Cyclical and Structural Trade Deficits

In this video we look at the important difference between a cyclical and a structural trade deficit.

Trade deficits occur when the value of imports exceeds the value of exports sold overseas for a country over a given time period.

Cyclical trade deficit

This is when a country’s trade balance in goods and services deteriorates during a period of rapid economic growth. Higher incomes and spending can lead to a fast-growth of imports and exports might slowdown if domestic demand is high.

Structural trade deficit

A structural trade deficit is one that arises due to supply-side weaknesses in a country rather than a change in GDP or currency – structural trade deficits are often caused by relatively poor price and non-price competitiveness.

Key causes of a cyclical trade deficit

1. Phase of fast “above-trend” growth leading to a surge in imported components, raw materials, finished products
2. Cyclical rise in global commodity prices (especially for countries that are net importers of commodities)
3. Rising real incomes and consumer spending – leading to increased import demand especially when the marginal propensity to import is high
4. Strong (possibly over-valued) exchange rate making imports cheaper and exports more expensive (remember the acronym: SPICED)
5. Recession in the economy of a country's major trade partner – negatively affecting export sales & revenues

Key causes of a structural trade deficit

1. Low levels of business investment
2. Low relative labour productivity
3. High unit labour costs
4. Long term decline in the world price of a country’s major export
5. Weaknesses in design, branding, performance & other non-price factors

Trade deficits are also linked to the stage of economic development that a country may have reached. Many developing / emerging countries run large trade deficits because they are importing capital equipment and components that they cannot produce themselves.