Financing the U.S. Trade Deficit
James K. Jackson
Specialist in International Trade and Finance
June 22, 2010March 7, 2011
Congressional Research Service
7-5700
www.crs.gov
RL33274
CRS Report for Congress
Prepared for Members and Committees of Congress
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 U.S. merchandise trade deficit and the associated
increase in U.S. dollar-denominated assets owned by foreigners. The recentInternational trade has begun to
recover somewhat from the slowdown in global
economic activity has reduced in 2008-2009 that reduced
global trade flows and, consequently, reduced the size of the U.S.
trade deficit. 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 officialprivate investors sharply increased their purchases of U.S. Treasury
securities in 2010 after declining in 2009 in response to uncertainty associated
with disruptions in global
financial markets. During the same period, foreign private
official investors sharply
reduced their purchases of U.S. corporate stocks and bonds compared with 2008in
2010 from the more rapid pace set in 2009.
•
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.
Congressional Research Service
Financing the U.S. Trade Deficit
Contents
Background ................................................................................................................................1
Capital Flows and the Dollar ............................. Error! Bookmark not defined.
Capital Flows and the Dollar ..........................................................................1 Error! Bookmark not defined.
The U.S. Balance of Payments ....................................................................................................4
The U.S. Net International Investment Position ......................................................................... 10
Implications .................................... Error! Bookmark not defined.
The U.S. Net International Investment Position ........................... Error! Bookmark not defined.
Implications .......................................................................................... 15 Error! Bookmark not defined.
Figures
Figure 1. Foreign Private and Official Purchases of U.S. Treasury Securities, 1997-2009.............72009Error! Bookmark not defin
Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-2009................................8
Figure 3. Foreign Official and Private Investment Positions
in the United States, 1994-2008..................................2009Error! Bookmark not defined.
Figure 3. Foreign Official and Private Investment Positions
in the United States, 1994-2008............................................................ 14 Error! Bookmark not defined.
Figure 4. U.S. and Foreign Investment Position, By Major Component, 2008............................ 15
Tables
Table 1. Selected Indicators of the Size of the Global Capital Markets, 2008 ...............................2
Table 2. U.S. International Transactions, Selected Accounts ........................................................42008Error! Bookmark not defined.
Tables
Table 1. Selected Indicators of the Size of the Global Capital Markets, 2009Error! Bookmark not defined.
Table 2. U.S. International Transactions, Selected Accounts ........ Error! Bookmark not defined.
Table 3. Summary of the Net Balances by Major Accounts in the U.S. Balance of
Payments .................................................................................................................................6 Error! Bookmark not defined.
Table 4. Net Foreign Purchases of Long-Term U.S. Securities .....................................................8
Table 5. U.S. Net International Investment Position................................................................... 11
Contacts
Author Contact Information ............................. Error! Bookmark not defined.
Table 5. U.S. Net International Investment Position..................... Error! Bookmark not defined.
Contacts
Author Contact Information ......................................................................... 16 Error! Bookmark not defined.
Congressional Research Service
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 and it serves as a major trade invoicing currency.
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.
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
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 CuresPolicy Options, by Craig K. Elwell.
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Financing the U.S. Trade Deficit
various countries and regions and the relative importance of international foreign exchange
markets. In 20082009, these markets amounted to nearlyover $700 trillion, or more than 30 times the size
of of
the U.S. economy. Worldwide, foreign exchange and interest rate derivatives, which are the
most most
widely used hedges against movements in currencies, were valued at $431500 trillion in 2008,
50% larger than2009, twice
the size of the combined total of all public and private bonds, equities, and bank assets. For
the the
United States, such derivatives total nearly three times as much as all U.S. bonds, equities,
and and
bank assets.
Table 1. Selected Indicators of the Size of the Global Capital Markets, 20082009
(billions of dollars)
Exchange Market Derivatives
Bonds, Equities, and Bank Assets
Gross
Domestic
Product
(GDP)
Total
Official
Reserves
World
61,218.7
7,389.7
European
Union
17,134.2
Euro
Area
$57,843.4
$8,543.8
European
Union
15,373.1
Euro
Area
World
United
Kingdom
United
States
Japan
Emerging
markets
Stock
Market
Capitalization
Debt
Securities
221,494.0
33,513.1
296.2
87,354.8
13,631.0
185.5
2,684.2
OTC
Foreign
Exchange
Derivatives
OTC
Interest
Rate
Derivatives
Bank
Assets
Total
83,268.7
104,712.3
430, 96.0
44,200.0
385,896.0
7,269.1
29,041.3
51,044.4
N.A.
N.A.
N.A.
65,036,2
4,991.0
23,700.1
36,345.0
155,134.0
9,049.0
146,085.0
44.3
10,564.8
1,868.2
3,967.6
12,729.0
28,264.0
4,732.0
23,532.0
14,441.4
66.6
56,313.7
11,737.6
30,571.3
14,004.8
166,974.0
37,076.0
129,898.0
4,887.0
1,009.4
25,082.6
3,209.0
11,454.3
10,419.3
61,526.0
4,075.0
57,451.0
18,941.9
4,838.2
28,896.5
5,960.0
6,207.0
16,729.5
N.A.
N.A.
N.A. Market
Capitalization
Debt
Securities
$232,240.8
$47,789.9
404.7
85,277.1
12,478.1
282.8
2,178.9
OTC
Foreign
Exchange
Derivatives
OTC
Interest
Rate
Derivatives
Bank
Assets
Total
$92,082.4
$92,969.5
$498,989.0
$49,196.0
$449,793.0
10,013.4
33,556.0
41,707.7
NA
NA
NA
62,887.9
6,576.1
27,239.5
29,072.4
196,091.0
20,364.0
175,727.0
55.7
18,217.0
2,796.4
4,712.3
10,708.3
40,185.0
5,929.0
34,256.0
14,119.1
119.7
60,892.3
15,077.3
31,652.0
14,163.0
194,279.0
40,921.0
153,358.0
5,068.9
1,022.2
24,163.5
3,395.6
11,920.9
8,846.9
65,091.0
11,238.0
53,853.0
17,962.0
5,523.0
33,477.1
9,909.8
7,618.9
15,948.3
NA
NA
NA
Total
Source: Global Financial Stability Report, International Monetary Fund, AprilOctober 2010. Statistical Appendix, Table 3Tables
3, 4, and 5.
Note: 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 intervene in international capital markets to acquire the dollar directly or to acquire
Treasury securities in order to strengthen the value of the 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.
The dollar is also 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. During the decade preceding
the recent global financial crisis, banks and other financial institutions expanded their global
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Financing the U.S. Trade Deficit
balance sheets from $10 trillion in 2000 to $34 trillion in 2007. These assets were comprised
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Financing the U.S. Trade Deficit
primarily of dollar-denominated claims on non-bank entities, including retail and corporate
lending, loans to hedge funds, and holdings of structured finance products based on U.S.
mortgages and other underlying assets. As the crisis unfolded, the short-term dollar funding
markets served as a major conduit through which financial distress was transmitted across
financial markets and national borders, according to analysts with the Bank for International
Settlements (BIS). 2 When these short-term dollar funding markets collapsed in the early stages of
the crises, the U.S. Federal Reserve had to engage in extraordinary measures, including a vast
system of currency swap arrangements with central banks around the world, to supply nearly
$300 billion. After initially expanding the then-existing reciprocal currency arrangements (swap
lines) with the European Central Bank, the Bank of England, the Swiss National Bank, and the
Bank of Japan, the Federal Reserve made an unprecedented announcement in October 2008 that it
would provide swap lines to “accommodate whatever quantity of U.S. dollar funding is
necessary” to stem the dollar shortage. 3 At the same time, the U.S. Treasury announced a money
market guarantee program to stop the withdrawal of funds from the money markets and to offset
the withdrawals by providing public funds.
The prominent role of the dollar 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 200742010 indicates that the daily trading of foreign
currencies through traditional foreign exchange markets5 totals more than $3.2 trillion, up sharply
from the $1.9markets4 totals $4.0 trillion, up 20% from the
$3.3 trillion reported in the previous survey conducted in 20042007. In addition to the
traditional traditional
foreign exchange market, the over-the-counter (OTC)65 foreign exchange derivatives
market market
reported that daily turnover of interest rate and non-traditional foreign exchange
derivatives derivatives
contracts reached $2.1 trillion in April 20072010. The combined amount of $5.36.1 trillion for
daily daily
foreign exchange trading in the traditional and OTC markets is more than three times the
annual annual
amount of U.S. exports of goods and services. The data also indicate that 86.384.9% of the
global global
foreign exchange turnover isin April 2010 was in U.S. dollars, slightly lower than the 88.7% share reported
85.6% share
reported in a similar survey conducted in 2004.7
2
2007.6
2
McGuire, Patrick, and Gotz von Peter, “The US Dollar Shortage in Global Banking and the International Policy
Response,” BIS Working Paper No. 291, the Bank For International Settlements, October 2009; McGuire, Patrick, and
Goetz von Peter, “The U.S. Dollar Shortage in Global Banking,” BIS Quarterly Review, March 2009.
3
Ibid., p. 76.
4
A similar survey was conducted in April 2010 and is expected to be released in August 2010.
5
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.
65
The over-the-counter foreign exchange derivatives market is an informal market consisting of dealers who customtailor agreements to meet the specific needs regarding maturity, payments intervals or other terms that allow the
contracts to meet specific requirements for risk.
76
Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 20072010. Bank for International
Settlement, September 20072010. pp. 1-2. A copy of the report is available at http://www.bis.org/publ/rpfx07rpfx10.pdf
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Financing the U.S. Trade Deficit
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
sevenfive quarters. The data indicate that in 2008 and 2009 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. On a quarterly basis, the deficit in the current account has risen from the
second quarter of 2009 through the first quarter of 2010, reflecting the gains experienced in the
U.S. economy. According to the accounts, the increased each
quarter since the second quarter of 2009. According to the balance of payments accounts, the
United States experienced growingsuccessively higher deficits in the
merchandise trade goods accounts in the third and fourth quarters of 2009 and the first quarter of
2010
through the most recent five quarters and a surplus in the services accounts across the entire periodduring the 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 throughout the
five-quarter period.
Table 2. U.S. International Transactions, Selected Accounts
(billions of dollars)
2009
2008
2009
I
2010
II
III
IV
I
-$84
-$98
-$101
-$109III
2010
IV
I
II
III
Current account
Balance on current account
-$669
-$378
-$9698
-101
-109
-123
-127
Balance on goods and services
-699
-375
-90
-80
-99
-105
-11599
-105
-114
-133
-134
Balance on goods
-835
-507
-121
-114
-132
-140
-151132
-140
-151
-170
-171
Exports
1,305
1,068
255
254
269
291
306
316
323
Imports
-2,140
-1,575
-376
-368
-401
-431
-457401
-431
-457
-486
-494
Balance on services
136
132
31
33
33
35
3633
35
37
36
37
Exports
534
502
123
124
125
130
133
134
137
Imports
-398
-370
-93
-91
-92
-94
-97
Balance on income
578
216
8
15
78
116
131
Income Receipts
797
588
143
142
147
156
16492
-94
-96
-97
-100
Balance on income
152
121
35
35
40
43
41
Income Receipts
797
588
147
156
161
164
166
Income Payments
-645
-467
-119
-116
-111
-121
-122
0
0
0
0
0
0
0
6
0
0
0
0
0
0111
-121
-121
-121
-124
Unilateral current transfers
-122
-125
-34
-31
-35
-33
-34
6
0
0
0
Balance on financial account
578
216
8
15
78
116
35
31
182
31
U.S.-owned assets abroad, net
156
-140
113
32
-276
-9
-301
-5
-52
-1
-4
-49
1
-1
-530
541
244
194
58
46
10
691
-630
-130
-158
-285
-56
-310
Foreign-owned assets in the U.S.
-153
-71
-45
-5
-34
13
-16
Foreign official assets, net
104
22
5
12
4
1
1
Unilateral current transfers
141
-325
-5
-52
-49
1
-1
0
-1
-530
541
58
46
9
-2
1
691
-630
-285
-56
-310
-139
-324
Foreign-owned assets in the U.S.
-455
306
342
104
320
162
506
Foreign official assets, net
551
450
97
117
73
44
142
Capital account
Capital account transactions
Financial account
U.S. official reserve assets, net
U.S. Government assets, net
U.S. private assets, net
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Financing the U.S. Trade Deficit
2009
2008
2009
I
IIIII
2010
III
IV
I
II
III
U.S. Treasury Securities
328
135
6
32
56
42
47549
561
124
124
90
18
198
Foreign private assets, net
-96
-144
-220
-157
246
-13
257246
-13
248
119
365
U.S. Treasury Securities
161
23
46
-29
-9
15
103
0
0
0
0
0
0
0
152
121
25
26
35
35
42
Financial derivatives
-9
15
103
101
65
Financial derivatives
-33
51
11
21
16
10
NA
85
162
20
-15
74
92
-54
Statistical discrepancy
Source: Yorgason, Daniel R., and Paul W. FarelloScott, Sarah P., “U.S. International Transactions: FirstThird Quarter 2010.” BEA
News Release, BEA 10-28, June 17, 2010Survey of Current Business, January
2011, p. 39.
The data also indicate that the U.S. financial accounts were in surplus throughout the period,
because they represent the opposite and offsetting transactions to the 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
2009the first three quarters of 2010 indicate that foreign official purchases of U.S. Treasury securities dropped sharply from
dropped from similar purchases in 20082009, but private foreign purchases of Treasury securities in 2009 virtually
collapsed from the amount recorded for 2007. Foreign official purchases of U.S. Treasury
securities remained fairly even in the first quarter of 2010, while foreign private purchases of
such securities rebounded noticeably in the first quarter of 2010
2010 rose sharply from that recorded in 2009.
The data in Table 2 also indicate that private capital flows accountedgenerally account for the largest share
of both
U.S. capital inflows and outflows in 2009 and through the first quarter of 2010. 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 2009 for instance, total net
capital inflows representing the net balance
on the current account, the capital account, and the
statistical discrepancy, were a negative $216 billion, markedly less than the deficit of $578
recorded in 2008. This decrease in the overall net capital inflows occurred in part because of an
increase in the surplus in the services account and in the income account. These totals, however,
are subject to periodic
billion, which was equivalent to the 216 recorded in the financial accounts. The 2009 values
represent the smallest net amount recorded since 2006 and likely reflect the impact of the
financial crisis and the economic recession. These totals, however, are subject to periodic
revisions.
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Table 3. Summary of the Net Balances by Major Accounts in the U.S. Balance of
Payments
(billions of dollars)
2002
2003
2004
2005
2006
2007
2008
2009
-$501
-$533
-$532
-$701
-$809
-$664
-$578
-$216
-485
-549
-672
-791
-847
-831
-835
-507
Total Net Services
61
54
62
76
87
130
136
132
Total Net Income
27
45
67
72
48
91
152
121
-65
-72
-88
-106
-91
-116
-122
-125
-1
-3
1
11
-4
-2
6
0
-38
-8
97
37
-2
65
85
162
$501
$533
$532
$701
$809
$664
578
216
Total Net Official
113
280
402
279
496
459
16
939
Total Net Private
388
253
130
422
284
199
594
-774
Direct Investment
-70
-86
-170
76
-2
-123
-23
-134
Portfolio Investment
335
165
305
331
260
306
193
-185
Other Private (Banks)
123
173
-4
14
26
16
424
-455
0
0
0
0
30
6
-33
51
Total Net Capital Inflows
Total Net Goods
Total Net Transfers
Total Net Capital Account
Statistical Discrepancy
Total Net Financial Account
Financial Derivatives
Source: Data developed by CRS from data published by the Department of Commerce.
Commerce Department data indicate that foreign private purchases of Treasury securities turned
negative between 1998 and 2001, in 2006, and again in 2009 and in 2006 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 $273 billion in 2004. In
2005, though, official
purchases of Treasury securities plummeted to $112 billion and were less
than private purchases
of $132 billion. 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 2009, foreign private investors accumulated $197 23
billion in Treasury
securities, as foreign governments sharply increased their net purchases of Treasury securities,
which rose from $98 billion in 2007 to $549 billion in 2008 and $561 billion in 2009 securities, down from $161 billion accumulated in 2008. Foreign
governments, however, increased their net purchases of Treasury securities in 2009 , which rose
from $549 billion in 2008 and $561 billion in 2009. According to data for the first three quarters
of 2010, private investors had returned to acquiring U.S. Treasury securities, but such purchases
continued to trail behind similar purchases by foreign governments.
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Figure 1. Foreign Private and Official Purchases of
U.S.Treasury Securities, 1997-2009
$500
Trillions of dollars
$400
$300
$200
$100
$0
-$100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
Official
Private
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 way the composition of the
balances in the net financial account have changed over the period since 2002. Net private and net
official capital inflows have changed abruptly since the period prior to 2002, when private
inflows were greater than official inflows, as indicated in Figure 2. In 2004, 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. In 2008, however2007, and
2009, net official inflows exceeded net private inflows. In 2000, private capital flows by U.S.
citizens shifted from a net outflow of $1.4 trillion in 2007 to a net inflow of $500 billion in 2008.
During the same period, U.S. official outflows increased from $22 billion in 2007 to $530 billion
in 2008. In contrast, foreign private inflows of capital dropped from $1.6 trillion in 2007 to $47
billion in 2008. During the same period, foreign official inflows increased slightly from $481
billion in 2007 to $487 billion in 2008. As a result of these changes, net official flows, or the
combination of U.S. and foreign officials flows dropped from a net outflow of $458 billion 2007
to a net inflows of $47 billion in 2008. In addition, net private flows increased from a net inflow
of $199 billion in 2007 to a net inflow of $581 billion in 2008. In 2009, however, net private
inflows dropped to a negative $774 billion, while net official inflows rose to nearly $1 trillion.
Congressional Research Service
7
Financing the U.S. Trade Deficit
Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-2009
$1,000
Trillions of dollars
$500
$0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-$500
-$1,000
Year
Total Net Official
Total Net Private
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 20012002-2009. The
data indicate that in 2009, the net accumulation of U.S. securities continued to fall below the
previous year, although net private purchases shifted from net sales in 2008 of $114 to a net
accumulation of about $100 billion, primarily due to large net purchases by investors in Asia.
doubled from the low reached
in 2008. Part of this increase in net purchases reflects the change in net private from a negative
$186.5 in 2008 to a positive $86 in 2009, reflecting increased net purchases of U.S. corporate
stocks and U.S. Treasury securities. Private foreign investors operating in every area but Canada and Africa
increased their
accumulation of U.S. corporate stocks. However, foreign private investors generally reduced their
continued reducing their net accumulation of corporate bonds, reflecting the deteriorating
economic and profit conditions of
most U.S. firms in 2009. In addition, both private and official
investors reduced their net
accumulation of other U.S. government agency bonds.
Table 4. Net Foreign Purchases of Long-Term U.S. Securities
(billions of dollars)
2002
2003
2004
2005
2006
2007
2008
2009
$428.3
$520.5
$767.8
$875.7
$1,099.1
$989.6
$245.6
$92.2236.3
$485.4
361.7
311.7
455.6
598.3
611.4
644.8
-113.7
94.9186.5
86.0
Corporate stocks
56.1
34.3
59.5
88.3
139.7
230.5
57.1
130.25
136.4
Europe
31.5
22.1
36.3
44.0
92.6
90.5
4.3
59.3-2.1
58.4
Total private and official net
purchases of U.S. securities
Total private purchases
Congressional Research Service
2009
8
Financing the U.S. Trade Deficit
2002
2003
2004
2005
United Kingdom
14.4
0.2
28.9
21.2
Canada
12.9
11.5
3.9
2007
2008
73.2
67.9
28.5
31.54
33.2
21.0
12.6
9.8
6.7
-3.01.9
-17.1
-2.3
3.1
14.8
34.4
95.4
3.01.7
34.91
0.8
0.5
-0.4
-0.4
1.8
1.1
3.75
5.23
Asia
23.0
2.8
5.5
8.7
-2.2
27.9
44.0
32.250.7
36.9
Of which: Japan
12.2
-2.3
4.9
-0.1
-1.2
-5.6
20.7
12.121.8
13.0
Africa
-0.1
0.2
-0.1
0.3
0.0
-0.4
-4.7
-0.87
145.4
223.2
254.6
312.3
517.8
383.7
1.0
-86-51.4
-130.6
Europe
78.9
130.9
126.3
199.8
332.1
225.9
-62.5
-10080.4
-111.0
United Kingdom
55.8
89.0
69.6
144.7
203.6
130.5
-38.0
-59.446.3
-61.3
Canada
-0.0
5.2
6.0
1.9
7.9
12.4
7-2.0
6.7-8.1
Caribbean financial centers
35.5
54.0
47.1
40.2
106.9
61.9
22.2
1.612.1
-7.4
4.6
6.7
20.2
7.3
9.3
4.7
1.7
3.8-13.7
-4.5
Asia
22.7
24.2
51.9
54.4
53.7
72.8
32.3
2.44
1.6
Japan
10.8
10.5
33.5
25.6
12.2
39.5
21.6
-2.37
-1.6
Africa
0.1
0.4
0.6
0.6
0.2
-0.4
-0.4
0.1
Other
3.6
1.7
2.6
8.1
7.7
6.4
0.7
-1.3
U.S. Treasury bonds
78.4
91.0
74.1
147.9
-71.9
39.2
13.0
101.5-20.0
85.9
Europe
38.7
18.1
38.2
65.2
-61.9
57.8
-65.9
-74.143.5
-33.0
Canada
-5.0
11.4
16.3
21.8
14.7
-1.9
-5.76.2
42.32
Caribbean financial centers
14.8
6.2
22.1
44.9
-10.9
-6.2
172.6
3.9-9.8
3.1
3.0
-3.4
10.4
-2.1
9.8
-5.10
6.12
22.3
46.4
1.0
1.3
-10.7
-20.8
6929.3
11976.9
Africa
1.1
-0.2
0.7
1.7
1.1
1.5
7.10
1.1
Other
3.6
6.1
-0.8
2.5
-2.1
-1.1
-4.3
2.3
81.8
-36.8
67.4
49.8
25.8
-8.6
-184.8
-50.2172.6
-5.7
4.7
-29.4
13.3
-11.9
-8.1
42.3
0.9
-7-17.4
-14.6
United Kingdom
22.4
14.6
31.4
-1.3
-8.8
70.9
59.2
2.342.4
-12.9
Canada
-1.9
-4.0
5.0
12.1
9.7
3.0
4.95.0
1.58
Caribbean financial centers
23.2
6.0
11.3
3.0
31.3
-21.6
-100.1
-28.075.8
7.9
7.5
4.9
1.8
7.1
3.4
2.8
0.8
-0.40.8
Asia
49.3
-11.9
36.4
40.2
-10.8
-34.6
-87.8
-10.981.4
2.8
Japan
16.8
-16.4
16.5
15.6
2.9
-14.9
-37.2
-239.0
-1.2
Africa
0.3
0.2
-0.1
-0.3
-0.3
-0.6
-2.8
-1.89
-2.0
Caribbean financial centers
Latin America
Corporate bonds
Latin America
Latin America
Asia
Federal agency bonds
Europe
Latin America
Congressional Research Service
2006
2009
9
Financing the U.S. Trade Deficit
2002
2003
2004
2005
Other
-1.2
-2.7
-0.3
-0.4
Total official purchases
66.5
208.7
312.2
U.S. Treasury bonds
32.4
163.5
Other U.S. Government securities
30.5
Corporate bonds
Corporate stocks
2006
2007
2008
2009
0.6
0.1
-0.8
-3.01.0
-2.4
277.4
487.7
344.8
359.3
-2.8422.8
399.4
256.8
156.9
233.5
76.6
205276.2
26497.7
39.9
41.7
100.5
219.8
171.5
65.8
-39.042.7
-120.1
5.6
5.6
11.5
19.1
28.6
51.6
35.0
-2.13
-2.0
-0.3
2.2
1.0
5.8
45.1
53.4
11.768.9
24.2
Source: Weinberg, Douglas B., and Erin M. WhitakerScott, Sarah P., “U.S. International Transactions: Fourth Quarter and
Year 2009.” Survey of Current
Business, April, 2010January, 2011. Table 8a.
The U.S. Net International Investment Position
As indicated above, the data in Tables Table 2 and Table 2 and 3 show that the trade deficit is
accompanied by an
equal capital inflow that represents an accumulation of dollar-denominated
assets by foreigners.
Some observers have equated the trade deficit and 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-denominateddollardenominated 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 would 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, the
overall stability of the U.S. economy, and the generally held view that U.S. securities, especially
Treasury securities, are high quality financial instruments that are low risk. 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 dollar-denominated assets through the
nation’s net international investment position. The U.S. net international investment position
Congressional Research Service
10
Financing the U.S. Trade Deficit
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 20082009, the latest year for which data are available, the overseas
assets of U.S. residents totaled $19.417.8 trillion, while foreigners had acquired about $2320.8 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 a negative $3.62.9 trillion, with direct investment
measured at historical cost, as indicated in Table 5.
Table 5. U.S. Net International Investment Position
(billions of dollars)
Type of Investment
2005
2006
2007
2008
2009
Net international investment position of the United States:
With direct investment at current cost
-1,925.1
-2,225.8
-2,139.9
-3,469.2$-2,191.7
$-1,915.7
$-3,493.9
$-2,737.8
With direct investment at market value
-1,850.9
-1,849.3
-1,506.6
-4,006.9808.5
-1,380.0
-4,164.2
-2,934.0
With direct investment at historical cost
-2,129.9
-2,399.4
-2,334.2
-3,638.1
57.9378.2
-2,421.3
-3,661.4
-2,927.7
59.8
71.5
159.6
127.9
With direct investment at current cost
11,961.6
14,381.3
18,278.8
19,888.2
With direct investment at market value
12,947.8
15,900.0
20,055.3
19,260.6
With direct investment at historical cost
11,445.3
13,900.0
17,744.3
19,351.4
1,190.0
1,239.0
2,559.3
6,624.5
188.0
219.9
277.2
293.7
77.5
72.2
94.5
624.1
With direct investment at current cost
10,506.0
12,850.3
15,347.8
12,345.8
With direct investment at market value
11,492.2
14,368.9
17,124.3
11,718.2
With direct investment at historical cost
9,989.7
12,369.0
14,813.3
11,809.0
—At current cost
2,651.7
2,936.0
3,451.5
3,698.8
—At market value
3,638.0
4,454.6
5,228.0
3,071.2
—At historical cost
2,135.5
2,454.7
2,916.9
3,162.0
Foreign securities
4,329.3
5,604.5
6,835.1
4,244.3
Bonds
1,011.6
1,275.5
1,567.1
1,392.9
Corporate stocks
3,317.7
4,329.0
5,248.0
2,85114,428.1
18,339.9
19,244.9
18,379.1
With direct investment at market value
15,950.3
20,062.0
18,605.7
18,630.7
With direct investment at historical cost
13,721.6
17,264.2
18,721.8
17,836.0
1,239.0
2,559.3
6,127.5
3,512.0
219.9
277.2
293.7
403.8
72.2
94.5
624.1
82.8
With direct investment at current cost
12,897.1
15,408.9
12,199.6
14,380.5
With direct investment at market value
14,419.3
17,130.9
11,560.5
14,632.2
With direct investment at historical cost
12,190.6
14,333.2
11,676.5
13,837.5
—At current cost
2,948.2
3,552.9
3,742.8
4,051.2
—At market value
4,470.3
5,275.0
3,103.7
4,302.9
—At historical cost
2,241.7
2,477.3
3,219.7
3,508.1
Foreign securities
5,604.5
6,835.1
3,985.7
5,471.0
—Bonds
1,275.5
1,587.1
1,237.3
1,493.6
—Corporate stocks
4,329.0
5,248.0
2,748.4
3,977.4
Financial derivatives
U.S.-owned assets abroad:
Financial derivatives
U.S. official reserve assets
U.S. Government assets, other
U.S. private assets:
Direct investment abroad:
Congressional Research Service
11
Financing the U.S. Trade Deficit
Type of Investment
2005
2006
2007
2008
2009
U.S. claims by US nonbanking concerns
1,184.1
1,173.7
794.7
794.2
U.S. claims reported by US banks
3,160.4
3,847.1
3,676.3
4,064.1
With direct investment at current cost
16,619.8
20,255.6
22,738.8
21,116.9
With direct investment at market value
17,758.8
21,441.9
22,770.0
21,564.7
With direct investment at historical cost
16,099.8
19,685.5
22,383.2
20,763.7
1,179.2
2,487.9
5,967.8
3,384.1
2,833.0
3,411.8
3,940.0
4,373.8
With direct investment at current cost
12,607.6
14,355.9
12,830.9
13,359.0
With direct investment at market value
13,746.6
15,542.2
12,862.2
13,806.8
With direct investment at historical cost
12,087.7
13,785.8
12,475.3
13,005.8
—At current cost
2,154.1
2,410.5
2,521.4
2,672.8
—At market value
3,293.1
3,596.9
2,552.6
3,120.6
—At historical cost
1,634.1
1,840.5
2,165.7
2,319.6
567.9
639.8
850.9
826.2
U.S. other securities
5,372.3
6,190.0
4,620.8
5,287.2
—Corporate and other bonds
2,824.9
3,289.1
2,770.6
2,841.2
—Corporate stocks
2,547.5
2,900.9
1,850.2
2,445.9
U.S. currency
282.6
272.0
301.1
313.8
U.S. liabilities by U.S. nonbanking concerns
799.5
864.6
731.5
665.5
3,431.3
3,979.0
3,805.2
3,593.6U.S. claims by US nonbanking concerns
1,018.5
1,163.1
1,239.7
991.9
U.S. claims reported by US banks
2,506.5
3,146.7
3,821.5
3,410.8
With direct investment at current cost
13,886.7
16,607.1
20,418.8
23,357.4
With direct investment at market value
14,798.7
17,749.2
21,561.9
23,267.4
With direct investment at historical cost
13,575.2
16,299.4
20,078.5
22,989.4
1,132.1
1,179.2
2,487.9
6,465.0
2,306.3
2,825.6
3,404.0
3,871.4
With direct investment at current cost
10,446.3
12,602.3
14,526.9
13,021.1
With direct investment at market value
11,360.3
13,744.4
15,670.1
12,931.1
With direct investment at historical cost
10,136.6
12,294.6
14,186.6
12,653.1
—At current cost
1,906.0
2,151.6
2,450.1
2,646.8
—At market value
2,818.0
3,293.7
3,593.3
2,556.9
—At historical cost
1,594.5
1,843.9
2,109.9
2,278.9
643.8
567.9
639.7
885.0
U.S. other securities
4,353.0
5,372.4
6,190.1
4,703.5
—Corporate and other bonds
2,243.1
2,824.9
3,289.1
2,865.9
—Corporate stocks
2,109.9
2,547.5
2,901.0
1,837.6
U.S. currency
280.4
282.6
272.0
301.1
U.S. liabilities by U.S. nonbanking concerns
658.2
797.5
1,000.4
873.2
2,606.9
3,430.3
3,974.6
3,611.4
Foreign-owned assets in the United States:
Financial derivatives
Foreign official assets in the United States
Foreign private assets:
Direct investment in the United States:
U.S. Treasury securities
U.S. liabilities reported by U.S. banks
Source: Nguyen, Elena L., “The International Investment Position of the United States at Yearend 20082009,” Survey
of Current Business, July 20092010. p. 10-18.
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 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 investment8 in
8investment7 in
7
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
(continued...)
Congressional Research Service
12
Financing the U.S. Trade Deficit
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. For instance, in 20082009, U.S. private
holdings abroad declined in value $15.3 trillion to $12.3 trillion due to a large decline in the value
rose in value from $11.7 trillion to $13.8 trillion, with direct investment valued at
historical cost, due in part to an increase in the value of foreign corporate stocks, reflecting the decline
rise in stock market values in nearly all exchanges after the low values reached in 2008,
combined with a decline in the exchange value of the dollareuro, which depreciatesappreciates the value of assets
held abroad when translated into dollar equivalents. Similarly, the value of foreign owned
corporate stocks in the United States fell sharplyrose in value in 20082009, pulling downup the overall
investment investment
position of foreign investors. The Department of Commerce 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.9 8
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 $3.84.4 trillion in 20082009, or about
1720% of the total foreign investment position, a share that has remainedincreased slightly in recent years
after remaining relatively stable over the
14-year period of 1994 to 20082009. 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.109
(...continued)
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).
98
For additional information, see CRS Report RL32964, The United States as a Net Debtor Nation: Overview of the
International Investment Position , by James K. Jackson.
109
For additional information, see CRS Report RL32462, Foreign Investment in U.S. Securities, by James K. Jackson.
Congressional Research Service
13
Financing the U.S. Trade Deficit
Figure 3. Foreign Official and Private Investment Positions
in the United States, 1994-2008
16
14
Trillions of dollars
12
10
8
6
4
2
19
94
19
95
19
96
19
97
19
98
r
19
99
r
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
19
96
19
95
19
94
20
09
0
Year
Foreign official assets
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.
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Financing the U.S. Trade Deficit
Figure 4. U.S. and Foreign Investment Position, By Major Component, 2008
US banks
Nonbanks
Stocks
Bonds
Govt. securities
Direct investment
Derivatives
Official assets
$0
$1
$1
$2
$2
$3
$3
$4
$54
$65
$75
Trillions of dollars
U.S. Assets
Foreign Assets
Source: Department of Commerce.
Implications
The persistent U.S. trade deficit raises concerns in Congress and elsewhere due to the potential
risks such deficits may pose for the long term rate of growth for the economy. In particular, some
observers are concerned that foreigner investors’ portfolios will become saturated with dollardenominated assets and foreign investors 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.
Another concern is with the outflow of profits that arise from the dollar-denominated assets
owned by foreign investors. This outflow stems from the profits or interest generated by the
assets and represent a clear outflow of capital from the economy that otherwise would not occur 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.
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
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Financing the U.S. Trade Deficit
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.
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.
Author Contact Information
James K. Jackson
Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751
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