Balanced Trade

Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Balanced Trade Definition

Balanced trade refers to the phenomenon where a country has equal imports and exports. Theoretically, it is a condition in which the country experiences neither a trade surplus nor a trade deficit. In essence, it points to a zero balance of trade.

To attain and maintain the equilibrium condition of import and export, quantifying and setting targets for international trade, and creating awareness among stakeholders about its significance is vital. Furthermore, its proponents advocate that achieving and maintaining an equal import and export value promotes economic growth, creates more employment, and develops a higher standard of living.

Key Takeaways

  • Balanced trade occurs when the value of exports is equal to the value of imports, or there is no significant difference between the value of export and import.
  • The concept is popularised by Michael McKeever Sr. of the McKeever Institute of Economic Policy Analysis in one of his essays.
  • To attain and maintain the equilibrium, quantifying and setting targets for international trade, educating stakeholders about its significance, and carefully designing and implementing policies, trade barriers, quotas, and tariffs are important.
  • Following the model promotes economic growth, creates more employment, and develops a higher standard of living.

Balanced Trade Explained

Balanced trade is easily explained using the Balance of trade (BOT) formula. BOT is the difference between the value of exports and the value of imports. If the BOT calculated is zero, it is balanced trade; if the value is greater than zero, trade surplus occurs, and if the value is less than zero, it is a trade deficit situation.

Balanced Trade

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Exports and imports are important for an economy. For example, export increases market share and business opportunities while import brings diverse and high-quality products to the market. Moreover, when a country produces something and exports it to another, it enhances revenue. Still, at the same time, there are products that a country has to import from other countries because it is not available in their country. A good profile is developed when the country remains debt-free from its trading partners for a continuous period. In other words, the country should maintain no or minimal difference between its value of imports and export.

Free trade occurs when the free-market idea is applied to international trade, and imports and export face minimal or no restrictions. It will be difficult for a nation to equalize export and import value if they follow a free trade model. Hence carefully designing and implementing policies, regulations, and trade barriers are important to achieve an equilibrium. To attain equilibrium from deficit conditions government can restrict imports using quotas and tariffs.

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Example

Indonesia and China are trade partners. However, Indonesia has a substantial trade deficit with China (a negative trade balance with China). As a result, Indonesia urged China to lift trade restrictions on several of its main items, like palm oil, fish, fruits, and bird’s nest, to resolve the trade imbalance by achieving balanced trade.

China is taking initiatives to increase imports from Indonesia and Chinese investments in Indonesia to promote a more healthy and stabilized growth of trade between the two countries. Furthermore, the trade deficit reduced significantly between January and November 2020, falling to $7 billion from $15.4 billion in the same period in 2019, primarily because Indonesia’s demand for imported products plunged amid a Covid 19 pandemic and recession.

Pros and Cons

Let’s look into some of the significant pros and cons:

Pros:

  • It is a prominent source of employment generation.
  • It helps establish a competitive market environment.
  • Aids in improving business and political relationships between two countries.
  • Remove trade barriers and induces globalization.
  • Uplifts its domestic business activities.
  • It provides opportunities for small businesses to join the international market.
  • Brings positive remarks to the country’s economy.

Cons:

  • It can be challenging for countries to maintain the equal value of imports and exports. For example, a country must produce an adequate number of products demanded by the trade partner and careful policy-making, introduction, and updating of trade barriers. 
  • Underdeveloped countries can’t import adequate amounts due to a lack of funds and reserves, even if they can export their domestic products.
  • It intervenes with the interaction of supply and demand and free-market activities, affecting the free market’s self-regulating feature and reducing its efficiency.

Frequently Asked Questions (FAQs)

Define balanced trade?

Under this model, the nation aims to achieve and maintain the equal value of imports and exports. It starts by reducing large trade deficits or trade surpluses. The concept is popularised by Michael McKeever Sr. of the McKeever Institute of Economic Policy Analysis in one of his essays.

Does the U.S. have a balanced trade?

The U.S. annual trade deficit recorded $859.1 billion in 2021, according to the U.S. Bureau of Economic Analysis (BEA) reports. Hence, there was a negative trade balance in the U.S in 2021. The U.S. imports are valued higher than the exports in 2021. The United States has been running consistent trade deficits since 1976 due to high imports of oil and consumer products.

Does India have a balanced trade?

According to the Reserve Bank of India (RBI) statistics, India’s account deficit is 1.2 percent of GDP in the financial year 2021–22 since the trade deficit increased to $189.5 billion from $102.2 billion a year earlier. A trade surplus of 0.9 percent was recorded in 2020–21. India buys more commodities than it sells to the rest of the world. It is a major importer of capital goods, gold, and oil. As a result, India’s trade balance is often negative. 

This is a Guide to balanced trade and its definition. We define and explain its example, pros, cons, and trade balance of the U.S., India, and China. You can learn more from the following articles –