Is the U.S. trade deficit unsustainable?
The U.S. trade deficit is the consequence of the U.S. being the largest and wealthiest economy in the world. As long as the American economy remains strong and competitive, it should not be a concern for investors.
The U.S. trade deficit is the consequence of the U.S. being the largest and wealthiest economy in the world, as well as being one of the most rational economies — in the sense that most economic decisions are made by rational corporations, unlike many other economies where central planning and government intervention ultimately lead to economic imbalances and risks.
As long as the U.S. remains an attractive market for equity investors, bond investors and real estate investors, the U.S. will have no problems offsetting the trade balance deficit with capital inflows. Furthermore, while the U.S. has a large trade deficit in goods (~USD 1.4 trillion per year) that is growing at about 14% p.a., it has a rising trade surplus in services (~USD 300bn p.a.) that is growing at about 17% p.a., led by technology.
As long as the American economy remains strong and competitive, capital inflows to the United States will continue. The U.S. trade deficit should therefore not be a concern for investors, and certainly not a reason to avoid U.S. bonds or U.S. equities.