Donald Boudreaux On How The Trade Deficit Can Be Misleading

From Cafe Hayek. He points out that Hyundai building a factory in Alabama keeps the trade deficit high. They could have purchased American goods and services with the dollars they earned, which would lower the trade deficit. But maybe in the long-run we are better off if we have more factories here. Here is the letter he wrote to the NY Times:

"I enjoyed your report on how Hyundai’s automobile-production operations in Alabama provide better economic opportunities to Alabamians and raise wages in that state (“Hyundai’s Swift Growth Lifts Alabama’s Economy,” Feb. 19). Such capital investments are indeed indispensable for widespread economic growth.

It’s worth noting that Hyundai’s investments in these facilities – which increase the stock of productive capital in operation in the U.S. – add to America’s trade deficit. Rather than Hyundai cashing out its dollars by purchasing American exports – expenditures which would have narrowed America’s trade deficit – this Korean company expanded that deficit by instead using those dollars to build productive facilities and machines in America.

This fact should give pause to the countless politicians and pundits who insist that a rising American trade deficit is necessarily a symptom of American economic decline, a contributor to this decline, and evidence of ‘unfair’ trade practices by foreign governments."