<p>Trade Deficits happen when the value of a country's imports exceeds the value of its exports. The imports and exports include goods, physical products, and services. </p><p><br></p><p>It's not inherently good or bad but trade deficits can actually be a sign of a strong economy and under certain conditions could lead to stronger economic growth for the deficit-running country in the future.</p>

Trade Deficits

<p>There is no clear link between trade deficits and economic growth because even if a country has a strong trade surplus does not equate to strong economic growth, take for example Japan and Germany.</p>

Trade Deficits and Economic Growth

<p>Economists argue on the broad impact of trade deficits on employment. Some argue for the connotation that imports necessarily reduce employment at home while others point to offsetting job growth in other sectors through the same trade ties. </p>

Trade Deficits and Employment 

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Economists disagree on the simple question of whether sustained <a href="https://www.investopedia.com/terms/t/trade_deficit.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">trade deficits</a> are good, bad, or don't matter much for a country and its economy. That's because there are so many variables—so many ways to generate a trade deficit and so many ways it might help or hurt an economy, or reflect good or bad aspects of that economy.
</p><h2 dir="ltr"> <span dir="ltr"> What Is a Trade Deficit? </span> </h2><p dir="ltr">
A trade deficit occurs when the value of a country's <a href="https://www.investopedia.com/terms/i/import.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">imports</a> exceeds the <a href="https://www.investopedia.com/terms/e/export.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="2" rel="noopener noreferrer" dir="ltr">value of its exports</a>—with imports and exports referring both to goods, or physical products, and services. In simple terms, a trade deficit means a country is buying more goods and services than it is selling. An overly simplistic understanding means that this would generally hurt job creation and economic growth in the deficit-running country.
</p><p dir="ltr">
This view of trade deficits is behind much of the complaints among U.S. politicians about bilateral U.S. trade deficits, especially with China, the country with which the U.S. runs what is by far its largest bilateral trade deficit. That deficit was a prominent campaign theme for Former President Donald Trump in 2016, and a primary reason he <a href="https://www.investopedia.com/terms/t/trade-war.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">launched a trade war</a> against China after taking office. Trump argued that cutting the trade deficit would create jobs in the U.S. and strengthen the economy.
</p><h3>
Key Takeaways</h3><UL><LI>In the simplest terms, a trade deficit occurs when a country imports more than it exports.</LI><LI>A trade deficit is neither inherently entirely good or bad.</LI><LI>A trade deficit can be a sign of a strong economy and, under certain conditions, can lead to stronger economic growth for the deficit-running country in the future.</LI></UL><h2 dir="ltr"> <span dir="ltr"> A Complicated View of Trade Deficits </span> </h2><p dir="ltr">
To many in <a href="https://www.investopedia.com/terms/e/economics.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">the world of economics</a>, though, a trade deficit is about an imbalance between a country's savings and investment rates. It means a country is spending more money on imports than it makes on exports, and under the rules of economic accounting it must make up for that shortfall. The U.S., for example, can do so by either borrowing money from foreign lenders or permitting foreign investment in U.S. assets.
</p><p dir="ltr">
This foreign lending and investment can be seen as a vote of confidence in the U.S. economy and a source of long-term economic growth, if the borrowed money or foreign investment is used wisely, such as investment in <a href="https://www.investopedia.com/terms/p/productivity.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">productivity growth</a>. This was the case with the U.S. for several decades in the 1800s. The money went into railroads and other public infrastructure, which helped the U.S. develop economically. South Korea saw the same kind of productive investment while running trade deficits in the 1980s and 1990s.
</p><h4>
What's a Deficit?</h4><h2 dir="ltr"> <span dir="ltr"> The Risk of Foreign Capital Inflows </span> </h2><p dir="ltr">
For a smaller country with a trade deficit, this greater degree of <a href="https://www.investopedia.com/terms/f/fdi.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">foreign direct investment</a> and foreign ownership of government debt can be risky.
</p><p dir="ltr">
Many countries in East Asia—including Thailand, Indonesia, and Malaysia—ran large trade deficits throughout the 1990s, and saw foreign capital pour into the country. Not all of that investment was efficiently or wisely allocated, and when the <a href="https://www.investopedia.com/terms/a/asian-financial-crisis.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">Asian financial crisis erupted</a> in 1997 and 1998, foreign investors were quick to flee. This left these East Asian countries at the mercy of global financial markets. The results were painful.
</p><h2 dir="ltr"> <span dir="ltr"> Trade Deficits and Economic Growth </span> </h2><h3 dir="ltr"> <span dir="ltr"> Not Clearly Linked </span> </h3><p dir="ltr">
A strong trade surplus doesn't necessarily mean strong <a href="https://www.investopedia.com/terms/e/economicgrowth.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">economic growth</a>. Japan, for example, has run a significant trade surplus for most of the past several decades, yet its economy has been stuck in low gear most of that time. Germany, too, generally runs a strong trade surplus but registers mediocre economic growth.
</p><p>
In the U.S., some periods of strong economic growth have come at times of a surging trade deficit, as consumers and businesses buy more products and services from abroad, and foreign investors seek to put their money to work in the U.S.
</p><div dir="ltr">
<p dir="ltr">Some economists say trade deficits necessarily hurt employment, at least in specific sectors. But others point to offsetting job growth in other areas.</p></div><h2 dir="ltr"> <span dir="ltr"> Trade Deficits and Employment </span> </h2><p>
Economists also disagree on the broad impact of trade deficits on employment. Some argue that imports necessarily reduce employment at home, while others point to offsetting job growth in other sectors through the same trade ties.
</p><p dir="ltr">
Often any job loss is limited to specific sectors. Research by the Economic Policy Institute found that the surge in Chinese imports cost the U.S. 3.4 million jobs between 2001 and 2015—and about 75% of those jobs were in <a href="https://www.investopedia.com/terms/m/manufacturing.asp" data-component="link" data-source="inlineLink" data-type="internalLink" data-ordinal="1" rel="noopener noreferrer" dir="ltr">manufacturing</a>.<span data-id="#citation-1" dir="ltr"><span dir="ltr">1</span></span>﻿ This partly explains why U.S. politicians are often focused on the bilateral trade deficit with China.
</p>

Is a trade deficit beneficial or detrimental to a country's economy? A negative trade balance offers advantages and disadvantages.

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<p dir="ltr">Economists disagree on the simple question of whether sustained <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/t/trade_deficit.asp" rel="noopener noreferrer">trade deficits </a>are good, bad, or don't matter much for a country and its economy. That's because there are so many variables—so many ways to generate a trade deficit and so many ways it might help or hurt an economy, or reflect good or bad aspects of that economy. </p>

<p dir="ltr">A trade deficit occurs when the value of a country's <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/i/import.asp" rel="noopener noreferrer">imports </a>exceeds the <a data-component="link" data-ordinal="2" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/e/export.asp" rel="noopener noreferrer">value of its exports </a>—with imports and exports referring both to goods, or physical products, and services. In simple terms, a trade deficit means a country is buying more goods and services than it is selling. An overly simplistic understanding means that this would generally hurt job creation and economic growth in the deficit-running country. </p>

<p dir="ltr">This view of trade deficits is behind much of the complaints among U.S. politicians about bilateral U.S. trade deficits, especially with China, the country with which the U.S. runs what is by far its largest bilateral trade deficit. That deficit was a prominent campaign theme for Former President Donald Trump in 2016, and a primary reason he <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/t/trade-war.asp" rel="noopener noreferrer">launched a trade war </a>against China after taking office. Trump argued that cutting the trade deficit would create jobs in the U.S. and strengthen the economy. </p>

<ul><li>In the simplest terms, a trade deficit occurs when a country imports more than it exports. </li><li>A trade deficit is neither inherently entirely good or bad. </li><li>A trade deficit can be a sign of a strong economy and, under certain conditions, can lead to stronger economic growth for the deficit-running country in the future. </li> </ul>

<p dir="ltr">To many in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/e/economics.asp" rel="noopener noreferrer">the world of economics </a>, though, a trade deficit is about an imbalance between a country's savings and investment rates. It means a country is spending more money on imports than it makes on exports, and under the rules of economic accounting it must make up for that shortfall. The U.S., for example, can do so by either borrowing money from foreign lenders or permitting foreign investment in U.S. assets. </p>

<p dir="ltr">This foreign lending and investment can be seen as a vote of confidence in the U.S. economy and a source of long-term economic growth, if the borrowed money or foreign investment is used wisely, such as investment in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/p/productivity.asp" rel="noopener noreferrer">productivity growth </a>. This was the case with the U.S. for several decades in the 1800s. The money went into railroads and other public infrastructure, which helped the U.S. develop economically. South Korea saw the same kind of productive investment while running trade deficits in the 1980s and 1990s. </p>

<p dir="ltr">For a smaller country with a trade deficit, this greater degree of <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/f/fdi.asp" rel="noopener noreferrer">foreign direct investment </a>and foreign ownership of government debt can be risky. </p>

<p dir="ltr">Many countries in East Asia—including Thailand, Indonesia, and Malaysia—ran large trade deficits throughout the 1990s, and saw foreign capital pour into the country. Not all of that investment was efficiently or wisely allocated, and when the <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/a/asian-financial-crisis.asp" rel="noopener noreferrer">Asian financial crisis erupted </a>in 1997 and 1998, foreign investors were quick to flee. This left these East Asian countries at the mercy of global financial markets. The results were painful. </p>

<p dir="ltr">A strong trade surplus doesn't necessarily mean strong <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/e/economicgrowth.asp" rel="noopener noreferrer">economic growth </a>. Japan, for example, has run a significant trade surplus for most of the past several decades, yet its economy has been stuck in low gear most of that time. Germany, too, generally runs a strong trade surplus but registers mediocre economic growth. </p>

<p>In the U.S., some periods of strong economic growth have come at times of a surging trade deficit, as consumers and businesses buy more products and services from abroad, and foreign investors seek to put their money to work in the U.S. </p>

<p dir="ltr">Some economists say trade deficits necessarily hurt employment, at least in specific sectors. But others point to offsetting job growth in other areas. </p>

<p>Economists also disagree on the broad impact of trade deficits on employment. Some argue that imports necessarily reduce employment at home, while others point to offsetting job growth in other sectors through the same trade ties. </p>

<p dir="ltr">Often any job loss is limited to specific sectors. Research by the Economic Policy Institute found that the surge in Chinese imports cost the U.S. 3.4 million jobs between 2001 and 2015—and about 75% of those jobs were in <a data-component="link" data-ordinal="1" data-source="inlineLink" data-type="internalLink" dir="ltr" href="https://www.investopedia.com/terms/m/manufacturing.asp" rel="noopener noreferrer">manufacturing </a>.<span data-id="#citation-1" dir="ltr"><span dir="ltr">1 </span> </span>﻿ This partly explains why U.S. politicians are often focused on the bilateral trade deficit with China. </p>

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Pros and Cons of a Trade Deficit

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Trade Deficits and Economic Growth

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Bite‑sized knowledgeto upgradeyour career

Pros and Cons of a Trade Deficit

Trade Deficits

Trade Deficits and Economic Growth

Trade Deficits and Employment

GDP vs. GNP: What's the Difference?

The Normal Economy Is Never Coming Back

Cost-Push Inflation vs. Demand-Pull Inflation: What's the Difference?

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to upgrade
your career