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March 10, 2010

The Myth of the Horrible Trade Deficit

During the last period of economic growth, the American media obsessed over the increased trade deficit.  The American consumer increased their purchases of imports, which caused the trade deficit to swell.  Unfortunately, the fact that we were buying more from abroad has given people the viewpoint that we are transferring wealth overseas, never to return again.  So, I decided to address a few trade deficit myths.
The first myth of the practice of trading is that most Americans view trading as a zero-sum transaction.  A zero-sum transaction is one where one party wins and the other party loses.  The reality is that this is almost never the case.  Trade transactions are the same as making a transaction at a grocery store.  You get a gallon of milk that fulfills your needs and the grocery store gets money.  Both parties benefit from the transaction.  A better way to think about it is if one party knew it was losing or might lose in trade, would it continue to make those transactions?
The second myth is that we are transferring wealth overseas never to be returned again.  This is an example of thinking that globalization ends once the transaction is complete.  The reality is that globalization never ends when dealing with trade.  Foreign entities receive dollars in exchange for providing goods and services to Americans. 
Even if they decide to keep the money within their country, they need to convert currencies with a bank within their country.  That bank will then take the dollars and invest them either by saving in the United States or buying treasury bonds.  We should also realize that a sizeable chunk of our money that goes “overseas” is actually going to multinational companies that are American owned, thus giving those companies the ability to invest back in the U.S.
The third and final myth is that many believe that we are going to transfer all of our jobs to China or other developing nations.  The fact is that American investment has declined in China over the last few years (Source).  While we are on the topic of foreign direct investment, many Americans fail to realize that the United States appears to be the biggest beneficiary of foreign investment from outside companies.  According to this report, New York City alone received $58 billion in FDI in 2006.
Foreign direct investment in the United States also creates jobs.  This is something you will not see on CNN or on Countdown with Keith Olbermann because many in the media are too focused on the jobs overseas, not the jobs coming in from abroad.  Indiana would seem to not be a large beneficiary of FDI, but according to this report, foreign owned companies employ 148,000 workers in the state of Indiana.
Even the New York Times picked up on the fact that millions of Americans actually work for foreign owned companies within the United States (read the story here).  In addition to this, most estimates show that about 55,000 jobs per quarter will be lost (at most) to outsourcing per year.  This is an interesting comparison considering we have millions of Americans working for foreign-owned companies due to in-sourcing (read more about this here).
Of an additional note, for those who argue foreign owned companies in the U.S. pay less than their domestic owned counter-parts, that was at least not true 20 years ago according to this 1990 study.  If detractors think that cannot be possible today, read this success story about a Nissan worker in the south, or this article about the rise in incomes in Talladega after a Honda plant opened there, or this story about how non-union autoworkers in the U.S. are making nearly as much as union workers, and none of their employers are bankrupt and taking government money.  Finally I would suggest these two articles as well on foreign owned car companies in the U.S.

Some American Cars Are Foreign-Owned, but Made in the U.S.A. (Fox News)

Now, this is just the auto industry and an industry that’s been in the dumps since 2003 at best.  There are likely better stories than these if we look at other industries.

Finally, the Obama administration pretends as if it understands the dynamics of foreign trade, yet it is proposing a tax increase on U.S. owned companies in foreign countries.  Today’s video demonstrates how this thinking is a failure of “thinking globally.”  It looks like we will be continuing to buy goods made in foreign countries, except now, more of those products will be made by foreign-owned companies (the video does the best job describing it).

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