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What A Trade Surplus Doesn’t Mean

Sunday, February 12, 2017 11:41
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(Before It's News)

(Don Boudreaux)

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Here’s a letter to a regular reader of Cafe Hayek:

Mr. Tony Hart

Mr. Hart:

You ask “What about Germany’s massive trade surplus of $253 billion!!!  Are you as relaxed about that as the massive US deficit?  Doesn’t that $253 bn make Germany very much richer?  They can go out and buy assets all over the world.  Wow!!!”

I’m not the least bit worried about Germany’s trade surplus.  Below are three chief reasons.  (But first a minor correction: this trade surplus doesn’t mean that Germans “can go out and buy assets all over the world”; rather, it means that Germans “have already gone out and bought assets all over the world.”)

First, Americans are no more made poorer by Germans being richer than are Alabamians made poorer by New Jerseyans being richer.

Second, the fact that Germany has a trade surplus while America has a trade deficit does not mean that Germans are richer than Americans.  This fact merely means that, while we Americans currently invest outside of our country less than non-Americans invest in America, Germans currently invest outside of their country more than non-Germans invest in Germany.  And because such balance-of-trade figures account only for international investment flows, they do not reveal the total size of investment holdings by the citizens of any given country.  The fact that Germany now has a trade surplus while America now has a trade deficit does not mean that the value of Germans’ total asset holdings – either in the aggregate or on a per-capita basis – is larger than is the value of Americans’ total asset holdings.

Third, because foreign investment in America generally strengthens the U.S. economy, I judge that the more we have of such investment the better for us.  If I were German, I would worry a bit about why investment opportunities outside of my country seem to be so much more numerous and better than are investment opportunities within my country.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA   22030

……

If I could go back in time to change one and only one economic convention, it would be to kill in its crib the mercantilist monster that is the doctrine of the so-called “balance of trade.”



Source: http://cafehayek.com/2017/02/42222.html

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