A bit of clarity on the trade deficit

Here's an interesting article on what a trade deficit is and isn't, by John Stossel of all people.

Trade statistics obscure reality. Individuals exchange only when each expects to benefit. If they didn't expect it, they wouldn't trade. That's true even if one party is American and the other Chinese. Trade is trade. [...]

In fact, it's a good thing. Foreigners trade cool products (and capital goods) for paper money. They can do only three things with our dollars: buy American goods and services, save them, or invest in the United States (including buying U.S. government debt).

In other words, most of what foreigners don't spend here, they invest here. The trade deficit is mirrored by the capital-account surplus .

A large trade deficit is more associated with successful and mature economies, and the converse is true as well:

What the trade fearmongers don't say is that countries with trade surpluses often don't do very well. Japan had a trade surplus all during its long recession, which began in 1990 and is only now ending. By contrast, countries running trade deficits often experience economic booms. A Cato Institute study shows, "Contrary to prevailing assumptions, 'worsening' trade deficits are associated with faster GDP and manufacturing growth and more rapidly declining unemployment, while 'improving' trade deficits are associated with slower GDP and manufacturing growth and rising unemployment."

(h/t Mankiw)

Comments

[Matt]

Hmm...I'd never thought critically about trade deficits before. I've only accepted the party line that they were bad and our deficit with China was the worst thing ever. I'm glad to see this alternate perspective.