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Mr Chairman and members of the Senate Finance Committee Thank you for allowing me to testify on the causes and consequences of the US trade deficit The economic turmoil in East Asia has thrust Americas trade deficit back into the news Perhaps no aspect of American trade is talked about more and understood less than the trade deficit It has been cited as conclusive proof of unfair trade barriers abroad or a lack of competitiveness among US industries at home It has been blamed for destroying jobs and dragging down economic growth I welcome the opportunity to present a more charitable view of this much abused trade number The US trade deficit is the result of a net inflow of capital to the United States from the rest of the world Because of our stable and relatively free domestic market we remain the worlds most popular destination for foreign investment We have become a net importer of capital because Americans do not save enough to finance all the available investment opportunities in our economy This inflow of capital from abroad allows us to pay for imports over and above what we export In other words the trade deficit is simply a mirror reflection of the larger macroeconomic reality that investment in the United States exceeds domestic savings If we want to change the US trade deficit we must change the rate at which Americans save and invest In a study published by the Cato Institute in April I address four enduring myths about the US trade deficit Two of them relate to causes two to consequences The first myth is that the overall US trade deficit is caused by unfair trade barriers abroad Foreign barriers are certainly a problem just as our own barriers to imports remain a problem But trade restrictions do not determine the overall US trade deficit nor do they fully account for
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