A ‘trade deficit’ is not a deficit. It means a capital surplus.

The Wall Street Journal offers a quick tutorial:

Americans may be alarmed when they hear that the U.S. buys more from the rest of the world than it sells because they can’t run a household deficit. But national accounting isn’t the same as household accounting, and a trade deficit isn’t a debt that must be repaid. It is often a sign of economic prosperity.

Start by keeping in mind the basic formula embedded into the national balance of payments: A trade deficit equals a capital surplus. The trade deficit is part of the “current account” and it means that Americans are importing more merchandise and services than they export. On the other side of the ledger is the “capital account,” which records capital inflows. When the U.S. has a current-account deficit it has to have a capital-account surplus of the same amount.

This is not by choice or speculation. It happens by definition because for every buyer there must be a seller, as these columns have written for 125 years. The national payments must “balance.”

I’ve written in recent weeks how the realization that foreign trade is beneficial is one of the founding insights of economics — as is the idea that tariffs and protectionism are therefore harmful to economic growth.

WSJ points out a time when the U.S. wasn’t running a trade deficit. It isn’t a time most would like to revisit:

If trade surpluses were a sign of success, the 1930s might have been different in the U.S. As George Mason economist Don Boudreaux points out on his Cafe Hayek blog, “For only 18 of the 120 months of that dreary decade did the United States run a trade deficit. For each of the remaining 102 months of the decade of the 1930s the U.S. ran a trade surplus.”

On the other hand, the U.S. ran a trade deficit in nearly every year of its rapidly growing first century and all through the prosperous 1980s and 1990s.

Recall that protectionists had a champion in the disastrous Smoot-Hawley tariff, which greatly contributed to the second phase of the four-phase Great Depression.

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