Order Code RL33274
Financing the U.S. Trade Deficit
Updated AprilJuly 22, 2008
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Financing the U.S. Trade Deficit
Summary
The U.S. merchandise trade deficit is a part of the overall U.S. balance of
payments, a summary statement of all economic transactions between the residents
of the United States and the rest of the world, during a given period of time. Some
Members of Congress and other observers have grown concerned over the magnitude
of the growing U.S. merchandise trade deficit and the associated increase in U.S.
dollar-denominated assets owned by foreigners. This report provides an overview
of the U.S. balance of payments, an explanation of the broader role of capital flows
in the U.S. economy, an explanation of how the country finances its trade deficit or
a trade surplus, and the implications for Congress and the country of the large inflows
of capital from abroad. The major observations indicate that:
!
Foreign private investors sharply increased their purchases of U.S.
Treasury securities in 2007 as they reducedalso increased their purchases of
U.S.
corporate stocks and bonds. At the same time, foreign official
purchases of
U.S. Treasury securities plummetedrose slowly in 2007 as foreign governments
governments curtailed their purchases of such securities.
!
The inflow of capital from abroad supplements domestic sources of
capital and likely allows the United States to maintain its current
level of economic activity at interest rates that are below the level
they likely would be without the capital inflows.
!
Foreign official and private acquisitions of dollar-denominated
assets likely will generate a stream of returns to overseas investors
that would have stayed in the U.S. economy and supplemented other
domestic sources of capital had the assets not been acquired by
foreign investors.
This report will be updated as events warrant.
Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Capital Flows and the Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The U.S. Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The U.S. Net International Investment Position . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1213
List of Figures
Figure 1. Foreign Official and PrivatePrivate and Official Purchases of U.S. Treasury Securities,
19961997-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 2. Net Inflows of Foreign Private and Official Sources of Capital,
1997-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 3. Foreign Official and Private Investment Positions in the United States,
1994-2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Figure 4. U.S. and Foreign Investment Position, byBy Major Component,
20062007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
List of Tables
Table 1. Selected Indicators of the Size of the Global Capital Markets, 2006 . . . 2
Table 2. U.S. International Transactions, Selected Accounts . . . . . . . . . . . . . . . . 4
Table 3. Summary of the Net Balances by Major Accounts in the
U.S. Balance of Payments
Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 4. Net Foreign Purchases of Long-Term U.S. Securities . . . . . . . . . . . . . . 7
Table 5. U.S. Net International Investment Position . . . . . . . . . . . . . . . . . . . . . 10
Financing the U.S. Trade Deficit
Background
By standard convention, the balance of payments accounts are based on a
double-entry bookkeeping system. As a result, each transaction that is entered into
the accounts as a credit must have a corresponding debit and vice versa. This means
that a surplus or deficit in one part of the accounts necessarily will be offset by a
deficit or surplus, respectively, in another account so that, overall, the accounts are
in balance. This convention also means that a deficit in one account, such as the
merchandise trade account, is not necessarily the same as a debt.1 The trade deficit
can become a debt equivalent depending on how the deficit is financed and the
expectations of those who hold the offsetting dollar-denominated U.S. assets. The
balance of payments accounts are divided into three main sections: the current
account, which includes the exports and imports of goods and services and personal
and government transfer payments; the capital account, which includes such capital
transfers as international debt forgiveness; and the financial account, which includes
official transactions in financial assets and private transactions in financial assets and
direct investment in businesses and real estate.
When the basic structure of the balance of payments was established,
merchandise trade transactions dominated the accounts. Financial transactions
recorded in the capital accounts generally reflected the payments and receipts of
funds that corresponded to the importing and exporting of goods and services. As
a result, the capital accounts generally represented “accommodating” transactions,
or financial transactions associated directly with the buying and selling of goods and
services. During this early period, exchange rates between currencies were fixed, and
private capital flows, such as foreign investment, were heavily regulated so that
nearly all international flows of funds were associated with merchandise trade
transactions and with some limited government transactions.
Since the 1970s, however, private capital flows have grown markedly as
countries have liberalized their rules governing overseas investing and as nations
have adopted a system of floating exchange rates, where the rates are set by market
forces. Floating exchange rates have spurred demand for the dollar. The dollar also
is sought for investment purposes as it has become a vehicle itself for investment and
speculation. This means that the balance of payments record not only the
accommodating flows of capital which correspond to imports and exports of goods
and services, but also autonomous flows of capital that are induced by a broad range
of economic factors that are unrelated directly to the trading of merchandise goods.
1
For additional information about the causes of the U.S. trade deficit, see CRS Report
RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig Elwell.
CRS-2
Capital Flows and the Dollar
Liberalized capital flows and floating exchange rates have greatly expanded the
amount of autonomous capital flows between countries. These capital transactions
are undertaken in response to commercial incentives or political considerations that
are independent of the overall balance of payments or of particular accounts. As a
result of these transactions, national economies have become more closely linked, the
process some refer to as “globalization.” The data in Table 1 provide selected
indicators of the relative sizes of the various capital markets in various countries and
regions and the relative importance of international foreign exchange markets. In
2006, these markets amounted to nearly $600 trillion, or more than 30 times the size
of the U.S. economy. Worldwide, foreign exchange and interest rate derivatives,
which are the most widely used hedges against movements in currencies, were valued
at $395396 trillion in 20072006, 50% larger than the combined total of all public and private
bonds, equities, and bank assets. For the United States, such derivatives total three
as much as all U.S. bonds, equities, and bank assets.
Table 1. Selected Indicators of the Size of the Global Capital
Markets, 2006
(in billions of U.S. dollars)
Gross
Total
Domestic Official
Product Reserves
(GDP)
World
European
Union
Euro Area
United
States
Japan
Emerging
Market
Countries
Bonds, Equities, and Bank Assets
Total
Stock
Debt
Market Securities
Capitalization
Bank
Assets
Exchange Market Derivatives
Total
OTC
OTC
Foreign Interest
Exchange Rate
DerivDerivatives
atives
48,434.4 5,091.5 194,452.7 50,826.6 68,200.9 74,465.2 395,557.0 48,620.0 211,970.0
13,658.0
10,586.1
252.7 73,983.7 13,068.8 23,192.3 37,736.3
N.A.
N.A.
N.A.
157.5 54,129.5 8,419.1 18,761.1 26,719.2 145,903.0 18,280.0 81,442.0
13,194.7
4,377.1
54.9 56,822.0 19,569.0 27,050.1 10,202.9 154,799.0 40.488.0 74,441.0
879.7 20,109.5 4,795.8 8,723.7 6,590.0 58,329.0 10,579.0 25,605.0
14,262.9 1,932.0 30,984.4 11,692.4
6,072.7 13,219.4
N.A.
N.A.
N.A.
Source: Global Financial Stability Report, International Monetary Fund, April 2008. Statistical
Appendix, Table 3. Quarterly Review, Bank for International Settlements, March 2008, Tables 20b
and 21b. Total derivatives does not include equity and commodity-linked derivatives.
Another aspect of capital mobility and capital inflows is the impact such capital
flows have on the international exchange value of the dollar. Demand for U.S.
assets, such as financial securities, translates into demand for the dollar, since U.S.
securities are denominated in dollars. As demand for the dollar rises or falls
according to overall demand for dollar-denominated assets, the value of the dollar
changes. These exchange rate changes, in turn, have secondary effects on the prices
of U.S. and foreign goods, which tend to alter the U.S. trade balance. At times,
foreign governments have intervened in international capital markets to acquire the
dollar directly or to acquire Treasury securities in order to strengthen the value of the
CRS-3
dollar against particular currencies. In addition, various central banks moved
aggressively following the Asian financial crisis in the 1990s to bolster their holdings
of dollars in order to use the dollars to support their currencies should the need arise.
Furthermore, the dollar is heavily traded in financial markets around the globe
and, at times, plays the role of a global currency. Disruptions in this role have
important implications for the United States and for the smooth functioning of the
international financial system. This prominent role means that the exchange value
of the dollar often acts as a mechanism for transmitting economic and political news
and events across national borders. While such a role helps facilitate a broad range
of international economic and financial activities, it also means that the dollar’s
exchange value can vary greatly on a daily or weekly basis as it is buffeted by
international events. A triennial survey of the world’s leading central banks
conducted by the Bank for International Settlements in April 2007 indicates that the
daily trading of foreign currencies through traditional foreign exchange markets2
totals more than $3.2 trillion, up sharply from the $1.9 trillion reported in the
previous survey conducted in 2004. In addition to the traditional foreign exchange
market, the over-the-counter (OTC)3 foreign exchange derivatives market reported
that daily turnover of interest rate and non-traditional foreign exchange derivatives
contracts reached $2.1 trillion in April 2007. The combined amount of $5.3 trillion
for daily foreign exchange trading in the traditional and OTC markets is more than
three times the annual amount of U.S. exports of goods and services. The data also
indicate that 86.3% of the global foreign exchange turnover is in U.S. dollars, slightly
lower than the 88.7% share reported in a similar survey conducted in 2004.4
The U.S. Balance of Payments
Table 2 presents a summary of the major accounts in the U.S. balance of
payments over the last six quarters. The data indicate that in 20062007 and 2007 the U.S.
the first
quarter of 2008 the U.S. current account, or the balance of exports and imports of
goods, services and
transfers, was in deficit, or the United States imported more than
it exported.
According to the accounts, the United States experienced a deficit in the merchandise
merchandise trade goods accounts in all four quarters in 2007 and a surplus in the services
accounts. In the income the first quarter of
2008 and a surplus in the services accounts during those five quarters. In the income
accounts, which represent inflows of income on U.S. assets
abroad relative to outflows of income earned on U.S. assets owned by foreigners, the
net balance of the accounts was in surplus in 2006 and in all four quarters of 2007. abroad relative to
2
Traditional foreign exchange markets are organized exchanges which trade primarily in
foreign exchange futures and options contracts where the terms and condition of the
contracts are standardized.
3
The over-the-counter foreign exchange derivatives market is an informal market consisting
of dealers who custom-tailor agreements to meet the specific needs regarding maturity,
payments intervals or other terms that allow the contracts to meet specific requirements for
risk.
4
Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in
2007. Bank for International Settlement, September 2007. pp. 1-2. A copy of the report
is available at:[http://www.bis.org/publ/rpfx07.pdf]
CRS-4
The data also indicate that the U.S. financial accounts were in substantial
surplus, because they represent the opposite and offsetting transactions to deficits in
the current account. Indeed, the accounting of the balance of payments is such that
the surplus in the financial accounts is equivalent to the deficit in the combined
balance in the capital account, the statistical discrepancy, and the balance on the
current account. The balance in the financial accounts represents the difference
between the capital outflows associated with U.S. investments abroad, which are
recorded as a negative value, and the capital inflows associated with foreign
investment in the United States, which are recorded as a positive value. This
investment is a combination of both private and official investments, or investments
by private individuals and institutions and investments by governments and
governmental institutions, respectively. Data for 2007 indicate that foreign official
purchases of U.S. Treasury securities were down substantially from similar purchases
in 2006 and private foreign purchases of Treasury securities in 2007 rose sharply
from the negative amount recorded for 2006.
Table 2. U.S. International Transactions, Selected Accounts
(in billions of U.S. dollars)
2007
II
2006
III
IV
2007
I
III
IV
Current account
Balance on current account
-811 -217 -188 -739 -198 -190 -177 -173
Balance on goods and services
-759 -199 -177 -709 -179 -179 -173 -178
Balance on goods
-838 -219 -200 -815 -202 -205 -201 -208
Exports
1,023
260
266 1,149
269
279
297
304
Imports
-1,861 -479 -467 -1,965 -471 -484 -498 -512
Balance on services
80
20
23
107
23
26
28
30
Exports
423
106
111
479
112
117
123
128
Imports
-343
-86
-88 -372
-89
-91
-95
-98
Balance on income
37
6
10
74
7
13
21
33
Income Receipts
650
167
173
782
176
195
206
204
Income Payments
-614 -161 -163 -708 -169 -183 -185 -171
Unilateral current transfers
-90
-24
-21
74
7
13
21
33
Capital account
Capital account transactions
-4
-1
-1
-1
-1
-1
-1
0
Financial account
Balance on financial account
833
255
225
657
183
156
111
230
U.S.-owned assets abroad, net
-1,055 -210 -289 -1,206 -450 -466 -174 -116
U.S. official reserve assets, net
2
1
1
-0
-0
0
-0
-0
U.S. Government assets, net
5
2
1
-23
0
0
1
-24
U.S. private assets, net
-1,063 -212 -291 -1,183 -450 -466 -175
-93
Foreign-owned assets in the U.S.
1,860
450
516 1,864
618
623
277
347
Foreign official assets, net
440
109
85
413
152
70
39
151
U.S. Treasury Securities
189
53
47
50
38
-13
-12
37
Foreign private assets, net
1,419
341
431 1,451
466
552
238
195
U.S. Treasury Securities
-36
-13
22
166
45
2
50
70
Financial derivatives
29
15
-2
15
-1
9
0
Statistical discrepancy
-18
-37
-37
84
16
35
67
-57
Source: Bach, Christopher L., U.S. International Transactions in 2007. Survey of Current Business,
April 2008.
The data in Table 2 also indicate that private capital flows account for the
largest share of both U.S. capital inflows and outflows. Perhaps of more importance,
CRS-5
however, are the data in Table 3 which show the net amount of the flows in the
major accounts, or the difference between the inflows and outflows. In 2007, for
instance, total net capital inflows representing the net balance on the current account,
the capital account, and the statistical discrepancy, were a negative $657 billion,
markedly less than the record deficit of $833 set in 2006. This decrease in the overall
net capital inflows occurred in part because of a slight decrease in the deficit in trade
in manufactured goods and an increase in the surplus in trade in services.
Commerce Department data also indicate that foreign private purchases of
Treasury securities turned negative between 1998 and 2001 as foreign private
investors experienced net sales of Treasury securities, as indicated in Figure 1. By
2002, foreign private investors returned to acquiring Treasury securities, but the
amount they acquired remained relatively level at $100 billion per year from 2002 to
2005. In contrast, foreign official net acquisitions of Treasury securities trended
slightly upward between 2000 and 2002, but such net acquisitions more than doubled
over the 2002 to 2004 period, rising to $261 billion in 2004. In 2005, though, official
purchases of Treasury securities plummeted to less than $100 billion and were less
than private purchases. In 2006, private foreign investors again reduced their net
holdings of Treasury securities. This action was offset by a large increase in
acquisitions of Treasury securities by foreign governments, directed at least in part
to slow the decline in the international exchange value of the dollar. In 2007,
however, foreign private investors accumulated more than $166 billion in Treasury
securities, as foreign governments sharply reduced their net purchases of Treasury
securities from$189 billion in 2006 to $50 billion in 2007outflows of income earned on U.S. assets owned by foreigners, the net balance of the
accounts was in surplus in all four quarters of 2007 and the first quarter of 2008.
Table 2. U.S. International Transactions, Selected Accounts
(in billions of U.S. dollars)
2006
Current account
Balance on current account
Balance on goods and services
Balance on goods
Exports
Imports
Balance on services
Exports
Imports
Balance on income
Income Receipts
Income Payments
Unilateral current transfers
Capital account
Capital account transactions
Financial account
Balance on financial account
U.S.-owned assets abroad, net
U.S. official reserve assets, net
U.S. Government assets, net
U.S. private assets, net
Foreign-owned assets in the U.S.
Foreign official assets, net
U.S. Treasury Securities
Foreign private assets, net
U.S. Treasury Securities
Financial derivatives
Statistical discrepancy
2007
-788
-731
-753
-700
-838
-819
1,023 1,148
-1,861 -1,968
85
119
434
497
-349
-378
57
82
685
818
-628
-736
-82
-113
2007
II
I
III
IV
2008
I
-197
-180
-203
270
-474
24
115
-91
13
187
-174
-30
-194
-179
-206
279
-485
27
120
-93
10
202
-192
-25
-173
-168
-201
295
-497
33
129
-96
23
214
-191
28
-167
-174
-209
303
-512
35
132
-97
36
215
-179
30
-176
-175
-211
318
-529
36
136
-100
30
199
-170
-31
-2
-1
-0
-1
-1
-1
839
774
-1,252 -1,290
2
-0
5
-22
-1,259 -1,267
2,061 2,058
488
411
209
59
1,573 1,647
-58
157
30
6
-47
-41
265
-442
-0
0
-442
693
163
40
529
43
15
-68
194
-524
0
-1
-523
718
89
2
629
-14
-1
1
102
-170
-0
1
-171
266
13
-26
253
67
6
72
213
-154
-0
-23
-131
380
145
43
235
60
-13
-46
124
-287
-0
3
-290
411
174
89
237
69
0
53
-4
Source: Sauers, Renee M., and Kristy L. Howell, U.S. International Transactions: First Quarter of
2008. Survey of Current Business, July, 2008. P. 67.
The data also indicate that the U.S. financial accounts were in substantial
surplus, because they represent the opposite and offsetting transactions to deficits in
the current account. Indeed, the accounting of the balance of payments is such that
the surplus in the financial accounts is equivalent to the deficit in the combined
balance in the capital account, the statistical discrepancy, and the balance on the
current account. The balance in the financial accounts represents the difference
between the capital outflows associated with U.S. investments abroad, which are
recorded as a negative value, and the capital inflows associated with foreign
investment in the United States, which are recorded as a positive value. This
investment is a combination of both private and official investments, or investments
by private individuals and institutions and investments by governments and
governmental institutions, respectively. Data for 2007 indicate that foreign official
purchases of U.S. Treasury securities were down substantially from similar purchases
in 2006 and private foreign purchases of Treasury securities in 2007 rose sharply
CRS-5
from the negative amount recorded for 2006. Data for first quarter of 2008, however,
show a strong increase in foreign official purchases of U.S. Treasury securities, while
foreign private purchases of U.S. Treasury securities increased slightly over the
previous quarter.
The data in Table 2 also indicate that private capital flows account for the
largest share of both U.S. capital inflows and outflows. Another way of viewing the
data is presented in Table 3 which shows the net amount of the flows in the major
accounts, or the difference between the inflows and outflows. In 2007, for instance,
total net capital inflows representing the net balance on the current account, the
capital account, and the statistical discrepancy, were a negative $774 billion,
markedly less than the record deficit of $839 set in 2006. This decrease in the overall
net capital inflows occurred in part because of a slight decrease in the deficit in trade
in manufactured goods and an increase in the surplus in trade in services.
Table 3. Summary of the Net Balances by Major Accounts in the
U.S. Balance of Payments
(in billions of U.S. dollars)
Total Net Capital Inflows
Total Net Goods
Total Net Services
Total Net Income
Total Net Transfers
Total Net Capital Account
Statistical Discrepancy
Total Net Financial Account
Total Net Official
Total Net Private
Direct Investment
Portfolio Investment
Other Private (Banks)
Financial Derivatives
2000 2001 2002 2003 2004 2005 2006 2007
$-477 $-416 $-570 $-546 $-585 $-777 $-833 $-657839 $-774
-452 -427 -483 -548 -665 -787 -838 -815819
74
64
61
51
48
73
80
10785
119
21
24
7
33
30
48
37
7457
82
-56
-47
-59
-67
-81
-89
-90 -10492 -113
-1
-1
-1
-3
-2
-4
-4
-2
-63
-29
-95
-12
85
-18
-18
8447
-41
477
416
570
546
585
777
833
657839
774
42
23
111
251
399
279
448
390496
389
436
393
460
295
186
498
356
268314
379
162
25
-62 -134 -145
117
-55 -1311
-96
268
295
402
292
374
386
267
284260
442
6
74
120
137
-43
-4
145
11453
33
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
29
n.a.30
6
Source: Data developed by CRS from data published by the Department of Commerce.
CRS-6
Figure 1. Foreign Official and Private Purchases of U.S. Treasury
Securities, 1996-2007
$300
Billions of dollars
$250
Official
$200
$150
$100
Private
$50
$0
-$50
-$100
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Year
Commerce Department data indicate that foreign private purchases of Treasury
securities turned negative between 1998 and 2001 as foreign private investors
experienced net sales of Treasury securities, as indicated in Figure 1. By 2002,
foreign private investors returned to acquiring Treasury securities, but the amount
they acquired remained relatively level at $100 billion per year from 2002 to 2005.
In contrast, foreign official net acquisitions of Treasury securities trended slightly
upward between 2000 and 2002, but such net acquisitions more than doubled over
the 2002 to 2004 period, rising to $261 billion in 2004. In 2005, though, official
purchases of Treasury securities plummeted to less than $100 billion and were less
than private purchases. In 2006, private foreign investors again reduced their net
holdings of Treasury securities. This action was offset by a large increase in
acquisitions of Treasury securities by foreign governments, directed at least in part
to slow the decline in the international exchange value of the dollar. In 2007,
CRS-6
however, foreign private investors accumulated more than $157 billion in Treasury
securities, as foreign governments sharply reduced their net purchases of Treasury
securities from$209 billion in 2006 to $59 billion in 2007.
Figure 1. Foreign Private and Official Purchases of U.S. Treasury
Securities, 1997-2007
Billions of dollars
$300
$250
Official
$200
$150
$100
Private
$50
$0
-$50
-$100
1997
1998
1999 2000
2001
2002 2003
2004
2005 2006
2007
Source: Department of Commerce
The deficit in the net capital inflow account was financed by an offsetting net
inflow in the financial account. One striking feature of the financial flows is the
recent change in the composition of the balances in the net financial account. Except
for 2004, total net private inflows were greater than total net official inflows. This
trend was reversed in 2004, when net official inflows were nearly double that of the
net private inflows, as indicated in Figure 2. In 2006 and 2007, net official inflows
exceeded net private inflows. In 2007, foreign private inflows of capital increased
by more than 2%, but similar private outflows by U.S. citizens increased by more
than 11%, so that the overall net private flows fell in 2007, or were sightly more than
half of those received in 2005. The decline in net private inflows in 2007 reflects a
higher level of U.S. direct investment abroad, rising to over $335 billion in 2007,
from $235241 billion in 2006, which is entered into the balance of payments accounts
as a negative amount and lower holdings of foreign assets by U.S. banks. Data for
2007 also indicate that the United States again experienced a net positive income
inflow from U.S. assets held abroad as U.S. investors received more in income on
their investments held abroad than foreign investors received from their investments
in the United States.
CRS-7
Figure 2. Net Inflows of Foreign Private and Official Sources of
Capital, 1997-200719972007
Billions of dollars
$600
$500
Private
$400
$300
$200
$100
Official
$0
-$100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Source: Department of Commerce
The data in Table 4 show the total net accumulation of U.S. securities, or the
amount of securities purchased less those that were sold, by foreign private and
official sources from 2000-2007. The data indicate that in 2007, the net
accumulation of U.S. securities fell in 2007 from the amount recorded in 2006,
largely due to reduced official purchases of U.S. Treasury securities and corporate
stocks. Private foreign investors operating in Asia and operating through financial centers in
the Caribbean corporate stocks increased their net purchases of corporate stocks,
while sharply smaller net accumulations of corporate bonds by European investors
led to while European
investors sharply reduced their net accumulations of corporate bonds, which
experienced a 40% drop in the net accumulation of such securities. In addition, foreign
foreign investors, both private and official reduced their net accumulation of other
U.S.
government agency bonds.
Table 4. Net Foreign Purchases of Long-Term U.S. Securities
(in billions of dollars)
2000
2001
2002
2003
2004
2005
2006
2007
Total private and official
net purchases of U.S.
$437.3 $430.3 $428.3 $520.5 $767.8 $875.7 $982.5 $807.4
securities
Total private purchases
394.6
370.7
361.7
311.7
455.6
598.3
542.5
528.4
Corporate stocks
Europe
United Kingdom
Canada
Caribbean financial
centers
192.5
181.6
71.8
7.7
-20.7
119.5
86.8
37.3
11.7
-5.8
56.1
31.5
14.4
12.9
-17.1
34.3
22.1
0.2
11.5
-2.3
59.5
35.3
28.9
3.9
3.1
88.3
44.0
24.2
21.0
14.8
142.8
94.2
74.8
12.8
34.3
183.4
91.6
68.8
9.3
47.4
CRS-8
Latin America
Asia
Of which: Japan
Africa
3.5
20.0
1.9
0.4
6.8
20.2
6.6
-0.4
0.8
23.0
12.2
-0.1
0.5
2.8
-2.3
0.2
-0.4
5.5
4.9
-0.1
-0.4
8.7
-0.1
0.3
1.9
-1.1
-0.8
0.1
1.3
29.1
-52000
2001
2002
2003
2004
2005
2006
2007
3.5
6.8
0.8
0.5
-0.4
-0.4
1.9
1.3
20.0
20.2
23.0
2.8
5.5
8.7
-1.1
29.1
1.9
6.6
12.2
-2.3
4.9
-0.1
-0.8
-5.1
0.4
-0.4
-0.1
0.2
-0.1
0.3
0.1
-0.3
Corporate bonds
Europe
United Kingdom
Canada
Caribbean financial
centers
Latin America
Asia
Japan
Africa
Other
166.4
111.7
95.2
3.0
25.0
191.6
108.4
84.1
3.3
49.6
145.4
78.9
55.8
-0.0
35.5
223.2
130.9
89.0
5.2
54.0
254.6
126.3
69.6
6.0
47.1
312.3
199.8
144.7
1.9
40.2
412.3
242.1
192.4
7.9
91.1
246.7
111.2
121.4
12.6
41.4
4.3
21.4
15.6
0.1
0.9
5.0
24.2
6.1
0.3
0.9
4.6
22.7
10.8
0.1
3.6
6.7
24.2
10.5
0.4
1.7
20.2
51.9
33.5
0.6
2.6
7.3
54.4
25.6
0.6
8.1
9.3
53.9
12.3
0.2
7.7
4.6
71.1
38.5
-0.4
6.2
U.S. Treasury bonds
Europe
Canada
Caribbean financial
centers
Latin America
Asia
Africa
Other
-65.3
-54.9
2.1
-5.1
-23.2
-30.2
0.2
1.0
78.4
38.7
-5.0
14.8
91.0
18.1
11.4
6.2
74.1
38.2
16.3
22.1
147.9
65.2
21.8
44.9
-49.5
-37.8
14.7
-10.6
136.5
153.4
-2.9
3.8
-1.2
-7.2
-0.0
1.1
-3.3
8.1
0.0
1.0
3.1
22.3
1.1
3.6
3.0
46.4
-0.2
6.1
-3.4
1.0
0.7
-0.8
10.4
1.3
1.7
2.5
5.5
-20.3
1.1
-2.1
24.5
-42.8
1.5
-1.1
Federal agency bonds
Europe
United Kingdom
Canada
Caribbean financial
centers
Latin America
Asia
Japan
Africa
Other
101.0
36.8
28.5
7.6
17.5
82.8
29.6
33.4
-0.7
6.4
81.8
4.7
22.4
-1.9
23.2
-36.8
-29.4
14.6
-4.0
6.0
67.4
13.3
31.4
5.0
11.3
49.8
-11.9
-1.3
12.1
3.0
36.9
11.6
13.6
9.6
29.8
-38.2
53.0
81.0
2.2
-21.9
5.7
33.0
21.3
0.1
0.3
4.6
45.3
12.6
0.2
-2.6
7.5
49.3
16.8
0.3
-1.2
4.9
-11.9
-16.4
0.2
-2.7
1.8
36.4
16.5
-0.1
-0.3
7.1
40.2
15.6
-0.3
-0.4
3.4
-17.7
-5.4
-0.2
0.5
1.9
-73.7
-22.4
-0.1
0.3
42.8
59.6
66.5 208.7 312.2 277.4 440.0 279.0
Total official purchases
U.S. Treasury bonds
-1.3
32.9
32.4 163.5 256.8 156.9 214.1
30.3
Other U.S. Government
40.9
20.9
30.5
39.9
41.7 100.5 191.6 182.0
securities
Corporate bonds
2.0
3.8
5.6
5.6
11.5
19.1
28.6
51.6
Corporate stocks
1.1
2.0
-2.0
-0.3
2.2
1.0
5.8
15.1
Source: Bach, Christopher L., U.S. International Transactions in 2007. Survey of Current Business,
April 2008.Total official purchases
U.S. Treasury bonds
Other U.S. Government
securities
Corporate bonds
Corporate stocks
42.8
-1.3
40.9
59.6
32.9
20.9
66.5
32.4
30.5
208.7
163.5
39.9
312.2
256.8
41.7
277.4
156.9
100.5
440.0
214.1
191.6
279.0
30.3
182.0
2.0
1.1
3.8
2.0
5.6
-2.0
5.6
-0.3
11.5
2.2
19.1
1.0
28.6
5.8
51.6
15.1
Source: Sauers, Renee, and Kristy L. Howell, U.S. International Transactions: First Quarter of 2008.
Survey of Current Business, July 2008. Table 8a.
CRS-9
The U.S. Net International Investment Position
As indicated above, the data in Tables 2 and 3 show that the trade deficit is
accompanied by an equal capital inflow that represents an accumulation of dollardenominated assets by foreigners. Some observers have equated the trade deficit and
CRS-9
the associated accumulation of foreign-owned dollar-denominated assets as a debt
that the U.S. economy owes to foreigners that will have to be repaid. This
characterization, however, is not entirely appropriate. The debts owned by foreign
investors represents claims on assets, rather than loans where payments on the
principle and interest are specified according to a fixed schedule and where failure
to meet the repayment schedule can result in the loans being called in and made
payable in full. While foreign investors have expectations of a positive return on
their dollar-denominated assets, returns, except for Treasury securities, are not
guaranteed, but are subject to market forces. An important feature of claims by
foreign investors on U.S. assets is that some or all of the profits or returns on the
assets can be repatriated to the home country of the foreign investor, thereby reducing
the returns that would otherwise remain in the U.S. economy.
According to the most commonly accepted approach to the balance of payments,
macroeconomic developments in the U.S. economy are the major driving forces
behind the magnitudes of capital flows, because the macroeconomic factors
determine the overall demand for and supply of capital in the economy. Economists
generally conclude that the rise in capital inflows can be attributed to comparatively
favorable returns on investments in the United States when adjusted for risk, a
surplus of saving in other areas of the world, the well-developed U.S. financial
system, and the overall stability of the U.S. economy. In turn, these net capital
inflows (inflows net of outflows) bridge the gap in the United States between the
amount of credit demanded and the domestic supply of funds, likely keeping U.S.
interest rates below the level they would have reached without the foreign capital.
These capital inflows also allow the United States to spend beyond its means,
including financing its trade deficit, because foreigners are willing to lend to the
United States in the form of exchanging goods, represented by U.S. imports, for such
U.S. assets as stocks, bonds, U.S. Treasury securities, and real estate and U.S.
businesses.
While this exchange of assets is implicit in the balance of payments, the
Department of Commerce explicitly accounts for this broad flow of dollardenominated assets through the nation’s net international investment position. The
U.S. net 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 a net debtor nation, 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 net international investment position is not a measure of the
nation’s indebtedness similar to the debt borrowed by some developing countries, but
it is simply an accounting of assets. By year-end 20062007, the latest year for which data
CRS-10
are available, the overseas assets of U.S. residents totaled approximately $12 trillion,
while $17.1 trillion, while
foreigners had acquired about $14.820 trillion in assets in the United States, with
direct direct
investment measured at historical cost. As a result, the U.S. net international
investment position was about a negative $2.86 trillion, with direct investment
measured at historical cost, as indicated in Table 5.
CRS-10
Table 5. U.S. Net International Investment Position
(in billions of dollars)
Type of Investment
20032004
Net international investment position of the United States:
With direct investment at current cost
-2,140245.4
With direct investment at market value
-2,339.6355.8
With direct investment at historical cost
-2,232.6470.7
Financial derivatives
U.S.-owned assets abroad:
With direct investment at current cost
7,643.59,340.6
With direct investment at market value
8,318.210,204.6
With direct investment at historical cost
7,380.98,893.3
Financial derivatives
U.S. official reserve assets
183189.6
U.S. Government assets, other
84.883.1
U.S. private assets:
With direct investment at current cost
7,375.19,068.0
With direct investment at market value
8,049.89,932.3
With direct investment at historical cost
7,112.68,620.7
Direct investment abroad:
— At current cost
2,054498.5
— At market value
2,729.13,362.8
— At historical cost
1,791.9
Foreign securities
2,953.8
Bonds
874.42,051.2
Foreign securities
3,545.4
Bonds
985.0
Corporate stocks
2,079560.4
U.S. claims by US nonbanking concerns
594.0
U.S. claims reported by US banks
1,772.9
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
3,553.4
993.0
2,560.4
737.6
2,229.8
2,535.2
3,570.3
2,135.5
4,345.9
1,028.2
3,317.7
734.0
2,505.6
2,855.6
4,377.8
2,384.0
5,432.3
1,180.8
4,251.5
848.5
3,089.0
Foreign-owned assets in the United States:
With direct investment at current cost
9,783.9 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. 17793.6
U.S. claims reported by US banks
2,230.5
Foreign-owned assets in the United States:
With direct investment at current cost
With direct investment at market value
With direct investment at historical cost
Financial derivatives
Foreign official assets in the United States
Foreign private assets:
With direct investment at current cost
With direct investment at market value
With direct investment at historical cost
Direct investment in the United States:
— At current cost
— At market value
— At historical cost
U.S. Treasury securities
U.S. other securities
— Corporate and other bonds
— Corporate stocks
2005
2006
2007
-1,925.1
-1,850.9
-2,129.9
57.9
-2,225.8
-1,849.3
-2,399.4
59.8
-2,441.8
-1,727.5
-2,653.6
83.5
11,961.6
12,947.8
11,445.3
1,190.0
188.0
77.5
14,381.3
15,900.0
13,900.0
1,239.0
219.9
72.2
17,640.0
19,455.1
17,098.4
2,284.6
277.2
94.5
10,506.0
11,492.2
9,989.7
12,850.3
14,368.9
12,369.0
14,983.7
16,798.8
14,442.1
2,651.7
3,638.0
2,135.5
4,329.3
1,011.6
3,317.7
1,018.5
2,506.5
2,936.0
4,454.6
2,454.7
5,604.5
1,275.5
4,329.0
1,163.1
3,146.7
3,332.8
5,148.0
2,791.3
6,648.7
1,478.1
5,170.6
1,176.0
3,826.2
2,011.9
13,886.7
14,798.7
13,575.2
1,132.1
2,306.3
16,607.1
17,749.2
16,299.4
1,179.2
2,825.6
20,081.8
21,182.6
19,752.0
2,201.1
3,357.0
9,574.2
10,548.8
9,352.2
10,448.3
11,360.3
10,136.8
12,602.3
13,744.4
12,294.6
14,543.7
15,644.5
14,214.0
1,742.7
2,717.4
1,520.7
561.6
3,995.5
2,035.1
1,960.3
1,906.0
2,818.0
1,594.5
643.8
4,353.0
2,243.1
2,109.9
2,151.6
3,293.7
1,843.9
567.9
5,372.4
2,824.9
2,547.5
2,422.8
3,523.6
2,093.0
734.8
6,132.4
3,299.3
2,833.1
11,586.1
12,560.7
11,364.1
CRS-11
Type of Investment
2004
2005
2006
2007
U.S. currency
272.0
280.4
282.6
272.0
U.S. liabilities by U.S. nonbanking concerns
600.2
658.2
797.5
959.5
U.S. liabilities reported by U.S. banks
2,402.2
2,606.9
3,430.3
4,022.2
Source: Nguyen, Elena L., The International Investment Position of the United States at Yearend
2007, Survey of Current Business, July 2008. p. 9.
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 principle
and debt service payments are guaranteed in advance. While foreign investors likely
expect positive returns from their dollar-denominated assets, the returns on most of
CRS-11
the assets in the international investment position, except for bonds, are not
guaranteed and foreign investors stand to gain or lose on them similar to the way U.S.
domestic investors gain or lose.
As Table 5 indicates, the investments in the international investment position
include such financial assets as corporate stocks and bonds, government securities,
and direct investment5 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 provide
estimates on U.S. direct investment abroad and foreign direct investment that can be
considerably different at times.6
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. While the foreign official share of the overall amount of capital inflows
has grown sharply as indicated in Table 3, the overall foreign official share of
foreign-owned assets in the United States has remained relatively modest.
As Figure 3 indicates, official asset holdings were valued at about $2.83.4 trillion
in 20062007, or about 1617% of the total foreign investment position, a share that has
remained relatively stable over the 13-year period of 1993 to 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.72007. Official assets
5
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).
6
For additional information, see CRS Report RL32964, The United States as a Net Debtor
Nation: Overview of the Net International Investment Position, by James K. Jackson.
7
For additional information, see CRS Report RL32462, Foreign Investment in U.S.
Securities, by James K. Jackson.
CRS-12
CRS-12
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.7
Figure 3. Foreign Official and Private Investment Positions in the
United States, 1994-2007
Trillions of dollars
$16
$14
$12
$10
$8
$6
$4
$2
$0
1994
1996
1998
2000
Foreign official assets
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 4, the composition of U.S. assets abroad
and foreign-owned assets in the United States differ 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
official investors have been drawn at times to U.S. government securities as a safe
haven investment during troubled or unsettled economic conditions.
7
For additional information, see CRS Report RL32462, Foreign Investment in U.S.
Securities, by James K. Jackson.
CRS-13
Figure 4. U.S. and Foreign Investment Position, By Major
Component, 2007
US Assets
Foreign Assets
Total = $17.1 trillion
Total = $19.8 trillion
Official assets
Direct invest.
Govt. securities
Bonds
Stocks
Nonbanks
US banks
$5
$4
$3
$2
$1
$0
Trillions
$1
$2
$3
$4
$5
Trillions
Source: Department of Commerce
Implications
The persistent U.S. trade deficit raises concerns in Congress and elsewhere
because of the potential risks such deficits may pose for the long term rate of growth
for the economy. In particular, some observers are concerned that foreigners will
become saturated with dollar-denominated assets and will become unwilling to
accommodate the trade deficit by holding more dollar-denominated assets. The shift
in 2004 in the balance of payments toward a larger share of assets being acquired by
official sources generated speculation that foreign private investors had indeed
reached the point where they were no longer willing to add more dollar-denominated
assets to their portfolios. This shift was reversed in 2005, however, as foreign private
investments rebounded.
CRS-13
Figure 4. U.S. and Foreign Investment Position, by Major
Component, 2006
US Assets
Foreign Assets
Total = $12.0 trillion
Total = $14.8 trillion
Official assets
Direct invest.
Govt. securities
Bonds
Stocks
Nonbanks
US banks
$4
$3
$2
Trillions
$1
$0
$1
$2
$3
$4
Trillions
Source: Department of Commerce
Another concern is with the outflow of profits that arise from the dollardenominated assets owned by foreign investors. This outflow arisesstems from the profits
or interest generated by the assets and represent a clear outflow of capital from the
economy that otherwise would not ariseoccur if the assets were owned by U.S. investors.
These capital outflows represent the most tangible cost to the economy of the present
mix of economic policies in which foreign capital inflows are needed to fill the gap
between the demand for capital in the economy and the domestic supply of capital.
CRS-14
Indeed, as the data presented indicate, it is important to consider the underlying
cause of the trade deficit. According to the most commonly accepted economic
approach, in a world with floating exchange rates and the free flow of large amounts
dollars in the world economy and international access to dollar-denominated assets,
macroeconomic developments, particularly the demand for and supply of credit in the
economy, are the driving forces behind the movements in the dollar’s international
exchange rate and, therefore, the price of exports and imports in the economy. As
a result, according to this approach, the trade deficit is a reflection of macroeconomic
conditions within the domestic economy and an attempt to address the issue of the
trade deficit without addressing the underlying macroeconomic factors in the
economy likely would prove to be of limited effectiveness.
CRS-14
In addition, the nation’s net international investment position indicates that the
largest share of U.S. assets owned by foreigners is held by private investors who
acquired the assets for any number of reasons. As a result, the United States is not
in debt to foreign investors or to foreign governments similar to some developing
countries that run into balance of payments problems, because the United States has
not borrowed to finance its trade deficit. Instead the United States has traded assets
with foreign investors who are prepared to gain or lose on their investments in the
same way private U.S. investors can gain or lose. It is certainly possible that foreign
investors, whether they are private or official, could eventually decide to limit their
continued acquisition of dollar-denominated assets or even reduce the size of their
holdings, but there is no firm evidence that such presently is the case.