Are US Property Rights Contributing to the Trade Deficit?

The United States has relatively strong property rights protections compared to other nations.  According to the Economic Freedom of the World Index, the US remains in the top quartile when it comes to property rights protection (although the absolute score has fallen in recent years).  Could this ranking be contributing to the US’ global trade deficit, and especially that with China?

When looking at international trade accounts, what is typically reported on is the trade balance or current account.  This is, generally, the amount of goods/services imported and exported between two countries.*  However, there is an opposite side to the coin here that is less discussed: the capital account or the importation/exportation of asset ownership between countries.  Asset ownership includes things like real estate, ownership of firms, etc.  By definition, the current account and the capital account must sum to zero.  In other words, foreigners sell to us in order to buy either US made goods/services or US assets.  If the US has a trade deficit (more imports being sold to US buyers coming in then exports being sold to foreign buyers going out), then the US must necessarily have a capital account surplus (more assets being bought in the US by foreigners then US citizens buying foreign assets).

So, where do property rights play in?  Property has long been a good vehicle for saving as it literally provides shelter and typically has some value.  As with any nation that gets wealthier, the wealthy people in China are looking for safe yet productive ways to invest and save.  Property does not play that role in China.  Much of Chinese property is, at best, leased from the government; it cannot be outright owned.  What can be owned, however, is always at risk from nationalization or appropriation from the Chinese government, especially if one becomes a political target.

In the US, property rights are much more secure.  Except under few conditions, and with compensation, the US government cannot just appropriate property to itself.  Property is easily transferable, either by sale or by inheritance or gift, in the US.  The US has a strong rental market, meaning they can earn rents, and the police generally enforce property rights from burglary and fraud.  In short, property is generally safe in the US.**

If a Chinese person wanted to put money in property as a means of saving, putting money in his own country would not necessarily make sense given their instability when it comes to property rights.  S/he may be more interested in investing in the US.  In order to do this, however, they would need US dollars.  US dollars are acquired by selling goods in the US.  The Chinese person then, instead of using those dollars to buy American-made goods/services, invest in the American economy by buying real estate and turning them into investment properties, an option not easily available to them in China.

Trade deficits are not, prima facie, a reason for worry.  they do not mean that the economy is weak or weakening.  Indeed, just the opposite: in the above discussion, the trade deficits exist precisely because the US economy is strong!

*It’s slightly more complicated than this, but for our purposes here that does not matter.

**Of course, a glaring exception to this is the abomination known as civil asset forfeiture, but even that is restricted in the US and, God willing, on its way out