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Let’s Increase America’s Trade Deficit

Here’s a letter to the Wall Street Journal:

Robert Kimmitt and Matthew Slaughter clearly explain how freer trade would increase foreign investment in the U.S. (“How to Ensure That Volvo Is Starting A Trend,” April 10).  And they’re correct that such investment would be a boon to Americans.

Regrettably, Americans are unlikely to absorb Messrs. Kimmitt’s and Slaughter’s important lesson.  The reason is that opportunistic politicians and economically ignorant reporters and pundits incessantly bemoan increases in the U.S. trade deficit and, therefore, treat as harmful any and all economic forces that increase this ‘deficit.’  Yet foreigners cannot invest more in America without putting upward pressure on the U.S. trade deficit.  The reason is (or should be) plain: every dollar that foreigners use to buy dollar-denominated assets is a dollar that returns to America as investment demand rather than as demand for American exports.  America’s capital-account surplus rises.

Of course, it might be that freer trade, by enhancing also the attractiveness of foreign countries to American investors, results in no rise in the U.S. trade deficit.  But such an outcome for America’s balance of trade is neither inevitable nor necessarily desirable.

The benefits of freer trade and greater foreign investment in the U.S. are real even if, as I think likely, the result will be a higher U.S. trade deficit – a happy consequence that, sadly, will inspire doomsday predictions and wails of fear by the politically wily and the economically uninformed.

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


Here’s another important fact that Kimmitt and Slaughter report in this same WSJ article:

Last year more than 60% of all U.S. imports consisted of intermediate inputs—parts and subassemblies—not final goods sold to U.S. consumers.

This fact is one part of the appropriate response to those who ignorantly insist that rising American imports (or a rising American trade deficit, or both) necessarily is evidence that Americans are consuming too much.


By the way, an excellent introduction to balance-of-payments is the late Herbert Stein’s contribution to the Concise Encyclopedia of Economics.