What Is a Debtor Nation?

Debtor nation is a nation with a cumulative balance of payments deficit. 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.

Key Takeaways

  • A debtor nation is one that in aggregate imports more than in exports, and is the opposite of a creditor nation.
  • Debtor nations run current account deficits and experience a negative balance of trade against other nations.
  • The United States is currently the world's largest debtor nation with a current account deficit of around half a trillion dollars.

Understanding Debtor Nations

Debtor nation is a term that refers to a nation whose debts to other countries exceed its foreign investments. A debtor is a 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 a current account deficit in the aggregate; however, it may run deficits or surpluses with individual countries or territories depending on the types of goods and services traded, 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 2006, The United States was the world's biggest debtor nation, posting a trade deficit of more than $61 billion and total debt of trillions of dollars. A trade deficit is an economic measure of international trade in which a country's imports exceed its exports.

One of the biggest contributors to America's status as debtor 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‚Äôs 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 imports isn't always negative as it also 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. 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 2016, U.S. exports were $2.2 trillion and imports were $2.7 trillion, making the trade deficit approximately $500 billion. In other words the United States imported $500 billion more than it exported.