Exports, Imports, and the Balance
A country's trade balance is the difference between what it exports and what it imports. When exports exceed imports, the country runs a trade surplus. When imports exceed exports, it runs a trade deficit.
These figures matter because they reflect the flow of money between a country and the rest of the world. A country with a trade deficit is, in effect, sending more money abroad than it receives — which must be financed somehow, either by borrowing from foreigners or by selling them assets.
The Current Account
The current account is a broader measure that includes trade in goods, trade in services, income earned on investments abroad, and transfer payments (like remittances). A country can run a goods deficit but a services surplus — as the UK does, for example, given its large financial services and professional services exports.
The current account balance has to be offset by the capital account: if a country imports more than it exports, foreigners are accumulating that country's currency and assets. This capital inflow finances the deficit.
Do Trade Deficits Matter?
This is contested. A trade deficit isn't inherently bad. If a country is importing capital equipment that raises its future productive capacity, the deficit is financing investment. If a country is running a deficit because it is consuming more than it produces and financing it with debt, that's more concerning in the long run.
Persistent large deficits can put downward pressure on the currency and, if financed by foreign borrowing, create vulnerability to sudden reversals if foreign investors lose confidence.
Trade Policy and Tariffs
Governments sometimes try to reduce trade deficits through tariffs — taxes on imports that make foreign goods more expensive, shifting demand toward domestic producers. The intended effect is to reduce the deficit and protect domestic industries. The unintended effects often include higher prices for consumers and retaliatory tariffs from trading partners, which reduce exports.