Busting ‘Trade-Deficit’ Myths

by Don Boudreaux on September 26, 2018

in Balance of Payments, Myths and Fallacies, Seen and Unseen, Trade

In this op-ed being published now in several newspapers across the United States, I do my best to bust three of the many myths about so-called “trade deficits.” Its title is “Why Isn’t President Trump Proud of American Trade Deficits.” A slice:

Myth No. 3: U.S. trade deficits reflect American consumers’ reckless profligacy.

This fallacy springs from an exclusive focus on imports and exports. If the value of what we buy from foreigners exceeds the value of what we sell to foreigners, it’s easy to assume that we’re spending beyond our means. Not true.

First, well over half of American imports are inputs used here by U.S. producers. They aren’t consumption goods; they’re raw materials, component parts, and machinery that increase the output produced by American farms, factories, laboratories, and other businesses.

Second, because many foreign investments in America are entrepreneurial ventures conceived and executed by foreigners (again, like Ikea), a significant portion of U.S. trade deficits are driven by foreigners taking advantage of the open-ended opportunities offered by the dynamic and relatively free U.S. economy. Blaming all increases in the U.S. trade deficit on Americans’ profligacy — or, for that matter, on unfair trade practices abroad or free trade generally — masks the reality that foreigners actively seek opportunities to invest in America.


Add a Comment    Share Share    Print    Email

Previous post:

Next post: