Balanced Trade - Explained
What is Balanced Trade?
Written by Jason Gordon
Updated at June 27th, 2021
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Table of Contents
What is Balanced Trade?How Does Balanced Trade Work?Arguments Against Balanced TradeAcademic Research on Balanced TradeWhat is Balanced Trade?
In a balanced trade, a country does not account for trade surplus or trade deficits. This model mandates countries to equal their imports with exports. This ensures that a zero balance of trade is achieved which could also include the introduction of other means. Balanced trade is provided as a relative option to free trade.
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How Does Balanced Trade Work?
A balanced trade tries to maintain equal imports with exports. This is different to free trade. Free trade requires country trading as much as possible and striving towards a balance by involving tariffs or other barriers. This balance will either be on a bilateral basis (country by country basis) or o the overall trade balance (this is when there is a surplus in a country and deficit in another). However, In order to reduce these tariffs needed to maintain balanced trade, the country can deploy the system of import certificates. Warren Buffet supports this method rather than tariffs. This provides that exporters would receive this certificate for exports and importers would need them to be able to import, thus limiting the value of imports to that of exports. This certificate is said to be equivalent to tariffs. Lastly, being a member of International trade organizations, such as the World Trade Organisation(WTO), limits tariffs and trade barriers. In other words, member countries are not permitted to enforce tariffs or other barriers to ensure balanced trade.
Arguments Against Balanced Trade
The supporters of the balanced trades have specifically front this argument stating that there is a need to safeguard jobs, wages and growth of an economy where the economy operates on trade deficits only. Since imports are synonymous with sending jobs abroad. Likewise, for an economy that runs on trade surplus moving to balance is also impossible since this will result in a lack of jobs and stunted economic growth. Criticisms of this model include:
- Balance of trade disrupts the free market, this reduces efficiency in the economy.
- Capital flows will be needed to make a balance of trade work.
- In an attempt to limit trade, there will be improper records of imports or under-invoicing of imports.
- Limiting trades will result to hike in pieces of goods
- Since this will result in imposing tariffs which in turn can result in a trade war.
Academic Research on Balanced Trade
- The balance of payments constraint: frombalanced tradeto sustainable debt, Barbosa-Filho, N. H. (2004). The balance of payments constraint: from balanced trade to sustainable debt. InEssays on Balance of Payments Constrained Growth(pp. 144-158). Routledge.
- The Foreign-Trade and Balanced-Budget Multipliers, Holzman, F. D., & Zellner, A. (1958). The Foreign-Trade and Balanced-Budget Multipliers.The American Economic Review,48(1), 73-91.
- Balanced tradeunder uncertainty: A multiperiod non-cooperative game approach, Kanniainen, V., & Mustonen, J. (1989). Balanced trade under uncertainty: A multiperiod non-cooperative game approach.European Journal of Political Economy,5(1), 113-123. The theory of multiperiod non-cooperative games is applied to study the nature of balanced trade between two economies. Strategy choices are affected by the uncertainty associated with world trade. It is shown that under certain conditions, sequential strategies can be found which strictly dominate the outcome of a one-period game. The characterization of these strategies is presented and conditions derived for subgame perfectness of the constructed equilibrium. The Finnish-Soviet trading relationship is presented as one such an application of the described game.
- Balanced tradeand investment, Albert, M., Meckl, J., & Sauernheimer, K. (1992). Balanced trade and investment. InEuropean integration in the world economy(pp. 310-343). Springer, Berlin, Heidelberg. The paper considers intersectoral capital mobility in the context of investment theory. Convex costs of adjustment explain imperfect mobility of capital between sectors and generate adjustment over time due to exogenous shocks. Stocks of capital are endogenous. The paper analyzes adjustment in a small open economy without access to international financial markets. It is shown that the degree of intersectoral factor mobility and the intersectoral factorintensity differential considerably affect adjustment to changing economic conditions on world markets.
- The Scaled Tariff: A Mechanism for Combating Mercantilism and ProducingBalanced Trade, Richman, J. T., Richman, H. B., & Richman, R. L. (2011). The Scaled Tariff: A Mechanism for Combating Mercantilism and Producing Balanced Trade.Estey Journal of International Law and Trade Policy,12(1753-2016-141238). In this paper we first discuss whether or not the modern form of mercantilism that contributes to the trade deficit of the United States and other countries is a self-destructive and thus self-correcting strategy. We argue that it is not self-correcting. Then we discuss mechanisms that a trade deficit country could utilize in order to produce balanced trade. The mechanisms differ in six respects, with the Scaled Tariff excelling in each.
- Australia's economic problem: the issue of sovereignty.-Based on address to Society forBalanced Trade, June 1995, Santamaria, B. A. (1996). Australia's economic problem: the issue of sovereignty.-Based on address to Society for Balanced Trade, June 1995.Australia and World Affairs, (27), 13.