Is It Necessary to Cut Trade Deficit and Achieve Trade Balance?



While the Trump Administration is seeking to reduce the U.S. trade deficit and achieve a more “balanced trade” with its trading partners, a newly-released World Economic Forum (WEC) paper questions the necessity and economic rationale of doing so. As argued by the paper:

First, a country’s trade balance is NOT a measurement of its international commercial success. Neither is the case that “imports are bad and exports are good. “Instead, the paper says that “it is more accurate to think of imports as the benefits of trade, and exports as the cost that needs to be paid to obtain these benefits.”

Second, it is a misconception that “trade deficits cause a reduction in employment and production and trade surplus increase them.” Rather, imports could  increase because of an increase in domestic income thereby increasing the aggregate demand. Empirical studies also overwhelmingly find that rapid economic growth and larger trade deficit are associated with faster employment growth in the United States in history (see the graphs above).

Third, as the supply chain goes global, a tax on imported inputs can reduce rather than promote a country’s exports, particularly manufacturing goods (for example high tariffs on imported fabrics will reduce the price competitiveness of clothing exports). Likewise, trade barriers could disrupt production and reduce domestic employment in both the “protected” industries and those downstream sectors that use their outputs.  

Fourth, primarily trade balance is a function of a country’s national saving and investments, not of trade policies. In other words, trade policies, such as higher tariffs and quantitative restrictions, will have no impact on a country’s trade balance. Interesting enough, countries like Singapore which maintain fairly low trade barriers, run a trade surplus equal to as high as 20% of its GDP. In comparison, India was one of the most highly protected economies in the early 1990s when it experienced unsustainable large trade deficits. Further, there is a dynamic balance between a country’s trade balance and exchange rate: in an open economy, reducing a country’s imports could lead to an appreciation of its currency and eventually hurt its exports as well.     

What is your view on the trade deficit and trade balance? Why do you agree or disagree with the arguments of the WEC paper? Do you find any evidence that challenges the findings of the paper? Please feel free to leave your comments.

Trade Policy and the Textile and Apparel Industry: Discussion Questions

Global Partners

#1 Why or why not the textile and apparel industry should get involved in policy advocacy?

#2 Do you think the current U.S. trade policy reflects the interests of the U.S. textile and apparel industry? Please provide detailed examples.

#3 It is said that “trade is a way for countries to strengthen partnerships and alliances, promote peace and trust between the cooperating nations, and help other countries in need.” Do you think this principle still holds today?

#4 President Trump proposes an “America First Trade Policy,” which intends to encourage more “buy America” and reduce the U.S. trade deficit. How should President Trump respond if other countries adopt a similar approach by proposing initiatives such as “EU first trade policy,” “China first trade policy” and “Mexico first trade policy”?

#5 What do you take away from Case Study 2 regarding the making of U.S. trade policy?

Please mention the question # in your comment.

Historical Benefits of Trade

Interview with Dr. Douglas A. Irwin on the historical benefits of trade

Minute 1’53s: What’s wrong with the view that trade is a zero-sum game.

Minute 4’50s: A review of the concept of comparative advantage by using the textile and apparel industry as an example.

Minute 7’30s: What is trade protectionism?

Minute 9’02s: Why did the United States brace the idea of free trade after WWII and push forward the establishment of the multilateral trading system GATT?

Minute 10’30s: what drives the U.S. trade deficit from the economic perspective?

Minute 15’57s: international trade and U.S. apparel manufacturing jobs

Minute 22’15s: Is TPP a dead deal?

Minute 27’56s: What should Trump do about trade policy?

Q&A for International Trade Theories


Q1: How mercantilism and the absolute advantage theory see international trade differently?

Mercantilism believes everything shall be produced domestically and maximizing exports & minimizing imports is the best route to national prosperity.

Instead, absolute advantage theory believes countries should specialize in what they do best (means making a product cheaper, better and faster) while trading with other countries who are also doing what they’re best at. With specialization and free trade, all countries can end up consuming more products than in the absence of trade.  

Q2: What are the similarities and differences between the absolute advantage theory and the comparative advantage theory?


  • Both theories believe any economy has limited resources and there will be opportunity cost for making any product. Opportunity cost refers to the loss of potential gain from making one product because of choosing to make another product.
  • Both theories believe countries should specialize in production (rather than making everything by itself as suggested by the mercantilism).
  • Both theories also support free trade (rather than intentionally maximizing exports and minimizing imports as suggested by the mercantilism).


  • According to the absolute advantage theory, countries can only specialize in producing and exporting products that they can make absolutely cheaper, better and faster than other nations. Whereas according to the comparative advantage theory, countries should specialize in producing and exporting products that they have relatively bigger advantages or relatively smaller disadvantages [i.e. a country should choose to make and export products with a lower opportunity cost].
  • Developed countries like the US may enjoy absolute advantages over a less developed country such as Haiti, for ALL products. However, a country CANNOT enjoy comparative advantages for ALL products it makes: there will always be some products that a country has bigger advantages or smaller disadvantages in making compared with other nations.
  • According to the absolute advantage theory, least developed countries (LDCs) may not be able to export any products (because they may not have absolute advantages in making any products over developed countries). However, according to the comparative advantage theory, even LDCs can export to developed countries— for those products that LDCs suffer relatively smaller disadvantages in making. Meanwhile, developed countries can focus on making products they enjoy relatively bigger absolute advantages over LDCs. As the example demonstrated in class, with specialization based on comparative advantages and free trade, all countries still can end up consuming more products than in the absence of trade.

Q3: What is the contribution of the factor proportion theory?

Although the comparative advantage theory illustrates how nations should specialize in producing and exporting, it failed to explain what shapes a nation’s comparative advantages. Factor proportion theory answered the question: comparative advantage depends on countries’ relative endowment of factors of production. The country which is relatively abundant in labor will have a comparative advantage in the production of relatively labor intensive goods. The nation which is relatively capital abundant will have a comparative advantage in the production of the relatively capital intensive goods. Surely, factor proportion theory supports everything proposed by the comparative advantage theory, especially the argument that with specialization based on comparative advantages and free trade, all countries can end up consuming more products than in the absence of trade.

Q4: Why most apparel consumed in the U.S. are imported from developing countries?

Because generally developing countries enjoy comparative advantages in making clothing whereas US enjoys comparative advantages in making more capital and technology intensive products such as machinery. To be noted, it doesn’t mean US necessarily makes clothing less productive and more expensive than most developing countries. Just economically it is wiser for the US as a capital abundant country to make more capital  intensive products so as to maximize the gains from using its limited resources.

Q5: Why top U.S. apparel suppliers in the 1980s (Taiwan, Hong Kong and South Korea) are different from today (China, Vietnam and Bangladesh)? How to explain this phenomenon?

In the 1980s, Taiwan, Hong Kong and South Korea had comparative advantages in making clothing on the basis of their relatively abundant supply of cheap labor back then. However, with the gradual growth of economies and accumulation of capital, these countries/regions start to have more capital relative to labor. As a result, their comparative advantages shift from making labor-intensive clothing to more capital-intensive products such as electronics and machinery. Likewise, once China, Vietnam and Bangladesh become more capital abundant, they may also lose comparative advantages in making labor-intensive clothing to other less-developed economies where cheap labor is more abundant relative to capital.