In his introductory textbook Principles of Economics, Greg Mankiw explains (Chapter on Open-Economy Macroeconomics) the balance of payments identity that “net capital outflow (NCO) must always equal net exports (NX): NCO = NX.”
In other words, a trade deficit with another country is balanced perfectly by a capital inflow from that country. If I buy a doll from China, then China acquires dollars (U.S. asset) that can be used to purchase U.S. Treasuries, stocks, or goods. It’s an equal goods for money trade.
We are not being "ripped off".
One can think about the trade at a more granular level in terms of costs and benefits. In China the doll manufacturer makes a profit on selling the doll. If the manufacturer takes the dollars and buys U.S. Treasuries, then the U.S. government benefits. In China, workers at the doll manufacturing plant benefit in terms of jobs and wages. In the U.S., consumers benefit from cheaper dolls.
Who is hurt? The U.S. doll manufacturers and workers have lost a purchase to China. In China, the money could have been used to buy Chinese bonds.
With any economic transaction there are winners and losers within a country. If a policy change (e.g. letting China into WTO) results in one class of winners and one class of losers, then a simple remedy is transfer from the winners to the losers. For example, if China used their trade surplus to buy U.S. financial instruments, then the winners were Wall Street and the losers were manufacturers and labor in the Midwest.
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