Editing Balance of trade (section)

==Views on economic impact==
The notion that bilateral trade deficits are bad in and of themselves is overwhelmingly rejected by trade experts and economists.<ref name=":16">{{cite web|url=https://foreignpolicy.com/2017/03/06/economists-take-aim-at-trump-trade-theory-again-peter-navarro-bilateral-multilateral-trade-deals-china-germany-national-security/|title=Economists Take Aim at Trump Trade Theory – Again|last=Gramer|first=Robbie|date=6 March 2017| publisher=Foreign Policy (magazine) |access-date=12 March 2017}}</ref><ref name=":15">{{Cite news|url=https://www.washingtonpost.com/news/wonk/wp/2017/03/07/trump-rails-against-the-trade-deficit-but-economists-say-theres-no-easy-way-for-him-to-make-it-go-away/|title=Analysis: Trump rails against trade deficit, but economists say there's no easy way for him to make it go away |newspaper=Washington Post |access-date=12 March 2017 }}</ref><ref name=":0">{{Cite news|url=https://www.pri.org/stories/2017-03-01/trump-warns-trade-deficits-economists-say-who-cares|title=Trump warns of trade deficits. Economists say, who cares?|work=Public Radio International|access-date=2017-10-17|language=en-US}}</ref><ref name=":1">{{cite web|url=http://www.igmchicago.org/surveys/trade-balances|title=Trade Balances|website=www.igmchicago.org|access-date=2017-10-27}}</ref><ref name=":2" /> According to the [[International Monetary Fund|IMF]] trade deficits can cause a [[balance of payments]] problem, which can affect foreign exchange shortages and hurt countries.<ref>{{cite web|url=https://www.imf.org/external/np/exr/center/action/eng/devalue/index.htm|title=The IMF in Action: How can the IMF help in a crisis? Getting a member country's economy back on track| publisher=www.imf.org|access-date=15 March 2018}}</ref> On the other hand, [[Joseph Stiglitz]] points out that countries running surpluses exert a "negative externality" on trading partners, and pose a threat to global prosperity, far more than those in deficit.<ref>{{cite web|url=https://www.theguardian.com/commentisfree/2010/may/05/reform-euro-or-bin-it-greece-germany |title=Reform the euro or bin it by Joseph Stiglitz|first=Joseph |last=Stiglitz |date=5 May 2010| publisher=www.theguardian.com}}</ref><ref>{{cite news|url=https://www.nytimes.com/2016/08/21/books/review/euro-joseph-e-stiglitz.html |archive-url=https://ghostarchive.org/archive/20220101/https://www.nytimes.com/2016/08/21/books/review/euro-joseph-e-stiglitz.html |archive-date=2022-01-01 |url-access=limited|title=Nobel Laureate Joseph Stiglitz Says the Euro Needs Big Reform|first=Roger |last=Lowenstein |date=16 August 2016|access-date=15 March 2018| work=[[The New York Times]]}}</ref><ref>{{cite web|url=http://lahcenbounadereconomics.blogspot.com/2016/12/a-critical-issue-adressed-to-joseph.html|title=Lahcen Bounader's weblog: A Critical Issue Addressed to Joseph Stiglitz|first=Lahcen|last=Bounader|date=31 December 2016}}</ref> [[Ben Bernanke]] argues that "persistent imbalances within the euro zone are... unhealthy, as they lead to financial imbalances as well as to unbalanced growth. The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany."<ref>{{cite web|url=https://www.brookings.edu/blog/ben-bernanke/2015/04/03/germanys-trade-surplus-is-a-problem/|title=Germany's trade surplus is a problem|first=Ben S.|last=Bernanke|access-date=15 March 2018}}</ref> According to [[Carla Norrlöf]], there are three main benefits to trade deficits for the United States:<ref>{{Cite book|last=Norrlof|first=Carla|url=https://www.cambridge.org/core/books/americas-global-advantage/29F591B11AD3CCFDA25F7ED7D9191B55|title=America's Global Advantage: US Hegemony and International Cooperation|date=2010|publisher=Cambridge University Press|isbn=978-0-521-76543-5|location=Cambridge|pages=89|doi=10.1017/cbo9780511676406}}</ref>

# Greater consumption than production: the US enjoys the better side of the bargain by being able to consume more than it produces
# Usage of efficiently produced foreign-made intermediate goods is productivity-enhancing for US firms: the US makes the most effective use of the global division of labor
# A large market that other countries are reliant on for exports enhances American bargaining power in trade negotiations

A 2018 National Bureau of Economic Research paper by economists at the International Monetary Fund and University of California, Berkeley, found in a study of 151 countries over 1963–2014 that the imposition of tariffs had little effect on the trade balance.<ref>{{Cite journal|last1=Furceri|first1=Davide|last2=Hannan|first2=Swarnali A|last3=Ostry|first3=Jonathan D|last4=Rose|first4=Andrew K|date=2018|title=Macroeconomic Consequences of Tariffs|series=Working Paper Series|journal=National Bureau of Economic Research|url=http://www.nber.org/papers/w25402|doi=10.3386/w25402|s2cid=198728925|doi-access=free}}</ref>

===Classical theory===

====Adam Smith on the balance of trade====
{{See also|Friedrich List}}
{{Blockquote|In the foregoing part of this chapter I have endeavoured to show, even upon the principles of the commercial system, how unnecessary it is to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous.

Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded. When two places trade with one another, this [absurd] doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses and the other gains in proportion to its declension from the exact equilibrium.|Smith, 1776, book IV, ch. iii, part ii<ref>Smith, Adam. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations, Indianapolis: Liberty Fund, 1981, 2 vols., (1776) (reprint of the Clarendon Press edition, Oxford 1976, with Edward Cannan's original index from 1922)</ref>}}

===Keynesian theory===

In the last few years of his life, [[John Maynard Keynes]] was much preoccupied with the question of balance in international trade. He was the leader of the British delegation to the [[United Nations Monetary and Financial Conference]] in 1944 that established the [[Bretton Woods system]] of international currency management.
He was the principal author of a proposal – the so-called Keynes Plan – for an [[International Clearing Union]]. The two governing principles of the plan were that the problem of settling outstanding balances should be solved by "creating" additional "international money", and that debtor and creditor should be treated almost alike as disturbers of equilibrium. In the event, though, the plans were rejected, in part because "American opinion was naturally reluctant to accept the principle of equality of treatment so novel in debtor-creditor relationships".<ref>
{{cite book|author=Crowther, Geoffrey|title=An Outline of Money|version=Second Edition|publisher= Thomas Nelson and Sons|year=1948|pages=326–29}}</ref>

The new system is not founded on free-trade (liberalisation<ref>{{cite web|url=http://www.investopedia.com/terms/d/deregulate.asp|title=Deregulation|work=Investopedia|author=<!--Staff writer(s); no by-line.-->|date=25 November 2003|access-date=15 March 2018}}</ref> of foreign trade<ref>{{cite web|url=http://www.investopedia.com/terms/t/trade-liberalization.asp|title=Trade Liberalization|work=Investopedia|author=<!--Staff writer(s); no by-line.-->|date=3 April 2010|access-date=15 March 2018}}</ref>) but rather on the regulation of international trade, in order to eliminate trade imbalances: the nations with a surplus would have a powerful incentive to get rid of it, and in doing so they would automatically clear other nations' deficits.<ref>{{cite web|url=https://scholarworks.umass.edu/cgi/viewcontent.cgi?referer=https://en.wikipedia.org/&httpsredir=1&article=1127&context=peri_workingpapers |title=Current Global Imbalances and the Keynes Plan |last=Costabile |first=Lilia |date=2007 |website=scholarworks.umass.edu |access-date=2019-08-21}}</ref> He proposed a global bank that would issue its own currency – the bancor – which was exchangeable with national currencies at fixed rates of exchange and would become the unit of account between nations, which means it would be used to measure a country's trade deficit or trade surplus. Every country would have an overdraft facility in its bancor account at the International Clearing Union. He pointed out that surpluses lead to weak global aggregate demand – countries running surpluses exert a "negative externality" on trading partners, and posed far more than those in deficit, a threat to global prosperity.<ref>{{cite web|url=https://www.theguardian.com/commentisfree/2010/may/05/reform-euro-or-bin-it-greece-germany|title=Reform the euro or bin it - Joseph Stiglitz|first=Joseph|last=Stiglitz|date=5 May 2010|website=The Guardian|access-date=15 March 2018}}</ref>
In ''"National Self-Sufficiency" The Yale Review, Vol. 22, no. 4 (June 1933)'',<ref>{{cite web|url=https://grepa.es/|title=Inicio|website=Grupo de Economía Política Alternativa}}</ref><ref>{{cite web|url=http://www.india-seminar.com/2009/601/601_david_singh_grewali.htm|title=601 David Singh Grewal, What Keynes warned about globalization|website=www.india-seminar.com|access-date=15 March 2018}}</ref> he already highlighted the problems created by free trade.

His view, supported by many economists and commentators at the time, was that creditor nations may be just as responsible as debtor nations for disequilibrium in exchanges and that both should be under an obligation to bring trade back into a state of balance. Failure for them to do so could have serious consequences. In the words of [[Geoffrey Crowther, Baron Crowther|Geoffrey Crowther]], then editor of ''[[The Economist]]'', "If the economic relationships between nations are not, by one means or another, brought fairly close to balance, then there is no set of financial arrangements that can rescue the world from the impoverishing results of chaos."<ref>{{cite book|author= Crowther, Geoffrey|title=An Outline of Money|version=Second Edition|publisher=Thomas Nelson and Sons
|year=1948|page=336}}</ref>

These ideas were informed by events prior to the [[Great Depression]] when – in the opinion of Keynes and others – international lending, primarily by the U.S., exceeded the capacity of sound investment and so got diverted into non-productive and speculative uses, which in turn invited default and a sudden stop to the process of lending.<ref>{{cite book|author=Crowther, Geoffrey| title=An Outline of Money|version=Second Edition|publisher=Thomas Nelson and Sons|year=1948|pages= 368–72}}</ref>

Influenced by Keynes, economics texts in the immediate post-war period put a significant emphasis on balance in trade. For example, the second edition of the popular introductory textbook, ''An Outline of Money'',<ref>{{cite book|author=Crowther, Geoffrey|title=An Outline of Money|version= Second Edition|publisher=Thomas Nelson and Sons|year=1948}}</ref> devoted the last three of its ten chapters to questions of foreign exchange management and in particular the 'problem of balance'. However, in more recent years, since the end of the [[Bretton Woods system]] in 1971, with the increasing influence of [[monetarist]] schools of thought in the 1980s, and particularly in the face of large sustained trade imbalances, these concerns – and particularly concerns about the destabilising effects of large trade surpluses – have largely disappeared from [[mainstream economics]] discourse<ref>See for example, Krugman, P and Wells, R (2006). "Economics", Worth Publishers</ref> and Keynes' insights have slipped from view.<ref>although see Duncan, R (2005). "The Dollar Crisis: Causes, Consequences, Cures", Wiley</ref>

===Monetarist theory===
Prior to 20th-century monetarist theory, the 19th-century economist and philosopher [[Frédéric Bastiat]] expressed the idea that trade deficits actually were a manifestation of profit, rather than a loss. He proposed as an example to suppose that he, a Frenchman, exported French wine and imported British coal, turning a profit. He supposed he was in France and sent a cask of wine which was worth 50 francs to England. The customhouse would record an export of 50 francs. If in England, the wine sold for 70 francs (or the pound equivalent), which he then used to buy coal, which he imported into France (the customhouse would record an import of 70 francs), and was found to be worth 90 francs in France, he would have made a profit of 40 francs. But the customhouse would say that the value of imports exceeded that of exports and was trade deficit of 20 against the ledger of France. This is not true for the current account that would be in surplus.

By ''[[reductio ad absurdum]]'', Bastiat argued that the national trade deficit was an indicator of a successful economy, rather than a failing one. Bastiat predicted that a successful, growing economy would result in greater trade deficits, and an unsuccessful, shrinking economy would result in lower trade deficits. This was later, in the 20th century, echoed by economist [[Milton Friedman]].

In the 1980s, Friedman, a [[Nobel Memorial Prize in Economic Sciences|Nobel Memorial Prize]]-winning economist and a proponent of [[monetarism]], contended that some of the concerns of trade deficits are unfair criticisms in an attempt to push macroeconomic policies favorable to exporting industries.

Friedman argued that trade deficits are not necessarily important, as high exports raise the value of the currency, reducing aforementioned exports, and vice versa for imports, thus naturally removing trade deficits ''not due to investment''. Since 1971, when the Nixon administration decided to abolish fixed exchange rates, America's Current Account accumulated trade deficits have totaled $7.75 trillion as of 2010. This deficit exists as it is matched by investment coming into the United States – purely by the definition of the balance of payments, any current account deficit that exists is matched by an inflow of foreign investment.

In the late 1970s and early 1980s, the U.S. had experienced high inflation and Friedman's policy positions tended to defend the stronger dollar at that time. He stated his belief that these trade deficits were not necessarily harmful to the economy at the time since the currency comes back to the country (country A sells to country B, country B sells to country C who buys from country A, but the trade deficit only includes A and B). However, it may be in one form or another including the possible tradeoff of foreign control of assets. In his view, the "worst-case scenario" of the currency never returning to the country of origin was actually the best possible outcome: the country actually purchased its goods by exchanging them for pieces of cheaply made paper. As Friedman put it, this would be the same result as if the exporting country burned the dollars it earned, never returning it to market circulation.<ref>{{cite web|url=http://www.ideachannel.tv/|title=TheIdeaChannel.tv|website=www.ideachannel.tv|access-date=15 March 2018|archive-date=10 December 2006|archive-url=https://web.archive.org/web/20061210002522/http://www.ideachannel.tv/|url-status=dead}}</ref>

This position is a more refined version of the theorem first discovered by [[David Hume]].<ref>{{cite book|author=Hume, David|title=Essays, Moral, Political, and Literary|year=1904|url=https://archive.org/details/in.ernet.dli.2015.45548}}</ref> Hume argued that England could not permanently gain from exports, because hoarding gold (i.e., currency) would make gold more plentiful in England; therefore, the prices of English goods would rise, making them less attractive exports and making foreign goods more attractive imports. In this way, countries' trade balances would balance out.

Friedman presented his analysis of the balance of trade in ''[[Free to Choose]]'', widely considered his most significant popular work.

===Trade balance’s effects upon a nation's GDP===
Exports directly increase and imports directly reduce a nation's balance of trade (i.e. net exports). A trade surplus is a positive net balance of trade, and a trade deficit is a negative net balance of trade. Due to the balance of trade being explicitly added to the calculation of the nation's gross domestic product using the expenditure method of calculating gross domestic product (i.e. GDP), trade surpluses are contributions and trade deficits are "drags" upon their nation's GDP; however, foreign made goods sold (e.g., retail) contribute to total GDP.<ref>{{cite web|url=http://www.investopedia.com/terms/e/expenditure-method.asp|title=Expenditure Method|work=Investopedia|author=<!--Staff writer(s); no by-line.-->|date=11 May 2010|access-date=15 March 2018}}</ref><ref>{{cite web|url=https://www.bea.gov/methodologies/index.htm#national_meth|title=Bureau of Economic Analysis|author1=US Department of Commerce|author2=Bureau of Economic Analysis|website=www.bea.gov|access-date=15 March 2018}}{{dead link|date=March 2025}}</ref><ref>{{cite web|url=https://www.britannica.com/topic/gross-domestic-product|title=gross domestic product - Definition & Formula|access-date=15 March 2018}}</ref>