What is Balance of Trade (BOT)?

Balance of trade is like keeping score on a golf course…

If you play a round of golf, each hole has a par, or the target number of strokes it should take to get the ball in the cup. When you’re done playing, you add up all the shots you took compared to the par for the course. Your score (exports) minus the par (imports) gives you your score relative to the expected score (balance of trade). That number might be positive (trade surplus) or negative (trade deficit).

A country’s balance of trade (BOT), also known as trade balance or net exports, is the difference between what it ships to other countries (exports) and what it buys from them (imports).

Balance of trade = Exports – Imports

A country that purchases a lot of products made abroad — more than it sells to other countries — runs a trade deficit. The US is an example of a country that typically has a trade deficit.

Likewise, a country that ships a lot of the things it produces to other nations — more than it buys — is running a trade surplus. China is an example of a country that typically runs a trade surplus.

A country’s balance of trade (exports minus imports) can be positive, negative, or zero.

A positive balance is called a trade surplus, or a favorable trade balance. A negative balance is called a trade deficit, or an unfavorable balance of trade.

If the value of exports and imports are the same, the balance of trade is zero.

A country’s balance of trade (BOT) consists of the value of the imports and exports that flow across its borders.

The balance of trade is the value of the goods, services, and materials that a country sells to other countries, minus the foreign goods, services and materials it purchases. It doesn’t include sending or receiving money, like foreign aid.

BOT is typically the most significant component of a country’s current account (a record of all its international trade in goods and services, investment income from abroad, and foreign aid).

The Bureau of Economic Analysis (BEA) calculates the balance of trade for the US. Many nations have an office responsible for tracking trade statistics and other national accounts. In some countries, the central bank tracks the balance of payments, including the trade balance.

The UN Comtrade database aggregates official statistics on international trade for countries around the world. The International Monetary Fund also publishes an annual report on trends in the global balance of payments, which includes trade.

A positive trade balance means a country exports more than it imports, while a negative trade balance means the opposite. Interpreting what a trade imbalance indicates is more complicated.

Some economists and officials assume a trade surplus (more exports than imports) is beneficial. They argue that having a trade deficit harms national security and promote protectionist policies that favor domestic industries.

Economists today largely disagree. Centuries ago, Adam Smith argued that trade isn’t a zero-sum game (where one country’s gain is another person’s loss). Imagine a country with abundant oil supplies exports $2B in oil and imports $1B of rice to feed its citizens. Even though it runs a trade deficit, that doesn’t mean the country is worse off. It’s a win-win.

David Ricardo, an 18th-century British economist, pointed out that trade imbalances are a natural consequence of each country's comparative advantage (the thing they can do at a lower cost than others).

Economists today point out that trade balances are a result of many factors, like two countries’ currency exchange rates and relative growth rates. Some argue that a negative trade balance is a good sign, since the ability to import so much is generally a signal of a healthy economy. Countries with high per capita incomes and strong economies tend to run trade deficits.

A balance of payments (BOP) is an accounting of all of a country’s international transactions over a certain time period. It tracks all the money flowing into and out of a nation, including the balance of trade (value of exports compared to imports). Money flowing into a country is a credit, while money flowing out is a debit.

Three accounts make up the BOP:

• The current account includes the balance of trade (exports minus imports), income from foreign assets, and unilateral transfers (like direct foreign aid).
• The capital account captures the purchase and sale of capital assets (land, resources, building, etc.) to foreigners, as well as the financial transfers of migrants.
• The financial account consists of currencies and securities owned by US citizens abroad, or foreign-owned currency and securities in the US.

In theory, the balance of payments should always be zero, as a trade imbalance implies an offsetting change to one of the other accounts. In reality, statistical discrepancies and technical accounting issues result in slight differences.

The US has run a trade deficit every year for the last half-century or so, as well as through most of the 19th century. In 2019, the US exported $1.6T worth of goods. The same year it imported $2.6T worth of goods, making its balance of trade -$1T.

Here are the trade balances between the US and its top 10 trade partners:

Source: UN Comtrade Database

People have different ideas about why the balance of trade is important. Some believe that the trade balance is how you keep score in international trade deals. Most professional economists point out that viewing trade as a zero-sum game is misguided, and that the balance of trade isn’t that important as a measure of economic health.

Regardless, the balance of trade is important as an indicator of the direction that money is flowing. It’s just a matter of interpreting that indicator. Some people argue that a trade deficit puts national security at risk if the US grows reliant on other countries for essential goods and that it hurts American workers.

But most economists point out that a trade deficit usually indicates that a country’s economy is healthy and its people are wealthy. Economists often stress that trade results in lower prices and more efficient markets, regardless of the trade balance.