Here’s a letter sent last week to the New York Times, but not published there.
Editor:
You correctly report that “economists argue that bigger economic forces” – forces beyond trade policy – “typically determine the size of the trade deficit, like savings rates and government spending” (“U.S. Trade Deficit Fell to Lowest Level Since 2009 as Tariffs Reshape Trade,” January 8). While this standard economists’ argument rightly counsels against using trade restrictions to reduce trade deficits, it misses an important reality.
U.S. trade deficits overwhelmingly reflect America’s desirability as a destination for global capital. Wishing to invest in the U.S., foreigners cannot spend on American exports all dollars they earn from their own exports – thus America runs trade deficits. The standard economists’ argument that you mention presumes that the investments that foreigners make in the U.S. would instead be made by us Americans if only we saved a lot more. But this isn’t so. Investment opportunities aren’t fixed. Many of these are created by the combination of America’s attractive investment climate with global investors’ entrepreneurial ingenuity. Were Americans to save more, these additional savings very well could increase U.S. trade deficits by making the U.S. economy even stronger and, hence, more attractive to global investors.
Rather than celebrate the recent decline in the U.S. trade deficit, we should, if this decline is the start of a long-term trend, lament it as evidence that Mr. Trump’s policies are making the U.S. a less attractive investment destination.
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
