What is it? How do we calculate it? Written with Dr. Luis Ribera, Associate Professor and Extension Economist, Texas A&M AgriLife Extension.
In the last few years the balance of trade has become a flash point for debate. You’ve probably heard it described most commonly as the U.S. trade deficit, or maybe the U.S. – China trade deficit. Regardless of your politics on the topic, I thought this would be a great opportunity to talk about exactly what a trade deficit, trade surplus, and just the balance of trade are in general.
Image Credit: Lisa Benson Dist. by The Washington Post News Service & Syndicate
I thought this cartoon was a great abstraction of what the idea of the trade deficit has led to with tariffs and retaliatory tariffs being lobbed back and forth. So what EXACTLY is the trade balance?
Definition of trade balance
Mathematically, the formula for the trade balance is about as simple as they come:
Exports – Imports = Trade Balance
If Exports are greater than Imports, we will be in a trade surplus (with whoever the trade relationship is with). If Imports are greater than Exports, then we get a trade deficit. It’s that simple. If we import more than we export we get a deficit and if we export more than we import we get a surplus, two different outcomes for the same figure, the trade balance. (If we export the exact same amount as we import, a net zero, its a balance)
Adding up imports and exports
Since this is a blog about agriculture, we’ll focus on agricultural goods. This is the part where we learn how to add (or compare) apples and oranges. In the figures I present later on in this post, you’ll see exports and imports by fiscal year, with an amount for that year. How do we come to that number when we’re exporting agricultural goods that range from grains to meats?
Again, it’s more simple than most people think. We just take the monetary value of each product, multiply it by the volume of the product exported (or imported) and arrive at the value of exports (or imports).
As an example, let’s assume the United States’ trading relationship with Mexico ONLY involves ground beef and corn. We’ll assume that the U.S. imports ground beef from Mexico, and the U.S. exports corn to Mexico. If corn is $4.50/bushel and the U.S. exports 5,000 bushels, and ground beef is $1.00/lb., and the U.S. imports 4,000 lbs. of ground beef we get a trade balance of:
($4.50*5,000) – ($1.00*4,000) = $18,500
Geography and timing of trade balance:
A final pair of factors about the balance of trade between two places that I’ve learned gives some people conceptual problems are the fluidity of time and place when talking about the balance of trade.
Both time and place are fluid when discussing the balance of trade. It is possible to talk about the balance of trade between U.S. and China and the balance of trade between the U.S. and Asia, with the balance of trade between the U.S. and China being a component of the trade balance between the U.S. and Asia.
It is also possible to talk about the trade balance between the U.S. and China for January, the first quarter of a year, a single year, five years, or a decade. It all depends on what time period you select.
Additionally, it is possible to talk about trade balance as a product group. For instance, this being a blog with an agricultural focus, we present the trade balance for agricultural goods. In certain countries we will have a trade surplus in agricultural goods, where we might have a trade deficit in another group of goods. Adding the dollar value of those groups of goods together will give us the overall trade balance.
Agricultural trade balance:
The United States regularly posts a trade surplus with the rest of the world in the agricultural sector. As we’ve discussed, this means that the value of the agricultural products we export exceeds the value of the agricultural products we import.
For a real world example, I’ve pulled data from the May 30 ‘Outlook for U.S. Agricultural Trade’ published by the USDA Economic Research Service. The bar graph below shows our trade balance in billions of dollars with a select group of trading partners for the 2018 Fiscal Year.
Exports are shown in green, imports are in red, and the trade balance is shown in gray. If the gray bar is below 0, the U.S. has a trade deficit with that area or country. If the gray bar is above 0, the U.S. has a trade surplus with that area or country.
As you can see, the U.S. has a trade surplus in agricultural products with Asia (the gray bar is above 0). The U.S. also has a trade surplus of agricultural goods with China, which feeds into the U.S.’s trade surplus of agricultural goods with Asia.
Finally, we present a graph of the U.S. agricultural trade balance with the rest of the world.
If you have any questions regarding the trade balance, agricultural trade in general, or other topics you’d like to see discussed on this blog, please feel free to reach out to me at: