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A Clarification

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Several people have correctly identified a technical error in this earlier post [2], but as my response below indicates, correcting this error does nothing to diminish the trust or relevance of the main point of the earlier post.

Dear Phil:

You are correct that, in my earlier e-mail about the deal Trump brokered to have a Japanese firm invest $50 billion in the U.S., the result might not necessarily be a full $50 billion increase in the U.S. trade deficit.  If some or all of this $50 billion is now held by foreigners in other dollar-denominated assets, such as U.S. treasuries or Texas real-estate, then the absolute size of the U.S. trade deficit will not rise if and to that extent the new $50 billion of foreign investment will be transferred from these existing foreign holdings of dollar-denominated assets.

I regret the careless wording my earlier letter.  But the thrust and relevance of my criticism of Trump are undiminished: not only does this deal do nothing whatsoever to achieve what Trump claims to be his goal of reducing the U.S. trade deficit, it works in the opposite direction by ensuring that $50 billion at least remain invested in the U.S., and perhaps increasing the amount of trade-deficit-swelling foreign investment in the U.S. by the full $50 billion.

If Trump really understands what a U.S. trade deficit is – and if he really believes (as he and many of his advisors repeatedly insist) that the American economy is harmed whenever and to the extent that foreigners buy fewer of our exports than we buy of theirs – then he has no business boasting about brokering a deal that commits foreigners even to maintain $50 billion of their investments in the U.S., for those $50 billion are thereby rendered unavailable to be used to buy U.S. exports.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

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