If say, Japan buys less from us than we buy from them, they have cash from us in hand. If that cash does not come back to us some way, we have less here and prices in the U.S. are bid down by the market there being less cash chasing after the same goods. This is a type of deflation.
If they buy more from us than we from them, we will have excess cash chasing the same goods and the market will bid prices up. This is a type of inflation (albeit one which we might have a "yen" for ;o)
Either inflation or deflation is a destabilization of the economy. Both are disasters of undetermined extent in one form or another. We wish to avoid them. Stability is wanted. People know where they stand and can make long term plans when the economy is stable.
To offset inflation or deflation, the Federal Reserve Board increases or decreases the supply of money in order to keep the amount of money chasing after goods more or less stable. They do this to the best of their ability even though forecasting the state of the market into the future is like predicting the weather. You can predict the seasons pretty well but not day to day weather. And predict you must because the effects of changes in the economy have a lag time which may be measured in months or even years. So if you want to offset a future rise in the average cost of goods you might have to take steps to decrease the money supply today and hope that that decrease takes effect just in time to offset the predicted increase.
When your prediction fails people get mad. They lose money. They lose purchasing power. They can't make ends meet. They must "adjust" everything (prices, wages, expectations, etc.) to meet the new state of the economy.
The trade deficit is just one factor of many to be handled.
But it can be eliminated.
The solution is timed money. By this I mean, money which is legal tender for a specified amount of time after which it is "just worthless paper".
How does this work?
The government gives notice to all countries that form this day forward, if you wish to trade with the United States you must accept timed money in all trade transactions. Thus, when an American company buys a shipload of product from China, they give their Chinese counterparts a "check with a serial number" drawn on the U.S. Bank (which doesn't exist yet) for that amount.
Now, they have a certain amount of time to buy something in the U.S. with that money and if they fail to do so, its value then expires. If you snooze, you lose.
It doesn't have to be a really short time. Just some finite time which would serve the purpose of getting the cash back to the U.S. rather than sitting indefinitely in some commisars sock under his mattress. The Chinese wouldn't even have to spend it themselves. They could trade that check to another country for whatever they wanted ... then the other country would have the responsibility of buying in the USA or losing that amount to "timed expiration".
This ends trade deficits without causing a deflation or inflation.
Other countries would be encouraged to follow the same pattern. Tourists could just do as they have always done ... but big international business trade would have to buy and sell for "timed money".
Also, the time set for expiration should be flexible ("Oh, you lost the check? OK ... we'll cut you another and forget about the late fees.") and graduated (total value lost over say, ten days) so that no one would lose a zillion dollars just because they were 10 seconds late. The spirit of the law here is to end trade deficits and if flexible gets the job done that's just fine. And ... the later you get, the higher up the chain of command you must go to get the matter resolved.
These are large checks with a short history and a serial number so that they can't be counterfeited. For instance,
the check #30388394763 was cut by the U.S. Bank for Ajax Imports of SanFrancisco, California, U.S. on Dec. 25,2000 and expires on Dec.25,2001. It was endorsed on the back by companies in China, then Pakistan, then Sri Lanka ... then back to the Ford Motor Company in the U.S. on Dec.20,2001. Then presented to the U.S. Bank for redemption by FoMoCo on Dec.21,2001.You see, it's a large check with a short, easily verifiable history and a serial number. Forgery is impossible if each endorsee verifies its authenticity with the U.S. Bank all along the paper trail.