# What does trade deficit really mean?

I watched a video about how if America imports USD 1m worth of goods but only exports USD 600k worth of goods, there is a USD 400k debt to other countries if the other country allows this deficit.

US importers pay for the value of the goods they import. So why is there debt? Doesn't the US pay in USD the full value based on the transaction? Why would importing have anything to do with exporting, also why would anyone "exchange" goods for credit with somebody that already is USD 18 trillion in debt?

• What if we went to China and said, "Instead of us paying you 600m USD in full for your goods, how about we just give you a piece of paper that entitles you at some point in the future to come take some of our US goods? Say, \$1 worth of US goods." That sounds like debt to me. But that paper is the same thing as a \$1 bill. This is one sense in which you could think of the trade deficit as representing actual indebtitude. Mar 16 '15 at 3:23
• @NickJ interested in converting comment to answer? Sep 4 '17 at 8:53

Every country has a trade balance, which is defined as exports minus imports. The United States is a typical observing state, which means their imports are higher than their exports. I do not know the current numbers but USD 1m of imports and USD 600k might be right. In this sense you import USD 400k than you export. Now as you already pointed out you have to pay you imports in USD. Now the point NickJ mentioned is insofar important as to understand what you are actually entitled when holding USD. And all you are entitled to is to buy products within the United States. True, you as a single person could change it into another currency, but this does not change the fact that some else is holding USD and is sooner or later going to demand goods in USD.

So it is correct that in some sense running a trade deficit really brings debt to a country.

However, one has to understand that running a trade deficit is not only indebting. In some way it is a credit for future production and consequently employment. The debt you are causing when running a trade deficit can also be seen as in some way storing demand for US products which in some point in the future will be carried out.

Say it's Japan with whom the US has a trade deficit of \$400,000 this year. This means that this year, the US gave Japan \$400,000 more green pieces of paper than Japan gave the US.

If the Japanese are silly, then they might just sit on this huge pile of green paper and never make use of it.

But more likely, the Japanese will in the future use this money to buy goods and services from the US. At which point the US must repay its debt of \$400,000 in the form of goods and services. This is a form of intertemporal trade. This year, the US is borrowing from Japan a net total of \$400,000 worth of goods and services. In the future, the US must repay this debt.

What if we went to China and said, "Instead of us paying you 600m USD in full for your goods, how about we just give you a piece of paper that entitles you at some point in the future to come take some of our US goods? Say, \$1 worth of US goods." That sounds like debt to me. But that paper is the same thing as a$1 bill. This is one sense in which you could think of the trade deficit as representing actual indebtitude.

(Originally a comment from @NickJ)