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Highly Deficient Thinking about Trade

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Here’s a letter to the Wall Street Journal:

Debra Summers complains that “While it is true that some portion of foreign-trade-generated capital investment will return to expand the U.S. economy and create U.S. jobs, there is no guarantee that our trading partners won’t prioritize use of their trade profits to more effectively compete with the U.S. or for actions that otherwise jeopardize U.S. interests” (Letters [2], Nov. 30).

Putting aside the use of dollars to purchase weapons of war aimed at Americans, Ms. Summers is mistaken. There is indeed such a guarantee. It exists chiefly because U.S. dollars have value only because they can be spent or invested in the U.S.

Foreigners who, say, use dollars to build factories in China – even ones that will compete against American factories – must first convert those dollars into yuan. But why does a Chinese bank accept dollars in exchange for the yuan that it gives to the builder of the factory? The answer is that the bank’s customers want dollars in order to spend or invest in the U.S. Therefore, contrary to Ms. Summers’s suggestion, nearly all dollars on the U.S. current-account deficit do most certainly return to the U.S. as investments.

The only exception are dollars that foreigners hold indefinitely (although even these are accounted as being invested in America). But this particular use of dollars unambiguously enriches us Americans and impoverishes foreigners. In exchange for these dollars, foreigners give us valuable goods and services – many of which are inputs used by American firms – while foreigners get and keep lots of monochrome portraits of dead American statesmen.

A final point: foreigners using their trade profits to more effectively compete with the U.S. is good, not bad, for America. Not only does this competition ensure that American buyers pay the lowest possible prices, it also inspires American producers to innovate with a gusto and determination that they’d lack in the absence of this competition.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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