Should We Be Concerned About the Large American Trade Deficit?

The United States operates under a large and relatively persistent trade deficit. Broken down to a basic level, this means that the cost of our imports exceeds the value of our exports. Or, more specifically, our external liabilities outweigh our external assets.

The obvious conclusion would be that in the long run, this would lead the U.S. to go broke. However, this is not necessarily the case given the actual circumstances.

First and foremost, assets pay returns. In this case, the United States’ dividends on its external assets are actually quite a bit higher than the interest it pays on its liabilities to foreigners. So even though we have more debts than assets, our net inflow is positive.

Documented reports state that our external assets actually pay more than 3% higher annual returns than our external debts. This is because our assets are comprised of different investments than our liabilities. The United States’ external assets are made up in large part by private equity and foreign direct investments, which have a greater risk and in turn, a greater return. Our liabilities are made up of more conservative investments.

So, as long as our external investment accounts continue to produce large dividends, we can continue to pay for the American trade deficit and should not be too concerned about it.