Does America Need a Trade Surplus?

Here’s a letter of mine published last month in the New York Sun:

Usually sure-footed, Martin Feldstein stumbles
when he argues that "America will need a trade surplus" in order to
"repay" today’s trade deficit [Opinion, "Thinking About the Dollar,"
July 28, 2008].

First, the only part of the trade deficit that must be repaid is the
part that becomes debt, such as when foreigners buy Treasury notes.
When foreigners buy dollar-denominated equity or real estate, or when
they make greenfield investments in America or simply hold dollars, no
debt is created. None of these investments require repayment.

Second, when it comes to repaying debt, the trade deficit is a red
herring. It matters not if a creditor is an American or an Armenian:
the debt must be repaid and, if repaid in dollars, those dollars will
eventually be redeemed for American goods, services, or assets. (The
last could put upward pressure on America’s trade deficit.)

Uncle Sam and many private Americans might well have financed
excessive consumption with excessive debt, but, if so, the problem is
the debt and not the nationalities of the creditors.

Donald Boudreaux

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