A country’s trade surplus (more accurately its current account surplus, which includes things like royalty payments, tourism, returns on investment abroad, and other things, but we will pretend they are the same) is exactly equal to its total savings minus its total investment, which is equal to the amount of savings it exports. This is why we refer to the balance of payments. The total money that ants receive from their trade (current account) surplus is perfectly balanced by the capital account deficit, which is simply the amount of savings they send abroad.
Why save more than you invest?
Countries run trade surpluses, in other words, not because their citizens are hard working ants, but rather because they save more than they invest. Of course ants are supposed to save more than grasshoppers because they are prudently willing to make some sacrifice today in order obtain a better outcome tomorrow, but this means that they also must invest more than grasshoppers because the only way a sacrifice today results in a better outcome tomorrow is if we save part of today’s production and invest it in something that will increase our productivity tomorrow. The natural thriftiness of ants explains why they save more, but it cannot explain why countries save more than they invest, and so run trade surpluses, year after year. There are three reasons that explain most cases of large, persistent trade surpluses.
The first reason is a good one in that it results in higher growth and a better outcome for the world overall. The second two reasons, which are really variations of the same reason, result in lower growth for the world overall.
In the first case, there is a huge investment opportunity abroad, perhaps because a group of foreign ants have identified a great opportunity to increase productivity, and this opportunity persists year after year. The returns on that investment are so much higher than they are at home that ants at home are willing to save more than they naturally would to invest at home.
Because they save more than they invest, they export the excess savings abroad, where it earns an outsized return. Total growth in production for the world, consequently, is higher, and if that increase in production is shared between the ants at home and foreign ants, every one is better off. Notice however that the foreign ants will be importing savings because their investment needs exceed their savings, and so in spite of their hard work and rapidly rising productivity, they will run trade deficits for many years. In the 19th Century England and the United States played these two roles, with excess English savings pouring into the United States to fund growth in history’s most successful emerging market, and while the British ran persistent trade surpluses, and the US ran persistent trade deficits, both countries got richer.
The second reason a country might save more than it invests is because of high levels of income inequality. Rich people usually save more of their income than ordinary people, so that the more they keep of the total amount of goods and services produced by hard working ants, the higher that country’s savings rate and the lower its consumption rate. Because lower consumption discourages businesses from building new factories or otherwise expanding production, higher savings often come with lower investment, and so countries with highly unequal income distribution tend to run large trade surpluses.
The other reason has to do with the share that households receive of everything they produced. A country’s total production is divided between households, businesses, and the government. Although governments do make purchases that we can classify as consumption, almost all consumption comes from households. This matters, because in countries in which households are allowed to keep a very large share of what they produce, whether they are as thrifty as ants or as spendthrift as grasshoppers, their total consumption will be a high share of total GDP, and total savings a low share. If their high consumption encourages businesses to open new factories, low savings and high investment might even lead them to run temporary trade deficits, although only until the factories begin to produce.
But if households retain a low share of everything they produce, with governments and businesses getting the rest, then again, whether they are as thrifty as ants or as spendthrift as grasshoppers, their total consumption will be a low share of total GDP, and the country’s total savings, which is equal to GDP minus consumption, will be a high share. Once again if low consumption actually causes investment to drop, they will run large trade surpluses. Notice however, that the country has a high savings rate not because ants have saved a lot of their earnings. It has a high savings rate because businesses and governments are able to save the money that was not given to households.