What happens to the US dollars used to buy imports?

When we as US citizens use our income, whether labor or capital income, to buy a product from another country, those US dollars are remitted to a bank. Now the bank may be in the United States or in a foreign country.

If the US dollars are remitted to a foreign bank, that bank pays the exporter in local currency, and then sends those US dollars to that country’s central bank in exchange for local currency. The central bank of the foreign country then holds the US dollars in their Foreign Exchange Reserves.

The US dollars in the foreign exchange reserves can be used for investment anywhere, in Europe for example. Now Europe holds US dollars in their foreign exchange reserves.

What happens to those US dollars? Do they stay overseas? Do they ever come back? Some are used to buy our exports, but since we have a trade deficit, many of those US dollars remain overseas. This would result in an imbalance. However, through the Balance of Payments mechanisms, imbalances in the foreign exchange reserves can be corrected.

“When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries.” (Wikipedia)

Thus, we see that those US dollars that leaked out of the US economy from purchases of imports by labor or capital are counterbalanced in various ways, including foreign investment in the United States, loans from foreigners and the actions of foreign central banks. One reason why a foreign central bank would use its foreign exchange reserves of US dollars is to protect its own currency.

The purpose of writing this quick post is to show that US dollars going to imports are not lost. They don’t disappear. There are mechanisms to keep them balanced within the global presence of the US economy. An accounting of the US economy that keeps track of those US dollars in foreign exchange reserves would be considered more complete.