Foreign Investment in the U.S. Isn’t “Distorting”

(Don Boudreaux)

Tweet

Here’s a letter to a first-time correspondent:

Mr. G__:

Thanks for writing.

You charge that, in my letter that appears in today’s Wall Street Journal, I “ignore the distorting effects which excessive foreign investments have on the US economy.”

I plead innocent. The sole point of my letter is that former U.S. Trade Representative Robert Lighthizer fails to understand a reality that is grasped by every sophomore economics student, namely, that U.S. trade deficits (or, more precisely, U.S. current-account deficits) are the flip side of U.S. capital-account surpluses – that is, of net inflows of global investment funds to the U.S. If – as Mr. Lighthizer often alleges – U.S. trade deficits are a real problem for America, then he should be delighted rather than disturbed that a provision in the USMCA reduces in the minds of global investors the relative attractiveness of America’s economy.

But because you mention distortions, let me add that I see no reason why investments in America by non-Americans are more (or less) likely to be distorting than are investments in America by Americans. Foreigners, like Americans, have every incentive to invest their funds in ways that yield the highest returns. To the extent that these investments systematically distort, these distortions are due to American monetary, fiscal, or regulatory policies that inject into the U.S. economy signals that mislead. But because American investors are no less subject to being misled by these false signals than are foreign investors, there’s no reason to conclude that foreign investment as such is “excessive” or “distorting.”

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