Final answer:
A country can sustain trade deficits if investments of borrowed funds lead to high economic returns. However, historical examples like those from Latin America show that without adequate productivity gains, such deficits can cause financial troubles.
Step-by-step explanation:
It is possible for a country with debt today to perpetually run trade deficits if the returns on its foreign assets are sufficiently high relative to its liabilities. A nation can avoid potential economic distress from running continuous trade deficits if it invests borrowed funds in projects or assets that generate higher productivity and economic returns than the cost of its borrowing. However, historical experiences, such as those of Latin American countries like Mexico and Brazil in the 1970s, show that trade deficits funded by borrowing can lead to significant financial issues if the investments do not yield sufficient productivity gains.
Without such gains, countries face difficulties repaying debts, particularly when global economic conditions change. An ideal scenario for any nation would be to have both a trade surplus and a healthy inflow of capital, though this is challenging because it requires an export increase and an import reduction, often influenced by currency valuation changes.