Trade Deficits And Surpluses.pdf

On the other hand, a trade surplus occurs when a country exports more goods and services than it imports, resulting in a positive balance of trade.. Consequences of trade imbalances: Neg

ECO201 INTERNATIONAL ECONOMICS

LECTURER: VU TUNG LINH

CLASS: IB1707

Nguyen Thien Thanh Trung- SS171190 Phan Tien Phuc Anh- SS171266 Huynh Thi Phuong Lan- SS171153 Nguyen Tan Nhat Quang- SS171191 Nguyen Thi Van Anh- SS171293 TRADE DEFICITS AND

SURPLUSE

TABLE OF CONTENT

I Introduction: ··· 4

II Causes of trade imbalances: ··· 4 III Consequences of trade imbalances: ··· 5

IV How countries can address trade imbalances: ···6

V Conclusion: ··· 9

VI References: ··· 9

I Introduction:

Trade deficits and surpluses are two concepts that describe the economic relationship between countries A trade deficit occurs when a country imports more goods and services than it exports, resulting in a negative balance of trade On the other hand, a trade surplus occurs when a country exports more goods and services than it imports, resulting in a positive balance of trade Trade is an important aspect of a country’s economy as it allows countries to specialize in producing goods and services that they are most efficient at, leading to increased productivity and economic growth However, trade imbalances can have negative consequences on a country’s economy, and it is essential to understand the causes and consequences of them imbalances

For instance, the United States and Germany are two nations that have different trade imbalances The US is known for having a significant trade deficit, importing more goods and services than it exports, while Germany is recognized for ít trade surplus, exporting more than it imports The causes and consequences of these trade imbalances can have

a significant impact on the domestic economy, raging from job loss to changes in the value of the currency Therefore, it is crucial to understand the complexities of trade imbalances and the measures that countries can take to address them

II Causes of trade imbalances:

The disparity in production costs and competitiveness with other nations is one of the primary reasons for the US trade imbalance Despite having a sizable and established economy, the US has generally greater production costs than other nations, which makes American goods less competitive abroad

Furthermore, changes in exchange rates have a major impact on the US trade deficit There will be a price difference in the market as a result of

the dollar's decline versus other currencies, which will increase the cost

of imports while lowering the cost of US exports internationally The pace of domestic savings and investment also has an impact on the trade deficit A trade imbalance will result if the US saves less than other nations do and invests in various industries, leading to an increase in imports and a reduction in exports

Trade imbalances are largely a result of government policies and

regulations The competitiveness of US exports, for instance, may be impacted by tax laws and industry assistance

Finally, the US trade imbalance is also impacted by world economic conditions While the US will confront intense competition on the global market, there will be many chances for other nations who are developing quickly to export their products

III Consequences of trade imbalances: Negative effects on domestic industries and employment:

Increased competition from cheaper imports could have a negative impact on domestic industries and employment in the United States While trade can reduce consumer prices, it can also put pressure on domestic producers to reduce their prices or go out of business This may result in job losses and the decline of specific industries Some US manufacturing industries, for example, have been influenced by cheaper

imports from countries such as China and Mexico

The impact of trade on domestic industries and employment in Germany

is likely to vary depending on the industries involved Germany is well-known for its robust manufacturing sector, which may face increased competition from countries with lower labor costs Germany, on the other hand, is a major exporter with access to global markets

The ongoing trade between US and EU industries has the potential to have a negative impact on employment in Germany Tariffs on some German products, such as steel and aluminum, have been imposed by the United States, potentially leading to lower exports and job losses in those industries Furthermore, the United States has threatened to impose tariffs on German automobiles, which could have a significant impact on the German automotive industry

Impact on foreign exchange rates and balance payment

The impact of trade agreements on foreign exchange rates and the balance of payments in the United States will be determined by a number

of factors, including the balance of trade with partner countries, the competition of US goods and services in global markets, and the Federal Reserve's monetary policy For example, if US exports rise as a result of a trade agreement, the US dollar will strengthen and the country's balance

of payments will improve On the other hand, if imports grow faster than exports, the US dollar will fall and the country's balance of payments will worsen

Similarly, the impact of trade agreements on foreign exchange rates and the balance of payments in Germany will be determined by the country's trade relationships with partner countries as well as its global market competition Germany is a major exporter with access to global markets, but increased competition from other countries could put downward pressure on the euro and worsen the country's balance of payments Had a depressing effect on wages:

In the long run, job losses due to trade do not raise the unemployment rate Macroeconomic policies such as interest rates and government spending have a much greater impact on total employment and output than trade However, trade has an impact on the composition of employment Workers who are not employed in manufacturing

eventually find work elsewhere, usually in service industries with much lower wages Import growth, particularly from low-wage countries, puts downward pressure on wages in the United States If the prices of these goods fall, this puts downward pressure on prices in the United States

In response, domestic firms are forced to cut wages or otherwise reduce their own labor costs

Persistent imbalances within the eurozone are also harmful, as they lead

to both financial and unbalanced growth Wage declines in other eurozone countries, relative to German wages, would ideally reduce relative production costs and boost competitiveness

IV How countries can address trade

imbalances:

1 Policies to promote exports and reduce imports:

Governments of trade deficit countries can reduce their deficits by encouraging the export of goods, such as by offering export promotion policies in the form of cheap loans and tax breaks for manufacturers, a clearer and more consistent customs clearance processes Likewise, measures to reduce business costs such as reducing raw material costs and labor costs help lower the prices of domestic goods, allowing the production process to be less expensive, leading to lower prices, and attracting foreign buyers

Besides boosting exports, it is also necessary to reduce imports by imposing tariffs to make foreign goods more expensive than domestic goods, stimulating consumers to buy and use domestic goods Set quotas

on imports to regulate foreign purchases

As an illustration, the US can reduce imports of non-essential consumer goods and encourage investment in the production of import substitutes

In contrast, countries with a trade surplus like Germany need to implement policies to promote and encourage domestic consumption and investment, have tax incentives for domestic consumption, and reduce dependence on exports

2 Currency manipulation and exchange rate policies:

Exchange rate policies:

In addition, the trade deficit can also be resolved by adjusting the exchange rate The U.S government can do this by depreciating the dollar, making exports cheaper and imports more expensive, increasing net exports thereby improving the trade balance

As for countries with a trade surplus, the value of that country's currency should be increased In comparison to other currencies, this adjustment makes the currency stronger and more valuable As a result, the nation's imports will rise while exports would decline When compared to products from other nations, their products are more expensive

Currency manipulation:

When foreign governments actively push up another currency to maintain their trade surplus, leading to an artificially high value of that currency to manipulate the currency, the country that owns that currency can intervene by selling local currency and buying foreign currency

The US is experiencing this situation with the dollar, the government should also encourage the use of other currencies (such as the euro, Japanese yen, and Chinese yuan) as an alternative reserve currency

3 Trade agreements and negotiations:

Countries can negotiate trade agreements to reduce trade barriers and increase exports This can include reducing tariffs and quotas and improving market access for goods and services

4 International cooperation and coordination:

International organizations such as the World Trade Organization (WTO) and the International Monetary Fund (IMF) can facilitate cooperation among countries to address trade imbalances

Trade deficits and surpluses are caused by a range of factors, including differences in economic growth rates, exchange rates, government policies, and consumer preferences Countries with strong economic growth and a high demand for imported goods are more likely to have trade deficits, while those with slower growth rates and a focus on exporting are more likely to have trade surpluses

One consequence of a trade deficit is that it can lead to a decrease in a country's currency value, making imports more expensive and exports cheaper This can lead to a reduction in domestic production and employment, as companies may struggle to compete with cheaper imports On the other hand, trade surpluses can result in a stronger currency, which can make imports cheaper and exports more expensive, potentially leading to higher domestic production and employment

To address trade imbalances, countries can take a range of measures, including trade agreements and negotiations, international cooperation, and coordination For example, trade agreements can be used to reduce trade barriers, promote investment, and increase market access,

potentially leading to more balanced trade relationships Negotiations can also be used to address specific trade issues, such as intellectual property rights, labor standards, and environmental regulations International cooperation and coordination can also be helpful in addressing trade imbalances, as countries can work together to address common challenges and promote more balanced trade This could involve sharing information, coordinating policies, and developing joint initiatives to promote trade and investment

The US has a trade due to a strong dollar and high consumption deficit and has tried to address it by renegotiating trade agreements and

implementing tariffs, causing trade Germany has a trade surplus due to a strong manufacturing sector and high productivity and is trying to address concerns by increasing domestic spending and calling for greater international cooperation

Overall, addressing trade imbalances is important for promoting economic growth and stability, and countries can take a range of measures to address them By working together and developing mutually beneficial trade relationships, countries can promote more balanced and sustainable economic growth

V Conclusion:

In conclusion, trade imbalances can have significant consequences on a country's economy, including negative effects on domestic industries and employment, impact on foreign exchange rates and balance of payments, influence on economic growth and development, and political and social implications To address trade imbalances, countries can implement policies to promote exports and reduce imports, manipulate currency and exchange rate policies, engage in trade agreements and negotiations, and coordinate with other countries to promote international

cooperation It is crucial for countries to work together to address trade imbalances and promote global trade and economic development As the world becomes increasing, trade imbalances will continue to be an important issue for countries to address, and finding effective solutions will be critical for sustainable economic growth and prosperity

VI References:

Trade deficits: Post, wall street journal new york times causes - core (no date) Available at: https://core.ac.uk/download/pdf/6755183.pdf (Accessed: March 19, 2023)

AI-Powered Research Tool (no date) Semantic Scholar Available at: https://www.semanticscholar.org/ (Accessed: March 19, 2023) Investopedia (2021, August 26) Trade Deficit Investopedia Retrieved March 16, 2023, from

https://www.investopedia.com/terms/t/trade_deficit.asp

The contentious u.s.-china trade relationship (no date) Council on Foreign Relations Council on Foreign Relations Available at:

https://www.cfr.org/backgrounder/contentious- -china-trade-us

relationship (Accessed: March 19, 2023)

Testimony • By Robert E Scott • September 29 (no date) U.S trade deficits: Causes, consequences, and policy implications, Economic Policy Institute Available at: https://www.epi.org/publication/trade-deficits-consequences-policy-implications/ (Accessed: March 19, 2023)

BMWK - Federal Ministry for Economics Affairs and Climate Action (no date) Fostering International Trade and reducing barriers, BMWK Available at: https://www.bmwk.de/Redaktion/EN/Dossier/trade-policy.html (Accessed: March 19, 2023)

Federation of American scientists (no date) Available at:

https://sgp.fas.org/crs/row/R44981.pdf (Accessed: March 19, 2023) Bernanke, B.S (2016) Germany's trade surplus is a problem, Brookings Brookings Available at:

https://www.brookings.edu/blog/ben-bernanke/2015/04/03/germanys-trade-surplus-is-a-problem/ (Accessed: March 19, 2023)

Syed Ahmad Fathi (Mar 2, 2018) Balance of trade: Correcting trade deficit https://www.linkedin.com/pulse/balance-trade-correcting-

deficit-syed-ahmad-fathi#:~:text=By%20increasing%20import%20duty%20or,also%20help% 20correct%20trade%20deficit accessed on Mar 14, 2023

Andrew Loo (March 6, 2023) Imports and Exports

https://corporatefinanceinstitute.com/resources/economics/imports-and-exports/ accessed on Mar 14, 2023

Caroline Freund (November 6, 2017) Three Ways to Reduce a Trade Deficit https://www.piie.com/blogs/trade-and-investment-policy-watch/three-ways-reduce-trade-deficit accessed on Mar 14, 2023 Michael Collins (Jan 13, 2021) The Truth about Trade Deficits and Currency Manipulation

https://www.industryweek.com/the- economy/article/21152141/the-truth-about-trade-deficits-and-currency-manipulation accessed on Mar 14, 2023

U.S trade deficit surges to five-month high as imports soar (JULY 3, 2019)

https://www.reuters.com/article/us-usa-economy-trade- idUSKCN1TY1PRhttps://www.reuters.com/article/us-usa-economy-trade-idUSKCN1TY1PR

German trade surplus shrinks to lowest level in two decades (February 2, 2023)

https://www.dw.com/en/german-trade-surplus-shrinks- -lowest-level-to

in-two-decades/a-64589240#:~:text=This%20led%20to%20the%20trade,surplus%20of%20

%E2%82%AC175.3%20billion

United States Trade Representative (2021) Trade Policy Agenda and Annual Report