Title: The Benefits of Free Trade: Addressing Key Myths | Mercatus Center
Headings: The Benefits of Free Trade: Addressing Key Myths
The Benefits of Free Trade: Addressing Key Myths
The Truths of Free Trade
Myth vs. Reality

Content: It is typically a signal that global investors are confident in America’s economic future. The US trade deficit might be larger than it would otherwise be if a trading partner chooses to keep the price of its currency artificially low, but this practice harms the trading partner, not the United States. America’s trade deficit increases whenever non-Americans choose to increase the amount they invest in the United States. Dollars that leave the United States as part of the trade deficit must come back as a “capital account surplus”—that is, the net investment funds flowing into the United States. More investment means expansion of existing businesses, more new businesses, higher worker productivity, and more output-enhancing activities, such as research and development, all of which increase prosperity. So-called “currency manipulation” by a trading partner does not harm the American economy. For example, a lower price of the yuan makes Chinese goods cheaper for American consumers, conferring a real benefit on the United States. Keeping the price of the yuan lower through monetary policy, however, does not lower the real costs of the resources and outputs exported by the Chinese people, who also face higher prices for American imports. An undervalued yuan—assuming this undervaluation to be real rather than fanciful—benefits Americans at the expense of the Chinese. 5.