≡ Menu

No Deficit of Misunderstanding

Here’s a letter to the New York Times:

Robert Lighthizer is concerned that “our enormous trade imbalances – which require us to sell hundreds of billions of dollars in assets each year – will leave our children dependent on foreign decision makers” (“Throwing Free Trade Overboard,” Nov. 13).

He can calm down.

First, his factual claim is false.  Foreign holdings of U.S. dollars increase America’s trade deficit but involve no selling of U.S. assets.  Second, and more importantly, capital assets are not fixed in volume.  Capital can grow.

Suppose the Swiss firm Novartis builds a lab in San Diego and the American who sold the California land to Novartis uses the proceeds to start a business in Phoenix.  The result of these transactions – which increase America’s trade deficit – is a larger stock of capital invested in the U.S. economy and higher worker productivity, but without any necessary net increase in America of the influence of “foreign decision makers.”

Donald J. Boudreaux

The above letter isn’t the first that I’ve written in response to Mr. Lighthizer’s unimpressive “pragmatic” undestanding of trade: these letters were written almost three years ago.


Next post:

Previous post: