Debtor Nation: What it Means, How it Works (2024)

What Is a Debtor Nation?

Debtor nation is a nation with a cumulative balance of payments deficit and or a negative net international investment position. A debtor nation has a negative net investment after recording all of the financial transactions it has completed worldwide. Thus, a debtor nation is a net importer.

Debtor nations may be contrasted with creditor nations.

Understanding Debtor Nations

Debtor nation is a term that refers toa nation whose debts to other countries exceed its foreign investments. A debtor isa person or entity legally required to provide a payment, service, or other benefit to another person or entity. Debtors are often also called borrowers or obligors in contracts. A net debtor nation, by definition, runs acurrent accountdeficit in the aggregate; however, it may run deficits or surpluses with individual countries or territories depending on the types of goods and services traded, the competitiveness of these goods and services,exchange rates, levels of government spending, trade barriers, etc.

Nations that have invested fewer resources than the rest of the world has invested in them are known as debtor nations. In July 2023, The United States is one of the top five world's biggest debtor nations, posting a trade deficit of $65 billion. A trade deficit is an economic measure of international trade in which a country's imports exceedits exports. The U.S. net international investment position was $16.75 trillion as of the first quarter of 2023.

The U.S. status as the one of world's largest debtor nations is due to the central position that the U.S. plays in the world's monetary and financial systems. The U.S. dollar is the world's primary reserve currency and medium of exchange for settling international trade. This translates into enormous world demand to hold U.S. dollars (and close substitutes like U.S. Treasury debt) outside the U.S., and since the U.S. dollar is a debt instrument, this produces a large negative investment balance and balance of payments for the U.S.

One major way in which America's status as a global debtor manifests visibly is the availability of inexpensive manufacturing capabilities in China, as more and more U.S.-based businesses spend vast amounts of money in China for that purpose. Another major contributor is the large amount of U.S. debt held by China in the form of Treasury bonds. Other debtor nations include Greece, Spain, Portugal, Brazil, and India.

Debt and Trade

A debtor nation will have a negative balance of trade, or trade deficit, because the amount of money coming into the country from outsides sources is greater than the amount of money and exports the country sends out.

A trade deficit typically occurs when a country’s production cannot meet its demand, and therefore imports from other nations increase. An increase in imported goods from other countries decreases the price of consumer goods in the nation as foreign competition increases. An increase in importsisn't always negative as italso increases the variety and options of goods and services available to residents of a country. A fast-growing economy might import more as it expands to allow its residents to consume more than the country can produce.

The U.S. became a debtor nation in 1985, and the trade deficit has been growing for the past few decades, which has some economists worried. Foreign nations hold a substantial number of U.S. dollars, and those nations could decide to sell those dollars at any time. A substantial increase in dollar sales could devalue U.S. currency making it more expensive to purchase imports. In July 2023, U.S. exports were $251.7 billion and imports were $316.7 billion, making the trade deficit $65 billion. In other words, the United States imported $65 billion more than it exported.