Here’s a letter to the Wall Street Journal:
Clyde Prestowitz’s defense of Peter Navarro’s hysteria over trade deficits (Letters, March 24) reveals that Prestowitz is as misinformed about trade deficits as is Navarro. Here are two examples.
First, Prestowitz insists that trade deficits are debts that must be “repaid.” Not so. For example, most of the nearly $7 billion that BMW invested over the past quarter century in its Greer, SC, operations is part of America’s trade deficit, yet none of this investment is debt. It’s equity. Americans are not obliged to repay one cent of these funds.
It’s true that BMW’s owners, as Prestowitz correctly says about investors generally, “expect a return on their investment.” But no equity investors, foreign or domestic, receive returns unless they use their equity productively – that is, unless their equity is used to produce value that would otherwise not exist. Therefore, any returns received by successful foreign equity investors are created by these investors’ own vision, efforts, and risk-taking. Contrary to Prestowitz’s implication, these returns are not resources taken from Americans, for these returns would not exist absent the particular productive uses to which the foreign investments are put.
This misunderstanding is repeated when Prestowitz writes that “At least some of that return is repatriated to the home countries of the investors…. That repatriation constitutes a net outflow of wealth.” Again, the wealth to which Prestowitz refers is created by the foreign investors. It may “flow” out of the U.S., but it exists in the first place only because of the entrepreneurial vision and risk-taking of the foreign investors who earn it.
The second example of Prestowitz’s error arises from his failure to understand what happens when foreigners “repatriate” wealth earned in America. Returns on investments in America are earned in dollars. When BMW repatriates its U.S. returns to Germany, it converts those dollars into euros – and the sellers of euros who accept BMW’s dollars will either spend or invest those dollars in the U.S. Prestowitz’s is mistaken to suggest that repatriation of foreign returns causes a leakage of demand from the U.S. economy.
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