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Balance of Trade: Nothing More Absurd

Washington Post columnist Robert Samuelson is one of the more thoughtful and well-informed in the business.  But like most others, he takes the term “trade deficit” too literally.  As a result, he’s confused on the matter.  Here’s his column today.  And below I paste a letter that I sent to the Post in response.

Robert Samuelson is misled by the terms “trade deficit” and “trade imbalances” (“Dangers in a Dollar on the Edge,” Dec. 8).  As he himself notes, one reason for America’s trade deficit is the great attractiveness to foreigners of dollars and dollar denominated assets.  Americans give foreigners financial security in return for imports.  No real imbalance here.

Also, Mr. Samuelson is mistaken to say that foreigners’ demand for U.S. assets – by boosting the dollar’s purchasing power – helps American consumers but not American producers.  Because at least half of all American imports today are intermediate components, raw materials, and capital goods, a strong dollar unquestionably helps many American producers.

Mr. Samuelson should take to heart Adam Smith’s recognition that “Nothing, however, can be more absurd than this whole doctrine of the balance of trade.”*

Donald J. Boudreaux

* This quotation appears in The Wealth of Nations, Book IV, Chapter 3, Part II.  For data on the composition of U.S. imports, see Douglas Irwin’s fine book Free Trade Under Fire, 2nd ed., p. 12.