… is from pages 84-85 of Daniel Griswold’s superb 2009 book, Mad About Trade (footnotes excluded; link added):
America’s own history shows that persistent trade deficits can be sustainable for long periods of dynamic growth. For most of our first century as a nation, Americans imported more merchandise from the rest of the world than we exported. According to [eminent international-trade economist] Robert Lipsey, “The United States began its existence as a net debtor and all through the 19th century and up to World War I it paid out more in interest on debts than it earned on its foreign assets.” The trade deficits of that era made room for a steady inflow of foreign capital that “went to large, lumpy, social overhead capital projects, such as canals, railways, electrical utilities, and telephone and telegraph systems.”
Today’s inflow of capital is not funding canals and railways, but … it is funding automobile and chemical plants, research and development (R&D) facilities, and the huge and growing federal budget deficits. The trade deficits of today, like those of the 19th century, allow the world to invest in expanding the productive capacity of the private-sector American economy. The net inflow of investment, then and now, makes American workers more productive than we would be otherwise, leading directly to better jobs and higher living standards.
Indeed so. And – to add to Dan’s point here – what many people who fret about the trade (or current-account) deficit also forget is that the size of the world’s, and of any country’s, stock of productive capital is not fixed. Non-Americans can increase the real value of their holdings of dollar-denominated assets without causing the real value of Americans’ holdings of dollar-denominated assets to fall.
A more fundamental point that is missed by critics of trade in general, and by those who fret over trade deficits in particular, is that the nationality of the owners of assets is largely economically irrelevant: if a factory opens up across town from you – a factory that supplies you with lower-priced consumer goods and, perhaps also, with a job – it matters not to you whether that factory is owned by an Alabamian or by an Albanian.