What is the competitive advantage of trade surplus & trade deficit?

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What is the competitive advantage of trade surplus & trade deficit?
A well developed manufacturing base often leads to a nation achieving a trade surplus. (Ryan McVay/Photodisc/Getty Images)

A trade surplus is a balance of trade measure indicating that a nation exports more goods than it imports. A trade deficit is a balance of trade measure indicating that a nation imports more goods than it exports. A trade surplus effectively means a nation has a net currency inflow whereas a trade deficit means a nation has a net currency outflow.

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Exporting goods

A nation that exports more goods than it imports is likely to be rich in resources. These resources may not be natural resources, such as oil or coal. Japan’s post-war “economic miracle” occurred despite the country’s relative lack of natural resources. However, Japan succeeded in educating and training a willing workforce and focusing on key export opportunities to achieve a trade surplus and the competitive advantage of an economic boom.

Importing goods

According to The Levin Institute at The State University of New York, no nation is entirely self-sufficient in terms of resources and goods, so every nation imports things from other nations. A key competitive advantage of a trade surplus is the ability to buy the goods you need on the world markets. Nations that have a trade deficit are relatively less able to do this, unless they enter into sometimes economically crippling loan agreements with The International Monetary Fund.

Net currency inflow

A net currency inflow offers a nation more opportunities for economic growth. A nation with a net currency inflow has the competitive advantage of being able to invest more in education and training, developing the skills of its workforce. This leads to greater innovation and more business start-ups, generating more domestic trade and an increased flow of exports, according to economic consultant, Carl A. Nelson.

Net currency outflow

A net currency outflow created by a trade deficit offers little or no competitive advantage to a nation. However, since nations exist in a global economy, where each nation’s economic performance has a greater or lesser impact on every other nation’s economy, it behoves the larger economies, such as those belonging to the G8, to support the smaller economies with trade agreements, debt write-offs and benign economic regeneration packages. Indeed, according to senior economist George Alessandria, trade deficits can be beneficial as they tend to mean a shift to more efficient global productivity.

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