Talking Sanely About the Trade Deficit

by: Mark J. Perry
In his latest example of economic illiteracy and anti-trade nitwitery, Ian Fletcher claims that "Our trade deficit helps Guangdong, Seoul, Yokohama, even Munich – but not Gary, Indiana, Fontana, California, and the other badlands of America’s industrial decline."
Don Boudreaux injects a dose of economic sanity into the debate by reminding Fletcher that "Such a claim reveals its author to be unaware that another name for “U.S. trade deficit” is “U.S. capital-account surplus” – that is, inflows of investment funds into America that supply (directly or indirectly) financing for more capital creation in America."
The chart above shows just how significant those foreign capital inflows into the U.S. economy really are, using BEA data on "direct investment" by foreigners. Foreigners are also buying government Treasury securities and other private U.S. securities (stocks, bonds, bank CDs, etc.), but the chart above is showing just the capital inflows into American companies in industries including manufacturing (Toyota, Honda, BMW, etc.), retail trade (IKEA), publishing, telecommunications, finance and insurance, real estate, engineering, mining, utilities, computer systems, construction, hotels, health care, transportation, etc. (see BEA website here for more information).
Bottom Line: As a direct consequence of our trade deficit, foreigners have invested almost $3.5 trillion into the U.S. economy since 1960 in American companies, with about half of that investment occurring in the last decade. Those trillions of dollars of investments in U.S. companies HAVE generated HUGE benefits for the American economy, and are responsible for almost 6 million U.S. jobs for Americans working at Toyota (NYSE:TM), Honda (NYSE:HMC), BMW, IKEA, etc.