One of the most curious – and most mistaken – arguments that Ian Fletcher made during our debates on trade earlier this week at Hillsdale College  occurred repeatedly during discussions of the trade deficit. One of the facts that I pointed out is that a U.S. trade deficit is good for the U.S. insofar as such a deficit means that capital is flowing into the U.S. and creates new businesses (or bolsters existing businesses). Think, for example, of BMW’s factory in Greer, South Carolina, or of any of the many Ikea stores across the United States.
In reply, Fletcher agreed that such investment is productive, and even that it’s beneficial for Americans. “However,” he replied (and here I quote from memory), “it would be even better if those assets were owned by Americans.”
If you watched or listened to the debate you heard my response. I here want to drive that response home.
The core error in Fletcher’s reply is the assumption that the productive assets that are brought into being by foreign investment would exist in the absence of foreign investment. Fletcher assumes, for example, that the successful Ikea store in Dale City, Virginia, would exist in the absence of Ikea’s decision to build and operate a store there. Fletcher assumes, in other words, that the ownership of an asset is economically distinct from the creation of an asset. But this assumption is plainly mistaken. Nothing prevented Americans from building a large furniture (or other kind of) store on that very location before Ikea built its store there – nothing, that is, other than the failure of any Americans to have the vision or the willingness to do so. Ikea’s entrepreneurial vision and willingness to take the risk of building a store in Dale City added to the capital stock in America (and in the world).
Once the store exists, of course it’s child’s play to imagine it now being owned by Americans. And in a hyper-static view of economic reality, one might even agree that were that store owned by Americans rather than by Swedes then Americans as a group would be richer. But it is nonsensical to leap from this childish observation to the conclusion that the U.S. trade deficit means that Americans are made worse off. Again, the reality is that that store would not exist were it not for the foreign investment and entrepreneurship that created it.
One cannot legitimately do what Fletcher here does, namely, separate the existence of the asset from the individuals and the processes that bring that asset into existence. Assets do not create themselves; assets are not created ‘naturally’ or ‘automatically.’ The creation of each productive assets requires savings, creativity, risk-taking, and actual effort that are unique to that asset. As I said in my verbal response to Fletcher’s claim, I would be richer if Microsoft were fully owned by me. (This fact is a matter of mere arithmetic.) Yet it hardly follows that if Bill Gates and Paul Allen had been prevented from doing what they did to create and successfully launch Microsoft that Microsoft would nevertheless exist for me to own. Had these entrepreneurs been prevented from creating Microsoft, I’d be poorer today, not richer – for Microsoft products, many of which I use, would not be available for me to use. And, of course, I would not have created Microsoft.
Put differently, Fletcher implicit assumes that the processes that give rise to the U.S. trade deficit have no effect on the size of the U.S. capital stock. For Fletcher, this capital stock exists independently of the details of human decision-making. ‘If Ikea had not built that store, it would have been built instead by Americans, with Americans as a group being richer for owning the store’ – this is among Fletcher’s faulty premises.
Fletcher fails to see that the size, quality, and vital details of the capital stock, as these exist at any moment and as they change through time, are themselves determined by the pattern of international trade and investments that give rise to them. They are not phenomena independent of the market process. Therefore, it is illegitimate simply to imagine all of these phenomena as they are except with the pattern of capital ownership being different.
Relatedly, Fletcher doesn’t understand that, because the size and quality of the capital stock aren’t fixed (or, more generally, because they aren’t independent of the particular economic arrangements and individual decisions that give rise to them), when non-Americans successfully invest in America this investment does not mean that Americans’ capital ownership declines correspondingly. Each individual American remains free to invest as little or as much as he or she pleases. Ikea’s successful building and operation of retail furniture stores in America doesn’t stop me from investing. And if I invest successfully, then I’m become wealthier; if I don’t, I don’t. Ikea’s successful investment in America is not legitimately considered to be any subtraction from or constraint on my, or Fletcher’s, or any other person’s ability to invest in America.
Here’s one final point about this faulty argument by Fletcher: if you accept its premise and logic, then there’s no reason to confine the analysis to America. Fletcher can just as easily observe, for example, that while it’s true that, say, the Mercedes-Benz factory in Sindelfingen, Germany, is a productive asset, Americans would be even richer were that factory owned exclusively by Americans rather than chiefly by Germans. So by Fletcher’s poor, nationalist logic, American trade policy ‘fails’ insofar as it doesn’t result in Americans owning every productive asset in the world.