Do U.S. Trade Deficits Reduce Americans’ Net Worth?
Here’s a letter to a new correspondent.
Mr. R__:
Thanks for your kind e-mail.
About America’s trade deficits with foreigners you ask: “But is it not a problem that they end up owning more and more of our equities and farmland? Are we not impoverishing our future selves by selling off our assets to fund the consumption of cheap goods?”
Your question is understandable. U.S. trade deficits could result in the outcome you describe, and they woulddo so if a large-enough portion of Americans became willing to eat into their net worth in order to fund their current consumption. (If so, by the way, I would still oppose government intervention as I believe that people who earn incomes and accumulate wealth are entitled to spend those incomes and to dispose of that wealth as they choose. And it would also be bad economics: For government to interfere in this way is for government to dim the incentive to earn income and to accumulate wealth in the first place.)
But trade deficits do not necessarily result in the outcome you describe, and, in the actual case of the United States, do not in fact do so. Indeed, they have the opposite effect.
Contrary to countless careless or uninformed assertions, it’s simply untrue that a $1 increase in the U.S. trade deficit necessarily results in a $1 decrease in Americans’ net worth – a decrease in net worth brought about either through a $1 increase in American indebtedness to foreigners or a $1 decrease in Americans’ net ownership of assets.
Suppose Tim in Texas spends $40,000 on a pick-up truck made in Japan. If Mr. Toyoda turns around and spends that $40K on oranges from Florida, there’s no change in the U.S. trade deficit: the $40K of U.S. imports are matched by $40K of U.S. exports. But suppose instead that Mr. Toyoda uses the $40K to buy shares of Apple, Inc., from Vero in Virginia. In this case the U.S. trade deficit increases by $40K. If Vero then uses that $40K to throw a gigantic party, then Vero’s net worth falls by $40K – and, because Vero is an American, the aggregate net worth of Americans falls by $40K (although it’s worthwhile to point out that no other American’s net worth falls as a result of Vero’s consumption; that fall in wealth is, as we say, fully “internalized” on Vero).
But suppose instead that Vero uses that $40K to start a new business in Virginia that soon begins turning a profit. Her business is so successful that Vero’s net worth rises by $1 million. In this case the train of transactions results in a net increase in the aggregate net worth of Vero – and, hence, of Americans – of $960,000.
You might ask if Vero could have achieved the same result by selling her Apple shares to a fellow American. Fair question. First, the value of those Apple shares is surely higher than they would be if foreigners weren’t able or willing to bid for them; without foreigners ability and willingness to bid for dollar-denominated assets, Vero almost certainly would have received less than $40K for her Apple shares.
Second, even if Vero sold her Apple shares to Mike in Maine for $40K, from where did Mike get the $40K? If, as isn’t implausible, Mike paid for these shares by withdrawing $40K from his savings account, then his net worth doesn’t change while Vero’s rises by $960,000. It appears that this outcome is the same as when the U.S. trade deficit rose by $40K. But this appearance deceives. Because Mike’s bank now has fewer reserves, it won’t make the $30K loan to Valerie in Vermont that Valerie would have used to successfully expand her business. As a result, Valerie’s net worth is lower than it would have otherwise been. Because Valerie is an American, Americans’ aggregate net worth winds up, in this example, being lower than it winds up being when Vero sold her Apple shares to someone in Japan.
When there’s a rise in net global investment in the U.S., U.S. trade deficits increase, but the amount of capital in America also increases, enabling – as the above examples show – Americans’ own net wealth to increase.
The above examples, of course, are hypothetical. So what are the facts? The U.S. last ran an annual trade surplus in 1975. In that year, the average net worth of a U.S. household, in 2024 dollars, was $364,893. (See the link just above.) Today (the fourth quarter of 2024) the average net worth of a U.S. household (in 2024 dollars) is $1,212,974 – meaning that the average net worth of a U.S. household is today 232% greater than it was in 1975. This reality is practically impossible to square with the assertion that trade deficits are draining Americans of their wealth. Quite the opposite seems to be happening.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
>Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
The post Do U.S. Trade Deficits Reduce Americans’ Net Worth? appeared first on Cafe Hayek.
