Trade Deficit Increases, Investors Rejoice

Via Carpe Diem:

As the chart above shows, America’s “trade deficit” in every year is always offset by equal dollar amount of “capital inflow” or “foreign investment surplus,” such that the overall “Balance of Payments” for the U.S. is always zero.  Last year, there was a $556 billion “trade deficit” on America’s “current account” for international transactions involving goods and services, which was exactly offset by a $556 billion surplus on our “capital account” for international transactions involving financial assets, which could also be described as a “foreign investment surplus” for the U.S.Of the $556 billion capital inflow to the U.S. last year, $234 billion was for foreign investment directly into acquiring U.S. firms, investing in joint ventures with U.S. firms, or expanding operations of existing U.S.-based operations (e.g. BMW building a new factory in South Carolina).  The other $322 billion was for indirect “portfolio investments” into U.S. stocks, bonds and other securities.
While most of the media attention focuses on America’s “current account deficit” (“trade deficit”) for goods and services, a more complete analysis reveals offsetting surpluses for international transactions involving financial assets, which results in a “balance” of our total payments (cash outflows) and receipts (cash inflows) with the rest of the world.   Because international transactions are calculated using double-entry bookkeeping accounting, international payments HAVE TO BALANCE, and the balance of payments has to equal ZERO.
Since 1990, the cumulative capital inflow from foreigners investing in the U.S. (FDI + indirect portfolio investments) has totaled to $7.6 trillion, which has provided valuable investment capital to the U.S. economy that has financed the  expansion of U.S.-based business, and in the process has boosted U.S. stock prices and supported million of jobs.  But all we ever hear from the media, politicians and pundits is hand-wringing over America’s supposed economy-draining “trade deficit,” with no recognition of the offsetting, economy-energizing capital inflow.


Don Boudreaux chimes in:

Because increased foreign investment in the U.S. requires that foreigners spend a smaller portion of their dollars on buying American exports, a rise in foreign direct investment in the U.S. necessarily increases the U.S. trade deficit (or reduces the U.S. trade surplus).  As your report makes clear, however, such foreign investment is a boon to the U.S. economy and is no drain on jobs here.

Alas, you can be sure that this fact will be ignored the next time – which I guarantee will be soon – some politician or pundit takes to the airwaves to “explain” that America’s trade deficit is a symptom and source of U.S. economic decline or of foreign-government perniciousness (or both).


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