Trade-deficit Horsey

by Don Boudreaux on January 13, 2011

in Balance of Payments, Myths and Fallacies, Trade

This horse – although old, blind, deaf, dull, decrepit, diseased, deformed, deranged, and hard-ridden – just won’t die.  So I write to the Wall Street Journal:

You report that “The U.S. trade deficit with China expanded to $25.63 billion from $25.52 billion in October, reversing some of the improvement of recent months” (“U.S. Trade Deficit Narrows,” Jan. 13).

Accepting for the sake of argument the popular myth that, in this world of nearly 200 nations, America’s trade balance with any one nation is meaningful and relevant, I must nevertheless ask: Why do you so blithely label the recent shrinkage of this trade deficit as an “improvement”?  The U.S. trade deficit rises whenever foreigners invest more heavily in America; are such investments a cause for lamentations?  Do the factories, machines, worker training, R&D, inventories, retail outlets, pension contributions, and infrastructure throughout the U.S. that are financed – either directly or indirectly – by foreign investors hurt Americans?  Is it true that our economy is necessarily “improved” whenever such investments shrink, and harmed whenever such investments expand?

Donald J. Boudreaux


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