NCPA - National Center for Policy Analysis

Two Cheers for a Big U.S. Trade Deficit

September 26, 2011

News that the U.S. trade deficit narrowed this summer has brought the usual cheers from commentators.  Meanwhile, opponents of pending free trade agreements with South Korea, Panama and Colombia claim that the trade deficit is still too large and the trade deals should be abandoned.  But the truth is there's nothing to fear about trade imbalances: they only mean more investment in U.S. industries and businesses, say David Bier and Ivan Osorio of the Competitive Enterprise Institute.

Figures on the trade deficit do not account for many financial flows, specifically foreign direct investment in the United States.

  • It must be recognized that while Americans import more goods, products and services than they export, the country receives more investment from foreign lenders than any other nation in the world ($2.6 trillion in 2010 -- 4.5 times greater than China).
  • This investment helps to fund research and development, new factories and more jobs.

Opponents argue that the trade deficit represents a substantial problem that must be corrected immediately, and often advocate trade barriers and protectionism as the solution.

  • However, whether they are tariffs on foreign goods, import quotas or export surpluses, trade barriers hurt the American consumer and American companies.
  • These policies manipulate the free market and distort prices, employing taxpayer money to boost individual companies with subsidies or using quotas to force consumers to purchase American goods that are more expensive or lower quality than their foreign rivals.
  • In the case of domestic companies, these higher input prices can force them to cut jobs or can drive them out of the sector altogether.

Additionally, these trade barriers cause a second, indirect harm.  They damage foreign producers, denying them access to large American markets and undercutting them domestically with artificially cheap, American products.

For these reasons, addressing the trade deficit issue should certainly not be a priority of the federal government, nor should the deficit serve as a stumbling block in free trade negotiations, say Bier and Osorio.

Source: David Bier and Ivan Osorio, "Two Cheers for a Big U.S. Trade Deficit," Forbes, September 18, 2011.

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