18 January 2018
Mr. Donald Trump
1600 Pennsylvania Ave., NW
Washington, DC 20500
This morning you tweeted the following: “The Wall will be paid for, directly or indirectly, or through longer term reimbursement, by Mexico, which has a ridiculous $71 billion dollar trade surplus with the U.S. The $20 billion dollar Wall is ‘peanuts’ compared to what Mexico makes from the U.S.”
Let’s look at only two of the many ways in which your tweet reveals your misunderstanding of trade.
First, a bilateral trade account in a world of more than two countries is utterly meaningless. Many of the dollars that Mexicans earn on their exports to us Americans are spent by Mexicans buying goods and services from, and investing in, other countries. Those dollars then return to the U.S. from countries other than Mexico as either demand for American exports or as investments in America. To conclude, as you do, from Mexico’s ‘trade surplus’ with America that Mexico has an overall trade or current-account surplus is simply mistaken. In fact, Mexico has run a current-account deficit each year since at least 1993. So even if – contrary to fact – your assumption were correct that a country with a trade surplus is sitting on ready cash, Mexico – contrary to your conclusion – is not one of those countries.
Second and more fundamentally, even if Mexico did have an overall trade (or current-account) surplus, this surplus would not mean that Mexico has ready cash at hand to pay for a border wall. When a country has a current-account surplus its citizens have much of that surplus invested in other countries, including in the U.S. In 2015 (the most recent year for which this datum is available) the value of Mexican direct investment in the U.S. was $16.6 billion. And as of November 2017, Mexicans held nearly $41 billion worth of U.S. treasury securities. Add to these holdings the value of Mexican-owned real-estate in the U.S. and of Mexicans’ equity investments here other than direct investments, and it becomes clear that if you somehow did compel Mexicans to pay for your wall, they would do so by liquidating many of their existing investments in the U.S.
The fact that you likely suppose that such liquidation would improve the well-being of ordinary American reflects economic fallacies beyond the scope of this letter. Here I content myself to point out your failure to understand that if Mexicans do pay for your wall out of their ‘trade surplus,’ that payment will not come from ready cash in Mexico but from the disruptive liquidation of Mexican investments, many of which are in the United States.
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