An old, standard argument against trade deficits is that they are financed by foreign capital inflows that represent debt to be reimbursed in the future. In this perspective, an American trade deficit gives the foreign owners of the incoming capital a claim to future American production.

Don Boudreaux and other economists have argued that foreign capital inflows do not literally “finance” American imports. One reason is that foreign investment in America is mostly autonomous, that is, driven by foreign investors who find it attractive to invest in America for motives unrelated to the trade deficit.

The main reason for rejecting the old financing argument is that, at least in a free society as opposed to a collectivist one, individuals and private bodies own the resources, and each one runs his own private trade balance, and finance his own trade deficits when needed, as he sees fit. The concept of America’s net assets or net indebtedness towards the rest of the world is a collectivist fiction that hides the reality of 150 millions of American adults each one deciding (or delegating the decision to financial intermediaries) how much he will save, invest, or borrow, here or abroad.

In passing, it should be noted again that a large part of the trade deficit is accounted for by the portion of the federal budget deficit that is financed abroad. But this problem, although very real, is not what I wish to focus on here.

The recent counter-argument of Don Boudreaux I want to report on is different from the usual economic criticisms of the trade deficit obsession. Even if we grant the old argument that the trade deficit is financed by Americans contracting debt abroad, Don Boudreaux cleverly pointed out, this very argument is inconsistent with mercantilism itself—mercantilism taken to be the promotion of exports as the companion of import protectionism. In “Why Do Protectionists Complain About Trade Deficits” (Café Hayek, March 9, 2019), Don writes, responding to one of his regulars mercantilist critics:

Assuming (contrary to fact) that American trade deficits do necessarily cause Americans’ indebtedness to foreigners to rise, why do you bemoan these deficits? Why not instead cheer them? … why is such indebtedness undesirable? Being indebted to foreigners means that we Americans must repay these debts, which in turn means that we Americans must in the future work to produce more goods and services for export. Isn’t this situation precisely what you and other protectionists want? Isn’t a rise in the demand for American exports … your very ideal?

In other words, it is self-contradictory to criticize the trade deficit for leading to America’s foreign indebtedness and simultaneously to promote exports to counter the deficit. If a current trade deficit is bad because it indicates too little export today, more future exports tomorrow cannot be bad when they “finance” this trade deficit.

Before reading Don’s post, I had never met this powerful and astute argument, which appears so obvious once formulated. Logically, a theory that leads to an antinomy—exports both good and bad—must be discarded.