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The United States is committed to global trade. It creates jobs and lifts up American families. Exports contribute to America's prosperity; imports give us access to all sorts of items such as clothing, electronics, toys, games, wines, and gasoline at low prices.


Problems in global trade start to emerge when we buy more from other countries than we sell to them. This causes a trade deficit. Initially, a trade deficit is not a “bad” thing. Persistent and large trade deficits, however, create long-term harmful consequences.


Warren Buffett explains the problem of the trade deficit in this parable called Squanderville vs. Thriftville:


A trade deficit is created like this:


  • You buy things from overseas until your wallet is empty.

  • After that, you raid your savings account to buy more stuff from abroad.

  • Then, you borrow money from overseas in order to buy even more.

  • You get another loan, and then another.

  • Finally, you have to sell off the tools that you used in making a living to the foreign country just to pay off your debt.


This is exactly where America is now. We have been buying more than we have been selling for decades. In the past few years, our trade deficit has tripled. Our trading partners have collected so many U.S. dollars from the goods that we have imported that they have been able to buy expensive American assets like the Rockefeller Center, Pebble Beach Golf Club, and Columbia Pictures. Worse yet, our trading partners now lend U.S. dollars back to the U.S. and our government is using these borrowed dollars to live beyond our means.


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