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Nothing Unbalanced About So-called "Trade Deficits"

Posted By Don Boudreaux On March 30, 2008 @ 11:12 am In Balance of Payments,Myths and Fallacies,Trade | Comments Disabled

In this recent Wall Street Journal op-ed [1], Dartmouth economist Matthew Slaughter describes some of the benefits of foreign direct investment (FDI).  Here’s an important part of his essay:

Foreign direct investment (FDI) has long been a source of strength for
the American economy. In 2005, insourcing companies employed nearly 5.1
million Americans, 4.4% of the private-sector labor force. Beyond their
employment, insourcing companies perform large amounts of the crucial
activities that make their workers and the overall economy more
productive. They invest in physical capital and in research and
development, and they help connect the U.S. to the global economy
through international trade. The bottom line is larger paychecks. In
2005, compensation per worker at insourcing companies was $66,042 –
31.8% above the average for the rest of the private sector of $50,124.

I do, though, pick one (admittedly small) nit with Mr. Slaughter’s exposition, as I explain in this letter that I sent to the WSJ:

Bravo for Matthew Slaughter’s outstanding explanation of the pattern
and enormous benefits of foreign direct investment (FDI) in the United
States ("What Tata Tells Us," March 27).

I’ve one nit to pick:
Mr. Slaughter incautiously aids and comforts protectionists when he
writes that FDI today is driven by "the evolving pattern of global
imbalances." While incoming FDI does indeed increase America’s
current-account deficit and many other countries’ current-account
surpluses, there’s nothing unbalanced – either in the sense of being
unsustainable or of being harmful – about America’s attractiveness to
investors, or about foreigners being especially keen to invest their
dollars in the U.S. rather than spend these dollars on
American-produced goods and services.  Indeed, as Mr. Slaughter ably
explains, such actions by foreigners are a great boon to foreigners and
Americans alike.

Sincerely,
Donald J. Boudreaux

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