Observation on the U.S. Trade Deficit

by Don Boudreaux on February 22, 2011

in Balance of Payments, Trade

Here’s a letter to the New York Times:

I enjoyed your report on how Hyundai’s automobile-production operations in Alabama provide better economic opportunities to Alabamians and raise wages in that state (“Hyundai’s Swift Growth Lifts Alabama’s Economy,” Feb. 19).  Such capital investments are indeed indispensable for widespread economic growth.

It’s worth noting that Hyundai’s investments in these facilities – which increase the stock of productive capital in operation in the U.S. – add to America’s trade deficit.  Rather than Hyundai cashing out its dollars by purchasing American exports – expenditures which would have narrowed America’s trade deficit – this Korean company expanded that deficit by instead using those dollars to build productive facilities and machines in America.

This fact should give pause to the countless politicians and pundits who insist that a rising American trade deficit is necessarily a symptom of American economic decline, a contributor to this decline, and evidence of ‘unfair’ trade practices by foreign governments.

Sincerely,
Donald J. Boudreaux

QUESTION: How is my point changed, if at all, if it’s the case that Alabama’s government used inappropriate (by whatever criteria) economic policies – policies especially favorable to Hyundai – to attract that company to invest in Alabama?

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