Help Me Understand What Is a Trade Imbalance?
I have been at home rehabilitating from knee replacement surgery, and Kathy and I have talked A LOT on this topic. I thought you may be interested in some of the analogies and examples from our conversations.
The national conversation has fixated on the amount of goods and services our country sells verses what we buy from other countries. If the US sells more stuff than we buy from that country, we have a trade surplus. If we buy more than we sell to them, this is a trade deficit. Is this important? Allow me to give an illustration, then you decide.
We will begin with four countries to make it easy, let’s call them Country #1, #2, #3 and #4. All four countries have healthy economies and they produce the same products, but each country has a special product that they produce more of than they can use. This product they export (sell) what they don’t need domestically to their other three trading partners. Again, to keep this simple, let us limit ourselves to milk, eggs, corn and plumbers (services).
Country #1 is famous for its milk. They really have a lot of milk…more than they can use, and this excess is sold to their trading partners. Country #1 also produce eggs, corn and plumbers, but they don’t have enough eggs, corn or plumbers to meet their needs, so they buy some of each from their trading partners.
Country #1 sells $100 milk to trading partner #2, $100 of milk to trading partner #3, and $50 of milk to trading partner #4. Country #1 has $250 in total exports and imports of $195 (keep reading). This is a national trade surplus.
Country #2 also produces the same four products: milk, eggs, corn and plumbers. Country #2’s specialty is egg production, and they have a lot of eggs, more than it can consume at home, so it exports the excess eggs. Country #2 exports $100 of eggs to Country #1, $100 to country #3, and $30 of eggs to Country #4. Country #2 has $230 in total exports and $210 in trade imports. A national trade surplus.
Same story with Country #3, all four products are produced but they grow a lot of corn. More than they can use. Country #3 sells $100 of corn to Country #2 and $75 of corn to Country #1. Country #4 does not need or want corn from Country #3 so it buys none. Country #3 has $175 in exports and $205 in imports. This is a national trade deficit.
Country #4 is a bit unique, it is a rather rich country, it still has dairies, egg ranches and farmers growing corn. But a couple of generations ago, the young people started to leave the farm and go to college and trade schools, now it has a lot of really good plumbers. In fact, Country #4 has more plumbers than it needs to fix its own toilets so some of the plumbers sell their expertise to other countries. This is considered an export product/service economy. In additional to being a product/ service economy, its citizens have money to spend and they spend it, it is a consumer driven economy.
Country #4 sells $20 of plumbing services to Country #1, $10 of services to Country #2 and $5 of services to Country #3. Total exports are $35 and total imports are $80. This is a national trade deficit. See the chart below.
When you combine it all it can get confusing, or as Kathy says, “a hot mess”
But this is where the discussion stops being about economics and becomes political.
Country #1 exports / sells $100 to #2 and #3 and imports $100 from #2 and $75 from #3. Therefore, it has a “trade surplus” with Country #3 and balanced trade with Country #2. Is that a good thing for Country #1? Maybe or perhaps maybe not. (See the story of Chinese farmer in the March 13, 2025 blog.) Or is it not really a big deal? Is this an economic or political conversation?
What about Country #4? They buy a lot of stuff from the others. Their total exports are only $35 in comparison to the $80 they buy / import. The balance of trade with Country #1 is $50 of imports and only $20 of exports for - $30 –a trade deficit. Their balance of trade with Country #3 is positive since they export $5 and import nothing. Is this a good thing? Maybe. With Country #2 they import $30 and export $10 so the balance of trade with #2 is -$20. – another trade deficit. Is this a bad thing? Maybe…remember the Chinese farmer March 13, 2025.
Is this a political or economic discussion? My ego says I need to be selling more stuff than I am buying, then “I am winning.” And if other countries are selling more to me than I am buying from them, then “I must be losing.”
The bigger goal in my mind, is to produce as much as I can whether it is goods (milk, corn or eggs) or services (plumbers) and sell it to whoever will buy it for the highest price. If I make as many products / services as I can, do I care if I sell it here or somewhere else. As a consumer, we will spend our money on the products and services we want, when we want them, and pay a price we feel is fair. Do we care if the product is made in the US? Maybe? To a point. Maybe not? To a point.
The discussion of trade balance/ imbalance perhaps misses the real point. So many items, products, and even services we want or need in this country are not made in sufficient quantity to satisfy our wants/needs. We need Canadian lumber to build all the homes we need or we can cut down the National Forests. If all we can get is US lumber, the price is going up. The US exports 49% of the soybeans it grows. If we don’t have a market to export / sell them, what will we do with the surplus? Make more soy-burgers? That is does not sound appealing to me, I am not eating them. I like my beef burgers too much.
My point is that this is a complicated economic issue. Not a political question that can be solved in 90 days of negotiation. This is a marathon. Not a sprint. To shift our economy away from a service-based economy to manufacturing / production, we are going to need time and significant capital investment (with delayed returns) to train a new workforce and build the necessary supply lines / infrastructure.
Call us if you want to discuss this further. The next few blogs will attempt a discussion of tariffs, and a discussion on the issue of the budget that Congress is attempting to pass. With more tax cuts and increased spending (and yes, the Federal Government may be smaller…but I am suspicious that over-all spending will be bigger), we could be perpetuating our actions of the last 75 years of spending money we don’t have. We need more revenue, not less. And no, the tariffs will not increase revenue – more later.
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