Much of the U.S. trade deficit consists of funds that return to the U.S. as equity investments that promote American economic growth and job creation

See There Is No Deficit of Erroneous Thinking About Trade by Don Boudreaux.

"Here’s a letter to National Review:

Edward Conard writes that “Trade deficits occur when countries such as Germany lend the U.S. economy the proceeds from the sale of goods to Americans, rather than using them to buy goods made by American workers.  To prevent trade deficits from reducing the wages and employment of lower-skilled workers … Americans must borrow and spend these savings.  But today, savings sit unused despite near-zero interest rates, putting downward pressure on wages as they accumulate” (“A Trade Policy That Wouldn’t Leave Low-Wage Workers Behind,” December 5th).

Mr. Conard errs.  Contrary to his claim – and to popular myth – trade deficits (more accurately, current-account deficits) are not exclusively, or even chiefly, debt.  Trade deficits occur when countries (actually, foreign people) do any form of investing in the U.S. economy.  The U.S. trade deficit also consists of foreigners’ purchases or creation of equity and intellectual property in the U.S., foreigners’ purchases of real estate in the U.S., and foreigners’ holdings of U.S. dollars.  In all but the last case, the dollars that foreigners earn from their exports to America return directly to the U.S. in ways that are just as likely to contribute to economic growth and job creation as are dollars that Americans themselves spend in the U.S. on equity, intellectual property, and real estate.  (And, it should be noted, dollars held by foreigners are not debt that Americans owe to foreigners.)

There is, furthermore, a bizarre mystery lurking in Mr. Conard’s argument.  In his view, foreigners lend Americans lots of money that Americans then simply sit on.  This scenario is too implausible to take seriously.  Why are we Americans borrowing all this money if we aren’t spending or investing it?

In fact, the entity that borrows the most from foreigners is Uncle Sam, whose borrowing in the first quarter of 2016 was 29 percent of the U.S. current-account deficit.*  Surely Mr. Conard knows that Uncle Sam immediately spends all of the dollars that it borrows.  And, as alluded to above, the great bulk of the U.S. trade deficit that is not lent by foreigners to Uncle Sam consists of funds that return to the U.S. as equity investments – that is, investments that promote American economic growth and job creation.

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"