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What is trade deficit?

Topics Covered:

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.


What is trade deficit?


What to study?

For Prelims: Meaning and impact.

For Mains: Concerns and impact of trade deficits.


Context: India decided that it won’t sign the Regional Comprehensive Economic Participation agreement.

A key reason that India forwarded for declining to sign on was the existence of trade deficits with many of the constituents of the RCEP.


How RCEP would have affected India?

India was concerned that joining the RCEP trade pact could lead to Chinese goods flooding the Indian markets, and India’s trade deficit ballooning against most of the RCEP members. This, India argued, would have led to several sectoral producers such as those in the dairy and steel sector being dominated by foreign competition.


What is trade deficit?

Simply put, the trade “balance” of a country shows the difference between what it earns from its exports and what it pays for its imports.

  • If this number is in negative – that is, the total value of goods imported by a country is more than the total value of goods exported by that country – then it is referred to as a “trade deficit”.
  • If India has a trade deficit with China then China would necessarily have a “trade surplus” with India.


What does a trade deficit signify?

A trade deficit means broadly can mean two things:

  1. The demand in the domestic economy is not being met by the domestic producers.
  2. Many a time a deficit signifies the lack of competitiveness of the domestic industry.


More often than not, the trade deficit of a country is due to a combination of both these main factors.

Is a trade deficit a bad thing?

Not necessarily. No trade is ever balanced. That’s because all countries have different strengths and weaknesses.

Trade typically enhances wellbeing all across the world by forcing countries to do what they can do most efficiently and procure (import) from the rest of the world what they cannot produce efficiently.

Another way to look at trade deficits is to look at the outcome of trade agreements on consumers instead of producers. For instance, if cheaper and better quality milk or steel was to come into India, Indian consumers would benefit as their health improves and their cars become more affordable. Of course, Indian producers of steel and milk will cry foul but then if they are not efficient, they should be producing something else.


Way ahead:

Trade doesn’t have elements that compromise a country’s strategic interests and that is why there are some commodities in which every country wants to maintain self-sufficiency.

But merely levying higher tariffs or not choosing to trade do not bring about self-sufficiency. For attaining self-reliance, a country’s domestic industry has to improve and the best of this happening is when one learns from the competition.


Sources: Indian Express.