Should Country Specific Trade Surpluses and Deficits Be Seen as Positive, Neutral, or Negative?

By: Ian Campbell | Fri, Sep 21, 2012
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Why read: Because I believe that where a country runs continuous net trade deficits and increasing net cumulative trade deficits that is a bad thing in the context of the economic well-being of that country. Others disagree, and in the current economic environment where the United States - still the world's most important economy - continuously:

this is something I think you ought to 'think for yourself' about and reach your own conclusion.

Commentary: As you know if you read this Newsletter, I have said more than once that:

An article yesterday has prompted me to revisit my thinking on this. Having done that, my views are unchanged.

The article titled Andrew Coyne: Trade deficit Canada's newest economic hobgoblin, began with a sub-title 'A trade deficit can be as much a sign of strength as weakness', and went on to espouse the view that:

"The notion that trade deficits are some sort of economic blight, or that policy should aim at earning a trade surplus (invariably described in the press as "healthy") is perhaps the oldest of all economic fallacies."

The premise for that view was then expressed (as I read the article) as:

"The trade deficit, in other words, is only one part of our overall balance of payments. And the balance of payments must balance: whatever deficit we have on trade (technically, the current account, a broader measure that includes, for example, payments on investments) is necessarily offset by an equal and opposite surplus on the capital account. That's not an accident, or a wish. It's an accounting identity."

As best I can figure, the economic theory behind this statement (and the article's conclusion that trade deficits don't matter) likely is driven from a view that where a country has a trade deficit:

See, for example Do trade deficits matter?, an August 2011 paper published by the Institute for Competitiveness and Prosperity (ICP).

The ICP article:

The economic theory is obvious, and I think worthwhile to understand as an intellectual underpinning. That said, while I try to see things simply, I don't think that one can always push a number of very complex interactivities into neat and simple packages. For me, it is far to simple to say that 'a trade deficit is necessarily offset by an opposite surplus on the capital account', or that currency exchange rates in the end ultimately will result in trade surpluses offsetting current trade deficits. If that were true ( to site but two of what could be a large number of examples):

Does Mr. Coyne's view find theoretical support among many economists? As best I know the answer is 'yes'.

Could it be right to say that Canada's recent monthly net trade deficits are "of no particular significance"? For sure that could be right if Canada reverts back to a monthly trade surplus, and does not find itself to be a 'United States' with a continuously building cumulative net trade deficits.

Could Mr. Coyne and the economists who hold to the 'economic balance theory' be right? I don't think so. I do think it is important, particularly if you participate in the financial markets, to think hard about whether you think the 'economic balance theory' as a practical matter is consistent with how our complex globalized world works.

For me, I plan to hold to my view that country-specific monthly net trade deficits and net cumulative trade deficits (and trade surpluses) indeed are important - and plan to continue to reflect that view in my own investment strategies.

Topical Reference: Andrew Coyne: Trade deficit Canada's newest economic hobgoblin, from The Financial Post, Andrew Coyne, September 19, 2012 - reading time 3 minutes. Also see Do trade deficits matter?, from the Institute for Competitiveness & Prosperity, August 11, 2011 - reading time 4 minutes, thinking time longer.

 


 

Ian Campbell

Author: Ian Campbell

Ian R. Campbell, FCA, FCBV
Economic Straight Talk

Through the Economic Straight Talk Newsletter Ian R. Campbell shares his perspective on the world economy, the financial markets, and natural resources. A recognized business valuation authority, he founded Toronto based Campbell Valuation Partners (1976), Stock Research Portal (2007) a source of resource companies market data and analytic tools, and Economic Straight Talk (2012). The CICBV* annually funds business valuation research in his name**. Contact him at icampbell@srddi.com.
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