Friday, August 15, 2008

Is trade deficit a cause for concern?

Financial and trade flows have to balance. So when we run a trade deficit, it means that foreigners are investing in the US, essentially supplying us with cheaper capital, resulting in lower interest rates.
Daniel Griswold, director of Cato's Center for Trade Policy Studies, comments: "Contrary to the claims of free trade critics, the trade deficit tells us almost nothing about the success or failure of U.S. trade policy. The deficit reflects the continuing inflow of foreign investment to the U.S. economy. Without that investment, millions of homeowners and businesses would be saddled with higher interest payments. It's ironic to hear Democrats complain about the trade deficit. Under President Clinton in the 1990s, the trade deficit exploded from $70 billion to $380 billion and by all accounts the American economy performed well."
- Cato Handbook on Policy: Trade, by Brink Lindsey and Daniel Griswold

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