Here’s a letter to the Richmond Times-Dispatch:
You report that “A widening [trade] deficit is bad for the U.S. economy. When imports outpace exports, more jobs go to overseas workers than to U.S. workers” (“Trade deficit widens to $40.6 billion ,” Feb. 13).
Untrue. Another name for a trade deficit is a “capital-account surplus.” Save for rare instances of dollars being hoarded or used as circulating media abroad, every dollar of a U.S. trade deficit is a dollar of foreign investment in America.
Suppose that in 2011 Richmonders buy $1 billion worth of goods and services from Charlottesvillians, but Charlottevillians buy no goods and services from Richmonders. Further suppose that Charlottesvillians use this billion dollars to invest in Richmond – such as building retail outlets in Richmond; buying stock in Richmond-based corporations; buying bonds issued by Richmond’s government to fund road improvements. Richmond will have a $1 billion trade deficit with Charlottesville. But are Richmonders harmed? Do the investments made by Charlottesvillians in Richmond fail to expand Richmond’s economy, fail to increase its capital stock, and fail to increase economic opportunity in that city? Does Richmond lose jobs as a result? Of course not.
And so it goes especially at the national level. Because nearly every dollar of the U.S. trade deficit represents foreign investment in America, only economically illiterate reporters assert that a U.S. trade deficit, as such, “is bad for the U.S. economy.”
Donald J. Boudreaux
For the record, my argument is not that a trade deficit necessarily is evidence of good economic fundamentals, performance, and tidings. It often is such, but it can also, at other times, be evidence of economic mischief – such as when the U.S. trade deficit rises as a result of foreigners buying more U.S. treasuries.
But even in such cases the foreign investments do not cause the underlying problems – and those underlying problems will not be solved with trade restrictions. Moreover, – especially given that the underlying problems have nothing to do with trade – whatever these underlying problems are, their ill-consequences are likely reduced by foreign investment. Most obviously, foreign purchases of U.S. treasuries reduce the cost to Americans of shouldering the burden of Uncle Sam’s deficit financing.