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An Open Letter to Pat Buchanan

Mr. Patrick Buchanan

Mr. Buchanan:

Your March 6 American Conservative essay “Why are Republicans Afraid of Tariffs?” is disappointingly filled with historical errors and economic confusion.  In response, I sent to the magazine this letter.  Here I want to flag one additional, major confusion that you have about the so-called U.S. trade deficit with China.  (I describe it as “so-called” because, in a world of more than two countries, one country’s trade balance with another is utterly meaningless, as is made clear in any economics textbook on international trade.)

The confusion I have in mind is in this passage of your essay: “In 2017, the U.S. ran a trade deficit in goods of almost $800 billion, $375 billion of that with China, a trade surplus that easily covered Xi Jinping’s entire defense budget.”  Wrong.

Forget that, especially because the U.S. is overwhelmingly a service-oriented economy, a trade deficit in “goods” is no more worrisome than is a trade deficit, say, in “liquids” or in “things that are yellow.”  Instead, I ask you: Do you understand that a U.S. trade deficit means that the U.S. is receiving a net inflow of capital from abroad?  To the extent, therefore, that these investment funds come to the U.S. from China, these funds are unavailable to Xi Jinping to cover his defense budget or anything else in China.  Because the funds that you identify as constituting the U.S. trade deficit with China are in the U.S. rather than in China, they cover not as much as one cent’s worth, and much less the entire, Chinese defense budget.

In short, to the extent that the U.S. trade deficit with China consists of funds invested by the Chinese in the U.S., Xi Jinping has fewer, not more, funds for use to pay for his government’s operations.

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