Wednesday, January 17, 2007

Why the Trade Deficit Doesn't Matter

The indispensable John Stossel explains why trade 'deficits' are common and beneficial:

Trade statistics obscure reality. Individuals exchange only when each expects to benefit. If they didn't expect it, they wouldn't trade. That's true even if one party is American and the other Chinese. Trade is trade.

If we don't care about trade balances at the individual level, why does it matter if in a given year Americans as a group buy more from the Chinese than they buy from us?

It doesn't.

In fact, it's a good thing. Foreigners trade cool products (and capital goods) for paper money. They can do only three things with our dollars: buy American goods and services, save them, or invest in the United States (including buying U.S. government debt).

In other words, most of what foreigners don't spend here, they invest here. The trade deficit is mirrored by the capital-account surplus.

And another point: if there's no problem with Florida running a trade deficit with New York (for example), why is there a problem with the United States running a trade deficit with China? Security issues notwithstanding (and they represent a separate question), I can't see any.

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