More on the Trade Deficit

by Don Boudreaux on November 23, 2010

in Balance of Payments, Myths and Fallacies, Trade

Here’s a letter to Chris Isidore, Senior Writer at (HT Richard Brewer):

You report that “as China’s [trade] surplus builds, nations like the United States that are running trade deficits also face risks.  Consistently consuming more goods and services than the nation produces means the country needs to finance that deficit by selling assets, such as U.S. Treasuries, to their overseas trading partners” (“The trouble with ‘global imbalances’,” Nov. 23).

Contrary to popular mythology, a U.S. trade deficit does not mean that Americans necessarily are “consuming more goods and services than the nation produces.”  When foreigners use the dollars they earn on their exports to America, say, to buy stock in The Dow Chemical Co. or to build a factory in Texas, America’s trade deficit rises.  But these investments in American-based enterprises also increase the volume of output that ‘the nation produces.’

I urge you to break the habit of equating trade deficits and trade surpluses with “imbalanced trade.”  Explicit recognition that trade – that is, current-account – deficits are fully offset by capital-account surpluses would go a long way toward better informing Americans of the true nature of trade and, importantly, also toward tamping down the hysteria stirred up by the incessant barrage of uninformed reporting about trade and trade deficits.

Donald J. Boudreaux


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