You'd Think He Didn't Like Protectionists

Josh at The Everyday Economist tries but happily fails to keep his emotions in check when "schooling" a protectionist. A commenter asks "Do you think the trade deals are working with soaring trade debt and falling wages?"

Josh opens a can of "Economics 101" on him:

First, a trade deficit is merely a capital surplus. For example, if we export lumber and steel to Brazil for the production of a factory, this is a trade surplus. However, if we import the lumber and steel from Brazil to build a factory in the U.S. and then it is bought by Brazilian investors, we say that we have a trade deficit. What is the difference? A Brazilian-owned factory was built. Does it matter where it was built? Why is it better for the Brazilians to build factories in their own country?
When exports fall, investment in the United States rises. We pay for goods from China with U.S. dollars. These dollars must be used to buy U.S. goods or assets.
A trade deficit does not create debt. If I buy a good that was made in China and the maker of that toy purchases a factory in the United States or shares of a publicly traded company, a trade deficit exists. But where is the debt?
If I purchase a good that was made in the U.S. and the company uses the money to purchase a factory or shares of stock, is debt created? Why is it any different if I buy the good from a foreign company?

Umm, AlexC, that would be a "must read."

Economics and Markets Posted by jk at October 27, 2006 8:35 PM