International Transfers of Wealth

The great Supreme Court Justice Oliver Wendell Holmes said: “Think things, not words.” Nowhere is that more important than when discussing international trade, where there are so many misleading and emotional words used to describe and confuse things that are not difficult to understand in themselves. The terminology used to describe an export surplus as a “favorable” balance of trade goes back for centuries. As early as 1776, Adam Smith’s classic The Wealth of Nations argued that the real wealth of a nation consists of its goods and services, not its supply of gold. If the goods and services available to the American people are greater as a result of international trade, then Americans are wealthier, not poorer, regardless of whether there is a “deficit” or a “surplus” in the international balance of trade. If Americans buy more Chinese goods than the Chinese buy American goods, then China gets American dollars to cover the difference. Since China is not just going to collect these dollars as souvenirs, it usually turns around and invests them in the American economy. In most cases, the money never leaves the United States. The Chinese simply buy investment goods—Rockefeller Center, for example—rather than consumer goods. American dollars are worthless to the Chinese if they do not spend them on something. In growth terms, international trade has to balance, in order to make any economic sense. But it so happens that the conventions of international accounting count imports and exports in the “balance of trade,” but not things which don’t move at all, like Rockefeller Center. What do the makers of Hondas and Toyotas do with all that American money? One of the things they do is build factories in the United States, employing thousands of American workers to manufacture their cars closer to their customers, so that Honda and Toyota do not have to pay the cost of shipping cars across the Pacific Ocean. Their American employees have been paid sufficiently high wages that they have repeatedly voted against joining labor unions in secret ballot elections. What alarms people are the words and the accounting rules that produce numbers to fit those words. A country’s total output consists of both goods and services—houses and haircuts, sausage and surgery—but the international trade balance consists only of physical goods that move. The American economy produces more services than goods, so it is not surprising that we import more goods than we export—and export more services than we import. American know-how and American technology are used by other countries around the world and these countries of course pay us for these services. For example, most of the computers in the world run on operating systems created by Microsoft. But their payments to Microsoft and other American companies for their services are not counted in the international balance of trade, since trade includes only goods. Yet the American “balance of trade” is reported in the media as if this partial picture were the whole picture and the emotionally explosive world “deficit” sets off alarm. When you count all the money and resources moving in and out of a country for all sorts of reasons, then you are talking about the international “balance of payments”—regardless of whether payments were made for goods or services. According to the accounting rules, when people in other countries invest in the United States, that makes us a “debtor” to those people, because we owe them the money that they put here. Foreigners invested $12 billion in American businesses in 1980 and this rose over the years until they were investing more than $200 billion annually by 1998. Looked at in terms of things, there is nothing wrong with this. It creates more jobs for American workers and creates more goods for American consumers. Looked at in terms of words, however, this is a growing debt to foreigners. Contrary to popular fears that Japan was 35 buying up America, the largest share of foreign direct investment in the United States in 1998 was Great Britain’s 19 percent, compared to Japan’s 16 percent. Britain was also the largest recipient of American direct investment abroad, receiving 18 percent of such investments, with Canada being next at 11 percent.