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American Focus > Blog > Economy > It’s Even Better Than A Consumption Surplus
Economy

It’s Even Better Than A Consumption Surplus

Last updated: May 1, 2025 9:37 am
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It’s Even Better Than A Consumption Surplus
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Co-blogger Kevin Corcoran recently penned a compelling piece advocating for a rebranding of the term “trade deficit.” He suggests we swap it out for the more precise “consumption surplus.” This notion is echoed by my esteemed professors, Don Boudreaux and Dan Klein, who similarly argue for a shift in terminology. Their reasoning is sound, and I would go even further to assert that the situation is even more favorable than they indicate.

It’s indisputable that consumption is the ultimate aim of all production. Without consumption, the fruits of production are rendered worthless. We toil not for the sake of toil but to achieve certain desired outcomes. However, we must not overlook the significance of investment. In the realm of economics, investment extends beyond mere stock and bond purchases; it encompasses the acquisition of capital goods, real estate, and various resources vital for production. To be more precise, investment is defined as “the production or construction of capital goods that provide a ‘flow’ of future service” (Economics: Private and Public Choice by James Gwartney, Richard Stroup, Russell Sobel, and David Macpherson, 17th Ed, pg. 137). Thus, investment plays a crucial role in driving long-term economic growth.

When imports surpass exports, it signifies an influx of more desired goods into the country. This scenario also implies that a greater volume of investment funds is entering our economy. Foreigners are eager consumers of American products (the U.S. stands as the world’s second-largest exporter, with exports reaching approximately $3 trillion in 2023), but they are equally interested in investing their savings in America. An increased supply of savings leads to lower interest rates, which, all else being equal, allows American businesses and individuals to invest more as borrowing costs decrease. This cascade of investment fosters the creation of more businesses, homes, educational opportunities, renovations, upgrades, and research—all essential for boosting production, innovation, and overall societal welfare. Consequently, rather than being constrained by domestic savings alone, the American production possibilities frontier can be enhanced through foreign investments. Trade enables us to not only consume beyond our production capabilities but also to expand those very capabilities, all while utilizing fewer resources.

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Political attempts to mitigate the trade deficit could essentially throttle the golden goose. Rising borrowing costs will lead to diminished investment and a subsequent decline in the standard of living. We’ve already witnessed such consequences with the billions in wealth lost to the “Liberation Day” tariffs. Treasury bond rates are on the rise, which inevitably results in slower economic growth and increased borrowing costs—actively undermining the administration’s purported goal of correcting fiscal imbalances.

In summary, I propose that we build upon Kevin’s insightful rebranding by labeling it a “consumption and investment surplus.” Trade deficits not only enrich Americans in the present (through consumption) but also contribute to future wealth (through investment).

PS. While developing my International Trade lectures this semester, I stumbled upon an intriguing paradox: Americans earn more from their overseas investments than foreigners do from their investments in the U.S. Yet, we still report a negative trade deficit and net investment position, suggesting that foreigners are investing more in the U.S. than vice versa. What explains this contradiction? Risk. The U.S. is perceived as a safe haven, prompting foreigners to invest here. Conversely, Americans often seek a balance of risk and stability, pursuing higher interest rates abroad while maintaining some investments domestically. As a result, American investments abroad yield higher returns than foreign investments in the U.S. This dynamic flips during economic downturns: foreigners tend to earn more on their U.S. investments than Americans do on their overseas ventures as American investors retreat to safer havens while riskier investments falter. For further reading, see Why Does U.S. Investment Abroad Earn Higher Returns Than Foreign Investment in the United States? (CBO, 2005) and New Evidence on the US Excess Return on Foreign Portfolios (Bertaut, et al, 2024).

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