The Truth About The Trade Deficit
Last month, the Trump administration issued its objectives for a renegotiation of the North American Free Trade Agreement. There is much about the trade agreement that should be modernized, such as updated rules for e-commerce and stronger intellectual property protections. I support the president’s objective to maintain existing duty-free market access for agricultural goods, as it is important for industries in many states, including my home state of Oklahoma.
However, the administration has also emphasized its desire to reduce the trade deficit — the degree to which the United States imports more than it exports — in NAFTA renegotiations. This is rooted in the belief that when the United States buys more from foreign countries than those countries buy from us, jobs increase elsewhere and decrease here at home. This is a faulty assumption but one that has unfortunately found its way into mainstream political dialogue. Trade deficits are not always bad for U.S. workers and consumers, nor should they remain the focus in NAFTA renegotiations.
For starters, a powerful economy such as ours often runs a trade deficit because of the immense buying power of its people. Mexico’s average net per capita income is roughly $13,000, while the average U.S. household brings in more than $41,000 each year. Americans have a far greater capacity to buy goods than do consumers in Mexico. It should come as no surprise that we do exactly that.
If the United States and Mexico were the only countries in the world, and both countries traded openly with each other, American consumers would still benefit from Mexican imports in order to satisfy our buying power and immense market demand. Conversely, Mexico would still import goods from the United States. Its citizens, however, simply cannot afford to buy things at the same rate and quantity that Americans do from Mexico. If Mexicans suddenly became wealthier, they would likely start buying more U.S. products. That is why one of the best things that can happen to our economy is for other nations’ economies to grow. When they grow, they buy more American products, and we grow even more. This trading relationship holds true for many countries with relatively high-consumption populations.
As the United States purchases more goods from Mexico, Mexican workers become wealthier, which means they will be able to purchase more goods from the United States. A growing economy in Mexico also means that Mexican workers have less reason to immigrate illegally into the United States. And while U.S. consumers and businesses are buying more cheap goods from Mexico, it gives us greater purchasing power to buy more things and reinvest in our own economy, lifting our own standard of living. Simply put, free and fair trade is a win-win scenario.
Foreign investment also tilts the trade-balance calculation. Because we have the world’s largest economy and the strongest currency, more money comes into the United States than goes out. This surplus of investment adds to our trade deficit, even though this foreign cash stimulus is a positive for our economy.
When a Canadian company decides to invest in a U.S.-based company, it increases our trade deficit. Similarly, when the Mexican government buys U.S. Treasury bonds (as most of the world does), the likelihood of an American trade deficit increases. Investments such as these are indicative of a strong economy.
It should be an encouraging sign that we are by far the world’s largest receiver of foreign direct investment. Our trade deficit means, in part, that U.S. companies are considered to be a better investment than companies in other countries. More investment in American businesses means more jobs and higher wages for American workers.
It is my hope that as the Trump administration begins quickly reviewing past and future trade agreements, we can work together toward building a better future for the American middle class. We have real problems with trade, such as closed markets, foreign subsidies and stolen intellectual property. But setting up additional barriers and taxes on imports to reduce the trade deficit should not be the focus of our trade policy. The United States already benefits from trade and, when there is free and open competition, American workers and consumers always win.
By: Senator James Lankford
Source: The Washington Post
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