Does a Trade Deficit Imply Trade Debt?

Our sister publication “Law & Liberty” published a piece recently by Oren Cass in which he criticizes economists for their beliefs in free trade and trade based on comparative advantage. It’s “Free Trade’s Origin Myth,” Law & Liberty, January 2, 2024.

Co-blogger Pierre Lemieux has criticized the collectivist premise that Cass uses in his discussion. There’s also much economic content to criticize in his article. I want to focus on one important misunderstanding. Cass writes:

Since 1992, the United States has accumulated $15 trillion in trade debt—goods and services consumed by Americans for which nothing was produced in return.

He gets to that figure, presumably, by adding up the yearly current account deficits between 1992 and now. But he never tells the reader why he thinks that trade deficits translate, dollar for dollar, into debt.

They don’t.

When there’s a current account deficit, there’s necessarily an offsetting capital account surplus. When foreigners sell us goods and services, they have basically five things to do with the money that they don’t spend on our goods and services: (1) buy U.S. dollar-denominated debt, typically U.S. government Treasury bills and bonds; (2) buy stock in U.S. companies; (3) buy land in the United States; (4) directly invest in the United States; and (5) hold on to the actual currency because it’s still the world’s leading currency. In only one of those cases, case (1), does the current account deficit translate into debt.

It’s understandable that Cass makes that mistake because many bona fide economists do. They often talk about the capital account surplus as if it’s all debt, even though they know (or should know) better.

I wrote about some of this in 1988, when many observers, not including me, were worried that Japanese people would take an outsize share of U.S. capital assets. It’s titled “America for Sale?” Reason, July 1988.

By the way, to the extent (5) applies, the U.S. Federal Reserve makes out well. It costs the U.S. government under 30 cents to print a $100 bill. And in return for that $100, we get actual goods. As Jay Leno said, in a 1989 ad for Doritos, “Crunch all you want; we’ll make more.”