What is an adverse trade balance?
An adverse trade balance is when a country buys more from other countries than it sells to them. This is also called a trade deficit. This means that more money is being left in the country to pay for imports than is coming in from selling exports.
Imports and exports
A country buys imports from other countries and sells exports to other countries. Countries trade with each other to obtain things they need or want that they don’t have or make themselves.
For example, Canada sells a lot of maple syrup to the United States. The maple syrup is an export for Canada but an import for the US. If Canada sells $1 million of maple syrup to the US, that counts as $1 million of exports for Canada and $1 million of imports for the US in their trade balance.
Calculating the trade balance
To determine the trade balance, you take the total value of everything a country exports and subtract the total value of everything it imports. If a country exports $100 billion but imports $120 billion, it has a trade deficit or adverse trade balance of $20 billion. More money is going out than coming in.
But if a country exports $150 billion and imports $100 billion, it has a trade surplus of $50 billion. That’s a positive trade balance – more money is coming in from exports than going out for imports.
Why adverse trade balances happen
Consuming more than producing
One reason for an adverse trade balance is that a country’s people buy more than the government makes. They consume more than they produce. To get all the extra stuff they want, they must get it from other countries. All those imports add up and can create a big trade deficit.
Not being competitive
Another cause is when a country’s exports aren’t competitive. Maybe what they make costs more or isn’t as good as other countries, so it’s harder for them to sell exports; their exports go down, but they still need imports, so the trade balance tilts negatively.
Currency value
How much a country’s money is worth matters too. If a country’s currency is really strong and valuable, imports look cheap to them. A strong currency is good if you’re going shopping in another country. But it makes the country’s exports look expensive to other countries. It’s harder for the country to sell its exports. Meanwhile, it sucks in a lot of imports. That also pushes the trade balance to be more negative.
Effects of adverse trade balances
Jobs
Big trade deficits can cost jobs, especially in industries that compete with imports. If people buy imported products instead of those made in the country, then the businesses that make those products might have to lay off workers. They can’t sell as much because of all the imports.
Economic growth
Adverse trade balances can slow economic growth if they get too big. A country is sending more money to other countries than it’s taking in. That can be like a leaky bucket – the country’s economy has difficulty filling up because money keeps draining out for imports. The economy can’t grow as fast.
Debt
Countries with large adverse trade balances often have to borrow money from other countries. They issue bonds to get cash to fund the trade deficit. But then the debt builds up, and they have to pay interest. It’s like putting the adverse trade balance on a credit card—the bill gets bigger and bigger.
Currency weakness
Eventually, an adverse trade balance should cause a country’s currency to weaken. If it keeps having big trade deficits, other countries don’t want to hold onto its currency as much. They’d rather hold currencies of countries that have more balanced trade or even a surplus. Less demand for a currency with a big trade deficit makes the value of that currency go down.
What countries can do
Produce more
A country can try to make more stuff within its borders and import less. Encouraging businesses to produce more can help create jobs and economic activity that reduce the need for imports. However, the country has to be careful not to restrict trade too far.
Consume less
Consuming less and saving more can help reduce adverse trade balances. The trade deficit decreases if people buy less overall, including fewer imports. However, if an economy depends on consumer spending, this can slow economic growth in the short term.
Make exports more competitive.
Countries can work to make their exports more attractive to other countries. Maybe they focus on creating higher-quality products or find ways to make the products more efficiently and sell them for less. Improving competitiveness boosts exports and improves the trade balance.
Manage the currency
If a country’s currency is too strong, it can intervene in foreign exchange markets to weaken it. Selling some of its currency can reduce the value a bit. That makes imports a bit more expensive and exports more affordable. Central banks sometimes do this to manage the trade balance.
The bottom line
An adverse trade balance isn’t necessarily a bad thing. Sometimes, countries trade deficits to buy productive assets like machinery to grow their economies over time. What matters is managing the trade balance so it doesn’t get too big relative to the size of the economy.
