… is from page 447 of my old international-trade professor Fritz Machlup‘s 1964 collection, International Payments, Debts, and Gold:
That is to say, we shall have to ask whether an autonomous capital export from A to B was spontaneous lending on the part of the A capitalists or spontaneous borrowing on the part of B borrowers.
DBx: The word “lending” above includes not only literal lending, but any investments by people in country A in country B. (On page 451, Machlup writes of “an increased demand for holding foreign assets” by the people of A.)
…..
Too often, discussions of a country’s trade (or, more generally, current-account) deficits assume that such deficits arise only when people in the trade-deficit country borrow money from abroad – and, indeed, not only borrow money from abroad, but borrow money from abroad to be used to pay only for increased current consumption in the trade-deficit country. If this assumption were correct, then it would be true that a country’s trade deficit is financing current consumption in a way that makes the residents of that country poorer than they would otherwise be.
But not only is this assumption not universally correct, at least in the case of the U.S. it isn’t even usually correct. When a country runs a trade deficit, that “deficit” need not be caused by residents of the “deficit” country paying for current consumption with funds borrowed from foreigners. Trade deficits can be – and often are – the accounting result of foreigners taking advantage of an attractive investment climate in the trade-deficit country. Trade deficits brought about by such entrepreneurial cross-border investments not only in practice do not necessarily either put the residents of the trade-deficit country further into debt to foreigners or reduce the net wealth of these residents, trade deficits brought about by such entrepreneurial cross-border investments do not have this effect necessarily even in theory.
The U.S. experience with now an unbroken 50-year stretch of annual trade deficits is solid evidence against the notion that trade deficits necessarily drain wealth from the residents of trade-deficit countries.
