All you wanted to know about ...Trade Deficit

It is not just Indian software firms that are caught between a rock and a hard place after Donald Trump’s election victory. Exporters of agri-commodities, textiles and apparel are soon likely to be in the same situation. One of the first policy steps that the Trump regime plans to take to “make America great”, is to home in on the trading nations with whom the US runs a big trade deficit, and force them to shrink it. It has released a new Trade Policy Agenda 2017 to identify and crack down on such trade partners.

While China (US runs a trade deficit of $300 billion with it), Germany ($68 billion) and Mexico ($62 billion) are high on the hit-list, India figures on it too given that the US runs a trade deficit of $30 billion with it.

Trade deficit is the excess of a country’s import bill over its export receipts. To illustrate, the US trade deficit of $502 billion in 2016 means that the country spent $502 billion more on importing goods and services from other countries last year, than it earned by shipping stuff out.

While some nations have an insatiable appetite for foreign goods, others are the opposite. They sit on a healthy trade surplus by churning out products and services that other nations need. Think of China.

India runs a trade deficit, with its import bill on crude oil, precious metals, electronic goods and other items, far exceeding its export earnings. In April to December 2016, India’s trade deficit was $76 billion.

Just like the US, India too is keen to shrink its trade deficit, especially the yawning one with China.

Running a persistent trade deficit has three key adverse effects on the economy. One, the country’s demand for dollars (foreign exchange) is usually greater than the supply. This leads to a steadily weakening home currency.

Two, a high trade deficit also forces a country to constantly look to foreign investors to make up the gap between its export earnings and its import payouts.

Three, in a slow-growing world, a rising trade deficit could be an indication that domestically produced goods are unable to compete against imports. If local factories shut down, that leads to job losses. It is the last factor that has the Trump camp worried. The dollar has been none the worse for US’ sustained deficits.

The US is hoping that by imposing high import tariffs on trade partners who run a large deficit with it, it can coax global manufacturing giants to relocate their factories back to its shores. By leaning on countries such as China and India to dismantle their import barriers, it can also access new markets for American goods and services.

Well, what the US does about its trade deficit with India matters a lot to both its exporting and importing sectors and the people who are employed in them. You may have read about the the controversy over issuing H1B visas. That’s not good news either for India’s young population looking for jobs, or for its policymakers looking to reap its much-touted demographic dividends. Export oriented sectors such as IT, agriculture and textiles are top job creators in the country.

Given that the US is one of the few countries with which India runs a trade surplus, a reversal of this trade balance can spell trouble for the exchange rate.

Do unto others as you would have them do unto you.

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