By Laura Taylor, Public Affairs Staff
Trading goods and services typically occurs between populations of two different countries. Items made by one country that are sold in another country are exports, and items purchased by residents of one country that are produced in another country are imports.
The difference between exports and imports is the trade balance.
“Running a trade deficit is nothing new for the United States,” as St. Louis Fed Economist Yi Wen and Research Associate Brian Reinbold wrote in a recent essay about historical U.S. trade deficits.
They explained how in the early 1800s, Europe could produce manufactured goods more cheaply, and the agrarian United States was still playing catch-up to advanced economies like Great Britain. That created trade deficits for the U.S. in several classes of manufactured goods. In fact, the U.S. ran a trade deficit for nearly the whole period of 1800-1870.
Not until the country advanced and began to surpass other manufacturing-based economies did the trade balance see a big shift—from persistent deficits to persistent surpluses in the first part of the 20th century.
Then, around 1970, things shifted again—from trade surpluses to trade deficits—as the U.S. economy began exporting more services.
Three stages occur in the typical evolution of economies. Countries focus their resources and expertise on:
This economic transformation, as outlined by St. Louis Fed Economist Paulina Restrepo-Echavarria, affects a country’s trade balance with the rest of the world.
In a recent Dialogue with the Fed event about the balancing act of international trade, she said that since the U.S. has entered a stage where it’s more devoted to providing services, and not manufacturing goods, it’s really no surprise that the country imports more goods than it exports.
Changes in the structure of an economy, like moving from one stage to another, can have a profound influence on the trade balance, Restrepo-Echavarria explained.
The U.S., a very developed economy, offers many services to rest of the world. Around 1990, the U.S. became a net exporter of services, even as it continued to be a net importer of goods.
According to the Bureau of Economic Analysis, the U.S. trade deficit in July 2019 was $54 billion. This number is calculated with some simple math: the U.S. imported $261.4 billion worth of goods and services in July, but only exported $207.4 billion worth of goods and services that same month.
But remember: There’s more to the trade deficit number than meets the eye. As St. Louis Fed Economist Ana Maria Santacreu explained in another blog post, the U.S. actually has a trade surplus in services.
Still, the deficit on the goods side is bigger than the surplus on the services side—which is why there’s an overall trade deficit.
You can see what that looks like in this chart from FRED, the St. Louis Fed’s free economic database.
There is often an assumption that international trade is a zero-sum game, with “winners” and “losers.” To put it another way, the idea assumes that countries with many exported goods are “winners” and countries with many imported goods are “losers.”
Economically speaking, trade can indeed impact parties beyond the buyer and seller—for better or worse. But Economic Education Coordinator Scott Wolla explains that in order for trade to occur, the transaction must make both buyer and seller better off.
That makes trade a positive-sum game, he said, since both sides gain from engaging in trade.
For a deep dive into the accounting of international trade, beyond just goods and services, check out this lesson from our Economic Education team. You’ll learn about the balance of payments, the current account and the capital and financial account.