Viewpoint: Three Cheers for Trade Deficits

It's aggravating to watch government and private economic "experts" confusing and distorting the general perception of the US balance-of-trade deficit. Most of what we hear coming out of Washington on the subject is self-serving nonsense—doomful pronouncements to scare up support for policies protecting special-interest groups.

Simply put, in 1984 the rest of the world sent the people of the United States roughly $452 billion worth of goods and services. At the same time, the rest of the world accepted roughly $362 billion worth of goods and services from the United States. The $90-billion difference is the US trade deficit. (Those wishing to distort the picture will often quote a higher figure that ignores the US surplus in services exported.)

If we paid the world $90 billion more than it chose to spend on US goods and services, what did they do with the money? Nothing terribly dangerous or insidious. In fact, they made a net investment of about $60 billion in our economy and chose to hang onto about $30 billion worth of those little pieces of paper called dollars. What do the experts think the problem is? Good question!

First, let's consider the major portion of that deficit—the $60 billion that foreigners invested in the United States. Politicians and special-interest groups are screaming that we must force the rest of the world to spend that $60 billion on goods and services today, rather than allow them to spend it on stocks and bonds. They claim that we would be much better off if we could just get our trade partners to cart $60 billion worth of goods back home. The special interests warn that if the appropriate measures are not taken soon, economic hell will break loose. This view is nonsense.

Americans, of all people, should understand that well-conceived investments benefit everyone involved. The investor supplies capital to a given project because he believes it shows the best potential for return. The person accepting that investment does so because he believes that he can produce the proper return for the investor using that capital and still have wealth left over for himself. If the investor simply holds onto his wealth, he misses the opportunity to make more. And if America refuses that investment, it misses the opportunity to increase its wealth as a nation.

When foreign investors give us $60 billion to work with, they are giving us the chance to produce wealth for ourselves by using their wealth. They are building factories, doing research, creating jobs here in America. In an uncertain world, we all like to have a little something saved for a rainy day. The rest of the world understands that there is no safer place to set aside that emergency fund than in America. Rather than consume all their wealth today by buying goods from us, foreigners choose to invest some of that wealth in America. And investing in America is good for everyone—especially Americans.

What about that other $30 billion that foreigners simply hung on to in 1984? That was a gift presented by the world to the United States. Americans sent $30 billion worth of little pieces of paper out for goods. The rest of the world chose to hang on to the dollars themselves rather than cash those dollars in for real things. For much of the world, the US dollar has taken on the role traditionally played by gold—it is a store of value and medium of exchange in troubled times, a parallel currency that fuels what little life some economies have. That others in the world will give up real things just for a sense of sharing our security is a vivid testament to the relative strength and stability of the American economy.

So the situation is really quite simple. Having traded wealth for wealth with us, foreigners may either take all their wealth home with them to consume, or they may leave some of it here in America to produce more wealth—both for its foreign owners and for Americans. Now if Congress passes legislation forcing the people of other nations to take all their wealth home with them, a few special-interest groups stand to benefit. But if that wealth remains here in America, producing still more, then the nation as a whole will benefit. We couldn't even begin to force the world to spend the billions of our paper dollars it hoards, and we would be foolish to try to force foreigners to invest their wealth elsewhere.

To argue that foreign imports are hurting America is to miss this fundamental point: if both parties in trade didn't perceive benefits for themselves, there would be no trade. Those who still insist that it is in America's best interest to force other nations to drag their wealth home with them after the trade, rather than to let them leave some of it here to grow, are talking about their special interest, not America's interest.

Scott Matthew is senior vice-president of Realty Electronics, Inc., in Fond du Lac, Wisconsin.