Trouble with high trade deficits

In the last article, I listed the five top countries in terms of trade surplus, illustrated by their high, positive “net trade in goods and services” in balance of payments (BoP) — the monetary reflection of a trade surplus or a trade deficit.

I also briefly explained what makes each country’s situation unique in its own right. In this article, I will be discussing the five highest trade deficits, also shown by their BoP, and briefly explain how they got there, and how those trade deficits can be reduced. The five are the US, the UK, Canada, France, and the Philippines. One common thing that I found common among all five is that their final household consumption (as a percentage of GDP) exceeds 50 per cent as per World Bank data. This could be one justification. However, I must note here that Germany’s households also exceed 50 per cent. So what makes Germany enjoy the largest trade surplus while the US has a trade deficit that is almost twice that?

You may be thinking now why I started the discussion with consumption rather than the two core pillars of trade: imports and exports. And a quick look at how imports by the US far exceed its exports, one could figure out where the deficit is coming from. But the reason I started with household consumption is because it’s a key driver of imports. The US is a hugely consumption-driven economy, explaining the increase in imports over exports hence the trade deficit, accumulated over time.

China needs to be careful as it moves away from its exportled growth model to a consumption-driven one. When compared to the US, Germany imports less than what it exports and the number is roughly the reported trade surplus.

When plotting the US and German household consumption from 1960 to 2015, one key observation is that Germany’s has been maintained in the 50-60 per cent range, while that of the US started from 61 per cent in 1960 and increased to about 70 per cent in 2015 in an upward trajectory. In other words, Germany imports to manufacture while striking a neat balance between its household consumption and all other types of consumption.

The UK, Canada, France, and the Philippines are all net importers. When compared to the US, the UK’s deficit is 10 per cent that of the US, which also can be justified by its high household consumption of more than 65 per cent.

Canada and France are net importers. The Philippines case though is peculiar — it has the highest household consumption among all countries compared, with a trade deficit despite its exports exceeding its imports. This could be explained by a weakness in Philippines peso compared to the US dollar. The same could be also a contributing factor for the other countries, but to varying degrees. In conclusion, there are three main points to bring more balance to a country’s trade, whether in surplus or deficit.

Countries with massive trade surpluses, and more sophisticated industries, should evaluate their exports in consideration of major importing markets of those exports. The idea is to eventually establish minor replicas of those industries in trade-deficit countries, as long as productions costs are lower. And economies of scale from access to regional markets could make this financially feasible.

Job creation, transfer of knowledge, and appropriate training would act in a trade-surplus country’s defence.

Countries must balance their imports and exports, in light of their currency’s values. Cheaper exports and more expensive imports are one way to keep adding to a trade deficit.

The future of growth cannot be either export-led or consumption-led, but the right mix of both depending on the country.

The last thought that I want to leave you with: What role does purchasing power play in trade surpluses/deficits?