What Makes the US Trade Deficit a Capital Magnet

The power of the U.S. economy lies in its entrepreneurship, its work ethic and a relatively light government hand, particularly as it relates to regulations and taxes. This allows the U.S. to punch well above its population weight. We are home to the world’s most innovative companies of the past 20 years; 50 percent of the global value of publicly traded stocks and private equity funds; the largest and most profitable financial companies; the most dominant tech firms; 21 percent of global oil production; the world’s greatest medical centers and universities; and perhaps 45 percent of the world’s discretionary GDP. All of this is generated by just 4.2 percent of the world’s population and is why you should not bet against the U.S. economy over the long term. Critically, real estate ownership is a long-term bet on the demand created by this economy.

From 1980-2000, the U.S. and the other members of the G7 had roughly equal growth (about 1.5 percent per annum) in output per hour worked. Since 2000, this growth continued for the U.S. but slowed significantly for other G7 members, resulting in a roughly 33 percent additional gap in output per hour worked.

Similarly, the highest-performing members of the G7 saw their overall productivity grow by about half as much as the U.S. since 2000, while other members saw modest declines in productivity over the same period. This has resulted in non-U.S. G7 members having a roughly 18 percent additional productivity deficit versus the U.S.

The simple truth is that our trade deficit reflects the fact that the U.S. is by far the world’s most desirable place in which to invest. If our trade deficit disappeared, it would mean that we have lost our unique attractiveness as an investment destination. And by the way, research clearly shows that tariffs and trade barriers over history had no notable impact on the U.S. trade deficit. This is because such restrictions do nothing to eliminate the fundamental attractiveness of the U.S. as the best place in the world to invest.

Our trade deficit binds countries closer to the U.S. than any embassy, ambassador or network of public servants.

The U.S. trade deficit does not exist because of widespread unfair trade practices by other nations. I’ve heard this cry our entire lives, but this narrative fails a common-sense test. To say that the largest and most powerful economy in the history of the world constantly faces disadvantageous trade terms, even with the weakest countries in the world, makes no sense. The empires of the Romans, Ottomans, British, Russians, etc., did not suffer from adverse trade terms.

To better understand the source of our trade deficit, conduct this simple thought experiment. If you won $500 million in the lottery, would you feel the need to invest in Kenya, Saudi Arabia, Guyana or Thailand? I seriously doubt it. You would invest the majority of this windfall in U.S. assets. Similarly, if you were a Kenyan, Saudi, Guyanese or Thai who won $500 million in their national lottery, you would invest little of it in your home market. Instead, you would also try to invest the bulk of your windfall in U.S. assets.

This has been true all our lives and hopefully continues ad infinitum. It reflects the relative transparency, integrity and quality of U.S. investment markets. This is why we have a capital surplus (trade deficit). Our trade deficit binds countries closer to the U.S. than any embassy, ambassador or network of public servants.

If our trade deficit disappeared, it would mean that we have lost our unique attractiveness as an investment destination.

Understand that to invest in the U.S., foreigners must sell us more goods and services than they purchase from us. They then channel the net dollars (the trade deficit, which exactly equals the capital surplus) into buying something they value more than our goods and services (even though our goods and services are quite good), namely, our assets. When foreigners invest here, they create tens of thousands of jobs in the U.S. financial services sector which processes and manages these foreign asset purchases. So, our trade deficit creates (not destroys) jobs.

The lust for manufacturing, which drives the prevailing anti-trade-deficit political narrative longs for a bygone era that never existed. Just as the now-beloved farm life of the early 1900s was brutal and harsh, in stark contrast to the misty nostalgia of books and movies, so too the manufacturing era of 1940 to1970 was polluted and dangerous. I saw the factories of this era up close as I grew up in Lima, Ohio, in the 1950s and 1960s. Working conditions were appalling, and pay and benefits were poor. Men (mostly) were truly worn out and broken down by these jobs by their mid-50s. Thankfully these jobs are gone, and people now work in hospitals, education, modern factories, etc.

As a result, while real GDP per capita (2024 dollars) was just $21,000 when I was born in March 1951, it is over $89,000 today. Living standards of almost all Americans have soared as farming and manufacturing have become a much smaller share of our economy and human capital has been put to higher productivity usages. In addition, lives are far safer and healthier.

So, long live the U.S. trade deficit!

Dr. Peter Linneman is a principal & founder of Linneman Associates (www.linnemanassociates.com), Professor Emeritus at the Wharton School of Business, University of Pennsylvania, author of “Real Estate Finance and Investments: Risks and Opportunities,” and co-author of “The Great Age Reboot: Cracking the Longevity Code for a Longer Tomorrow.” Follow Dr. Linneman on X: @P_Linneman

Read the May 2025 issue of CPE.

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