≡ Menu

On Trade Deficits and Foreign Ownership

Here’s a letter to a thoughtful Café Hayek reader who, because he doesn’t use Facebook, commented on this recent post by e-mailing me:

Mr. Johnson:

Thanks for your e-mail.

You write: “Regarding trade imbalances, I wish those who say they don’t matter would bring into the conversation the change of ownership that results.”

Your wish has been granted. I (among others) write about this fact often. Here are a few links to just some of the essays and letters in which I address this fact. I do so also in Chapter 4 of my 2008 book, Globalization.

To repeat here only one of the many points that I and others make about what you call “the change of ownership”: Because the amount of capital in the world, and in any country, isn’t fixed, if foreigners buy (say) a factory in America for $100M, this fact does not necessarily mean that Americans’ net worth has fallen by $100M. The American seller of the factory must do something with the $100M. If invested wisely elsewhere, the amount of capital in the world, and perhaps also in the U.S., grows – as does the net worth of Americans as a group, if you’re concerned about such an aggregate figure.

But even if the seller spends all of the $100M on a lavish party, we must ask: What’s the problem? The American seller sold the factory voluntarily; it was his to sell – not yours or mine or the government’s. His reason for earlier operating the factory profitably was to increase his and his family’s ability to consume.

We must also ask: What good is the factory to its new, foreign owner? Factories aren’t profitable – and hence aren’t valuable – by nature or automatically. They must be made so and kept so. If the foreign owner runs the factory inefficiently, he loses money, for the value of the factory falls below the $100M that he paid for it. More competent owners will eventually buy it from him.

If, instead, the foreign owner runs the factory profitably, the resulting rise in the factory’s value – value created by this foreigner – reflects the factory’s increased productivity. American consumers thereby enjoy improved consumption options and American workers enjoy higher wages.

And importantly, the greater the profitability and value of this foreign-owned factory, the greater is the stake that its non-American owner has, and feels, in America and in the American economy.

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