This blog post examines whether a situation where imports exceed exports necessarily signifies an economic crisis. It calmly outlines the correct criteria for judging a nation’s economic health by analyzing the relationship between the trade balance, current account balance, and GDP.

Is a trade deficit always bad?

In January 2023, South Korea recorded a $12.7 billion trade deficit, marking its largest monthly trade deficit on record. By February of the same year, the deficit had narrowed to $5.3 billion, and while the deficit continued to gradually decrease thereafter, the persistent deficit through May heightened concerns about the Korean economy. In response, the government emphasized that despite the prolonged trade deficit, the current account balance was showing a relatively favorable trend. So, which explanation is more accurate?

Trade Balance vs. Current Account Balance

Fundamentally, both the trade balance and the current account balance show a deficit when imports exceed exports and a surplus when exports exceed imports. However, the two indicators differ in their calculation methods and the items they include. The difference between the trade balance and the current account can be broadly divided into two aspects. To understand this, it is necessary to first examine the concept of the merchandise trade balance.
Statistics that systematically classify and organize international transactions are called balance of payments statistics. The current account encompasses not only goods transactions but also service transactions like tourism and income transactions such as stock dividends and interest. In contrast, the merchandise trade balance is a statistic that only covers the export and import of goods.
The trade balance is similar to the merchandise balance in that it covers the import and export of goods, but there are differences in the basis of calculation. The merchandise balance is calculated based on changes in ownership, while the trade balance is calculated based on all goods that have passed through customs, at the point when the import or export declaration is accepted. Because of these differing calculation methods, a difference arises between the trade balance and the merchandise balance. For example, the timing of aggregation may differ for the trade balance and the merchandise balance when exporting ships, and the methods for reflecting processing trade also differ. Consequently, significant differences can arise between the trade balance and the merchandise balance.
For these reasons, the trade balance and current account show different results due to differences in how goods exports and imports are calculated, as well as differences in the scope of transactions included beyond goods. From the perspective of foreign exchange inflows and outflows, the overall flow of the current account is more important. However, while the current account takes about 40 days to compile, the trade balance has the advantage of being compiled at the beginning of each month based on the previous month’s export and import statistics.
According to the preliminary 2022 balance of payments statistics, Korea recorded a current account surplus of $29.8 billion. Within this, the goods account showed a surplus of $15.0 billion, the services account a deficit of $5.5 billion, and the investment income sector, including dividend and interest income, a surplus of $23.7 billion. Conversely, the customs-based trade balance showed a deficit of $47.2 billion. Thus, when viewed based on the trade balance, imports appear higher than when viewed based on the current account balance. While classroom explanations using simple models often attribute this solely to the difference between exports and imports without considering the difference in compilation methods, such a discrepancy clearly exists in actual statistics. However, because the previous month’s trade balance is compiled quickly, news outlets tend to place greater emphasis on the trade balance.

The trade balance is not a sports competition

So, is it necessarily bad that imports exceed exports? When exports are high and imports are low, it can feel like Korea has won a sports match against other countries. However, in economics, the trade balance is not a competition to determine winners and losers. Exports exceeding imports also means that household consumption and corporate investment were relatively low compared to production. Consumption and investment are crucial elements in the economy. Consumption is the source of citizens’ satisfaction and happiness in life, while investment is essential for improving corporate productivity and ensuring long-term growth.
However, from the perspective of foreign exchange management, when examining the overall current account balance, an excessive expansion of the current account deficit can lead to a surge in foreign exchange demand. This can cause a decline in foreign exchange reserves, a depreciation of the domestic currency, and an increase in the exchange rate.
If this situation persists, the risk of shocks to the foreign exchange market or a decline in national creditworthiness also increases. Therefore, an excessive current account deficit is undesirable. However, many advanced economies often have large import volumes due to high consumer demand. For example, the United States, the United Kingdom, and France are countries where imports significantly exceed exports. In other words, one cannot simply conclude that a country’s economy is in crisis solely because its trade balance or current account is in deficit.
Since 2022, South Korea’s current account surplus has significantly narrowed compared to the previous year, yet it remains in surplus. Furthermore, the scale of its trade deficit is not severe enough to trigger an economic crisis. This situation is distinctly different from the IMF foreign exchange crisis era, when citizens had to unite to restore the national economy. Therefore, the argument that “because the economy is struggling, people shouldn’t travel abroad and spend money” is misaligned with the current economic environment. Citizens should continue their consumption activities within the scope appropriate to their individual income and financial situations.

GDP is paramount, but exports are also important

So, what should be considered most important in the trade balance? To understand this, we need to start with GDP, the most fundamental economic indicator. GDP is an indicator that comprehensively reflects the level of national income, household consumption, and the scale of corporate investment. The most desirable path for economic growth is one where GDP increases, exports and imports rise together, and citizens’ living standards improve in the process.
However, a decline in exports means domestically produced goods are not selling well in overseas markets, which in turn negatively impacts GDP. The performance of export-focused domestic companies tends to deteriorate, and reduced production leads to lower income for citizens. In other words, the gap between exports and imports in balance of payments statistics is not a critically important factor unless imports are extremely large relative to exports. What truly matters is the absolute scale of exports.
For this reason, one might think focusing solely on GDP, the most important economic indicator, is sufficient. However, GDP is released quarterly, and its compilation alone takes over three weeks. The current account balance is also released monthly, but its compilation requires over a month. In contrast, the trade balance is compiled and released at the beginning of each month, often as early as the first or second day. This makes the trade balance the fastest indicator for gauging changes in exports and imports, serving to quickly reveal the current economic situation.
Exports hold a particularly large share in the South Korean economy. The proportion of exports relative to GDP is around 40 to 50 percent, which is high even compared to major advanced economies. Furthermore, the more important an industry is to the Korean economy, the more intricately its exports and imports are intertwined. Producing semiconductors, mobile phones, automobiles, and petrochemical products requires numerous components and raw materials, along with complex manufacturing processes. These raw materials and intermediate goods are not sourced solely domestically but are supplied through a network spanning multiple countries. This is referred to in technical terms as the “global value chain.”
Therefore, even by looking only at export statistics, which are released before GDP figures, one can relatively easily grasp the overall mood of the Korean economy.
Of course, other countries also value exports, but few are as export-dependent as Korea. The United States and China, due to their sheer economic scale, have a lower proportion of exports and imports relative to GDP than Korea. While GDP is the most important economic indicator for every country, complementary indicators are also needed to quickly show economic trends. Therefore, in the United States, employment indicators like the unemployment rate—the percentage of people who want jobs but cannot find them—and the employment rate—the percentage of the adult population actually holding jobs—are given greater weight than exports.
In certain situations, even when exports decline, imports may decrease even more significantly, resulting in a current account surplus. However, such cases are likely the result of GDP contraction, a decline in the standard of living, and a subsequent contraction in consumer sentiment. This economic situation is called a “recession-type surplus.” While determining whether the economy is actually in recession requires a comprehensive analysis of multiple indicators, including GDP, the recession-type surplus clearly illustrates that the economic situation cannot be assessed based solely on whether the current account is in surplus or deficit.
If exports decrease while imports remain constant, the trade balance worsens, resulting in a deficit, which could be interpreted as a sign of economic deterioration. However, simplistic interpretations are risky because exports and imports often move in tandem. Having experienced the IMF foreign exchange crisis, Korea tends to be particularly sensitive to deficits in both the trade balance and current account. Yet, it bears repeating: what truly matters is not whether there is a deficit or surplus, but the scale of exports itself. Only by comprehensively understanding these points can we accurately grasp the position and trajectory of the Korean economy within the global economy.