Trading accounts are among the most dangerous accounts ever collected. It has long been said, for example, that calling something a “deficit” seems negative even though the current account deficit is compared to a financial account surplus. Put this matter aside, because the real problems are much deeper. International accounts make it appear that people, in their common buying and selling, bind us all to a common endeavour. Accounts take millions of voluntary, beneficial activities between individuals and firms and repackage them as relationships between nations—like “America” buying from “China”. Many, many experts get this wrong—not just non-economists who are misled by words like “scarcity.”
Don Boudreaux at Cafe Hayek provides an excellent example in response to a reader who asks:
The USA ran a trade deficit for 50 years. Those who are victimized by the investment of immigrants in the USA. Immigrants expect a return on this investment. Doesn’t it mean that eventually Americans have to pay for immigrants?
Answer from Don:
No.
The only Americans who are not obligated to pay anything to foreigners are Americans who borrow money from foreigners. (This number includes US citizens-taxpayers whose government lent money to foreigners.) But there is no such obligation for other investments made by foreigners in the US – those other investments are equity investments in the US (for example, foreigners buying a restaurant in Houston), purchases of real estate in the US, and holding US dollars.
If, for example, a foreign-owned restaurant in Houston goes bankrupt, the loss is borne entirely by its foreign owners; no American is obligated to pay anything on that account to foreigners.Yes, foreigners do they expect good returns on all their US investments, regardless of the type. But aside from paying Americans principal and interest on money they borrow from foreigners, there is no return that foreigners receive on their investment in America that Americans pay. If an outdoor restaurant in Houston makes a profit, those profits are newly created wealth – wealth created are the outside owners of this restaurant.
In international trading accounts, when foreign owners of a restaurant receive a return on their restaurant – say, by paying dividends on that restaurant’s profits – it appears that Americans pay for immigrants. This seems to come from the fact that dollars flow from the US to abroad, and thus are recorded as payments from America to another country or countries. But this seems misleading. America, as such, does not pay such reimbursements to foreign restaurant owners. And no flesh-and-blood Americans are paying that restitution. Those returns, in turn, are new wealth created by outside owners of the restaurant; economically, those returns are paid to the outside owners of the restaurant with foreign owners of the restaurant.
But world trade accounts hide this economic reality. What appears in trade accounts as payments made by the United States to foreign countries is not such a thing. This calculation makes a geographical error in economics. The inexplicable confusion is expressed by considering that, just because these dollar profits are created in the US and then exported to foreigners, these dollar profits are actually paid by Americans to foreigners.
As Don says, trade accounts make a kind of category error: they separate the local area, where, and treat it like a person, like “nations” that trade. But nations don’t trade, people trade. This confusion would not matter so much if the statistics remained on the back pages of government reports. But they don’t. They stay on the front page, create policy, and organize conversations. When the president says “we lost $500 billion” in “crazy trade” with China, he’s reading international accounts as a story about competing nations. Accounting creates narrative. narrative creates policy. Bad accounting leads to bad policy. In fact, we would all be better off if trading accounts simply disappeared.
