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The Absurdity of the So-called “Balance of Payments”

Here’s a letter to Cafe Hayek reader Tony Hart:

Mr. Hart :

Thanks for your e-mail.  Unhappy with my counsel for Americans to stop worrying about the so-called U.S. trade deficit, you write: “Surely the US owes this money to foreign countries. At some stage, it will need to be repaid.  I have asked this before;  exactly what assets does the US sell in order to pay for its trade deficit.”

No.  No.  No.

First, the only portion of the U.S. trade deficit that must be repaid is that portion that Americans borrow from foreigners.  Much of the trade deficit – for example, that portion that results from foreign direct investment in the U.S. – imposes no obligation on any American to repay anything to anyone.

Second, Americans need sell no assets in order, as you put it, “to pay for” the trade deficit.  The amount of capital – the number of assets – in the world and in the United States is not fixed.  It can and does grow.  When, say, a Swede builds a retail furniture store in Tucson the U.S. trade deficit rises by the dollar amount that the Swede invests in that store and, if the store is run profitably, the amount of capital in the U.S. rises.  If the store is unprofitable, the loss falls on the Swede.  Either way, no Americans had to incur a net reduction in asset ownership in order to “pay” for the Swede’s construction and operation of this retail store in Tucson (and the resulting rise in the U.S. trade deficit).

You’ll reply “Oh, but an American sold to the Swede the land – an asset! – on which the store is situated.”  To which I respond, ‘Not necessarily.  Perhaps the American rents her land to the Swede.’  But even if the land is sold to the Swede, the value the American seller fetches for it is higher the larger are the number of potential buyers (or renters) of that asset.  Therefore, reducing the U.S. trade deficit through trade restrictions thereby artificially lowers the value of Americans’ asset holdings by reducing the number of people who compete to purchase or to rent American-owned assets.

Finally, the American seller of the land might well invest the proceeds from the sale elsewhere and in a manner that yields to this American net returns greater than she would have earned had she maintained ownership of that piece of land.

It is simply untrue that a U.S. trade deficit either must be “repaid” or funded with net asset sales by Americans.

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