Current-Account Deficit = Capital-Account Surplus

I sent this letter this morning to the Wall Street Journal:

John Engler rightly
defends NAFTA against political-candidates’ misrepresentations of this
trade agreement ("What Nafta Trade Deficit?" April 21).  But he
stumbles into a common error when he asserts that much of the U.S.
trade deficit is caused by U.S. imports of oil.

A trade deficit
reflects decisions made by persons on both sides of a border.  If
foreign suppliers of oil to America spent all of their dollars on goods
and services produced in the U.S., Americans’ imports of oil would not
raise the size of the U.S. trade deficit.  America’s trade deficit
grows not just because Americans import lots of things (including oil),
but also because foreigners choose to invest their dollar earnings in
the U.S.  For this reason, Mr. Engler’s conclusion that it would be
"good" if America’s trade deficit were lower is questionable.  I, for
one, welcome capital inflows into the U.S.  Such inflows of capital not
only directly fund private investments in America, but help to lower
Americans’ cost of financing Uncle Sam’s reckless habit of spending
beyond his means.

Sincerely,
Donald J. Boudreaux

If it’s true that Americans save too little, we Americans should be especially pleased that foreigners save and invest much of their savings in the United States.

Comments    Share     Print     Email