Trade imbalances have been inherent in international trade for centuries.
Companies constantly trade with each other and, in the course of trade, patterns and imbalances emerge. Countries sending more money overseas in exchange for foreign goods and services are said to run a trade deficit. If a country consistently runs a deficit, the deficit tends to grow over time. While trade imbalances are an inherent part of international trade, economists do not agree on what constitutes a high deficit. In fact, the numbers may matter less than the trade deficit's context.
Balance of Trade
Companies and countries trade goods and services whose value reaches into the trillions every year. In international trade, some countries export more than they import and some import more than they export. Governments and international institutions track this activity and total customs receipts to arrive at a number called the balance of trade: negative means a deficit and positive means a surplus.
Deficits
Professors Barry Eichengreen and Michael Bordo demonstrated in a 2001 paper what many economists agree on: Severe trade imbalances and crises have been part of international trade for centuries. Additionally, professor Colin Danby states that trade deficits tend to grow over time, as increased spending is financed in part by debt, and subsequent years include interest payments as well as new purchases.
High Trade Deficits
When economists refer to a country's "high trade deficit," they mean that the country's deficit is high relative to other countries or that one year's trade deficit was high in comparison to past years' deficits. Economists use deficit as a percentage of gross domestic product, or GDP, when comparing trade deficits across countries, as the dollar amount changes drastically depending on an economy's size.
Context
What constitutes a high trade deficit is very relative. The United States has run a deficit every year since 1976, and the amount of the deficit grows nearly every year. Most observers agree that the United States' deficit is high and growing. Yet, the United States is the world's largest economy, making the numbers -- a deficit of more than $500 trillion in 2010 alone -- astronomical, while the deficit as a percentage of GDP seems small at 3.5 percent. The percentage indicates that while the current deficit is high, the economy has the capacity to run a higher deficit before provoking a crisis.
