From the always provocative Don Boudreaux:
Beyond contributing to American economic vitality, foreign investment here signals global confidence in that vitality. Investors go long only in assets or places that promise a reasonable prospect of future profits.
These facts are why the recent decline in America's trade deficit is just another piece of bad news: Foreign investors, like their American counterparts, are less willing now to take risks in this economy. As foreigners grow more reluctant to invest here, they become less eager to earn dollars by selling goods and services to Americans. So foreigners export less to America.
History reflects the validity of this analysis. During the Greatly Depressed 1930s, America ran a trade deficit for only 18 of the 120 months of that decade. In each of the other 102 months, Americans exported more than they imported -- that is, ran trade surpluses. The only calendar year of that decade that saw America's trade in deficit was 1936 -- and then only slightly. All of the other nine years were ones of trade surpluses.
For the decade as a whole, America ran a trade surplus of $4.92 billion, which was 19 percent of the value of America's total exports during the 1930s.
These data from the Great Depression suggest that trade surpluses neither help an economy nor are evidence that an economy's fundamentals are sound. Quite the opposite, in fact. As long as the U.S. economy remains in turmoil, foreign investors will be scared away, as they were during the Great Depression -- causing our trade deficit to shrink and possibly even to disappear. Americans will be all the poorer.
Let's hope for the rapid restoration of U.S. economic vitality. When that time comes, wise Americans will celebrate what will surely be a return to the days of high and growing U.S. trade deficits.
I agree that it is good when foreign companies want to invest in the U.S. However, I'm not sure that foreigners' willingness to invest here is the only relevant factor, or even the main factor, causing trade deficits. I see foreign investment as more of an effect of trade deficits than a cause.
