Explained:What is trade deficit and what does it signify

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News:India has decided not to join the Regional Comprehensive Economic Partnership(RCEP) Agreement as India’s core issues remained unresolved during the negotiations.One of the reason for not joining is the massive trade deficits India has with almost all of the RCEP countries.


About Trade deficit:

  • 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 negative which means 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.

Implication of Trade Deficit:A trade deficit can mean two things: 

  • Firstly,the demand in the domestic economy is not being met by the domestic producers.
  • Secondly,many a time a trade deficit signifies the lack of competitiveness of the domestic industry.

Is trade deficit a bad thing?

  • No trade is ever balanced.This is because all countries have different strengths and weaknesses.
  • India may have a trade deficit with China but a surplus with Sri Lanka and Bangladesh.It all depends on whether a country is playing to its strength or not.
  • Trade typically enhances well being 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.

Way forward:

  • Trade does have elements that compromises the 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.
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