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A Deficit of Understanding

Earlier this week we heard the same moaning and groaning that we always hear when the U.S. “trade deficit” increases — and the same misinformed statements that equate a higher trade deficit with greater American indebtedness.

In fact, a trade deficit is not synonymous with debt.

And as I’ll never tire of saying (as long as uninformed people never tire of giving me occasion to say), there is nothing inherently wrong or dangerous about a trade deficit.

Here’s a letter that I sent recently to CBS News on the day at the latest trade-deficit figures were released:

Dear Editor:

On today’s noontime CBS News radio broadcast, Christopher Glenn misleadingly described the U.S. trade deficit as “red ink” (Dec. 14).  In fact, the trade deficit is simply evidence of foreigners investing in America rather than buying U.S.-made goods and services.  Only insofar as these investments take the form of loans to Americans does the trade deficit become red ink.  All other modes of foreign investment, such as building businesses in the U.S., increase America’s trade deficit without spilling red ink.

Donald J. Boudreaux

My friend Jack Wenders (Emeritus Professor of Economics at the University of Idaho) makes the point more vividly.  He writes, in an e-mail to me:

If China buys lumber, concrete, steel, furniture, etc. from the US, it’s considered great. But if China buys exactly the same material embedded in a building within the US, it’s considered bad. Go figure.

Go figure indeed.  I sincerely wish that no national trade statistics were gathered.  People would then be a tad less likely to sink into nationalistic mindlessness when thinking about and discussing trade issues.


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