NCPA - National Center for Policy Analysis

International Trade Is A Win-Win Situation

February 22, 1999

Record U.S. trade deficits shouldn't cause so much hand-wringing, according to W. Michael Cox and Richard Alm. The reason why, the authors of Myths of Rich & Poor say, is that:

  • International trade benefits both exporting and importing countries -- "It's a fairer world than most of us suspect: Every country gives as much as it gets."
  • It is the goods that we import that are actually the gains from trade, while exports are a cost -- "When we sell overseas, we are giving up goods and services that could be consumed at home."
  • The "trade deficit" talked about in the news media reflects only the excess of tangible goods, called merchandise trade, imported over exports but misses much of international commerce.
  • The much larger "balance of payments," which includes payments for both goods and services, and capital flows in and out of the country, is always in balance, with minor adjustments.

The true trade picture, say Cox and Alm, shows that the United States is highly competitive in the world economy and a good place to invest. Since the early 1980s, annual capital flows into the U.S. for real estate, stocks, bonds, and government securities have skyrocketed from $58 billion to $733.4 billion. Net of U.S. purchases of foreign assets -- $478.5 billion in 1997 -- the U.S. had a capital inflow of $254.9 billion 1997.

This increasing pool of capital was attracted by the higher returns foreign investors can receive in the open U.S. economy. Thus as the trade deficit tripled between 1992 and 1997, the economy surged ahead by 24 percent in industrial production and 27 percent in manufacturing.

As a result, both the U.S. and the countries with which it trades are richer, have better paying jobs and produce more goods and services in those areas where they have a comparative advantage.

Source: W. Michael Cox and Richard Alm, Myths of Rich & Poor (New York: Basic Books, 1999).


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