Balanced Trade - Explained
What is Balanced Trade?
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Table of ContentsWhat is Balanced Trade?How Does Balanced Trade Work?Arguments Against Balanced TradeAcademic Research on Balanced Trade
What 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.
- Level of Trade
- Gain from Trade
- Intra-Industry Trade
- National Trade Data Bank
- Capital Account (Economics)
- Current Account
- Debtor Nation
- Merchandise Trade Balance
- Export of Goods and Services and Percentage of GDP
- Heckscher-Ohlin Model
- Linder Hypothesis