Friday 717

 

U.S. Trade Deficits Are Good Not Bad

“The gain from foreign trade is what we import. What we export is a cost of getting those imports. The proper objective of a nation, Adam Smith said, is ‘to arrange things so we get as large a volume of imports as possible for as small a volume of exports as possible.’” - Milton Friedman
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Should Americans worry when we import more products than we export?
Isn’t our GDP smaller when we import more than we export?
Aren’t we sending jobs overseas?
Most economists believe
· because the U.S. trade deficit is offset by foreign investment in the U.S. there is no negative effect of a trade deficit on U.S. GDP and employment
· foreign investments in the U.S. more than make up for the effects of a trade deficit
The stability and security of the U.S. and strength of the U.S. economy and dollar make investments in U.S. production facilities attractive to foreigners.
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Figure 1
Balance of payments must always be in balance at $0.
In this example a -$10 trade deficit is balanced by a +$10 investment surplus.
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Figure 2
In any case the trade deficit is a small percent of the GDP.
In 2017:
U.S. GDP was $19.7 trillion
U.S. trade deficit with China was $375 billion
U.S. total trade deficit with all countries was $566 billion
The total U.S. trade deficit was $566 billion ÷ $19.7 trillion = 2.9% of GDP.
[ChatGPT update:
In 2025, the most recent complete year:
U.S. GDP was approximately $30.8 trillion.
The U.S. goods trade deficit with China was approximately $202.1 billion.
The U.S. total trade deficit with all countries was approximately $901.5 billion.
The total U.S. trade deficit was $901.5 billion ÷ $30.8 trillion = approximately 2.9% of GDP.]
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Figure 3 shows the U.S. balance of payments starting 1980.
Red line foreign investments in the U.S. amount is mirror image of blue line U.S. trade deficit.
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Inflows of investment funds into America create more capital, investment in productive assets, and jobs — higher-paying than those that have moved overseas— in America.
As a direct consequence of our trade deficits, the U.S. economy has been the beneficiary of more than $8 trillion worth of capital inflows from foreigners since 1980.
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Foreign investment increases the amount of capital, equipment, buildings, land, patents, copyrights, trademarks, and goodwill in the U.S. economy.
These increase labor productivity, income, employment, and U.S. GDP.
About two-thirds of GDP goes to labor as wages and benefits.
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Some worry countries including China are gaining control of the U.S. economy by investing in U.S. production and financial assets.
This should not be a concern because
· total foreign investment is only about three percent of the U.S. GDP
· almost all employees including managers are U.S. citizens
In the worst case, the U.S. government could nationalize (take over) foreign assets located in the U.S.
We don’t care whether Indiana has a trade deficit with Illinois and we shouldn’t care if the U.S. has a trade deficit with another country.
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A helpful short video: Are Trade Deficits Good or Bad for the Economy?
https://www.youtube.com/watch?v=FOYcpcVIZMs
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Does a trade deficit reduce a country's gold reserves? ChatGPT:
Under today’s fiat-money system, a trade deficit usually does not directly reduce a country’s gold reserves.
The deficit is generally financed by foreign investment, borrowing, or foreigners purchasing the country’s financial assets, such as government bonds, stocks, and real estate.
Under a historical gold standard, persistent trade deficits could cause gold to flow abroad because international payments were ultimately settled in gold.
Gold reserves may also fall today if a central bank deliberately sells gold or foreign-exchange reserves to support a fixed exchange rate, but that is a policy choice rather than an automatic result of a trade deficit.
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What attributes of the U.S. make it a prime location for foreign companies to invest in manufacturing operations? CGPT:
The United States is a prime location for foreign manufacturing investment because it combines a huge consumer market, strong purchasing power, advanced transportation and energy infrastructure, reliable legal protections for property and contracts, access to capital, world-class universities and research centers, and a large base of skilled workers, suppliers, and business services.
The country also offers abundant energy and natural resources, relatively low energy costs in many regions, political stability, and access to the broader North American market through trade agreements with Canada and Mexico.
Federal, state, and local governments may further attract manufacturers through tax incentives, grants, workforce training, and infrastructure assistance.
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Tax levels are important, although the United States is not generally a low-tax country for corporations.
The federal corporate income-tax rate is 21 percent, and state corporate taxes raise the average combined rate to roughly 25.8 percent — above the 2025 OECD-member average of about 24.2 percent.
However, the actual tax burden on a new factory may be considerably lower because states and municipalities frequently offer property-tax abatements, investment tax credits, grants, accelerated depreciation, and other incentives.