Boiling it all down , countries sell products to foreigners ( exports ) in order to buy products from foreigners ( imports ). What we sell to foreigners — our exports — pays for what we buy from foreigners — our imports . Without capital flows , the value of all exports is the value of all imports . The idea of trying to expand exports while contracting imports defies all logic .
Which would you prefer : capital lined up on our borders trying to get into our country , or capital lined up on our borders trying to get out of our country ? The answer isn ’ t quite so obvious .
Politicians continue to frame the U . S . trade deficit with the rest of the world as costing us jobs . But , in the same breath , they love a capital surplus . With a capital surplus , politicians argue , foreigners are bringing capital into a country , which then creates jobs and productivity . But , ultimately , the reality has to be faced : if you want a capital surplus , you need a trade deficit .
Foreigners generate the dollar cash flow that allows them to buy U . S . -located assets by selling more goods to the U . S . and by buying less goods from the U . S . For foreigners who want to acquire dollars in order to invest in U . S . -located assets , they have to generate those dollars in some net fashion . The trade balance of a country is the value of all exports less all imports , which , in turn , is the difference between domestic production and domestic expenditure , and is also the difference between domestic savings and domestic investment .
The trade balance in balance of payments accounting terms is the counter-account to a country ’ s capital balance . Thus , a country ’ s trade surplus is also its capital deficit and its trade deficit is also its capital surplus . In order for the U . S . to have a net capital inflow , foreigners have to have a trade surplus with the U . S .
The trade deficit / capital surplus , in turn , determines the terms-of-trade . The terms-of-trade are the relative price of one country ’ s goods in terms of another country ’ s goods . The terms-of-trade are often referred to as the real exchange rate and are crucial to a country ’ s trade balance and the composition of its exports and imports . In order to export less and import more , a country ’ s goods have to become less competitive , i . e . that country ’ s terms-of-trade have to improve , which is one and the same as a rise in the real exchange rate .
When a country ’ s terms-of-trade improve , i . e . its real exchange rate appreciates , it means that foreign goods become relatively cheaper than domestic goods . Therefore , the citizens of the appreciated currency country will import more and export less , i . e . all of its goods become less competitive .
The terms-of-trade provide the exact , correct trade balance to meet the capital investment needs based upon the economic policies of the countries in question . If the U . S . were running good economic policies , such as tax cuts , sound money and free trade , we would expect to see the U . S . trade deficit increase . We would also expect U . S . goods to become less competitive relative to foreign products . The dollar should appreciate relative to other currencies , and , as a result , the U . S . would export less and import more and run a trade deficit . On a global level , capital would be moving from everywhere bound for the U . S .
EB5 : What are your thoughts about Chinese investment in America and in U . S . businesses in general ?
Dr . ABL : Regarding foreign investment in the U . S ., I say the more the merrier and the bigger the better .
Which would you prefer : capital lined up on our borders trying to get into our country , or capital lined up on our borders trying to get out of our country ? The answer isn ’ t quite so obvious .
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