On the Trade Deficit

by Don Boudreaux on June 17, 2004

in Trade

Tyler Cowen’s post on why Americans should not worry about foreigners in the U.S. sending remittances back to their homes is superb. (What else is new?) But even Tyler says that “to some extent our trade deficit may reflect an inadequately low rate of saving.”

I good-naturedly dissent.

My own trade deficit may reflect a rate of saving that is inadequate for me to consume as much in the future as I plan to consume. For example, if I run up credit-card debt to finance my current consumption of pricey French wines, my ability to consume in the future will be lessened.

But the concept of a trade account for a nation is more misleading than revealing.

What difference does it make to me if a new research lab in Boston, a refurbished factory in Chicago, or an expanded vineyard in Oregon is financed with saving from people whose passports are issued by the U.S. government or by people whose passports are issued by foreign governments?

Unless these enterprises are financed with my savings (or with the savings of family members or friends who would share some of their enhanced wealth with me), the answer is “none.” Why should I care if new enterprises are financed out of the savings of a stranger from South Dakota rather than out of the savings of a stranger from South Korea?

I do care if the overall savings rate is too low. But what matters is the rate of savings for the economy as a whole – that is, for people in the global economy. Insofar as Americans are part of an economy larger than America – as we certainly are – then the savings rates of Americans is not itself especially important.

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