Fears of escalating trade disputes hung over last week’s IMF-World Bank spring meetings.
The US has an overall trade deficit with the rest of the world and its leaders would like it to be smaller. For that to happen, however, trade partners must reduce their collective surplus with the US — a task made more difficult as American spending and imports surge after the recent tax cuts and increase in government spending. This stand-off could derail the world economy’s current expansion, especially if more countries turn to trade restrictions.
Countries’ overall trade deficits can of course be excessive — as can surpluses. That is why the IMF points out when these balances get out of line in either direction. But it is an age-old fallacy to believe countries lose from trade unless their total exports exceed their imports. Deficits often play a vital economic role. For example, they can help countries finance productive long-term investments that ultimately raise national income and wealth.