Thanks To America's Trade Deficit, We'll Soon Be Getting A $50B Capital Inflow That Will Create 50,000 American Jobs

About: ProShares Inflation Expectations ETF (RINF)
by: Mark J. Perry


According to The Week, a Japanese billionaire reportedly pledges a $50 billion investment in the U.S. and 50,000 jobs after meeting with Trump:

President-elect Donald Trump emerged from a meeting with SoftBank Group Corp. CEO Masayoshi Son on Tuesday with news he'd secured "a $50 billion investment in the United States and 50,000 jobs" from the Japanese billionaire, per a pool report. "I just came to celebrate his new job," Son said, referring to Trump's pending assumption of the presidency, before confirming he would make jobs by investing in American start-ups. "I said, 'This is great, the U.S. will become great again.'"

Trump called Son one of the "great men of industry" and was quick to celebrate the deal on Twitter:


As Don Boudreaux, Daniel Griswold, Greg Mankiw, I and other economists have pointed out many times, America's merchandise trade deficits are always offset almost exactly on a "dollar-for-dollar" basis with capital-creating, job-generating foreign investment surpluses as the example above illustrates. After all, where will Japan's $50 billion capital inflow in US dollars come from? How did Japan acquire the $50 billion in investment capital that is now coming back to America to create 50,000 jobs here? Most likely, it can be traced to America's trade deficits with Japan, which have averaged around $70 billion annually in recent years.

As Greg Mankiw explained recently in the New York Times (my emphasis):

The most important lesson about trade deficits is that they have a flip side. When the United States buys goods and services from other nations, the money Americans send abroad generally comes back in one way or another. One possibility is that foreigners use it to buy things we produce, and we have balanced trade. The other possibility, which is relevant when we have trade deficits, is that foreigners spend on capital assets in the United States, such as stocks, bonds and direct investments in plants, equipment and real estate.

In practice, these capital inflows from abroad have been large. Net foreign ownership of American capital assets has risen to about $8 trillion from $2.5 trillion at the end of 2010. American companies moving production overseas get a lot of attention, but this data shows that capital [and jobs] has, over all, moved in the opposite direction.

As Dan Griswold wrote in the Washington Times in 2011 (emphasis mine):

A trade deficit doesn't mean that the dollars flowing abroad just disappear. They quickly return to the United States. If they are not used to buy our goods and services to export, they are used to buy American assets - Treasury bills, corporate stock and bonds, real estate and bank deposits [and invest in U.S. companies]. In this way, America's trade deficit is always and almost exactly offset by a foreign investment surplus. The net surplus of foreign investment into the U.S. each year keeps long-term interest rates down, prevents the crowding out of private investment by government borrowing and promotes job creation through direct investment in U.S. factories and businesses."

And more recently, Dan was quoted in Forbes:

The net inflow of foreign capital allows our level of domestic investment to exceed our level of national savings, fueling productivity and growth. If politicians try to "fix" the trade deficit, they will only succeed in cutting off the net inflow of foreign investment, leading to higher interest rates and less investment in foreign-owned factories.

Bottom Line: On one hand, president-elect Trump complains about America's trade deficits, and naively tells us that Mexico, Japan and China are "absolutely crushing and killing us" on trade as they "rip us off and laugh at us." And on his other hand, Trump enthusiastically welcomes Japan's $50 billion "vital capital-creating, job-generating foreign investment for a better America" that is only possible because of our trade deficits with Japan (and other countries) that he foolishly laments (see Venn diagram above).

And to the extent that Trump does succeed in reducing the U.S. trade deficit with protectionist trade policies to save some American jobs and stop Mexico and Japan from "ripping us off," he'll at the same time reduce America's financial investment surplus and destroy other American jobs, and prevent new jobs from being created because of the necessary reduction in job-creating capital inflows. And that would be a sure formula to destroy jobs and make America poorer, not greater.

HT: John Thorne and Ben Cunningham.