A fellow economist sent to me today a Breitbart piece from February reporting with approval your fear that the U.S. trade deficit with China is (as the title of the piece says) “underwriting China’s military and infrastructure buildup.” In this piece you are quoted as asserting the following: “What are our dollars doing? We’re building, paying for, and underwriting [China’s] military buildup. We’re building their infrastructure We’re making their country stronger for the future, sort of at the long-term expense of our own. We’re not making the investments in our own infrastructure.”
Breitbart describes you as an “Asia expert.” Perhaps you are that. But your assertion that the U.S. trade deficit with China funds investment in China reveals that you clearly are no economics expert. You see, whenever the U.S. runs a trade deficit it necessarily is on the receiving end of global capital flows. A U.S. trade deficit – more precisely, current-account deficit – means that more investment funds are flowing into the U.S. than are flowing out of the U.S. In trade lingo, when the U.S. runs a current-account deficit it runs an identically sized capital-account surplus. Furthermore, China’s trade surplus implies that China is running a capital-account deficit – meaning that on net the Chinese invest more outside of China than foreigners invest within China and, thus, there is a net outflow of investment funds from China.
In short, your assertion that the U.S. trade deficit is funding investment in China is complete nonsense. The truth is exactly the opposite of what you assert.
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