Trump Attack on Trade Deficit Could Harm Economy

A better policy would be to pursue trade agreements that lower trade barriers both at home and abroad, expanding Americans' freedom to engage in mutually beneficial trade with the rest of the world.

The Trump administration has made reducing or eliminating the U.S. trade deficit a top priority. But the administration's push to reduce the gap between imports and exports is almost guaranteed to do more harm than good to our economy.

One particular facet of our trade deficit - ample foreign investment in U.S. businesses - provides millions of American jobs, saves homeowners hundreds each month, and expands the economy beyond the capabilities of domestic investment.

The president's advisers blame the deficit on the trade practices of other countries, but in fact America's $500 billion trade deficit in goods and services is homegrown. The United States runs a trade deficit year after year for one reason: We invest more than we save.

When investment exceeds savings by $500 billion, as it does in the United States, the only way the investment can be funded is through the inflow of $500 billion in foreign savings. And the only way that foreigners can acquire the $500 billion to invest in the United States is to sell Americans $500 billion more in goods and services than they buy from us.

Any federal policy program seeking to reduce the trade deficit that does not close the current gap between national investment and savings will be doomed to fail. It will also increase the risk of disrupting other channels of commerce between American residents and the rest of the world that are greatly beneficial to us.

If the Trump administration were to succeed in reducing the trade deficit, the biggest negative impact would be on the inflow of foreign investment to the United States. With fewer dollars flowing out of the country to buy imports, there will be fewer foreign dollars available to buy U.S. assets - Treasury bonds, stocks, bank deposits, and expanded investment in foreign-owned factories in the United States.

That type of foreign investment in U.S. stocks and corporate bonds provides capital for U.S. companies to invest in research and development and to expand their productive capacity. It also lifts stock prices above what they would otherwise be, boosting the value of retirement savings for millions of American workers.

Foreign investment in U.S. Treasury bonds prevents the crowding out of private domestic investment by the government's insatiable appetite to borrow. When the federal government can tap into the global savings pool, it means more of our domestic savings remains available to invest in housing, business expansion, and education.

Without a net inflow of capital year after year, the number of investment opportunities in America would be limited by the size of Americans' savings, depriving us of a significant portion of our current and future productivity.

By raising demand for U.S. Treasuries, foreign investment lowers long-term interest rates. The International Monetary Fund estimates that "foreign purchases of U.S. Treasuries are estimated to have had cumulatively reduced long-term real yields by around 80 basis points," or 0.8 percent. For a homeowner with a 30-year mortgage for $250,000, that translates into a savings of $115 a month.

For the federal government, which must finance its total public debt outstanding of almost $20 trillion, such a reduction in the interest rate translates into an annual savings of more than $150 billion. And lower borrowing costs facilitate productive investment throughout the economy.

Between 2011-2015, foreign investors increased their direct stake in U.S.-based affiliates by an average of $273 billion a year. More than half of the inward foreign-direct investment (FDI) to the United States each year flows into the manufacturing sector, with chemicals and pharmaceuticals the top sectors followed by motor vehicles and parts.

U.S. affiliates that are majority foreign-owned employed 6.4 million workers in 2014, according to the most recent Commerce Department figures. That represents 5.2 percent of U.S. private industry employment.

Almost a third of foreign-owned affiliate employment is in manufacturing. Foreign-owned affiliates in the United States also account for 17.6 percent of the total research and development performed by all U.S. businesses in 2013.

All this will be in jeopardy if the Trump administration begins to restrict our access to imported goods and services in the name of taming the trade deficit.

A better policy would be to pursue trade agreements that lower trade barriers both at home and abroad, expanding Americans' freedom to engage in mutually beneficial trade with the rest of the world.