Trade deficit: The picture is not as gloomy as it appears

The economy encountered an unpalatable experience in the first quarter of the current fiscal year. The trade deficit almost doubled during the period and rose to $2.4 billion due to rising imports and falling exports. Import growth of 13.62 per cent outran export growth of 0.94 per cent by a large margin.
'Trade Deficit' is an economic measure of a negative balance of trade in which a country's imports exceed its exports. In other words, a trade deficit, which is also referred to as net exports, is an economic condition that occurs when a country is importing more goods than it is exporting. The deficit equals the difference between the value of goods being imported and that of goods being exported. A trade deficit represents an outflow of domestic currency to foreign markets, implying that the economy is getting poorer.  
A little uneasy situation though, but economic theory says that a trade deficit is not necessarily a bad situation as it often corrects itself over time. However, any deficit usually has some economists worried. For example, in a country like the US this means that large amounts of the U.S. dollar are being held by foreign nations, who may decide to sell those at any time. A large increase in dollar sales can drive the value of the currency down, making it more costly to purchase imports.   
In our case, the picture is not as gloomy as it appears. Imports in a number of sectors recorded considerable fall. According to data on letters of credit settlement, quantity of food grain imported during July-September 2014 was 32.90 per cent less than that of the corresponding period of last year. On the other hand, capital machinery imports increased by 22.0 per cent and petroleum imports by 53.0 per cent.
Although trade deficit widened, the overall surplus was significant in the first quarter, as remittances, foreign direct investment and medium and long-term loans increased. In July to September, 2014, the overall surplus was $1.17 billion, up from $1.14 billion in the same period a year ago.
Inward remittances rose by 22.72 per cent, net FDI 10.24 per cent and medium and long-term loans 41.47 per cent compared to the same quarter of last year.
Foreign currency reserves have been hovering around $22 billion for last two months. On November 18, the forex reserves stood at $21.53 billion.
As the trade deficit widened, the exchange rate came under slight pressure and taka depreciated against the dollar. In the inter-bank forex market, the average taka-dollar exchange rate stood at Tk.77.54 on November 18, up from Tk.77.4 on October 30.
The list of probable impacts of trade deficit is not too long, but not negligible either by any stretch of imagination.
A prolonged trade deficit could have adverse effects. If a country has been importing more goods than it is exporting for a sustained period of time, it is essentially going into debt. Over time, investors will notice the decline in spending on domestically produced goods, which will hurt domestic producers and their stock prices.
Given enough time, investors will realise fewer investment opportunities domestically and begin to invest more in foreign stock markets, as prospects in these markets will be much brighter. This will lower demand in the domestic market and cause the market to decline.
A trade deficit can also result if a domestic company manufactures a lot of its products in other countries. If the raw materials are shipped overseas to its plant, that's counted as an export. When the finished good is shipped back home, that's counted as an import - even though it's made by a domestic company. It's subtracted from the country's Gross Domestic Product (GDP), even though the earnings will benefit the company's stock price, and the taxes will benefit the country's revenue stream.
Obviously, a trade deficit is caused when a country cannot produce all it needs. However, the true causes run deeper than that. A country cannot have a trade deficit unless other countries are willing to offer it as loan the funds needed to finance the purchases of its imports. Therefore, a country with a trade deficit will most likely have a current account deficit.
Initially, a trade deficit is not a bad thing. It raises the standard of living of a country's residents, since they now have access to a wider variety of goods and services for a more competitive price. It can reduce the threat of inflation, since the products are priced lower. A trade deficit can also indicate that the country's residents are feeling confident, and wealthy, enough to buy more than the country produces.
Over time, however, a trade deficit can cause jobs outsourcing. That's because, as a country imports certain goods rather than buying domestically, the local companies start to go out of business.
The domestic business itself will lose the expertise needed to produce that good competitively. As a result, fewer jobs in that industry are created in the home country. Instead, the foreign companies hire new workers to keep up with the demand for their exports.
For this reason, many experts propose reducing the trade deficit to measure different flows of investment. These accounts are the current account and the financial account, which are then totaled to help form the balance of payments figure. The current account is used as a measure for the total amount involved in importing and exporting goods and services, any interest earned from foreign sources, and any money transfers between countries. The financial account is made up of the total changes in foreign and domestic property ownership. The net amounts of these two accounts are then entered into the balance of payments.
Assessment of trade deficit is by no means an easy task given the manifold interpretations of activities involved which calls for a careful structuring of policy decisions. In fact, policy response to the issue should be so designed that the positives get preference and the economy is strengthened.
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