Here’s a letter to Foreign Affairs.
Editor:
Michael Pettis continues to stir up unwarranted fear of “trade imbalances” (“A Great Rebalancing Is Coming,” August 28). Although the global economy is indeed beset by government-created flaws destined to cause problems, so-called “trade imbalances,” as such, are not among these flaws. The fact that Mr. Pettis insists otherwise reflects his failure to understand that countries that run trade deficits do not thereby necessarily go further into debt, and that the capital stock can and does grow both for the world and for many trade-deficit countries, including the U.S. When a country, such as the U.S., regularly attracts foreign investment mostly to create and enhance enterprises in that country – rather than to fund consumption – that country’s productivity and prosperity grow even as it continues to run “trade deficits.” There’s no reason this process must ever end or be anything other than enriching for the people of the country.
But Mr. Pettis doesn’t get it. He stumbles immediately by writing that “for an advanced, capital-rich economy such as that of the United States, an enduring trade deficit will bring with it either rising unemployment or rising debt, neither of which is sustainable.”
Well.
The U.S. has run annual trade deficits every year, without fail, starting in 1976 – that is, for 20 percent of the country’s existence. And yet the U.S. unemployment rate is today 4.1% – less than half its rate of 8.5% in 1975 (the last year the U.S. ran an annual trade surplus).
As for debt, while it’s gone up in total, it’s gone down relative to the value of assets owned by American households – which is the relationship that matters for assessments of the sustainability of debt. At the end of 2025, the average net worth of an American household was $1,034,665. This figure includes each household’s share of federal, state, and local government debt. In inflation-adjusted terms, that’s a net worth 205% higher than in 1975.*
And, by the way, so too has the real net worth of the median American household risen. The economist Jeremy Horpedahl calculates that the real net worth of the median U.S. household in 2022 was 119% higher than in 1983 and 171% higher than in 1969.**
These facts alone belie Mr. Pettis’s belief that trade deficits necessarily drain wealth from countries that runs these so-called “deficits.”
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* To calculate this figure I updated the figures I reported in this March 19th, 2026 Café Hayek post.
** Private correspondence from Horpedahl. These figures will appear, with appropriate references and citations, in Bryan Caplan’s and my forthcoming book, Blockade: The Science and Ethics of Trade (Cato Institute, 2027).
