What Is the Competitive Advantage of Trade Surplus & Trade Deficit?

by Catherine Capozzi; Updated September 26, 2017

From the 16th to 18th century, western European countries believed the only way to engage in trade were through exporting as many goods and services as possible. Using this method, countries always carried a surplus and maintained a large pile of gold. Under this system, called mercantilism, the Concise Encyclopedia of Economics explains that nations had a competitive advantage by having enough money in the event a war broke out. The interconnected economies of the 21st century due to the rise of globalism means countries have new priorities and trade concerns than war. Both surpluses and deficits have their advantages.

Identification

A trade surplus arises when countries sell more goods than they import. Conversely, trade deficits arise when countries import more than they export. The value of goods and services imported and exported is recorded on the country’s version of a ledger known as the “current account.” A positive account balance means the nation carries a surplus. According to the Central Intelligence Agency World Factbook, China, Germany, Japan, Russia and Iran are “net creditor” nations. Examples of countries with a deficit or, “net debtor” nations are the United States, Spain, the United Kingdom and India.

Trade Deficit Advantages

George Alessandria, senior economist for the Philadelphia Federal Reserve, explains trade deficits also indicate an efficient allocation of resources: shifting the production of goods and services to China allows U.S. businesses to allocate more money towards its core competencies, such as research and development. Debt also allows countries to take on more ambitious undertakings and take greater risks. Though the U.S. no longer produces and exports as many goods and services, the nation remains one of the most innovative. For example, Apple can pay its workers more money to develop the best-selling, cutting-edge products because it outsources the production of goods to countries overseas.

Trade Surplus Advantages

Nations with trade surpluses have several competitive advantages. By having excess reserves in its current account, the nation has money to buy the assets of other countries. For instance, China and Japan use their surpluses to buy U.S. bonds. Purchasing the debt of other nations allows the buyer a degree of political influence. An October 2010 New York Times article explains how President Obama must consistently engage in discussions with China about its $28 billion deficit with the country. Similarly, the United States hinges its ability to consume on China’s continuing purchase of U.S. assets and cheap goods. Carrying a surplus also provides a cash flow with which to reinvest in its machinery, labor force and economy. In this regard, carrying a surplus is akin to a business making a profit -- the excess reserves create opportunities and choices that debtor nations don’t necessarily have by virtue of debts and obligations to repay.

Considerations

Deficits are not sustainable in the long-run. However, the United States is in a unique position because of the dollar’s status as the world reserve currency. If other nations redeem their “IOUs” with the U.S., their economy suffers if the U.S. were to default; China gains no advantage from losing its best customer.

About the Author

Since 2008 Catherine Capozzi has been writing business, finance and economics-related articles from her home in the sunny state of Arizona. She is pursuing a Bachelor of Science in economics from the W.P. Carey School of Business at Arizona State University, which has given her a love of spreadsheets and corporate life.

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