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Are persistent trade deficits a bad thing?

Dec 15th 2011 by R.A. | The Economist

Under what conditions are trade deficits benign, and under what conditions might they be a problem?

Guest contributions: 
Gilles Saint-Paul wrote on Dec 15th 2011, 18:08 GMT


Paul Seabright wrote on Dec 15th 2011, 18:23 GMT

ALL kinds of geographic entities have persistent trade deficits. The state of Florida has a trade deficit with the rest of the U.S. Buckingham Palace has a trade deficit with the rest of Britain. So do other groups of people, defined non-geographically. The under-18s have a trade deficit with the rest of society, as have the over-65s. In all of these cases what matters is how the deficit is financed, and whether the terms of its financing create coherent expectations for the future.

Hal Varian wrote on Dec 15th 2011, 18:27 GMT

THE answer to the basic question is "it depends" and I will let the others describe what the issues are. But I would like to use this opportunity to discuss the fallacy of measuring bilateral trade deficits.

Consider the iPad.


Michael Pettis wrote on Dec 15th 2011, 18:30 GMT

TRADE deficits, or more concretely current account deficits, have to be financed by net capital inflows, and it is really the cause of the deficit and the nature of the financing that determines whether or not persistent trade deficits are harmful. If a country is running a trade deficit mainly because domestic investment levels are very high, the high investment levels should generate enough growth in the economy that the costs of servicing the foreign capital inflow can easily be covered. In that case many years of trade deficits are unlikely to be a problem.

Laurence Kotlikoff wrote on Dec 15th 2011, 18:53 GMT


Mark Thoma wrote on Dec 19th 2011, 19:24 GMT


The cost of these loans is the interest that must be paid, and any vulnerabilities to speculative attacks that come with them. But so long the benefits from the investment of the borrowed money exceed the costs, then there is no reason to be concerned about running a deficit. The profits from the loans will be more than sufficient to pay back the interest and principle.

Scott Sumner wrote on Dec 20th 2011, 14:08 GMT

INTERNATIONAL trade theory has almost nothing to say about whether current account (or “trade”) deficits are good or bad. Yet in press discussion of trade balances, it's almost a given that surpluses are good and deficits are bad. This is a mistake; not all trade deficits are bad, and even those that are generally reflect some deeper problem in the economy.

It makes sense for a fast growing economy to borrow against the future, as when Korea ran deficits during the 1970s and 1980s. Or take a developed country like Australia. It absorbs a large flow of immigrants, who may borrow to buy a house against their future income within Australia. Indeed some current account deficits don't even represent borrowing, at least in the ordinary sense of the term. Consider the case where Australians buy cars from East Asia, and pay for the cars by selling vacation condos on the Gold Coast to wealthy Asians. In many respects this is ordinary trade, except that the products that are built with Australian labour (the condos) never leave the country.

Michael Heise wrote on Dec 21st 2011, 16:30 GMT

JUST as the Christmas-cracker poser “When is a door not a door?”* can liven up any yuletide party, Christmas spirits can also be lifted by the question “When is a trade deficit benign, when is it malign?”. Except the answer is more difficult to fathom. In reality, in fact, depending on the guest list, the ensuing debate could see the party end in tears. As with most economic issues there are two ardent camps at opposite ends of the scale, with an army of opinions in between.

While the raw merchandise trade deficit betrays much about the competitiveness of the manufacturing sector of an economy, the current account deficit (the broadest measure of a country's net exports to the rest of the world) sheds more light on its underlying state of health and serves better as an early warning of potentially dangerous imbalances. It is not that long ago that acolytes of the “current account deficits don't matter” thesis seemed to be winning the argument. The so-called Pitchford thesis states that a current account deficit does not matter if it is driven by capital flows in the private sector. But when the financial crisis struck in 2007/8, countries with sizeable deficits suffered disproportionately as international capital flows shuddered to a halt.

Focusing on the euro zone, the Allianz Euro Monitor, which evaluates EMU countries' ability to achieve balanced macroeconomic growth, has long been flagging dangerous imbalances on the competitiveness and domestic demand front, one of four key categories in the overall scoreboard.



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