ABSTRACT FROM CATO
With an ever-increasing trade deficit, some people have become concerned that the deficit hurts U.S. trade and job opportunities, and places strains on future generations. However, economic evidence suggests that these fears are unwarranted, that, in truth, a trade deficit like ours is a sign of economic prosperity. Trade barriers have little or no impact on trade deficits. Rather, investment flows and other macroeconomic factors have the largest affect on the trade deficit. An increasing trade deficit signals increased investment, which generally signals good economic conditions. The increase foreign investment is not a negative factor in the economy, nor should it cause concern. As long as the government maintains an economy conducive to investment, the high levels of foreign investment will not have adverse effects.
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