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Balance of Trade - Is it really a feasible indicator?

Have you ever wondered how a country competes in the global market? How a country maintains healthy relations with foreign countries? What determines the health of the economy? What’s the reason of deficit in India? How India faced a tremendous effect on foreign trade? Here it is. All you need to know is about Balance of Trade.

What is the Balance of Trade?

The balance of trade is the difference between country’s exports and imports for a given period where exports are those goods which are produced in the home country and sold in foreign countries and imports are those goods which are produced in foreign countries and bought by the citizens of the home country. The goods produced must be tangible. There are three types of balance of trade – positive trade balance in which exports exceed imports, the negative trade balance in which imports exceed exports, and equilibrium in the balance of trade which simply means that value of goods imported is equal to the value of goods exported.

But what we need to understand is BoT is not a feasible indicator. It can be adjusted according to the situations prevailing in the country. Two situations in which the level of imports and exports can be altered are – recession and boom period. A country may prefer to increase or decrease the level of import and export according to these situations. We can not say that trade surplus and deficit determine whether the country is in good shape or not. For instance, the US has been running a trade deficit for decades due to a large importer of oil. It’s economy still stands on a strong platform only because of the status of its currency. US dollar currency has the status of global reserve currency which is protecting its economy from crumbling. Along with it, US has its businesses globally which is holding it firm in the global markets.

Coming to the situation of India, India has been recording trade deficit over the years. Now the main reason for this prolong deficit is that imports are in excess of exports. As India is a developing and growing country, and having large population working in the primary sector, the trade deficit has trapped India to its roots. The country has experienced a tremendous rise in trade deficit with the coming years.

Also, India focuses more on the export of raw material rather than the manufactured goods. No doubt the size of the export of raw material is quite large but the value is way less. China has majorly affected India’s export of manufactured goods as it produced goods at a large scale and export it at lower prices as compared to India. A boost in the manufacturing sector is what India needs to tackle this problem.

Understanding the trade war

The trade war is the war between the countries by raising the trade barriers like import tariffs. A country strikes back against another country in order to protect the interests of the nation and its domestic business. It is done to balance the deficit.

'Smoot-Hawley Tariff Act' was implemented by the US in 1930 in order to give protection to American farmers from European agricultural products which resulted in a large increase in import duties(around 40%). However, other countries retaliate and later on the President 'Roosevelt' passed several acts to reduce it. No doubt it encourages domestic trade and give enormous benefits to the labour but every coin has two sides. It somewhere hampers the growth of the economy. The costs of goods increase and lead to inflation.

But there are chances which could lead countries in the wrong direction from their own policies. The recent example is the trade war between China and US in 2018. US President Donald Trump opposed China and wanted it to change its policies which according to him were 'unfair trade practices'. On the other hand, China thought that US was trying to narrow its global powers. These allegations led to an escalation of already bad relations between the two countries and also impacting the world of trade.

Both the countries increased their imports tariffs with time which adversely affected their growth and development. At the end of 2019, the US had imposed tariffs on more than US$360 billion worth of Chinese goods, while China had reacted with import duties of their own worth around US$110 billion on US products.

Since, all the policies are made keeping in mind the values of trade, it not only affects the economy but also has an impact on the financial market in many ways. A large and continuous trade deficit could have unfavourable impacts on the stock market too. In addition to this, Balance of trade somewhere reflects the stability of a country as the amount of foreign investment depends on it. So a country competes with other counties by participating in world trade, making fair trade policies which benefits in the development and growth of other countries' economy too. Following fair trade policies and keeping the even-handed approach is all a country needs to maintain healthy relationships globally.

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