So-Called “U.S. Trade Deficits” Are Microeconomic Phenomena
Here’s a letter to the Washington Post:
Editor:
Reporting on Pres. Trump’s effort to use tariffs to reduce America’s trade deficits, you quote former U.S. trade negotiator Wendy Cutler saying that “a lot of factors contribute to trade deficits. Most are macroeconomic” (“Trump barrels forward with tariffs for ‘Dirty 15’ trading partners,” March 26).
Ms. Cutler’s is the conventional line among economists. It comes from the indisputable accounting identity “Trade deficits = Savings – Investment” that prompts the disputable conclusion: U.S. trade deficits arise because Americans save too little – implying that that these ‘deficits’ will be reduced if Americans save more. But I (admittedly here being iconoclastic) believe this conventional line to be mistaken. In my view, most of the factors that contribute to U.S. trade deficits are microeconomic.
Compared to most other countries, property and contract rights in the U.S. are secure. American courts are honest. Taxes aren’t confiscatory or terribly oppressive. America’s financial markets are deep, sophisticated, and largely free. America’s labor markets are flexible. America welcomes foreign investment. Price controls are rarely used. Value-added per worker in American manufacturing is tops in the world. And America’s economy is large and churns with innovation; Americans embrace creative destruction and applaud the entrepreneurs who drive it. Oh, and over the past several decades, until very recently, America has moved toward freer trade and thus enjoyed the access this trade opens to the productivity-enhancing, globe-spanning web – not simple supply chains – of inputs.
The above phenomena are all microeconomic, and these attract capital. Because of these happy microeconomic realities, foreigners use many of their dollars, not to buy U.S. exports, but instead to invest in America. It follows that if we Americans do increase our savings – say, by the U.S. government being cured of fiscal incontinence – one result will likely be, not reduced trade deficits as predicted by the conventional economist’s line, but increased trade deficits that result from the American economy becoming even more productive and, hence, more attractive to global investors.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
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