When businesses and industries in different countries trade with each other, a financial transaction occurs. Throughout the year, imports and exports continue to move back-and-forth based on consumer needs or desires. At the end of this period, the total value of imports is that compared to the amount of money received from exports purchased by other nations. If more money is received then spent, a trade surplus occurs.
For over 300 years, countries in Western Europe believed that the only way to create trading relationships was to export as many goods as possible. Countries during this time always around a trade surplus while maintaining a large stack of currency, namely gold. This economic structure is referred to as mercantilism. It would give each country the opportunity to create a competitive advantage by having enough monetary resources to support itself in case of war.
The move toward globalization in the 21st-century means that countries have different priorities. The processes of trade no longer involve the need to have protectionism in place to guard against warfare. That means the top priority is to create economic growth at the national level, which then trickles down to the regional and local economies.
These are the pros and cons of a trade surplus to consider when looking at the economics of the world today.
List of the Pros of a Trade Surplus
1. It allows a country to purchase the assets of another nation.
When a country has the ability to sell more goods than they import, then a trade surplus arises. This structure creates extra money that can become an asset to the country. Many nations use these funds to purchase assets in other countries as a way to stabilize their economic growth. Japan and China often use their trade surpluses to purchase bonds from the United States.
At the end of 2018, the national debt of the United States was nearly $22 trillion. China owns about $1.2 trillion of it, while Japan owns about $1.03 trillion.
2. It allows countries to reinvest in specific industries.
When there is a surplus of cash lying around because of a trade surplus, then it creates an opportunity to reinvest resources into the economy. Organizations have the opportunity to begin repairing or upgrading their machinery. Companies and use those funds to begin training their labor force for new skills. These actions encourage further economic growth because it allows individuals and corporations a chance to become more productive.
When a nation is carrying a trade deficit, then these opportunities are few and far between.
3. It creates more jobs for the domestic economy.
When a country is able to export more value than it imports each year, then domestic productivity is typically higher than what it would be otherwise. That means there are more job opportunities available because of the economic circumstances that are present in that economy. In 2017, the United States had a trade deficit of $566 billion. If that figure could be reduced to zero, then it would add roughly 3.25 million jobs to the economy. That would place the unemployment rate somewhere near 2%, which is a rate that hasn’t been achieved since the 1950s.
4. It can lower the value of the nation’s currency.
When there is a trade surplus, then there is less interest in trading with a country that has a stable fiat currency. That occurs because the cost of goods and services are higher when the value of a currency is stronger. We can see this in the United States thanks to the trade surplus that exists with Canada. In 2016, US exports were $320 billion, while imports were only $307 billion.
To equal the value of $1 USD, a Canadian dollar must provide roughly $1.25 in return. That creates an incentive for domestic consumers to spend locally instead of globally because their products and services will be cheaper than the imported items.
5. It can improve the credit-worthiness of the nation with the surplus.
When debt accumulation continually occurs on the national level, then the credit rating of that country will begin to crumble. If this continues on for some time, then it is possible for the currency to eventually collapse.
When a trade surplus is available, then this issue no longer exists. The credit rating of the country can stay strong because investors know that there are enough resources available in savings for the debt to be repaid eventually.
6. It creates more free trade opportunities.
When there is a surplus available from the import-export activities of a country, then there are more free trade opportunities available as well. This process also leads to an increase in economic growth. The United States Trade Representative Office estimates that the presence of NAFTA created an additional 0.5% growth each year while the agreement was in effect.
7. It creates a dynamic business environment.
Having a trade surplus also creates the opportunity to add a dynamic element to the business environment domestically. It reduces the need for protectionism in specific industries because there are new opportunities internationally to create profits. When a company receives such protection from its government, then its innovation, research, and development all become stagnant because there is no incentive to create a competitive product. The policies which create the surplus give them the opportunity to become an authentic global competitor with the chance to grow.
8. It lowers government spending.
A trade surplus reduces the need to have government subsidies in place to protect specific industries. The agreements which lead to the additional profits make it possible for organizations to stand on their own because of the strength of their import-export policies. The funds that will generally be used as an incentive for protection can then be put to better use in other places, such as infrastructure or social safety net programs.
9. It can encourage higher levels of foreign direct investment.
When there is a trade surplus present in a country, then it can become an attractive environment for potential investors. This added capital makes it possible to start expanding local industries or boosting organizations that operate domestically. It is also a way to infuse other countries with a valuable currency which can promote economic growth overseas as well.
10. It transfers technologies around the world.
If a trade surplus is available, then it becomes possible for local companies to invest in technology resources that would otherwise be unavailable to them. It is the chance to establish an office internationally as a way to move resources more efficiently within the boundaries of the organization. Because multinational companies are responsible for local employee training, this advantage creates multiple benefits that can provide financial resources for every level of the economy to help it grow.
11. It encourages the development of expertise.
When trade surpluses encourage companies to get involved with international markets, then the amount of expertise available within the industry they operate begins to rise. Global businesses almost always have more expertise available than domestic organizations. This fact occurs most often in the oil drilling, manufacturing, and mining sectors. These multinational firms can them partner with local providers to develop new methods that promote additional revenue gains. Cost savings and best practices can help a trade surplus to continue growing.
12. It can lead to higher tax revenues.
If you have more money available in your economy, then there is the opportunity to generate new tax revenues. Companies that are creating profits internationally bring home money that can be used to upgrade local facilities. Schools, parks, roads, bridges, and many other items that we take for granted every day are funded in part because of the taxes that are paid on the profits made each year. Having a trade surplus makes it possible to build the coffers to create a rainy day fund without sacrificing the quality of what is available already.
13. It is not a government-to-government transaction.
The balance of trade that occurs between any two countries is not directly determined by the government policies that are in place. It occurs because of the purchasing decisions that happen locally by the millions of different households and businesses which are consumers. When you create a trade imbalance, it takes the form of private debt more than public debt, which means it becomes possible to accumulate a significant financial position against the other country which can be used to your benefit.
List of the Cons of a Trade Surplus
1. It is a temporary status because the money always goes back to the country.
Although China routinely operates on a trade surplus with the United States, sometimes topping $30 billion per year, it is not a harmful experience for Americans. The currency always comes back to the trading country in some way as an economic benefit. One way this happens is through the consumer. When individuals have an opportunity to purchase cheaper goods, then they have more money to reinvest in themselves and their local economy. The manufacturer of the less expensive item gains an economic benefit at the same time. Both countries come out better for it.
2. It doesn’t create a significant impact on larger countries.
If a smaller nation where to experience a significant trade surplus, then their economic well-being would receive a definitive boost. This outcome does not occur as often for larger countries like the United States and China. There may be an impact on the gross domestic product because of the surplus immediately, but because most of the goods and services are consumed and produced locally, the overall impact on the economy is negligible.
3. It can create economic problems for countries when it disappears.
Many of the trade surpluses which occur in the world today happen in the countries which export a large amount of crude oil and petroleum liquids. When these nations do not receive the same amount of money from the import-export market, then it can cause significant funding issues for their public programs. Decreases in prices lead to a narrower profit margin, which then makes it more challenging for individual households to make ends meet. This disadvantage can even lead to higher levels of political risk within the country and region.
4. It would create higher levels of inflation.
When there are a lot of new jobs entering an economy, then inflation rates begin to rise with extreme speed. If the United States were to eliminate its trade deficit entirely by the end of 2020, the Fed would likely be rising interest rates quickly as a way to stop inflation from happening. That would create a scenario where the unemployment rates would rise once again, eliminating the benefits of having the trade deficit stopped in the first place. Trade surpluses create a significant effect that is similar when their presence is in the economy. It costs more to do business, which means the benefits balance themselves out at the end of the day.
5. It can lead to a lower future income.
Germany currently holds the largest trade surplus in the world. Despite the availability of these funds, there is not enough investment or consumption occurring in their economy. That means the capital stock does not rise as much as it would if there was a balance within the system. It is a process where the country is consuming less now than they could through a voluntary process. If this continues to happen in the future, then they will consume less because that is the only way to maintain profitability.
6. It can lead to more job outsourcing opportunities.
When there is a trade surplus, then businesses seek to maximize their productivity while minimizing their expenses. This focus causes them to look at importing goods and services from nations where the cost-of-living is less than it is domestically. It creates a circumstance where high-wage countries find it challenging to compete because the imports are cheaper than what can be made locally, so a reduction in the workforce occurs.
When NAFTA went into effect, many of the manufacturing jobs went to Mexico because it was cheaper to produce goods there. Then the organizations could import the items back to the United States to increase their profits without reducing the cost of the items sold to consumers.
7. It can lead to the theft of intellectual property.
If you have a trade surplus, then other countries are going to want what you have. The only exception to this disadvantage is if the cost of labor is cheaper domestically then it would be internationally for the country being evaluated. Because most developing nations don’t have laws that protect inventions, processes, or patents, corporations can have their ideas stolen when they are highly profitable in the import-export market. Even when there are laws in place, they are not always strictly enforced. That can cause profits to balance out because organizations must compete with generic copies in the same market that are priced much lower than the authentic item.
8. It can lead to a reduction in domestic industries.
When you look at the structure of the global economy, most of the emerging markets are based off a traditional economy, such as agriculture. The larger organizations which are present on the import-export stage can crowd out the small businesses because they operate on an economy of scale. Even though this process creates cheaper goods and services, you can also drive some domestic industries out of business. It is impossible for a mom-and-pop shop to compete with a subsidized multinational organization when the emphasis is on creating a trade surplus.
9. It may lead to poor working conditions in some countries.
In the quest to find a trade surplus, some companies may take advantage of the import-export rules to outsource jobs to markets where there are not adequate labor protections. This decision can cause women and children to be subjected to intensive manufacturing jobs that operate in substandard conditions. Men may find themselves working 18 hours per day to earn the equivalent of $2 or less to support their families. That’s why this economic structure is not always beneficial. Even if the goods are cheaper for consumers, it is the business and government that profit the most.
10. It can degrade natural resources internationally.
Emerging markets typically have one commodity that they can sell: their natural resources. Larger nations are always looking for ways to obtain raw materials at the lowest possible price. Even if this transaction creates a trade surplus for the smaller country, it will also begin to degrade the local environment. If given enough time, the trade surplus will disappear because there are no longer items that are valuable to sell on the global stage. Through the processes of strip mining and deforestation, many small nations look for short-term gains instead of long-term solutions when considering the subject of trade.
11. It can destroy native cultures.
The quest for additional resources will eventually cause the government to keep pushing further into its most isolated areas. Even the United States follows this practice with the example of creating drilling leases for the Arctic Wildlife Rational Reserve. When this activity occurs, it disrupts the indigenous cultures that may live in that region. Tribes are uprooted, families are forced to move, and their way of life can change dramatically. When these events do not occur, many people suffer from new diseases because of the pollution of their resources, which can lead to death.
12. It can cause other countries to stop trading with you.
China frequently has a trade surplus with the United States. It reached a record high of $323 billion in 2018. This figure was possible even with the tariff battles going on between the two countries and a 3.5% reduction in the number of exports that China sent to the U.S. during the year. When you have a consistent financial benefit at the expense of another country, then you run the risk of having them begin to look for a better deal where they aren’t losing as much money each year. It makes no sense to continue running a deficit if there isn’t a domestic benefit to such a process.
The pros and cons of a trade surplus are influential on small economic scales because they lead to more opportunities for economic growth. Governments and organizations can reinvest those funds to help them grow and obtain more value in the future. Although these benefits and disadvantages are not as influential on a larger scale, they can influence consumer spending habits. That means a trade surplus (or a lack of one) can create local changes for better or worse even if the rest of the country doesn’t experience the same outcome.
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