Even though most economists do not dispute the fact that international trade increases the prosperity of all the economies concerned, the free trade principle is currently undergoing a political pressure, and not just since Donald Trump’s election. While no one wants to put a complete brake on international trade, the term “fair trade” may soon be used to restrict some cross-border flows of goods and services here and there. However, what the notion of “fairness” represents may be submitted to a wide margin of interpretations.

The United States reproaches

It is very often said that fair trade should not exist in areas experiencing trade surpluses or in services. For example, many US politicians believe that the United States is at a disadvantage because the country imports more goods than it exports. The difference is particularly striking in relation to China, which has already led the United States to take “countermeasures.” In Europe, Germany is often heavily criticized because of its export surplus which has increased in recent years – in particular vis-à-vis other countries in the eurozone. For years, Germany has been asked to increase its costs in order to be less competitive! Some even expect Germany to activate policy levers in order to further stimulate inflation, even though it does not really have the necessary instruments to lead an autonomous monetary policy.

This train of thought is not new. The economic theory of mercantilism – developed in the sixteenth century – was already based on the principle that only a current account surplus could lead to prosperity. Consequently, imports were subject to custom duties and the export sector had to be sustained. This is the economic policy France had set up during the era of absolutism. We could therefore label the current supporters of this principle as “neo-mercantilists”.

The misunderstanding starts with the terminology

Most of the Swiss population would probably agree that a current account surplus is better than a deficit. This is not surprising, given that the term “surplus” has a positive connotation in everyday language – and “deficit” a negative one. Students learn the following lesson: to avoid deficits. What applies to private affairs and generally, to the state budget too, makes no sense however, when it comes to foreign trade.

In economic terms, a deficit should not be regarded as fundamentally negative, nor a surplus as fundamentally positive. These terms simply describe the current trade and capital flows between two economies. For example, a current account surplus results in a capital account deficit. Countries with an export surplus need to “finance” it with a capital outflow; this surplus can also be potentially financed by the relevant central bank, as was the case in Switzerland in recent years. Furthermore, importing more than what is exported is not necessarily blasphemous. On the contrary, from a consumer’s point of view, it is even more advantageous since it makes it possible to consume more goods and services than those that need to be produced.

Reasons that justify surpluses and deficits in the long term

Critics speak out regarding the amount, but also the recurrence of current account surpluses or deficits in various economies. It is clear that a country’s trade balance sheet needs to maintain a very long-term equilibrium. However, there are concerns regarding abrupt corrections, such as the bursting of investment bubbles. Thus, the “herd behaviour”, which is manifested by a massive and rapid withdrawal of all liquidity, may lead a country that is in deficit and affected by this phenomenon, into a monetary and economic crisis. It is true that the currency devaluation, resulting from such a race to reach the cashiers, would force a readjustment in the balance of payments, but at the cost of huge price distortions and restructurings. In such a case, institutions such as the International Monetary Fund (IMF) have the key mission to support the concerned economy by fighting the current account crisis.

Apart from such crises of confidence, which typically occur in emerging economies, the long-term current account imbalances of an economy are quite understandable from an economic point of view and in most cases do not cause any concerns – they may even be desirable. In countries criticized for their surpluses, such as Germany, China or even Switzerland, major demographic changes are imminent. With the baby-boomers’ generation retiring, relatively fewer people will have to meet the demand for goods and services of the entire population. Since it will be almost impossible to meet this demand without a huge growth in productivity, it is reasonable for traders to consume less now and achieve export surpluses (even though this result does not prevail in all countries with an aging population). Later, the money saved will be used to cover the demand of the aging population through imports.

Additionally, it may be economically sensible for economies with high levels of immigration and the prospect of increased productivity (e.g. the United States) to import more today and to later compensate this “over-consumption” by export surpluses. The current account balance will therefore stabilize in the long-term.

By taking a closer look, we can see that the “disparities” in global trade that have been criticized are actually quite feasible. Protectionist interventions would be counter-productive and lead to a decline in trade and therefore a loss of prosperity. Many indicators suggest that trade flows will balance out in the long-term and that countries that currently have a current account surplus will see a deficit in the future. It is important to keep a cool head in economic policy matters. The same goes for Switzerland, which still shows an aversion to deficit.