Here’s a letter to Foreign Affairs.
Editor:
Adam Posen’s “Trade Wars Are Easy to Lose” (April 9) deserves loud applause. But in it he makes a statement – admittedly conventional among economists – that I believe is not only mistaken, but supplies protectionists with unearned ammunition.
The statement is this: “Countries with overall trade deficits, like the United States, spend more than they save.” This statement appeals to free traders because it shows the inaptness of tariffs as a means of reducing trade deficits. Because tariffs are unlikely to increase domestic savings, tariffs won’t lower trade deficits. Take that, protectionists!
But protectionists can respond by observing that free traders nevertheless seem to agree that something is amiss with the domestic economy. After all, by saying that trade deficits reflect an excess of spending over domestic savings, the impression is created that people in the domestic economy are spending excessively – especially on all those imports – and so perhaps tariffs might fix matters by rearranging the domestic economy so that its citizens save more. Although dubious, this response comes across to the general public as plausible.
Fortunately, countries with overall trade deficits, like the United States, do not necessarily spend more than they save. What such countries actually do is to attract to their shores more investment than is covered by domestic savings. Because investment opportunities are often created by entrepreneurial alertness and ingenuity – think of Ikea building a store near Boston or Kia building a factory in Georgia – the number of investment opportunities isn’t limited. Nor is the amount of capital. Both can grow. And both do grow when markets are free.
If last year some country had no trade deficit, and then this year global investors become more keen on it, that country can this year run a trade deficit without there being any change in the savings of that country’s citizens.
When global investors (including those in America) increase their net investments in the U.S., U.S. trade deficits rise. But this increase does not necessarily reflect domestic savings falling short of domestic consumption, or Americans spending beyond their means. It simply reflects greater net inward investment in the domestic economy – an occurrence that we Americans should applaud and be proud of.
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
