March 2012

The sticky problem of trade deficits

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But what about the balance of trade?

By Anders Höglund with Stephen Hinton

Trade imbalances which persist for long periods of time tend to warp the infrastructure of the economy and create imbalances which will harm the economy in the long run. Sooner or later these structural imbalances will have to be remedied at a cost.

The sole purpose of the export is to pay for the import. Just like the need for a household budget to balance outgoings with incomings, Acting according to this principle is the only long-term, responsible and sustainable way of handling the trade between countries.

Viewing a large trade surplus as positive indicators in the economy and failing to take action or even worse; trying to increase the amount of exported goods and services by various means, above what is needed to pay for the import, is harmful. The harmful side effects include warping the structure of the economy both in countries with an export surplus and in countries with an import surplus.

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