The US trade deficit and foreign borrowing: How long can it continue?

The United States has run significant external deficits for half a century and the associated net international liabilities have been growing, especially recently. Yet, in contrast to earlier periods when the deficit was rising, few economists have expressed concerns about external sustainability lately. This paper explores the drivers and risks associated with the deficits. The most persistent driver of US deficits is the attractiveness of US financial assets to foreign investors owing to the central role of the dollar in international transactions and to the perceived safety and creativity of US financial markets. Although it is likely that the US net liability position is overstated, it is clearly on an unsustainable path. President Donald Trump’s tariff war is raising uncertainty and frightening investors, a combination that may indeed reduce the trade deficit by slowing US economic growth and depreciating the dollar. However, this strategy puts at risk the longstanding ability of the United States to finance external debt at low cost, increasing the burden on future generations.