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Discoursing on Trade Deficits

Here’s a letter to the editor of Discourse:


Whatever credibility might reside in Kenneth Rapoza’s argument for us Americans to be wary of our trade with the Chinese is seriously diluted by his crude misunderstanding of trade balances (“In the U.S.’s Fight Against China, We’re at a Distinct Disadvantage,” January 3).

He errs by equating rising U.S. trade deficits with rising American indebtedness. In fact, rising U.S. trade deficits increase American indebtedness only when foreigners lend money to Americans, such as when foreigners help Americans bear the burden of the U.S. government’s fiscal incontinence by buying bonds from the Treasury. But Americans’ indebtedness does not rise when America’s trade deficit increases as a result of foreigners purchasing dollar-denominated equity or real estate in the U.S., or when foreigners simply hold dollars. Contrary to Mr. Rapoza’s assertion, we Americans do not have to “keep borrowing” to pay for imports that foreigners sell to us to obtain dollars for these latter purposes.

Furthermore, Mr. Rapoza’s assertion that long-running trade deficits threaten the U.S. with “disaster” is impossible to square with this fact: People who graduated from high school the year America began running its current unbroken string of annual trade deficits reached, in 2023, the age of retirement. Surely if trade deficits were so ruinous, 47 consecutive years of them would by now have left Americans immiserated. Yet in 2019 (the last year before the gusher of pandemic spending) the average real net worth of an American household was 46 percent higher than it was 20 years earlier when China got Most Favored Nation trading status, and 118 percent higher than in 1987 (the earliest year for which I can get consistent data).*

Mr. Rapoza commits an even more egregious error by attributing meaning to America’s trade balance with China. In a world of more than two countries, the trade balance between any pair of them is utterly without economic meaning. There is simply no more reason to expect any pair of countries to have ‘balanced’ trade with each other than there is to expect you to have ‘balanced’ trade with your dentist. I advise my students to ignore pronouncements about trade offered by anyone who suggests that economic meaning exists in one country’s trade deficit or surplus with another country.

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

* Data on total household net worth are here, and these nominal dollars were converted into real dollars using this deflator. The number of households is here.

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