Trump and Ip Are Both Wrong About Trade

by Don Boudreaux on June 14, 2017

in Balance of Payments, Myths and Fallacies, Trade

Here’s a letter to the Wall Street Journal:

In “This Time, Trump Is Right About Trade” (May 31), Greg Ip (like Donald Trump) is wrong to worry about Germany’s trade surplus with America.

If Germans find investment opportunities in America to be especially attractive, they invest much of their savings in America.  And if we Americans do not find investment opportunities in Germany to be attractive, we invest little or nothing in Germany.  The result is a net inflow of investment to America from Germany.  In turn, this net German investment in America causes the growth of the capital stock here to exceed Americans’ savings this period.  The conventional conclusion drawn from this pattern of international investment flows is that Americans save too little – or, at least, that Americans save less than Germans.

This conclusion is mistaken.  If Germans invest more of their savings in America than we Americans invest in Germany, this fact implies only that some of the savings invested in America are contributed by Germans.  While it’s therefore necessarily true that the resulting amount of investment in America exceeds Americans’ savings, this fact does not mean that Americans save too little.  It means only that Germans invest more in America than Americans invest in Germany.

How this net inflow of investment into America harms our economy is mysterious.  Would we Americans be better off without the additional factories here that are funded with German savings?  Do my fortunes, as an American, necessarily dim if Herr Mueller from Munich joins his savings with those of Mr. Miller from Miami in investing in Silicon Valley R&D?  Would our economy be more vibrant and grow more quickly if Germans and other foreigners reduce the amount of savings that they add to whatever investments we Americans make in our economy?  I fail to see how.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030


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