Cheap goods and lost paychecks landed on the same households – and the lost paychecks are at the root of the cost-of-living crisis. Trade with China raised the average household’s purchasing power by roughly $1,500 between 2000 and 2007, while a manufacturing worker heavily exposed to Chinese import competition lost cumulative earnings equal to 46% of a year’s pay.
America pays its import bill by selling pieces of the country, and the bill is compounding. The net international investment position (NIIP) — what America owns abroad minus what the world owns here — deteriorated from -$7.3 trillion to -$27.5 trillion in a decade. The U.S. borrowed roughly $7.5 trillion through current-account deficits over that period, yet its net debtor position deepened by $20 trillion.
The discounts were financed by the production base itself. Manufacturing has fallen from 23% of GDP in 1970 to 9% in 2025, and factory employment from 17.2 million in 2000 to 12.6 million today. Displaced workers moved into lower-paid service work that now accounts for nearly three-quarters of the economy.
What wages no longer cover, households now borrow. Labor’s share of income fell to 51% of gross domestic income in early 2026, its lowest since 1947, while corporate profits took 12.1%, their highest share since 1950. Household debt reached a record $18.8 trillion, up $4.6 trillion since 2019.
Cheap Goods as the Point of Trade
Two headlines from one week in June juxtapose the American economy’s strange bargain. The Bureau of Labor Statistics reported that rising prices had wiped out a year and a half of wage gains for the average worker; meanwhile, two days later, SpaceX’s market debut made Elon Musk the world’s first trillionaire.
The week was an extreme case of a long trend. Labor’s share of national income hit a record low in the first quarter, while the fortunes of the richest handful of Americans reached about 12% of annual output, four times the Gilded Age share. The market’s champions embody the split: Nvidia is worth nearly twenty times what IBM was at its 1985 peak, adjusted for inflation, with roughly a tenth of the workforce (Figure 1).
FIGURE 1:
In January, CPA showed that America’s cost-of-living crisis is a wage problem, not a price problem: the cost of essential services has raced ahead of the median paycheck for 25 years. The question that piece left open is why the paycheck stalled. The trail leads to a bargain Washington struck decades ago, when cheap imports became the whole measure of successful trade policy.
To be sure, the consumer half of the story holds up. Economists Xavier Jaravel and Erick Sager found that trade with China raised the average household’s purchasing power by about $1,500 between 2000 and 2007, and cheap goods remain the one promise the system kept. The echo runs through today’s tariff debate, where the National Retail Federation warns of “dramatic” price spikes and the argument begins and ends at the register. Somewhere along the line, the discount stopped being a byproduct of trade and became the entire endgame.
That is the bargain Washington struck: consumer welfare is maximized by cheap goods. But that only holds if those cheap goods are divorced from your paycheck. They aren’t.
The connection runs through where the import dollars go. Every dollar Americans spend on foreign goods returns to the United States in one of two ways: as demand for American products, or as a claim on American assets (e.g. stocks, bonds, companies, land). There is no third destination. When trading partners spend their dollars on American goods, the exchange supports production and wages here. But when they buy American assets instead, the goods arrive but the demand for American labor never does.
China and the other surplus countries chose assets, recycling their export earnings into U.S. securities rather than U.S. goods. This kept their currencies cheap, promoting export competitiveness and industrial expansion. The flow became one-way: manufactured goods came in, ownership claims went out, and the American production that once anchored middle-class wages had nothing to replace it.
Wages, Not Prices
Consumer welfare is truly maximized by higher wages, and wages rise only when the value of what a nation produces rises. A paycheck’s buying power is a fraction, wages over prices, and for 40 years trade policy worked exclusively on the denominator. The numerator is where the real gains lie. As Michael Pettis argues in the Financial Times, a country consumes, over time, out of what it makes; cheap goods are a byproduct of trade, and organizing the whole system around the byproduct gets cause and effect backwards. Consumption that runs ahead of production has to be financed, and the financing has a price: the goods got cheaper, and the country got poorer on every ledger that measures what it owns and what it makes.
Three structural facts show how:
1. The Trade Deficit Gets Settled in Pieces of America
When the U.S. buys more from the world than it sells, the gap gets paid in stocks, bonds, factories, farmland and office towers. Warren Buffett saw this coming in 2003, when he warned in Fortune that the trade deficit was “selling the nation out from under us” and sketched Squanderville, the island that consumed its way into tenancy. Robert Lighthizer, in an essay The Economist itself published, drew the conclusion: the arrangement trades ownership of the country’s productive future for short-term consumption. The net international investment position (NIIP), the ledger of what America owns abroad minus what the world owns here, hit -$27.5 trillion at the end of 2025. A decade earlier it stood at about -$7.3 trillion (Figure 2).
FIGURE 2:
The claims also compound faster than the borrowing that creates them. Over the decade to 2025, the U.S. borrowed about $8 trillion through cumulative current-account deficits, yet its net debtor position deepened by about $20 trillion. The other $13 trillion is appreciation: the stocks and buildings foreigners already own here gained value faster than the foreign assets Americans hold.
Defenders of the arrangement read a deepening NIIP as a vote of confidence, since the gap widened mostly because American stocks outperformed the world’s. The economists modeling the ledger draw the opposite conclusion.
Kristin Forbes of MIT, working with the Bank for International Settlements, finds the position swung from -11% of GDP in 2007 to a record -91% in 2024, driven by U.S. equities consistently outperforming their foreign counterparts. On her math, the old exorbitant privilege has reversed into what she calls a “generous giveaway” from the U.S. to the wider world. And the gap narrows only if American asset prices fall, which is to say the ledger improves only by destroying the wealth it measures.
2. Cheap Goods Were Paid For With the Production Base
The same inflows that settle the deficit also push the dollar up and price American factories out of world markets. Workers shift from making tradeable goods to serving non-tradeable demand, whatever their preference and whatever the country’s interest. Manufacturing has fallen from about 23% of GDP in 1970 to 9.4% in 2025, and factory employment dropped from 17.2 million in 2000 to 12.6 million today. The displaced workers moved into lower-paid service work, and the economy followed them; services now account for nearly three-quarters of U.S. GDP (Figure 3).
FIGURE 3:
The economics profession documented this cost after the fact. The China Shock research by David Autor, David Dorn and Gordon Hanson found that exposed communities stayed depressed for over a decade, with the offsetting job gains the models promised failing to materialize. Companion work using Social Security records put a household-scale number on it: a manufacturing worker heavily exposed to Chinese import competition lost cumulative earnings equal to 46% of a year’s pay relative to a less-exposed peer, nearly half a year’s income per worker to set against the $1,500 per household in cheaper goods. The heralded consumer benefits materialized. So did the costs, and they landed on the same households.
Income inequality, which had climbed steadily since the mid-1970s, kept climbing to record levels in the decades after China’s WTO entry — with the losses concentrated in the communities most exposed to the shock (Figure 4).
FIGURE 4:
3. The Consumption Is Borrowed, and the Borrowing Shows
A trade deficit can make a country richer when the money builds productive capacity. The 19th-century U.S. ran deficits for decades and grew stronger for it, because foreign capital financed the railroads, steel mills and ports that repaid the borrowing with output. That deficit was a construction loan. Today’s deficit is a store card, i.e. debt run up on consumption, with nothing left behind that earns. When imports displace domestic output and no export demand replaces it, Washington faces a choice between rising unemployment and rising debt, and it chooses debt every time. Household debt reached a record $18.8 trillion at the end of 2025, up $4.6 trillion since 2019 (Figure 5).
FIGURE 5:
The capital inflows that finance all this build remarkably little. Foreign investors bought a net $1.62 trillion of long-term U.S. securities (stocks and bonds) in 2025, per Treasury data, up from $1.18 trillion the year before. The textbook defense says those savings fund American investment, but S&P 500 firms spent a record $1.02 trillion buying back their own shares in the year to September 2025 while holding record cash. Companies returning that much to shareholders don’t need foreign savings to build plants. So the inflows fund buybacks, dividends and asset prices, because those are the sectors where American growth now lives: finance and real estate is the country’s biggest industry, at $6.8 trillion of value added, more than double manufacturing’s share.
Wall Street wins on every leg of the trade. The inflows bid up the assets it sells and lends against, and asset bubbles become the growth model.
The national accounts record who wins. Labor’s share of income fell to 51% of gross domestic income in the first quarter of 2026 — its lowest since 1947, and the record low where this piece began — while corporate profits took a record 12% (Figure 6). Trade is one force among several behind that slide, alongside automation and market concentration, but it works through the channel this piece describes: shrink the tradeable sector and you shrink the jobs that paid production workers a premium. An economy that sells a rising share of its assets abroad to cover its import bill can grow richer on paper while its households fall behind. June’s split screen: a trillionaire minted by an IPO, as all the while real wages fell, is that arithmetic surfacing as news.
FIGURE 6:
Workers lose the factory jobs. Farmers lose export markets to an overvalued dollar. And the consumer, the system’s supposed beneficiary, ends up holding a cheaper T-shirt and a share of the compounding national IOU.
Measure What America Makes
Trade policy should be judged by what it does to the value of American production. Trade structured to support production raises productivity, and rising productivity raises the incomes that fund consumption durably, out of earnings instead of borrowing. That is the only durable answer to the cost-of-living crisis: paychecks that can carry the price of housing, healthcare, and childcare. Consumers get their bargain at the end of that chain, and they keep it.
Washington’s scoreboard should match that standard. Track manufacturing’s share of output and the tradeable jobs base. Above all, track the NIIP, the national credit report, the line that records what three decades of cheap consumption cost. The Bureau of Economic Analysis already publishes it every quarter; policymakers simply never read it into the debate. The register price of a T-shirt was one number on a long ledger. Washington should read to the bottom line.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
The Trade Bargain Behind America’s Cost-of-Living Crisis
KEY POINTS
Cheap Goods as the Point of Trade
Two headlines from one week in June juxtapose the American economy’s strange bargain. The Bureau of Labor Statistics reported that rising prices had wiped out a year and a half of wage gains for the average worker; meanwhile, two days later, SpaceX’s market debut made Elon Musk the world’s first trillionaire.
The week was an extreme case of a long trend. Labor’s share of national income hit a record low in the first quarter, while the fortunes of the richest handful of Americans reached about 12% of annual output, four times the Gilded Age share. The market’s champions embody the split: Nvidia is worth nearly twenty times what IBM was at its 1985 peak, adjusted for inflation, with roughly a tenth of the workforce (Figure 1).
FIGURE 1:
In January, CPA showed that America’s cost-of-living crisis is a wage problem, not a price problem: the cost of essential services has raced ahead of the median paycheck for 25 years. The question that piece left open is why the paycheck stalled. The trail leads to a bargain Washington struck decades ago, when cheap imports became the whole measure of successful trade policy.
The bargain has a distinguished pedigree. Washington has treated low prices as the point of trade since Milton Friedman told a 1978 lecture audience: “The gain from foreign trade is what we import. What we export is the cost of getting those imports.” The Peterson Institute later put a number on the prize, $2.6 trillion a year in gains since 1950, and Bill Clinton sold China’s World Trade Organization (WTO) entry to Congress as gains without costs.
To be sure, the consumer half of the story holds up. Economists Xavier Jaravel and Erick Sager found that trade with China raised the average household’s purchasing power by about $1,500 between 2000 and 2007, and cheap goods remain the one promise the system kept. The echo runs through today’s tariff debate, where the National Retail Federation warns of “dramatic” price spikes and the argument begins and ends at the register. Somewhere along the line, the discount stopped being a byproduct of trade and became the entire endgame.
That is the bargain Washington struck: consumer welfare is maximized by cheap goods. But that only holds if those cheap goods are divorced from your paycheck. They aren’t.
The connection runs through where the import dollars go. Every dollar Americans spend on foreign goods returns to the United States in one of two ways: as demand for American products, or as a claim on American assets (e.g. stocks, bonds, companies, land). There is no third destination. When trading partners spend their dollars on American goods, the exchange supports production and wages here. But when they buy American assets instead, the goods arrive but the demand for American labor never does.
China and the other surplus countries chose assets, recycling their export earnings into U.S. securities rather than U.S. goods. This kept their currencies cheap, promoting export competitiveness and industrial expansion. The flow became one-way: manufactured goods came in, ownership claims went out, and the American production that once anchored middle-class wages had nothing to replace it.
Wages, Not Prices
Consumer welfare is truly maximized by higher wages, and wages rise only when the value of what a nation produces rises. A paycheck’s buying power is a fraction, wages over prices, and for 40 years trade policy worked exclusively on the denominator. The numerator is where the real gains lie. As Michael Pettis argues in the Financial Times, a country consumes, over time, out of what it makes; cheap goods are a byproduct of trade, and organizing the whole system around the byproduct gets cause and effect backwards. Consumption that runs ahead of production has to be financed, and the financing has a price: the goods got cheaper, and the country got poorer on every ledger that measures what it owns and what it makes.
Three structural facts show how:
1. The Trade Deficit Gets Settled in Pieces of America
When the U.S. buys more from the world than it sells, the gap gets paid in stocks, bonds, factories, farmland and office towers. Warren Buffett saw this coming in 2003, when he warned in Fortune that the trade deficit was “selling the nation out from under us” and sketched Squanderville, the island that consumed its way into tenancy. Robert Lighthizer, in an essay The Economist itself published, drew the conclusion: the arrangement trades ownership of the country’s productive future for short-term consumption. The net international investment position (NIIP), the ledger of what America owns abroad minus what the world owns here, hit -$27.5 trillion at the end of 2025. A decade earlier it stood at about -$7.3 trillion (Figure 2).
FIGURE 2:
The claims also compound faster than the borrowing that creates them. Over the decade to 2025, the U.S. borrowed about $8 trillion through cumulative current-account deficits, yet its net debtor position deepened by about $20 trillion. The other $13 trillion is appreciation: the stocks and buildings foreigners already own here gained value faster than the foreign assets Americans hold.
Defenders of the arrangement read a deepening NIIP as a vote of confidence, since the gap widened mostly because American stocks outperformed the world’s. The economists modeling the ledger draw the opposite conclusion.
Kristin Forbes of MIT, working with the Bank for International Settlements, finds the position swung from -11% of GDP in 2007 to a record -91% in 2024, driven by U.S. equities consistently outperforming their foreign counterparts. On her math, the old exorbitant privilege has reversed into what she calls a “generous giveaway” from the U.S. to the wider world. And the gap narrows only if American asset prices fall, which is to say the ledger improves only by destroying the wealth it measures.
2. Cheap Goods Were Paid For With the Production Base
The same inflows that settle the deficit also push the dollar up and price American factories out of world markets. Workers shift from making tradeable goods to serving non-tradeable demand, whatever their preference and whatever the country’s interest. Manufacturing has fallen from about 23% of GDP in 1970 to 9.4% in 2025, and factory employment dropped from 17.2 million in 2000 to 12.6 million today. The displaced workers moved into lower-paid service work, and the economy followed them; services now account for nearly three-quarters of U.S. GDP (Figure 3).
FIGURE 3:
The economics profession documented this cost after the fact. The China Shock research by David Autor, David Dorn and Gordon Hanson found that exposed communities stayed depressed for over a decade, with the offsetting job gains the models promised failing to materialize. Companion work using Social Security records put a household-scale number on it: a manufacturing worker heavily exposed to Chinese import competition lost cumulative earnings equal to 46% of a year’s pay relative to a less-exposed peer, nearly half a year’s income per worker to set against the $1,500 per household in cheaper goods. The heralded consumer benefits materialized. So did the costs, and they landed on the same households.
Income inequality, which had climbed steadily since the mid-1970s, kept climbing to record levels in the decades after China’s WTO entry — with the losses concentrated in the communities most exposed to the shock (Figure 4).
FIGURE 4:
3. The Consumption Is Borrowed, and the Borrowing Shows
A trade deficit can make a country richer when the money builds productive capacity. The 19th-century U.S. ran deficits for decades and grew stronger for it, because foreign capital financed the railroads, steel mills and ports that repaid the borrowing with output. That deficit was a construction loan. Today’s deficit is a store card, i.e. debt run up on consumption, with nothing left behind that earns. When imports displace domestic output and no export demand replaces it, Washington faces a choice between rising unemployment and rising debt, and it chooses debt every time. Household debt reached a record $18.8 trillion at the end of 2025, up $4.6 trillion since 2019 (Figure 5).
FIGURE 5:
The capital inflows that finance all this build remarkably little. Foreign investors bought a net $1.62 trillion of long-term U.S. securities (stocks and bonds) in 2025, per Treasury data, up from $1.18 trillion the year before. The textbook defense says those savings fund American investment, but S&P 500 firms spent a record $1.02 trillion buying back their own shares in the year to September 2025 while holding record cash. Companies returning that much to shareholders don’t need foreign savings to build plants. So the inflows fund buybacks, dividends and asset prices, because those are the sectors where American growth now lives: finance and real estate is the country’s biggest industry, at $6.8 trillion of value added, more than double manufacturing’s share.
Wall Street wins on every leg of the trade. The inflows bid up the assets it sells and lends against, and asset bubbles become the growth model.
The national accounts record who wins. Labor’s share of income fell to 51% of gross domestic income in the first quarter of 2026 — its lowest since 1947, and the record low where this piece began — while corporate profits took a record 12% (Figure 6). Trade is one force among several behind that slide, alongside automation and market concentration, but it works through the channel this piece describes: shrink the tradeable sector and you shrink the jobs that paid production workers a premium. An economy that sells a rising share of its assets abroad to cover its import bill can grow richer on paper while its households fall behind. June’s split screen: a trillionaire minted by an IPO, as all the while real wages fell, is that arithmetic surfacing as news.
FIGURE 6:
Workers lose the factory jobs. Farmers lose export markets to an overvalued dollar. And the consumer, the system’s supposed beneficiary, ends up holding a cheaper T-shirt and a share of the compounding national IOU.
Measure What America Makes
Trade policy should be judged by what it does to the value of American production. Trade structured to support production raises productivity, and rising productivity raises the incomes that fund consumption durably, out of earnings instead of borrowing. That is the only durable answer to the cost-of-living crisis: paychecks that can carry the price of housing, healthcare, and childcare. Consumers get their bargain at the end of that chain, and they keep it.
Washington’s scoreboard should match that standard. Track manufacturing’s share of output and the tradeable jobs base. Above all, track the NIIP, the national credit report, the line that records what three decades of cheap consumption cost. The Bureau of Economic Analysis already publishes it every quarter; policymakers simply never read it into the debate. The register price of a T-shirt was one number on a long ledger. Washington should read to the bottom line.
REFERENCES
[1] The New York Times. “Wages are Falling. Wealth is Surging. No Wonder Americans are Unhappy.” June 13, 2026.
[2] The Wall Street Journal. “The Record Divide Between Corporate Profits and Worker Pay.” 2026.
[3] Coalition for a Prosperous America. “America’s Cost-of-Living Crisis Is a Wage Problem, Not a Price Problem.” January 6, 2026.
[4] Friedman, Milton. Landon Lecture, Kansas State University, April 27, 1978.
[5] Peterson Institute for International Economics. “America’s Payoff from Engaging in World Markets Since 1950 Was Almost $2.6 Trillion.” 2023.
[6] U.S. Department of State. “Remarks by President Clinton on China’s WTO Accession.” May 24, 2000.
[7] LSE Business Review. “Trade with China Benefited US Consumers.” August 20, 2019.
[8] CNBC. “Trump Tariffs Could Spike Retail Prices, NRF Report Warns.” November 4, 2024.
[9] Pettis, Michael. “Do Consumers Really Benefit From Cheap Imports?” Financial Times.
[10] Buffett, Warren. “America’s Growing Trade Deficit Is Selling the Nation Out From Under Us.” Fortune, 2003.
[11] Coalition for a Prosperous America. “Lighthizer in The Economist: If Trade Deficit Persists Like This, U.S. Will Bleed to Death.”
[12] Bureau of Economic Analysis. “U.S. International Investment Position, 4th Quarter 2025.” 2026.
[13] Forbes, Kristin. “Monetary Policy and Global Imbalances.” January 2026.
[14] Autor, David, David Dorn, and Gordon Hanson. “The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade.” NBER Working Paper 21906, 2016.
[15] Autor, David, et al. “Trade Adjustment: Worker-Level Evidence.” NBER Working Paper 19226, 2013.
[16] U.S. Department of the Treasury. “Treasury International Capital (TIC) System.”
[17] S&P Global. “S&P 500 Q3 2025 Buybacks Post Modest 6.2% Gain to $249.0 Billion.” December 18, 2025.
[18] Federal Reserve Bank of St. Louis (FRED). “Shares of Gross Domestic Income: Compensation of Employees.”
MADE IN AMERICA.
CPA is the leading national, bipartisan organization exclusively representing domestic producers and workers across many industries and sectors of the U.S. economy.
TRENDING
The Trade Bargain Behind America’s Cost-of-Living Crisis
CPA Welcomes FDA Proposal to Expose Hidden Foreign Suppliers in America’s Drug Supply Chain
CPA and Aluminum Extruders Council Urge Treasury to Close Solar “Domestic Content” Loophole
Cancelling Hard-Won Fertilizer Trade Remedies, the Administration Tells Domestic Producers: Don’t Count On Your Home Market
May Trade Deficit of $106.4 Billion is Not as Bad as it Looks
The latest CPA news and updates, delivered every Friday.
WATCH: WORTH FIGHTING FOR
Get the latest in CPA news, industry analysis, opinion, and updates from Team CPA.
CHECK OUT THE NEWSROOM ➔