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Keeping Trade Facts Straight

Posted By Don Boudreaux On January 31, 2006 @ 4:48 pm In Trade | Comments Disabled

JR offers the following comment on this blog-post [1] of mine inspired by my perusal of a 1975 Sears catalog:

Were the products in 1975 made in the US? Where are they made today?

Sure, we can borrow the money from the Chinese to maintain a high standard of living. What we’re doing is mortgaging the productivity of our children in order to keep up a high standard of living for ourselves.

Contrary to JR’s suggestion, it’s not true that, if things once made in the U.S. are no longer made in the U.S., Americans are borrowing more from foreigners. The relationships that JR implies in his post aren’t real.

Most fundamentally, let’s make the extreme assumption that everything Sears sold in 1975 was made in America and that everything it sells today is made not-in-America. This fact (if it were a fact) in no way implies, or even suggests, that Americans are borrowing from foreigners. It might well be the case that Americans’ comparative advantage over the past 30 years has shifted from producing things such as hand tools, television sets, paint, and automobile tires into producing commercial aircraft, Hollywood movies, magnetic-resonance-imaging machinery, and other goods and services not sold by department stores. That is, Americans are exchanging MRI machines, Pixar animation, and Boeing jets for electric hand tools, tires, and lawn mowers.

Of course, the United States is running a trade deficit (as it has done since 1976) – meaning that at least part of what foreigners spend their dollars on is not U.S. goods and services but, rather, dollar-denominated assets.

As I’ve written on other occasions, this fact – the existence of a trade deficit – does not mean that Americans are borrowing from foreigners. It means only that foreigners are holding dollar-denominated assets (including, possibly, dollars themselves) rather than cashing these out for U.S.-made goods and services.

Good or bad? We applaud when Americans don’t rush to spend their dollars on goods and services but, instead, invest these dollars.  Why in the world (so to speak) should we feel differently about foreigners doing the same? If it’s good for the economy for Joe in Jackson Hole to save and invest in America, why is it not good for Gerhard in Gummersbach or Milton in Malaysia to do so?

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