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Yet More On the Trade Deficit

Here’s a letter to a first-time correspondent.

Ms. ___:

Thanks for your thoughtful e-mail.

You write, in response to a recent blog post of mine about the many confusions surrounding the notion of the “trade deficit”:

If we purchase $1B of stuff from foreigners & send them $1B of dollars to pay for it, don’t they have to spend that $1B back here, eventually? I mean they could trade that $1B to somebody, but – in the final analysis – doesn’t somebody have to spend that $1B here in the US? Thus, society as a whole has a debt. I agree w/ the rest of your analysis, but I think there is a debt somewhere in all that, no?

Your question is understandable, but the possession by foreigners of $1B dollars is not American indebtedness. With an actual debt obligation, the debtor is legally obliged to turn over valuable property to the creditor and would prefer that the creditor forgive the obligation by not accepting repayment. No such situation exists as a result of foreigners holding dollars. The possession by foreigners of $1B dollars neither imposes nor implies any legal (or ethical) obligation on any American. Any American who chooses to turn over goods, services, or assets to foreigners in exchange for these dollars does so voluntarily and not in fulfilment of any past promise.

It’s true that foreigners holding $1B of dollars can, as a practical matter, exchange those dollars in America for $1B of goods and services. But if it’s true that such spending by foreigners is not a regrettable burden to Americans when it occurs in the same period that foreigners earn the dollars by exporting to America, surely the prospect of such spending occurring in a later period is not a regrettable burden to Americans.

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

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