The balance of trade, or trade balance, is any gap between a nation’s value of its exports, or what its producers sell abroad, and its total dollar value of imports, or the foreign-made products and services that households and businesses purchase. If exports exceed imports, the economy is said to have a trade surplus. If imports exceed exports, the economy is said to have a trade deficit. If exports and imports are equal, then trade is balanced. But what happens when trade is out of balance and large trade surpluses or deficits exist?

Germany, for example, has had substantial trade surpluses in recent decades, in which exports have greatly exceeded imports. Germany ran a trade surplus of $260 billion. In contrast, the U.S. economy in recent decades has experienced large trade deficits, in which imports have considerably exceeded exports. In 2014, for example, U.S. imports exceeded exports by $539 billion.

A series of financial crises triggered by unbalanced trade can lead economies into deep recessions. These crises begin with large trade deficits. At some point, foreign investors become pessimistic about the economy and move their money to other countries. The economy then drops into deep recession. This happened to Mexico in 1995. A number of countries in East Asia — Thailand, South Korea, Malaysia, and Indonesia — came down with the same economic illness in 1997, which was referred to as the Asian Financial Crisis.