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A Rising U.S. Trade Deficit Does Not Mean Rising American Financial Obligations to Non-Americans

Here’s a letter to Forbes:

Dan Ikenson correctly explains why Noah Smith is mistaken to argue that the U.S. trade deficit is synonymous with American indebtedness to foreigners (“The U.S. Trade Deficit Is Not A Debt To Repay,” March 22).  Mr. Ikenson’s argument makes clear that a foreigner who, say, builds a new and profitable food-processing plant in Texas does not thereby become a creditor to Americans despite the fact that this transaction increases the U.S. trade deficit.

Also worth pointing out is the fact that increased foreign ownership of assets in America is not synonymous with decreased American ownership of assets.  That is, Mr. Ikenson’s argument against Mr. Smith can be reinforced by noting that the stock of productive capital is not fixed in size.  It can grow both globally and within a given country – a reality that means that the total value of Americans’ ownership of dollar-denominated assets does not necessarily fall when the total value of foreigners’ ownership of such assets rises.

Suppose that the foreigner who owns that new plant in Texas is uniquely talented at building and operating such a plant in an economy such as that of Texas.  This foreigner thus outbid Americans to purchase the land on which the plant is situated.  Further suppose that the American who sold the land to the foreigner used the full proceeds of the sale as seed money to start a successful IT company in Austin.  In this simple (but plausible) example, the value of Americans’ ownership of dollar-denominated assets rises along with the rise in the value of foreigners’ ownership of dollar-denominated assets.  (Indeed, here the rise in the value of American-owned dollar-denominated assets was enhanced by the trade-deficit-increasing transaction that raised the value of foreign-owned dollar-denominated assets.)

The bottom line is that, not only is it an error to equate a rising U.S. trade deficit with rising American indebtedness, it is also an error to equate rising foreign ownership of ‘American’ assets with declining American ownership of ‘American’ assets.

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

Back in 2004 I wrote two essays meant, in part, to correct the misunderstanding that a trade deficit is synonymous with debt.  See here, and then here.  See also here.


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