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Trade Deficit ≠ Deficient Savings

Here’s a letter to Barron’s:


In his recent interview with Rashema Kapadia, Stephen Roach declared that the U.S. “had a multilateral trade deficit with 102 countries last year, which reflects on a lack of savings” (“The Stock Market Is Gullible. Don’t Expect a Trade Deal, a China Expert Says.” Aug. 29). While the belief that trade deficits necessarily reflect a lack of domestic savings is canonic, it’s also mistaken. Indeed, in America trade deficits reflect, not a lack of savings, but an abundance of investment opportunities. The fact that foreign investments in America are funded with the savings of foreigners hardly means that Americans’ savings are deficient.

Suppose that Canadians sell $1 million worth of maple syrup to Americans and then spend that $1M to buy American lumber exports. Canadians then use this lumber to build a factory in Toronto. In this case, there’s no U.S. trade deficit.

But suppose instead that Canadians sell $1 million worth of syrup to Americans and then – crossing over to the American side of Lake Ontario – spend that $1M to buy lumber in Buffalo, where they then use it to build a factory. In this case, there’s a $1M U.S. trade deficit.

Clearly, the amount of Americans’ savings is the same in both scenarios, despite only one of these scenarios featuring a trade deficit.

The mistaken notion that U.S. trade deficits reflect deficient American savings stems from the assumption that if only Americans had saved more, the likes of this Canadian-built and operated factory in Buffalo would have instead been built and operated by Americans. Yet this assumption is utterly unwarranted.

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