Tuesday, February 13, 2007

Our Record Trade Deficit

The U.S. trade deficit widened to a record for 5th straight year in 2006. And here's the fine print: our imports are growing faster than exports (so in the long run, the deficit will gradually shrink); and the trade gap with China actually was smaller in December on a month-by-month basis.

But these fine points will not stop fearmongers like Lou Dobbs from getting very upset that "we're borrowing $3 Bln a day just to pay for our imports."

Truth is, it's glorious that foreigners are buying more financial products than manufactured goods from the U.S. (hence our current account deficit and our capital account surplus). It's taking in massive investments from foreigners. And it's a vote of confidence in the capital markets here.

As Walter Williams wrote in Town Hall that

During [the 10 years of the Great Depression], we had a significant trade surplus, with exports totaling $26.05 billion and imports totaling only $21.13 billion. So what do trade surpluses during a depression and trade deficits during an economic boom prove, considering we've had trade deficits for most of our history?

And it's simply not true that the U.S. is borrowing foreigners' money to pay for their products. Except for T-Bills, the investments foreigners make in the American capital market are not a form of debt we incur. Trade deficit is by no means an IOU run wild.

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