Earlier this week, I heard on the radio that Canada’s trade balance “worsened” in December. After checking Statistics Canada, I concluded that the reporter must have meant that Canada’s trade deficit increased. Indeed, the same bleak language is echoed in much of the national financial commentary. However, the logic behind the notion “trade deficits are bad, surpluses are good” is puzzling.
If a country is in trade deficit, this means simply that imports are more than exports. Intuitively this may sound like a bad thing–this sounds like it means, on balance, that Canadian wealth is decreasing. In fact, to be precise, it only means that Canadians are choosing to prioritize current consumption over future consumption.
However, it does not follow that this is a bad situation. You can liken a trade deficit to the lifestyle of a university student–someone who, by necessity, is consuming much more than she produces, in order to get through school. This is not a bad thing, and in fact it is the preferred strategy for someone to get through school. This difference will have to be repaid later, but it is a pretty good lifestyle–for a time, you have the luxury of “importing” more than you “export”.
Conversely, it is not clear that a trade surplus is inherently good. This time, consider a middle-aged couple that produces much more than they consume – they save the rest. They are in a personal “trade surplus” – which is another way of saying that they are consuming less than they could be. To return to a national scale, Canada would not necessarily be better off by producing more than it consumed.
A word of caution comes with these metaphors, though. Canada, as a country of 35 million people, cannot simply be personified and compared to a student or a family. What the net trade balance truly reflects is the aggregate of millions of personal trade balances, all of which are different across time, geography and cultures. A net figure does not say much, necessarily, about the situation of an individual Canadian. Additionally, no one bothers to keep track of provincial or municipal trade balances, which starts to expose how abstract the concept can be.
Of course, trade balance is eventually reflected in financial markets, and in the exchange rate. When there is a Canadian trade deficit, this also must mean that foreign investors will lend the difference to Canadians, so they can pay the bill. On the contrary, if Canada ran a large surplus, Canadians would have to lend money out beyond its borders. These lent funds could otherwise have been used to finance current Canadian consumption, so it is not clear that this would be a “good” situation either.
Where things get complicated is that certain fiscal situations can work more or less well with certain trade balances. For instance, countries pursuing expansionary fiscal and monetary policy typically welcome trade deficits in order to keep downward pressure on prices and inflation, whereas countries suffering from recessions typically prefer trade surpluses, which reflect higher export capacity. On the contrary, trade surpluses are prone to currency traps, where countries running them risk venturing into deeper trade imbalances as the value of their currency drops.
To summarize, trade deficits and surpluses are simply two sides of the same coin. One is not necessarily preferable to the other – it all depends on the circumstances and the goals and preferences of those involved. Furthermore, I hope that such personification of countries can stop. It is often heard that “France wants X”, or “China wants to avoid Y”. This is silly – there are certainly individuals in each country who may want these things, but that is a different story.
Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute