits, what they are really referring to is the ratio between imports and exports. If a country imports more than it exports, is said to have a trade deficit. More exports than imports constitute a surplus. This is important to know because it is the main factor that determines how imports and exports affect economies.
The Distribution of Wealth
Wealth is created when raw materials are used to produce tangible goods that are then sold on the open market. Likewise, wealth is transferred when one party pays for services provided by another. Both wealth creation and wealth transfer contribute to the overall distribution of wealth around the world.
With that understanding, imports and exports affect world economies by influencing wealth distribution. When U.S. manufacturers produce goods and export them overseas, the money paid for those goods represents wealth flowing into the country. Likewise, the countries whose importers are buying American goods are losing wealth.
If we tie that into the trade deficit/surplus concept, the implications become pretty clear. Countries with trade deficits are losing wealth. Those with trade surpluses are gaining it. Thus, countries with trade surpluses tend to have stronger economies.
According to Vigilant Global Trade Services, an Ohio trade services company with clients around the world, this is exactly why countries engage in activities designed to manipulate trade. It is why they enter into free trade agreements and implement tariffs and excise taxes.
Imports, Exports, and GDP
Perhaps you have heard economists talk about gross domestic product (GDP) in relation to trade deficits. GDP is a broad measure of a nation’s overall economic activity. It is calculated using a complex formula that accounts for consumer spending, private investment, government spending, imports, and exports.
As a general rule, maintaining a trade deficit negatively impacts both GDP and currency value. A trade deficit represents more wealth leaving the country, thereby giving companies and consumers alike less money to spend here at home. The result is negative pressure on GDP.
This is not to say that GDP cannot grow in the midst of a trade deficit. It can, and often does. But GDP is less likely to grow with a persistent trade deficit as compared to a persistent trade surplus.
A side effect of trade deficits and subsequent negative pressure on GDP is additional pressure on currency value. When trade deficits are high and GDP is low, a nation’s currency is worth less. Inflation is usually the result. Fortunately, we have been able to keep inflation under check in the U.S. for more than a decade – at least up until COVID hit.
Maintaining a Balance
It is reasonable to expect that individual countries want to maintain trade surpluses. But for every surplus there is a deficit. Therefore, a more realistic goal is to strive for balanced trade whenever possible. Sometimes that means taxing imports. Other times it means finding ways to boost exports. Still other cases call for doing both. Action is necessary because imports and exports directly affect national economies.