Trade deficit or trade surplus

The U.S trade deficit rose to its highest level since October 2008. The U.S trade deficit rose to $51,4bn in March, which is up 43,1%. The dollar have skyrocketed and made it cheaper to buy products and services and more expensive to sell.

This makes it more expensive to export which is hurting the U.S exporters. The strength of the dollar makes it more difficult to sell products because they will be too expensive and less competitive.

The U.S has been running consistent trade deficit since 1976 due to high imports of oil and consumer products. Balance of Trade reached an all time high of $19bn in June of 1975, and a record low of -$67bn in August of 2006.

 

Stack of $100 bills

Consumer goods, capital and foods` imports peaked at a record high in March and petroleum imports fell to the lowest level on record. Imports of mobile phones helped increase the U.S trade deficit. U.S imports whooped 7,71 percent and its exports rose by 0,88 percent in March

On the other side, Ben Bernanke said last month that Germany`s surplus is a problem. Five years ago, U.S Treasury secretary Tim Geithner scolded Germany for its large trade surplus.

In 2013, the U.S Treasury formally rebuked Germany`s for its export successes. In 2014, the French government also presented some strange ideas on how to reduce Germany`s competitivness.

Germany posted a €19,2bn trade surplus in February 2015. Up from €16,2 a year earlier, as exports grew faster than imports.

Previous Fed Chairman Ben Bernanke has a point. Germany is benefiting from an exchange rate that is too low for its economy.

Ben Bernanke writes; «The comparatively weak euro is an underappreciated benefit to Germany of its participation in the currency union. If Germany were still using the Deutschmarks, presumably the DM would be much stronger than the euro is today, reducing the cost advantage of German exports substantially.»

Bernanke also explains why Germany`s trade surplus does not correct itself. He writes; «Systems of fixed exchange rates, like the euro union or the gold standard, have historically suffered from the fact that countries with balance of payments deficits come under severe pressure to adjust, while countries with surpluses face no corresponding pressure.»

Should Germany be part of the euro zone if their exchange rate is out of kilter, and their balance of payments surplus appears persistent just because they are part of a fixed exchange rate system?

The problem can be solved if they exit the euro zone. Their trade surplus will decline. So will its competitiveness, and their currency will appreciate. Germany is an export country like China, but the U.S is not an export country. What is the best? Surplus or deficit?

First of all; The balance of trade compares the value of a country`s exports of goods and services against its imports. When exports are greater than imports, that`s a trade surplus, which is generally considered a favorable trade balance.

When the value of imports outweighs the value of exports, is a trade deficit, and this is generally considered an unfavorable trade balance. But it all depends on where the country is in its business cycle, how long the deficit or surplus has been ongoing, and the reasons behind it.

The balance of trade is important because it`s a large component of the current account.

Countries generally try to create trade policies that encourage a trade surplus. They consider this to be a favorable trade balance because it`s like making a profit as a country. If you sell more and get higher income, then you will have more capital for your residents.

This will translate into a higher standard of living. That`s because your businesses will sustain a competitive advantage by gaining the expertise in producing everything they export. They will hire more workers, reducing unemployment and generating more income for their residents.

But U.S have a trade deficit, and Germany have a surplus. Is it good for the U.S to have deficit?

Sometimes, a trade deficit can actually be a more favorable balance of trade. It all depends on where the country is in its business cycle. If a country has a trade deficit, its imports can be raw materials which it converts to finished goods and re-exports out. A country`s trade deficit can be a result of a strong economic growth, which allows its residents to enjoy the higher standard of living.

On the other side; Romania`s dictator Nicolae Ceausescu, created a trade surplus through protectionism and forcing Romanians to save, and not spend on imports. This resulted in such a low standard of living (Source; CIA World Factbook).

But a trade surplus is not always a favorable trade balance. Japan and China are both dependent on exports to drive economic growth. To maintain this surplus, they both purchase large amount of U.S Treasuries to keep the dollar`s value high, and their value of their currencies low to make their exports competitively priced.

 


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Disclaimer: The views expressed in this article are those of the author and may not reflect those of Shiny bull. The author has made every effort to ensure accuracy of information provided; however, neither Shiny bull nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Shiny bull and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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