The United States as a Net Debtor Nation: Overview of the International Investment Position

Order Code RL32964 CRS Report for Congress Received through the CRS Web The United States as a Net Debtor Nation: Overview of the International Investment Position Updated August 30, 2005October 18, 2007 James K. Jackson Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division Congressional Research Service ˜ The Library of Congress The United States as a Net Debtor Nation: Overview of the International Investment Position Summary The international investment position of the United States is an annual measure of the assets Americans own abroad and the assets foreigners own in the United States. The net position, or the difference between the two, sometimes is referred to as a measure of U.S. international indebtedness. Although this designation is not strictly correct, the net international investment position does reveal the difference between the total assets Americans own abroad and total amount of assets foreigners own in the United States. These assets generate flows of capital into and out of the economy that have important implications for the value of the dollar in international exchange markets. Some Members of Congress and some in the public have expressed concerns about the U.S. net international investment position because of the role foreign investors are playing in U.S. capital markets and the potential for large outflows of income and services payments. Some observers also argue that the U.S. reliance on foreign capital inflows leaves the economy vulnerable to financial crises. This report will be updated as events warrant. Contents Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Valuing Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Investment Patterns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 International Investment: Sources and Economic Impact . . . . . . . . . . . . . . . . . . . 89 Congressional Response . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 List of Figures Figure 1. U.S. Direct Investment Abroad: Estimated Value of Accumulated Position, 1982-2004 .2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 2. Foreign Direct Investment in the United States: Estimated Value Value of Accumulated Position, 1982-20042006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Figure 3. U.S. Investment Position Abroad and Foreign Investment Position Position in the United States, 1983-20041994-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 4. Foreign Official and Private Investment Positions in the United States, 1983-2004 1994-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 5. U.S. and foreignForeign Investment Position, Byby Major Component, 20042006 . . . 8 Figure 6. U.S. Income Receipts and Payments on U.S.-Owned Assets Abroad and and on Foreign-Owned Assets in the United States, 20042006 . . . . . . . . . . . . . . . . 12 List of Tables Table 1. U.S. International Investment Position . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Table 2. U.S. International Investment Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Table 3. Saving and Investment in Selected Countries and Areas; 1990-1996 and 2004 1993-2000 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Table 4. Estimates of Wealth in the United States, 2003 Current2005Current-Cost, Gross Stock Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 The United States as a Net Debtor Nation: Overview of the International Investment Position Background The U.S. international investment position represents the accumulated value of U.S.-owned assets abroad and foreign-owned assets in the United States measured on an annual basis at the end of the calendar year. Some observers refer to the net of this investment position (or the difference between the value of U.S.-owned assets abroad and the value of foreign-owned assets in the United States) as a debt, or indicate that the United States is in a net debtor position, because the value of foreign-owned assets in the United States is greater than the value of U.S.-owned assets abroad. In fact, the nation’s international investment position is not a measure of the nation’s indebtedness similar to the debt borrowed by some developing countries, but it is an accounting of assets. By year-end 20042006, the latest year for which data are available, the overseas assets of U.S. residents totaled approximately $8.712 trillion, while foreigners had acquired about $11.314.8 trillion in assets in the United States, with direct investment measured at historical cost. As a result, the U.S. net international investment position was about $2.6 trillion in the negative, as indicated in Table 1. Foreign investors who acquire U.S. assets do so at their own risk and accept the returns accordingly, unlike the debt owed by developing countries where debt service payments are guaranteed in advance. The returns on the assets in the investment position, except for bonds, are not guaranteed and foreign investors gain or lose on them similar to the way U.S. domestic investors gain or lose. As Table 1 indicates, these investments include such financial assets as corporate stocks and bonds, government securities, and direct investment1 in businesses and real estate. The value of these assets, measured on an annual basis, can change as a result of purchases and sales of new or existing assets; changes in the financial value of the assets that arise through appreciation, depreciation, or inflation; changes in the market values of stocks and bonds; or changes in the value of currencies. The 1 The United States defines foreign direct investment as the ownership or control, directly or indirectly, by one foreign person (individual, branch, partnership, association, government, etc.) of 10% or more of the voting securities of an incorporated U.S. business enterprise or an equivalent interest in an unincorporated U.S. business enterprise. 15 CFR § 806.15 (a)(1). Similarly, the United States defines direct investment abroad as the ownership or control, directly or indirectly, by one person (individual, branch, partnership, association, government, etc.) of 10% or more of the voting securities of an incorporated business enterprise or an equivalent interest in an unincorporated business enterprise. 15 CFR § 806.15 (a)(1). CRS-2 Department of Commerce also uses three different methods for valuing direct investments that yield roughly comparable estimates for the net position, although the three methods do provide estimates on U.S. direct investment abroad and foreign direct investment that can be considerably different at times8 trillion in the negative with direct investment measured at historical cost, as indicated in Table 1. Table 1. U.S. International Investment Position (in millionsbillions of dollars) Type of Investment 2001 20022003 Net international investment position of the United States: With direct investment at current cost -1,919,430 -2,107,2672,140.4 With direct investment at market value -2,339,448 -2,455,114.6 With direct investment at historical cost -1,977,688 -2,178,4822,232.6 U.S.-owned assets abroad: With direct investment at current cost 6,308,681 6,645,6797,643.5 With direct investment at market value 6,930,484 6,807,8498,318.2 With direct investment at historical cost 6,075,950 6,401,7617,380.9 U.S. official reserve assets 129,961 158,602183.6 U.S. Government assets, other 85,654 85,30984.8 U.S. private assets: With direct investment at current cost 6,093,066 6,401,7687,375.1 With direct investment at market value 6,714,869 6,563,9388,049.8 With direct investment at historical cost 5,860,335 6,157,8507,112.6 Direct investment abroad: — At current cost 2,054.5 — At market value 2,729.1 — At historical cost 1,791.9 2004 2005 2006 -2,294.4 -2,396.7 -2,485.3 -2,296.3 -2,199.0 -2,422.2 -2,598.6 -2,199.4 -2,759.8 9,257.1 10,130.0 8,844.7 189.6 83.1 10,386.3 11,421.4 9,986.6 188.0 77.5 12,517.4 14,039.6 12,045.8 219.9 72.2 8,984.4 9,857.3 8,572.0 10,120.7 11,155.8 9,721.0 12,225.4 13,747.6 11,753.8 2,463.6 3,336.4 2,051.2 2,535.2 3,570.3 2,135.5 2,855.6 4,377.8 2,384.0 CRS-2 Type of Investment 2003 2004 2005 2006 Foreign securities 2,953.8 3,553.4 4,345.9 5,432.3 Bonds 874.4 993.0 1,028.2 1,180.8 Corporate stocks 2,079.4 2,560.4 3,317.7 4,251.5At current cost 1,693,131 1,860,418 At market value 2,314,934 2,022,588 At historical cost 1,460,400 1,616,500 Foreign securities 2,169,735 2,079,891 Bonds 557,062 705,226 Corporate stocks 1,612,673 1,374,665 U.S. claims by US nonbanking concerns 839,303 902,002594.0 737.6 734.0 848.5 U.S. claims reported by US banks 1,390,897 1,559,457772.9 2,229.8 2,505.6 3,089.0 Foreign-owned assets in the United States: With direct investment at current cost 8,228,111 8,752,946 With direct investment at market value 9,269,932 9,262,963 With direct investment at historical cost 8,053,638 8,580,243 Foreign official assets in the United States 1,109,072 1,250,977 Foreign private assets: With direct investment at current cost 7,119,039 7,501,969 With direct investment at market value 8,160,860 8,011,986 With direct investment at historical cost 6,944,566 7,329,266 Direct investment in the United States: At current cost 1,518,473 1,517,403 At market value 2,560,294 2,027,420 At historical cost 1,344,000 1,344,700 U.S. Treasury securities 375,059 473,503 U.S. other securities 2,821,372 2,779,067 Corporate and other bonds 1,343,071 1,530,982 Corporate stocks 1,478,301 1,248,085 U.S. currency 279,755 301,268 U.S. liabilities by U.S. nonbanking concerns 798,314 892,574 U.S. liabilities reported by U.S. banks 1,326,066 1,538,154 Source: Nguyen, Elena L., The International Investment Position of the 2004, Survey of Current Business, July 2005. p. 37. 2003 2004 -2,156,703 -2,484,219 -2,372,370 -2,542,245 -2,252,156 -2,605,028 7,640,986 8,296,638 7,370,335 183,577 84,772 9,052,796 9,972,783 8,749,410 189,591 83,556 7,372,637 8,028,289 7,101,986 8,779,649 9,699,636 8,476,263 2,062,551 2,718,203 1,791,900 2,953,778 874,356 2,079,422 596,961 1,759,347 2,367,386 3,287,373 2,064,000 3,436,718 916,655 2,520,063 801,536 2,174,009 9,797,689 11,537,015 10,669,008 12,515,028 9,622,491 11,354,438 1,567,124 1,981,992 8,230,565 9,555,023 9,101,884 10,533,036 8,055,367 9,372,446 1,585,898 2,457,217 1,410,700 543,209 3,408,113 1,707,206 1,700,907 317,908 454,317 1,921,120 United States 1,708,877 2,686,890 1,526,300 639,716 3,987,797 2,059,250 1,928,547 332,735 581,258 2,304,640 at Yearend CRS-39,783.9 11,551.5 12,682.6 15,116.0 With direct investment at market value 10,657.7 12,526.6 13,620.4 16,239.0 With direct investment at historical cost 9,613.5 11,330.0 12,408.8 14,805.7 Foreign official assets in the United States 1,562.6 2,011.9 2,306.3 2,770.2 Foreign private assets: With direct investment at current cost 8,221.3 9,539.6 10,376.3 12,345.8 With direct investment at market value 9,095.2 10,514.7 11,314.1 13,468.9 With direct investment at historical cost 8,051.0 9,318.1 10,102.5 12,035.5 Direct investment in the United States: — At current cost 1,581.0 1,742.2 1,868.2 2,099.4 — At market value 2,454.9 2,717.4 2,806.0 3,222.5 — At historical cost 1,410.7 1,520.7 1,594.5 1,789.1 U.S. Treasury securities 527.2 561.6 643.8 594.2 U.S. other securities 3,422.9 3,995.5 4,353.0 5,228.5 — Corporate and other bonds 1,710.8 2,035.1 2,243.1 2,689.8 — Corporate stocks 1,712.1 1,960.3 2,109.9 2,538.7 U.S. currency 317.9 332.7 351.7 364.3 U.S. liabilities by U.S. nonbanking concerns 450.9 508.3 557.8 740.4 U.S. liabilities reported by U.S. banks 1,921.4 2,399.2 2,601.7 3,319.0 Source: Nguyen, Elena L., The International Investment Position of the United States at Yearend 2006, Survey of Current Business, July 2007. p. 17. Foreign investors who acquire U.S. assets do so at their own risk and accept the returns accordingly, unlike the debt owed by developing countries where debt service payments are guaranteed in advance. The returns on the assets in the investment position, except for bonds, are not guaranteed and foreign investors gain or lose on them in the same way as U.S. domestic investors. As Table 1 indicates, these investments include such financial assets as corporate stocks and bonds, government securities, and direct investment1 in businesses and real estate. The value of these assets, measured on an annual basis, can change as a result of purchases and sales of new or existing assets; changes in the financial value of the assets that arise through appreciation, depreciation, or inflation; changes in the market values of stocks and bonds; or changes in the value of currencies. The Department of Commerce also uses three different methods for valuing direct investments that yield roughly comparable estimates for the net position, although the three methods do 1 The United States defines foreign direct investment as the ownership or control, directly or indirectly, by one foreign person (individual, branch, partnership, association, government, etc.) of 10% or more of the voting securities of an incorporated U.S. business enterprise or an equivalent interest in an unincorporated U.S. business enterprise. 15 CFR § 806.15 (a)(1). Similarly, the United States defines direct investment abroad as the ownership or control, directly or indirectly, by one person (individual, branch, partnership, association, government, etc.) of 10% or more of the voting securities of an incorporated business enterprise or an equivalent interest in an unincorporated business enterprise. 15 CFR § 806.15 (a)(1). CRS-3 provide estimates on U.S. direct investment abroad and foreign direct investment that can be considerably different at times. Valuing Investments The Department of Commerce provides updated estimates on the nation’s international investment position each year, typically in July, based on data for the previous year through the end of the calendar year. Except for direct investment, all of the accounts in the international investment position are estimated directly by the Department of Commerce’s Bureau of Economic Analysis (BEA) relative to readily observable market prices. For example, the value of positions in portfolio investments (securities), gold, loans, currencies, and bank deposits can be directly estimated by the BEA based on the face values or market prices of recent transactions. Estimating the value of direct investments, however, presents a number of challenges. According to the Department of Commerce, these challenges arise because foreign direct investments, “typically represent illiquid ownership interests in companies that may possess many unique attributes — such as customer base, management, and ownership of intangible assets — whose values in the current period are difficult to determine, because there is no widely accepted standard for revaluing company financial statements at historical cost into prices of the current period.”2 As a result, the Department of Commerce estimates the U.S. international investment position in three ways, reflecting three different accounting methods for estimating the value of direct investments: historical cost; current cost; and market value. Initially, direct investments are valued at historical cost, or the cost at the time of the investment. This historical cost value can become outdated because it is not updated to account for changes in the value of an investment through appreciation, or through internal growth and expansion, or through changes in various intangible assets. The current cost approach estimates the value of capital equipment and land at their current replacement cost using general cost indexes, and inventories, using estimates of their replacement cost, rather than at their historical cost. The third measure, market value, uses indexes of stock market prices to revalue the owners’ equity share of direct investment. For the most part, the current cost and historical cost estimates have tracked closely together for U.S. direct investment abroad and for foreign direct investment in the United States, as indicated in Figures 1 and 2, respectively. These two measures of direct investment demonstrate a steady increase in the value of the investments over the 2325-year period from 1982 to 20042006. The market value estimate of direct investment, however, displays a markedly different pattern. These estimates spiked during the rapid runup in stock market values in the 1990s and then dropped sharply when market values declined at the end of the 1990s. The market value estimates rose sharply again in 2003 and 2004, as the rebound in stock market values pushed up the estimated market value of firms. Since the early 1980s, the annual value of foreign direct investment in the United States has been greater at times than 2 Nguyen, Elena L., “The International Investment Position of the United States at Yearend 20042005,” Survey of Current Business, July 20052007. p. 37. CRS-4 the annual value of U.S. direct investment abroad, but the accumulated value of U.S. direct investment abroad, or the position, has continuously been valued higher. 14. CRS-4 Figure 1. U.S. Direct Investment Abroad: Estimated Value of of Accumulated Position, 1982-2004 $3,5002006 $5,000 Billions of dollars $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1982 1987 Current cost 1992 1997 2002 Market value 1985 1988 Current cost 1991 1994 Market value 1997 2000 2003 2006 Historical cost Source: Department of Commerce Figure 2. Foreign Direct Investment in the United States: Estimated Value of Accumulated Position, 1982-2004 $3,0002006 $3,500 Billions of dollars $3,000 $2,500 $2,000 $1,500 $1,000 $500 $0 1982 1987 1992 1997 Current cost Market value Historical cost 1985 1988 Current cost 1991 1994 Market value 1997 2000 2003 2006 Historical cost Source: Department of Commerce 2002 CRS-5estimates rose sharply again in 2003 through 2006, as the rebound in stock market values pushed up the estimated market value of firms. As a result, the market value of U.S. direct investment abroad was estimated at $4.4 trillion in 2006, pushing the overall U.S. position to $14 trillion, compared with an estimate of the historical cost CRS-5 of $2.4 trillion for foreign direct investment in the United States and an overall position of $12 trillion and $2.9 trillion for direct investment position and $12.5 trillion position for current cost estimate. Since the early 1980s, the annual value of foreign direct investment in the United States has been greater at times than the annual value of U.S. direct investment abroad, but the accumulated value of U.S. direct investment abroad, or the position, has continuously been valued higher. Investment Patterns Foreign direct investment in U.S. businesses surged in the mid-1980s and has at times outpaced the annual amount of U.S. direct investment abroad. For various reasons, U.S. direct investment abroad and foreign direct investment in the United States have tended to track together so that the annual flows increase or decrease somewhat in tandem.3 Since 2000,3 except in 2005, when U.S. direct investment abroad dropped sharply as U.S. parent firms reduced the amount of reinvested earnings going to their foreign affiliates for distribution to the U.S. parent firms in order to take advantage of one-time tax provisions in the American Jobs Creation Act of 2004 (P.L. 108357). Between 2001 and 2006, U.S. direct investment outflows have been greater than similar inflows. As a whole, however, foreign investment among all U.S. assets has been greater than U. S. investment abroad, which has tended to push the net U.S. international investment position further into a negative position. This is not the first time in the nation’s history that the U.S. net international investment position has been negative. Early in the nation’s history as the United States made the transition from being a developing economy to being a major economic superpower, foreign investment flowed into capital development projects such as railroad and canal construction which aided the westward expansion and the development of heavy industries. By 1920, foreigners had withdrawn many of their assets from the United States to finance World War I, which turned the United States into a net creditor. This net creditor position grew unabated after World War II and into the 1980s, when large inflows of foreign investment once again turned the nation into a net international investment debtor. The U.S. net debtor status continued to grow through the 1990s and into the 2000s, as indicated by Figure 3. By year-end 20042006, U.S. assets abroad are estimated to have reached $8.712 trillion, while foreign owned assets in the United States reached $11.314.8 trillion. As a result, the U.S. net international investment position was estimated at a negative $2.68 trillion, or equivalent to about 21% of U.S. Gross Domestic Product, marking a substantial increase in the relative size of the net investment debt position over the previous decade, as indicated in Table 2. The net investment position worsened by nearly $350340 billion during 20042006, with direct investment measured at historical cost. According to the two other measures for direct investment — current cost and market value — the net investment position was valued at about negative $2.5 trillion. A similar decrease in the net international investment position in 2005, which seems possible, could push the net position to more than a negative $3 trillion6 trillion and $2.2 trillion, respectively. 3 See CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data, by James K. Jackson. CRS-6 Figure 3. U.S. Investment Position Abroad and Foreign Foreign Investment Position in the United States, 1983-2004 $12 Trillions $10 $8 $6 $4 $2 $0 1993 1995 1997 US assets 1999 2001 2003 States, 1994-2006 $16 Billions of dollars $14 $12 $10 $8 $6 $4 $2 $0 1994 1996 1998 US assets 2000 2002 2004 2006 Foreign-owned assets Source: Department of Commerce Table 2. U.S. International Investment Status (billions of dollars) 1980 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 ForeignU.S. Net Relative Share U.S. Gross U.S.-Owned Owned Assets International of U.S. Gross Domestic Assets Abroad in the United Investment Domestic Product States Position Product 929.8 569.0 360.8 5,161.7 7% 1,287.4 1,233.1 54.3 6,053.7 1% 1,469.4 1,505.6 -36.2 6,263.6 -1% 1,646.5 1,726.5 -80.0 6,475.1 -1% 1,829.7 2,008.1 -178.5 6,742.7 -3% 2,070.9 2,330.4 -259.5 6,981.4 -4% 2,179.0 2,424.3 -245.3 7,112.5 -3% 2,286.5 2,595.7 -309.3 7,100.5 -4% 2,331.7 2,762.9 -431.2 7,336.6 -6% 2,753.6 3,060.6 -307.0 7,532.7 -4% 2,987.1 3,310.5 -323.4 7,835.5 -4% 3,486.3 3,944.7 -458.5 8,031.7 -6% 4,032.3 4,527.4 -495.1 8,328.9 -6% 4,567.9 5,388.6 -820.7 8,703.5 -9% 5,090.9 5,990.9 -900.0 9,066.9 -10% 5,965.1 6,740.6 -775.5 9,470.3 -8% 6,231.2 7,620.0 -1,388.7023.4 7,455.8 -1,432.4 9,817.0 -14% 6,308.7 8,228.1 -1,919.4 9,890.7 -19% 6,645.7 8,753.0 -2,107.3 10,074.8 -22% 7,641.0 10,669.0 -2,156.7 10,381.3 -23% 9,052.8 12,515.0 -2,484.2 11,733.015% 6,075.9 8,053.6 -1,977.7 9,890.7 -20% 6,401.8 8,585.0 -2,183.2 10,074.8 -22% 7,380.9 9,613.7 -2,132.8 10,960.8 -20% 8,844.7 11,330.0 -2,485.3 11,712.5 -21% 9,986.6 12,408.8 -2,422.2 12,455.8 -19% 12,045.8 14,805.7 -2,759.9 13,246.6 -21% Source: Department of Commerce CRS-7 The foreign investment position in the United States continues to increase as foreigners acquire additional U.S. assets and as the value of existing assets appreciates. These assets are broadly divided into official and private investments reflecting transactions by governments among themselves and transactions among the public. At times, some observers have been concerned about the amount of foreign official investment in the U.S. economy, particularly in U.S. Treasury securities. and, more recently, purchases of U.S. businesses by foreign governments. As Figure 4 indicates, official asset holdings were valued at nearly $2 about $2.8 trillion in 2004 2006, or about 16% of the total foreign investment position, a share that has remained relatively stable over the 1214-year period of 1993 to 2004. Official assets through 2006. Official assets include such monetary reserve assets as gold, the reserve position with the International Monetary Fund (IMF), and holdings of foreign currency. An important component of foreign official holdings in the United States is the acquisitions of U.S. Treasury securities by foreign governments. At times, such acquisitions are used by foreign governments, either through coordinated actions or by themselves, to affect the foreign exchange price of the dollar. Foreign currency holdings account for a relatively small share of the total foreign investment position. Figure 4. Foreign Official and Private Investment Positions in the United States, 1983-2004 $101994-2006 $14 Trillions $8 $6 $4 $2 $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Foreign official assets Foreign private assets of dollars $12 $10 $8 $6 $4 $2 $0 1994 1996 1998 Foreign official assets 2000 2002 2004 2006 Foreign private assets Source: Department of Commerce Private asset holdings are comprised primarily of direct investment in businesses and real estate, purchases of publicly traded government securities, and corporate stocks and bonds. As indicated in Figure 5, the composition of U.S. assets abroad and foreign-owned assets in the United States is different in a number of ways. The strength and uniqueness of the U.S. Treasury securities markets make these assets sought after by both official and private foreign investors, whereas U.S. investors hold few foreign government securities. As a result, foreign official assets in the United States far outweigh U.S. official assets abroad. Both foreign private and CRS-8 official investors have been drawn at times to U.S. government securities as a safe haven investment during troubled or unsettled economic conditions. CRS-8 Figure 5. U.S. and foreignForeign Investment Position, By Major by Major Component, 20042006 US Assets Foreign Assets Total = $9.112.0 trillion Total = $11.514.8 trillion Official assets Direct invest. Govt. securities Bonds Stocks Nonbanks US banks $4 $3 $2 Trillions $13 $2 $1 Trillions $0 $1 $2 $3 $4 Trillions Source: Department of Commerce Of all the accounts, inward and outward direct investments are the most closely matched, demonstrating the appeal of such investments to both U.S. and foreign investors. In fact, the United States is unique in that it not only is the largest foreign direct investor in the world, but it is also the largest recipient of direct investment in the world. Foreign investors have also been attracted to U.S. corporate stocks and bonds for the same reasons domestic U.S. investors have invested in them.4 The decline in the overall value of U.S. corporate stocks after 2000, however, curbed the rate of growth of foreign purchases of these assets. A similar decline in the value of foreign stocks and the depreciation in the value of the U.S. dollar relative to a broad range of currencies reduced the dollar value of American-owned stock holdings abroad. Claims by private banks are also included in the international investment accounts and represent a broad range of international financial transactions, including financing for short-term trade credits associated with exports and imports of merchandise goods. 4 For additional information, see CRS Report RL32462, Foreign Investment in U.S. Securities, by James K. Jackson. CRS-9 International Investment: Sources and Economic Impact International investment not only has an impact on the U.S. economy, but it is affected by the economy. For U.S. investors, foreign markets provide them with 4 For additional information, see CRS Report RL32462, Foreign Investment in U.S. Securities, by James K. Jackson. CRS-9 opportunities to seek out the greatest returns for their investments, returns which are repatriated back to the United States. In addition, U.S. direct investment abroad, for the most part, tends to stimulate U.S. exports, which in turn stimulates the most productive sectors of the economy.5 U.S. direct investment abroad is highly sought after by developing countries which want the capital not only to supplement their own limited domestic sources, but they also want American technology and expertise. Foreign capital inflows augment domestic U.S. sources of capital, which, in turn, keep U.S. interest rates lower than they would be without the foreign capital. Indeed economists generally argue that it is this interplay between the demand for and the supply of credit in the economy that drives the broad inflows and outflows of capital. As U.S. demands for capital outstrip domestic sources of funds, domestic interest rates rise relative to those abroad, which tends to draw capital away from other countries to the United States. The United States has also benefitted from a surplus of saving over investment in many areas of the world that has provided a supply of funds. This surplus of saving has been available to the United States because foreigners have remained willing to loan that saving to the United States in the form of acquiring U.S. assets, which have accommodated the growing current account deficits. Over the past decade, the United States experienced a decline in its rate of savings and an increase in the rate of domestic investment, as indicated in Table 3. The large increase in the Nation’s current account deficit would not have been possible without the accommodating inflows of foreign capital. As Table 3 indicates, compared with the 1990-19961993-2000 period, U.S. saving in 20042006 declined by 2.7% of gross domestic product (GDP), while investment increased by 1.50.6% of GDP. This shift toward greater investment relative to saving was accommodated by an increase worldwide in saving relative to investment. Among other advanced economies and the newly industrialized economies in Asia, both saving and investment declined in 20042006 relative to the 1990-19961993-2000 period, but investment declined more as a share of GDP than did saving, so in relative terms saving increased as a share of GDP. In the emerging developing economies and in the developing economies of Asia, saving as a share of GDP increased faster, the developing economies of Asia (which includes China), and the Middle East, saving as a share of GDP increased faster, and in some cases much faster, than did investment, which also increased in most of these areas. The large inflows of foreign capital capital to the United States likely arise from the relatively more robust economic growth that occurred in the United States compared with almost any other area, the welldeveloped well-developed U.S. financial system, and the overall stability of the U.S. economy. 5 For additional information, see CRS Report RL32461, Outsourcing and Insourcing Jobs in the U.S. Economy: Evidence Based on Foreign Investment Data, by James K. Jackson CRS-10 Table 3. Saving and Investment in Selected Countries and Areas; 1990-1996 and 20041993-2000 and 2006 (Percentage of Gross Domestic Product) Area/Country World Saving Investment United States Saving Investment Other Advanced Economies Saving Investment Eurozone Saving Investment Japan Saving Investment Newly Industrialized Asian Economies Saving Investment Emerging Developing Economies Saving Investment Developing Asia Saving Investment ChinaMiddle East Saving Investment Average, 1990-1996 2004 Change 22.9 24.0 24.9 24.6 2.0 0.6 15.6 18.1 13.6 19.6 -2.0 1.5 23.7 23.6 22.7 21.3 -1.0 -2.3 21.4 21.3 20.9 20.2 -0.5 -1.1 32.4 30.2 27.6 23.9 -4.8 -6.3 34.1 32.6 30.3 24.9 -2.8 -7.7 25.2 27.5 31.5 29.2 6.3 1.7 30.7 32.8 38.2 35.5 7.3 2.7 40.6 38.8 46.4 43.9 5.8 5.1 Source: The Economic Outlook, the Congressional Budget Office, August 2005. p. 391993-2000 2006 Change 22.2 22.5 23.3 23.0 1.1 0.5 16.8 19.4 14.1 20.0 -2.7 0.6 21.7 21.9 20.0 21.4 -1.7 -0.5 21.4 21.1 21.6 21.6 0.2 0.5 30.0 27.5 28.0 24.1 -2.0 -3.4 33.5 30.7 31.6 25.9 -1.9 -4.8 24.1 25.2 32.6 27.8 8.5 2.6 33.1 33.2 43.5 37.6 10.4 4.4 24.2 22.6 42.1 22.4 17.9 -0.2 Source: World Economic Outlook, International Monetary Fund, October 2007. p. 242-245. Capital inflows also allow the United States to finance its trade deficit because foreigners are willing to lend to the United States in the form of exchanging the sale of goods, represented by U.S. imports, for such U.S. assets as stocks, bonds, and U.S. Treasury securities. Such inflows, however, put upward pressure on the dollar, which tends to push up the price of U.S. exports relative to its imports and reduce the overall level of exports. Furthermore, foreign investment in the U.S. economy drains off some of the income earned on the foreign-owned assets that otherwise would accrue to the U.S. economy as foreign investors repatriate their earnings back home. Some observers are particularly concerned about the long-term impact of the U.S. position as a net international investment debtor on the pattern of U.S. international income receipts and payments. In 20042006, the United States received $368710 billion in income receipts on its investments (including receipts on royalties) on its investments CRS-11 abroad and paid out $344631 billion CRS-11 in income payments (including payments on royalties) on foreign-owned assets in the United States for a net surplus of $2479 billion in income receipts. Considering the overall negative balance of the U.S. net investment position, the net surplus of income receipts is surprising. As the in income receipts.6 This surplus has varied over time as rising interest rates increases payments to foreign investors on such assets as Treasury securities and corporate bonds.7 As the annual amount of foreign investment in the U.S. economy continues to exceed the amount of U.S. investment abroad, however, it seems inevitable that U.S. payments on foreign-owned assets will rise to the point where they exceed U.S. receipts. There are no estimates of when such a turn-around in income payments will occur, but acontinue to exceed U.S. receipts. A net outflow of income payments eventually will actacts as a drag on the national economy as U.S. national income is reduced by the net amount of funds that are channeled abroad to foreign investors. Part of the reason for the current surplus in income receipts stems from the large One of the positive areas of the income accounts is the income receipts the nation United States receives on U.S. direct investments abroad. Although the historical historical cost value of U.S. direct investment abroad and foreign direct investment in the U.S. are roughly equal, the United States earned $13255 billion more on its assets abroad in 2004direct investment assets abroad in 2006 than foreigners earned on their direct investments in this country, as indicated in Figure 6. The As indicated previously, in 2005 U.S. parent firms reduced the amount of reinvested earnings going to their foreign affiliates for distribution to the U.S. parent firms in order to take advantage of one-time tax provisions in the American Jobs Creation Act of 2004 (P.L. 108-357). The Department of Commerce has analyzed data on direct investment to determine the source of the low rate of return of foreign direct investment relative to U.S. direct investment abroad.68 This analysis concluded that the gap in the rate of return between U.S.-owned enterprises abroad and foreignownedforeign-owned enterprises in the United States is narrowing over time and seems to be related to the age of the investment, or that as foreigners’ investments mature the rate of return of the assets approaches that of U.S. direct investment abroad. 6 Mataloni, Raymond, Jr., “An Examination of the Low Rates of Return of Foreign-Owned U.S. Companies,” Survey of Current Business, March 2000, p. 55-73; and Landefeld, J. Steven, Ann M. Lawson, and Douglas B. Weinberg, “Rates of Return on Direct Investment,” Survey of Current Business, August 1992, p. 79-86. CRS-12 Figure 6. U.S. Income Receipts and Payments on U.S.Owned Assets Abroad and Foreign-Owned Assets in the United States, 2004 US Receipts US Payments Direct investment Other private assets U.S. Government Royalties $250 $200 $150 $100 $50 Millions of dollars $0 $50 $100 $150 $200 $250 Millions of dollars Source: Department of Commerce that of U.S. direct investment abroad. The U.S. net surplus of income receipts arising from direct investments was offset to a large extent by large net income payments to foreign holders of U.S. government securities, which grew to slightly more than $84 billion in 2004, compared with the $3 billion the United States received on similar assets owned abroadby 30% to $131 billion in 2006, up from the $101 billion it received in 2005. The overall U.S. income surplus was further reduced by the income payments made to foreign holders of U.S. corporate stocks and bonds. The United States received $125335 billion in income from the corporate stocks and bonds bonds Americans owned abroad, but paid out over $146334 billion to foreign holders of U.S. corporate securities, for a net outflow of $21 billioninflow of $300 million in income paymentsreceipts on such assets. In addition, the United States received $5162 billion in royalties in 20042006 on various products and on U.S.-licensed production technology, patents, and copyrighted material. This was more than double the $23 billion the United States paid foreigners in royalties on their investments in the United States. 26 billion the United States paid foreigners in royalties on their investments in the United States. 6 Sauers, Renee M., U.S. International Transactions: First Quarter 2007. Survey of Current Business, July 2007. P. 66. 7 Whitehouse, Mark, U.S. Foreign Debt Shows Its Teeth AS Rates Climb. The Wall Street Journal, September 25, 2006. P. A1. 8 Mataloni, Raymond, Jr., “An Examination of the Low Rates of Return of Foreign-Owned U.S. Companies,” Survey of Current Business, March 2000, p. 55-73; and Landefeld, J. Steven, Ann M. Lawson, and Douglas B. Weinberg, “Rates of Return on Direct Investment,” Survey of Current Business, August 1992, p. 79-86. CRS-12 Figure 6. U.S. Income Receipts and Payments on U.S.-Owned Assets and on Foreign-Owned Assets in the United States, 2006 US Receipts Total = $709.9 million US Payments Total = $630.8 million Direct investment Other private assets U.S. Government Royalties $300 $200 $100 $0 $100 $200 $300 $350 $250 $150 $50 $50 $150 $250 $350 Millions of dollars Millions of dollars Source: Department of Commerce Some observers also are concerned about the extensive amount of foreign investment overall in the U.S. economy and in U.S. financial assets. According to the estimates provided in Table 4, foreigners own approximately 16% of total U.S. wealth. Although foreign investors own a little more than 6% of total U.S. fixed private capital stock, they own substantially larger shares of U.S. financial assets. For instance, foreign investors now own nearly 4043% of total U.S. Federal debt and CRS-13 more than half of the outstanding publicly- traded U.S. Treasury securities.79 Some observers argue that such investments could spur an economic crisis in this country should foreign investors decide to pull their money out of the investments, whether for economic or political reasons. This possibility seems remote, however, given the negative impact such an action might have on the foreign investors themselves, but the concerns remain. 9 For additional information, see CRS Report RL32462, Foreign Investment in U.S. Securities, by James K. Jackson. CRS-13 Table 4. Estimates of Wealth in the United States, 20032005 Current-Cost, Gross Stock Values (billions of dollars, percent) Item Total Fixed Private Capital Nonresidential — Agriculture, Forestry, and Fisheries Mining Construction Manufacturing Transportation Wholesale Trade Retail Trade — Mining — Construction — Manufacturing — Transportation — Wholesale Trade — Retail Trade — Finance, Insurance, Real Estate — Services Residential Farms — Farms — Real Estate Fixed Government Capital Equipment — Equipment — Structures Consumer Durable Goods Financial Assets — Federal Debt, Publicly Held — Corporate Stocks — Corporate Bonds — Other Total $29,343.8 $13,543.8 $516.7 $1,007.2 $222.2 $1,953.4 $937.7 $420.0 $876.5 $1,364.9 $4,001.1 $15,800.1 $95.6 $13,039.8 $7,585.0 $814.6 $6,770.4 $3,738.0 $31,089.8 $4,601.4 $18,177.7 $8,310.7 Foreign Foreign Owned Share $1,635.3 5.6% $1,653.3 12.1% $2.2 0.4% $48.2 4.8% $7.7 3.5% $538.1 27.5% $23.4 2.5% $230.1 54.8% $29.7 3.4% $207.6 15.2% $189.9 4.7% $71,756.6 $9,901.2 $1,994.0 $2,115.5 $2,275.2 $3,516.5 $11,536.5 31.8% 43.3% 11.6% 27.4% 16.1Corporate Bonds Other $24,823.7 $11,698.3 $448.6 $631.9 $190.6 $1,832.9 $880.1 $380.4 $732.7 $910.3 $2,679.1 $13,125.4 $85.6 $13,039.8 $6,493.2 $742.1 $5,751.1 $3,376.3 $25,846.2 $3,950.0 $15,497.0 $6,399.2 Total $60,539.4 Foreign Foreign Owned Share $1,585.9 6.4% $1,585.9 13.6% $2.0 0.4% $34.0 5.4% $5.9 3.1% $475.0 25.9% $23.2 2.6% $182.0 47.8% $24.2 3.3% $185.6 20.4% $151.1 5.6% $8,212.1 $1,533.0 $1,700.9 $1,707.2 $3,271.0 31.8% 38.8% 11.0% 26.7% $9,798.0 16.2% Source: Nguyen, Elena L., The International Investment Position of the United States at Yearend 20042005, Survey of Current Business, July 20052006. p. 37; Lally, Paul R18-19; Wasshausen, David B., Fixed Assets and Consumer Consumer Durable Goods for 1993-20031995-2005, Survey of Current Business, September 2004. p. 29-42; Foreign 2006. p. 22-33; Foreign Direct Investment in the United States, Detail for Historical-Cost Position and Related Capital and and Income Flows, 20032002-2005. Survey of Current Business, September 2004. p. 96-982006. p. 82-84; Flow of Funds Funds Accounts of the United States, June 9, 20058, 2006. Tables L212 and L213; Treasury Bulletin, June 2005. Table FD-1. p. 24. 7 For additional information, see CRS Report RL32462, Foreign Investment in U.S. Securities, by James K. Jackson. CRS-14 September 2006. Table FD-1. p. 24. Congressional Response Despite expressing concerns at times about the U.S. net international investment position, Members of Congress generally have been reluctant to intervene in the investment process, whether inward or outward. Indeed, successive Congresses and Administrations have led international efforts to eliminate or reduce restraints on the international flow of capital. If the U.S. net investment position continues to turn more negative, prospects increase that the positive U.S. net income receipts will turn negative as U.S. income payments overwhelm U.S. income receipts. In such a case, the U.S. economy will experience a net economic drain as income that could be used to finance new U.S. businesses and investments will be sent abroad to satisfy foreign creditors. Such a drain likely will be small at first relative to the overall size of the CRS-14 economy, but it could grow rapidly if the economy continues to import large amounts of foreign capital. Some observers are also concerned about the growing role foreign investment is playing in the economy by bridging the gap between domestic sources and demands for credit. One chief consideration is how the capital is being used. Investment funds that are flowing into direct investment and into corporate stocks and bonds presumably are being used to bolster investments in plant and equipment and other investments that aid in corporate productivity over the long run. As such, those investments may well provide a boost to U.S. economic growth well into the future. Foreign investment in U.S. Treasury securities directly aid in financing the Federal government’s budget deficits and indirectly ease the Federal government’s demands on domestic credit markets, which assists U.S. firms and consumer consumption by freeing up capital in the economy and by relieving some of the pressure on domestic interest rates. One growing concern among some policymakers is the rising amount of investment by foreign governments in U.S. businesses, real estate, and portfolio assets (corporate stocks and bonds, and U.S. Government securities). Such investments by foreign governments are bolstered by the growing holdings of U.S. currency by foreign governments, known as sovereign wealth funds, which are estimated to amount to more than $2.5 trillion.10 U.S. policy toward foreign investment generally has been one of acceptance and openness. Investments by foreign governments, however, are viewed by some as a new and different kind of investment that bears greater scrutiny. Such investments by foreign governments are viewed by some as contrary to longstanding U.S. policies which have encouraged foreign governments to shift away from owning businesses enterprises and to support private ownership. For some observers, investments by foreign governments also raise the potential for official interference into a broad range of market activities. There is no evidence to date that ownership of various U.S. assets by foreign governments, by itself, has affected the management of those assets or the markets in which they exist in ways that differ from ownership by private foreign entities. Nevertheless, such concerns likely helped motivate Congress to pass, and President Bush to sign on July 26, 2007 P.L. 110-49, the Foreign Investment and National Security Act of 2007, which increases congressional oversight over acquisitions of U.S. businesses by foreign governments. Some observers contend that a sharp decline in capital inflows or a sudden withdrawal of foreign capital from the economy could spark a financial crisis. Congress likely would find itself embroiled in any such financial crisis through its direct role in conducting fiscal policy and in its indirect role in the conduct of monetary policy through its supervisory responsibility over the Federal Reserve. Such a coordinated withdrawal seems highly unlikely, particularly since the vast majority of the investors are private entities that presumably would find it difficult to coordinate a withdrawal. Short of a financial crisis, events that cause foreign investors to curtail or limit their purchases of U.S. securities likely would complicate 10 Weisman, Steven R., A Fear of Foreign Investments. The New York Times, August 21, 2007. CRS-15 efforts to finance budget deficits in the current environment without such foreign actions having an impact on U.S. interest rates, domestic investment, and long-term rate of growth.