Does a trade deficit mean that American wealth is moving in strange hands?

Copyright © HT Digital Streams Limit all rights reserved. Economics Deepa Vasude of 4 min Read 16 Apr 2025, 12:17 AM IST Senior Trade Advisor Peter Navarro on April 10, 2025 at the White House. Photo: Reuters Summary and will rates help reduce it? A senior adviser from President Donald Trump claims that the total trade deficit of the US is a transfer of wealth in foreign hands. Here is an explanation of how it works. Peter Navarro, senior trade adviser of US President Donald Trump, claimed last week that cumulative US trade deficits transferred more than $ 20 trillion in foreign hands from 1976 to 2024 (Financial Times, April 8). A quick calculation shows that the sum of the US trade deficits during this period was indeed about $ 22.2 trillion. But how is it a wealth transfer? If the US imports goods by paying dollars is not a transaction rather than a transfer? The point of Mr. Navarro is best understood in terms of America’s external balance sheet. To construct this, take all American entities – individuals, government and private enterprises – and add to what they (liabilities) owe and what they own (assets) relative to the rest of the world. Also read: Unilateral rates Risk Disroverion aimed at intellectual property on this balance sheet have the assets held by US citizens. Examples include a Nike shoe factory in Vietnam, an investment in Indian government bonds by the California Pension Fund, or a property in the US possession in Mexico. The liability side contains US bonds, stocks and real assets held by foreigners, such as the Japanese Subaru manufacturing plant in Indiana, Apple shares held by Indian investors, or US Treasury debt owned by the Chinese government. At the end of 2024, the US owned $ 35 trillion foreign assets, and foreigners owned $ 62 trillion US assets. The $ 26 billion negative gap between the two is the Net International Investment Position (NIIP) of the US. A negative niip means that the US is a net debtor for the rest of the world, and that this debt worsens at an alarming rate. The Trump administration seems to believe that trade deficits are the cause, and pruning it will make the US balance sheet strong again. A global comparison shows that countries that have trade deficits are usually net debtors for the rest of the world, and surpluses countries tend to have positive NIIPs. It is no coincidence; There is a clear accounting relationship between trade deficits and NIIP. From the trade deficit to a poor balance sheet, the US has a massive shortage of goods and a small surplus on services, which contributes to a fairly large current account deficit. It represents a net outflow of dollars to the rest of the world, which is financed in two ways. One of them by selling US bonds, shares or real assets to foreigners, increasing US international obligations. Two, by reducing investment in international assets. Over the past five decades, persistent deficits have led to a continuous decline in the stock of foreign assets held by the US and a corresponding increase in US assets owned by foreigners. In other words, the niip has become negative. This is at the heart of Navarro’s argument: that the cumulative trading deficit represents a transfer of US wealth to foreigners. Will rates solve this problem? The US administration thinks so. It is alleged that rates will reduce trade deficiencies and generate revenue, which in turn will improve NIIP. But here is an inherent trade -in. If rates reduce imports, trade deficit will improve, but rates from rates will not be as high. If the import question remains unchanged, the tariff income will come in as expected, but the trade deficit will continue to exacerbate. Also read: Soon your work contract will have a tariff clause and it is not already – a series of outcomes are possible at this point. Faced with the threat of rates, partners may agree to import more from the US or open their markets for US products (a positive for NIIP). But if some countries (eg China) retaliate with corresponding rates, the resulting trade uncertainty will prevent US firms from investing overseas (a negative for NIIP). The reform of supply chains could increase production costs in the US, which could possibly hinder the investment in the US (once again a positive for NIIP). Even if rates reduce the trading deficit, NIIP cannot fall into the same relationship. This is because valuation effects due to changing share prices and exchange rates also play a role in determining NIIP. In recent years, foreigners have invested relatively more in US fairness than debt. As a result, US foreign obligations are increasingly skewed in equity. As US stock markets outperform the market value of foreign ownership, which is declining. Since foreign obligations tend to be dollar denominated, while foreign assets have a foreign exchange component, a stronger dollar is exacerbating by shrinking asset values ​​relative to liabilities. A significant part of the weakening or strengthening of the balance sheet is valuation-driven and immune to trade flow. Confidence to Current Account The turnaround of a trading deficit is a surplus for capital account. The fact that foreign investors like to raise funds to finance US trade deficits ($ 1.2 trillion in fiscal 2024) should not be considered a wealth transfer; On the contrary, it shows that US assets are attractive to investors. The US is the world’s best recipient country of direct foreign investment, it issues the global reserve currency and has the world’s deepest and most liquid bond markets. Rates risk it all by creating uncertainties about business, inflation expectations and market valuations. Also read: Trump has cut on smartphone rates. Can India still seize the moment? Sales of mortgage markets, volatile treasury returns and dollar weakening indicate some doubt about the secure status of US assets. The underlying strength of the US balance sheet is eventually measured by the confidence that investors are resting in the economy. Rates should not jeopardize the confidence. The author is an independent author in economics and finance. Catch all the business news, market news, news reports and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #wone Factors #in Cards #Donald Trump #Genitstate Mint Specials