Posted on 09/28/2018 7:16:04 AM PDT by SeekAndFind
No economic artifact is as responsible for more confusion and bad policy as is the so-called “trade deficit.” President Donald Trump, of course, frequently rails against the U.S. trade deficit, citing it as evidence of economic weakness at home, of nefarious trade practices abroad, and of the need for trade restrictions.
Yet nearly everything Trump asserts about the trade deficit is wrong and often the opposite of the truth. But to be fair, the president’s confusion isn’t unique to him; it’s widespread. We need to bust a few myths about the trade deficit:
Myth No. 1: U.S. trade deficits mean that demand for U.S. outputs is too low to maintain full employment.
This assertion comes from the fact that a U.S. trade deficit means that foreigners buy less from us than we buy from them. If foreigners bought more of our exports or if we bought fewer of their exports, it would appear that we could then produce more in America — and, hence, employ more Americans.
This appearance is false. Those who fall for this illusion fail to realize that the dollars foreigners don’t spend buying our exports are instead invested by foreigners in the United States — in factories, retail stores, research and development, real estate, etc. Some dollars invest in U.S. equity, while others become loans to Americans. These investments promote economic growth and job creation here at home just as much as investments made in America by Americans.
Here’s an accounting identity: A U.S. trade deficit (or, more precisely, current-account deficit) is always exactly offset — down to the last cent — by a U.S. capital-account surplus. This surplus means that America attracts a net inflow of global investment funds. Far from being evidence of American economic weakness or foreign hostility toward America, this surplus is evidence of American economic strength and of foreign confidence in America. Rather than lament U.S. trade deficits, Trump should boast about those that occur on his watch.
Myth No. 2: U.S. trade deficits push Americans further into debt to foreigners.
While some portion of the U.S. trade deficit does indeed become debt — as when foreigners lend dollars to Uncle Sam — not all of it does. For example, if the U.S. trade deficit rises as a result of foreigners investing in U.S. equity, as when Ikea builds a store in Iowa, there’s no corresponding increase in Americans’ indebtedness. No American owes Ikea shareholders, or anyone else, a single cent as a result of Ikea making equity investments here.
If the value of Ikea’s U.S. investment rises, it does so because Ikea creates value in the form of improved furniture retailing. Ikea’s profit is its own creation; it’s not a repayment from Americans. If, instead, Ikea doesn’t create value or earn profits, its shareholders suffer losses. Either way, this and other equity investments by foreigners — while they raise the U.S. trade deficit — don’t raise Americans’ indebtedness. The same is true when non-Americans hold dollars and buy U.S. real estate.
Myth No. 3: U.S. trade deficits reflect American consumers’ reckless profligacy.
This fallacy springs from an exclusive focus on imports and exports. If the value of what we buy from foreigners exceeds the value of what we sell to foreigners, it’s easy to assume that we’re spending beyond our means. Not true.
First, well over half of American imports are inputs used here by U.S. producers. They aren’t consumption goods; they’re raw materials, component parts, and machinery that increase the output produced by American farms, factories, laboratories, and other businesses.
Second, because many foreign investments in America are entrepreneurial ventures conceived and executed by foreigners (again, like Ikea), a significant portion of U.S. trade deficits are driven by foreigners taking advantage of the open-ended opportunities offered by the dynamic and relatively free U.S. economy. Blaming all increases in the U.S. trade deficit on Americans’ profligacy — or, for that matter, on unfair trade practices abroad or free trade generally — masks the reality that foreigners actively seek opportunities to invest in America.
While it’s theoretically possible that U.S. trade deficits could result from poor economic decision-making by Americans, in practice the opposite is true. The United States remains a distinctly attractive place to invest. We should be proud and celebrate, rather than bemoan, the fact that our global trade results in persistent U.S. trade deficits.
———
ABOUT THE WRITER
Donald J. Boudreaux is professor of economics at George Mason University and Getchell Chair at George Mason’s Mercatus Center.
Ignorance is bliss.
Wow. Boudreaux is pulling out all stops to defend trade deficits.
As a Deplorable, I guess I’m too stupid to understand the many twists and turns in his argument.
Instead, this is what makes sense to me: If a country (or a company, or a family) has more money going out than coming in, something is wrong.
Good post but the protectionists won’t like it.
Economic “experts’ have been touting this explanation for years. What is beyond dispute however is that as our trade deficits have grown our manufacturing sector has shrunk and those jobs have moved overseas.
“Those who fall for this illusion fail to realize that the dollars foreigners don’t spend buying our exports are instead invested by foreigners in the United States — in factories, retail stores, research and development, real estate, etc.”
So if “foreiners” buy our factories, retail stores, R&D, real estate, etc., that’s good for America?
This guy needs to read yesterday’s Wall Street Journal article about how China extorts technology and IP from foreign companies doing business there.
Krugman accolyte?
The stupid. It burns!!!
If trade deficits are so good, why are EVERY other country fighting Trump to maintain their trade surpluses???
That question answers everything you need to know.
I look forward to the author’s next article, justification for a bad rash.
Ultimately a goods and services trade deficit from A to B must come into accounting balance. This happens in two ways: by being loaned back from B to A, or if foreign investment in A is not effectively prohibited, in the purchase of increasing ( equity ) ownership of A by B. ( corporations, land, minerals) Either debt or equity gives B incremental power ( “mastery”) over A.
Foreign ownership and debt leads companies not only to remit profits, but to make corporate decisions against the national interest, such as moving the industrial base overseas, even the strategic industrial base.
When you are owned and indebted, you can’t even mention your master’s hostile acts. Examples: Fox non-coverage of political Islam threat because of its large Saudi ownership interest, or pandering to the Communist Chinese, or the globalist consensus of the Chamber of Commerce against American citizens.
Aside from these “legitimate” counterflows ( equity and debt) the trade deficit comes back into A as bribes, lobbying, etc.
Every one of these ways the trade deficit is balanced undermines the sovereign independence of nation A.
That's exactly right. I guess China should be thanking President Trump because he's doing them a favor by taking away their multi-billion dollar trade surplus with us. Heck, if China plays their cards right, maybe they'll even get a trade deficit with the US! Then they will really be celebrating, huh?
More seriously: Business is about making money. If the money is moving away from you and going overseas, it's not good. You go into business because you want the money to move toward you and wind up in your pocket. How hard is that to understand?
The Chinese should name one of their new (American funded)Warships after this guy.
Ford (The Car Company, not the nutty Professor) just said Trump’s Aluminum / Steel Tariff’s) will cost them a Billion Dollars in Profits.
Does this mean those F-150’s are made from Chinese Aluminum instead of American? Mom, Apple Pie and an F-150, not...
Yes. The Chinese are buying up US companies, hundreds of thousands of acres of farmland, hundreds of thousands of acres of oil and gas properties. They have bought whole oil fields in Canada. They essentially do all of this with our money.
Brilliant.
It only takes one piece of data to refute his argument.
Trump put tariffs on steel from China and steel companies in the US were re-opened.
RE: Trump put tariffs on steel from China and steel companies in the US were re-opened.
And how does this affect the prices of steel using companies and the consumers?
If the price of a good is the most important issue, then why not just shut down every US plant and import everything.
Just have the government print money, give money to all Americans who don’t need to work producing anything, and Americans can use the government printed money to buy the imported goods. As the price of imported goods go up, just print more money. Oh wait, Venezuela is doing that right now. They don’t produce anything domestically. They import nearly everything (except oil).
RE: If the price of a good is the most important issue, then why not just shut down every US plant and import everything.
If the intent is for trade to be free, then we ought to be believe that if the US government does not interfere too much by means of useless and burdensome regulations, American companies CAN COMPETE in terms of VALUE FOR MONEY ( Price vs Quality ).
If an American company cannot compete even under these conditions, I don’t think it is our government’s job to protect them at the expense of American consumers.
Let’s review what happened over the past 4 decades.
American workers earn, say $20 an hour. So companies laid off American workers and relocated to China where workers were paid $1-2 an hour. American consumers got a price discount at Walmart while our industrial base decreased.
Meanwhile, the huge transfer of wealth from the US to China, via trade deficits, built China into a large military rival. China supports nations financially who are anti-US (iran, north korea, venezuela).
Has the lower price at Walmart really been worth the damage to the USA?
Traitorous American CEOs have led us into this dangerous situation with China. It may lead to the death of many Americans in the future.
Don’t worry though, you were able to buy a foreign TV for a couple hundred dollars less.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.