Trade Imbalances

Trade imbalances are widespread throughout the world and persistent over time.

In order to reduce the gap with rich countries, poor countries have to rise much faster than them, which are usually their main commercial partners. But this leads to trade deficit, which risks to jeopardize growth with alternate phases of "stop-and-go".

Trade balance tend to be strongly anti-cyclical: in boom periods it usually exhibits deficits, whereas in recessions a trade surplus can help inverting the business cycle. The reasons are explained in depth here and here.

Trade Balance

Trade balance is a component of GDP: other things equal, a surplus increases GDP and deficit reduces it. If this impact is strong enough, it gives rise to the traditional Keynesian multiplier effect with consumption moving in the same direction.

In financial terms, trade balance influence the total size and the composition of the current-account balance and, more broadly, it influences the balance of payments (which comprehends not only the trade balance but also income payments, loans and aid from abroad, etc).

In particular, long-lasting trade deficit can lead to foreign debt, on which a country has to pay interests. If this debt is judged by market agents as unsustainable, a currency crises can erupt. Even before that this perspective materialises, the government can be induced to dampen GDP growth.