Tuesday, April 22, 2008

The Nature of Trade

Jeff Faux (Economic Policy Institute, founder) on the Diane Rehm Show argued against NAFTA today, arguing that globalization changed the nature of trade. It's no longer about exchanging goods but about US firms manufacturing abroad and importing back to the States. The trade deficit, he concludes, is a problem.

Mr. Faux should know better. The trade deficit (aka the current account) is an arbitrary distinction between the net flow of goods and the net flow of investment (capital account). By definition, the two add up to zero (the balance of payments or BoP). Americans import goods and in exchange they spread the US dollars that give foreigners the ability to invest in the US economy. As a result, US citizens maintain a very low savings rate without losing the technological and economic progress that investment generates.

Here's a simple graph to drive home the point:

No comments: