Tools and theories of economic policy 565The trade deficits have to be financed with borrowing from overseas. In the past,
these loans came largely from foreign investment by private individuals who saw
greater returns on their investments in the United States than in other countries. The
net international investment position in June 2018 was –$7.8 trillion (that is, the value of
foreign investments in the United States exceeded the value of U.S. investments abroad).^62
Foreign investors now own about 42 percent of our publicly owned government debt, with
Japan and China owning 35 percent of that foreign debt.^63 Why does this matter? If foreign
governments decide to stop investing in treasury securities or to start selling them,
interest rates will have to rise, perhaps dramatically, to attract buyers for our debt.
To reduce the trade deficit, people in government may support protectionist
policies such as trade sanctions, tariffs, and quotas, or attempt to reduce the value of
the dollar. Advocates for protectionist policies argue that “free trade” is a myth and
we are being taken advantage of by nations that engage in unfair trade practices while
selling goods in our open markets. Former senator Ernest F. Hollings once said, “We
hear those in the national Congress running around saying, ‘Free trade, free trade, I
am for free trade,’ when they know free trade is like dry water. There is no such thing.”^64
As discussed in the chapter opener, Donald Trump focused on this issue in the 2016
campaign, arguing that the United States is getting “ripped off,” “absolutely crushed,”
and “killed” on trade with China, Japan, and Mexico.^65 It is only fair, protectionist
proponents argue, that we set up trade barriers or impose quotas to support our own
goods and protect American jobs. Although broadly based protectionist policies have
been rare in the past couple of decades, U.S. policy makers have applied protectionFIGURE
15.9–$200
–$300
–$400
–$500
–$600
–$700
–$800
–$900
–$1,000
–$1,100
–$100
0
$100
$200
$300
Trade surplus
in servicesTrade deficit
in goodsBillions1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2017 2018
Trade Deficits, 1990–2018
The trade deficit remains high. Which groups are most likely to support policies aimed at reducing the
trade deficit, and which groups would oppose these policies?Note: Totals are calculated on a balance of payment basis.Sources: Data from the U.S. Department of Commerce, Bureau of Economic Analysis, International Economic Accounts: Trade in Goods and
Services, http://www.bea.gov (accessed 9/7/18).Full_16_APT_64431_ch15_530-571.indd 565 15/11/18 2:35 PM