Financing the U.S. Trade Deficit
James K. Jackson
Specialist in International Trade and Finance
November 16, 2012December 23, 2013
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. International trade recovered
from the global financial crisis of 2008-2009 and the subsequent slowdown in global economic
activity that reduced global trade flows and, consequently, reduced the size of the U.S. trade
deficit. Now, however, U.S. exporters face new challenges with economies in Europe and Asia
confronting increased risks of a second phase of slow growth. 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 reducedincreased their purchases of U.S. Treasury securities in
2012, although at a slower rate than in 2011 after rising sharply in 2010 in
response to financial requirements in home
markets and continued uncertainty
associated with disruptions in global financial
markets. During the same period,
foreign private investors reducedincreased their
purchases of U.S. corporate stocks and bonds in 2011, while foreign official
purchases of U.S. Treasury securities continued at a strong pace. The inflow of
, but
reduced their purchases of corporate bonds, reflecting the growth experienced in
the values of U.S. corporate stocks. During 2012, foreign official purchases of
U.S. Treasury securities more than doubled over the amount purchased in 2011.
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 ........................................................................................................... 1
The U.S. Balance of Payments ........................................................................................................ 43
The U.S. Net International Investment Position ............................................................................ 10
Implications ................................................................................................................................... 15
Figures
Figure 1. Foreign Private and Official Purchases of U.S. Treasury Securities, 1997-20112012 ............. 7
Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-2011 2012................................. 8
Figure 3. Foreign Official and Private Investment Positions
in the United States, 1994-2011 2012.................................................................................................. 14
Figure 4. U.S. and Foreign Investment Position, By Major Component, 20112012 ............................. 15
Tables
Table 1. Selected Indicators of the Size of the Global Capital Markets, 2011.2012 ................................ 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....................................................................................................................................... 6
Table 4. Net Foreign Purchases of Long-Term U.S. Securities ....................................................... 89
Table 5. U.S. Net International Investment Position...................................................................... 11
Contacts
Author Contact Information........................................................................................................... 16
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 Policy 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 20092012, these markets amounted to over $800 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 $567557 trillion in 20112012, more
than twice the size of the combined total of all public and private bonds, equities, and bank assets.
For the United States, such derivatives total more than three times as much as all U.S. bonds,
equities, and bank assets.
Table 1. Selected Indicators of the Size of the Global Capital Markets, 20112012
(billions of dollars)
Exchange Market Derivatives
Bonds, Equities, and Bank Assets
Gross
Domestic
Product
(GDP)
Total
Official
Reserves
$69,899.2
10,650.4
European
Union
16,426.5
Euro
Area
World
United
Kingdom
United
States
Japan
Emerging
markets
Stock Market
Capitalization
Debt
Securities
255,855.6
47,089.2
468.0
82,251.6
13,118.5
316.7
2,431.3
OTC
Foreign
Exchange
Derivatives
OTC
Interest
Rate
Derivatives
Bank
Assets
Total
98,388.1
110,378.2
567,447
63,349
504,098
8,530.2
31,548.5
42,172.7
NA
NA
NA
58,874.6
4,586.6
24,976.2
29,311.8
207,937
23,235
184,702
79.3
19,055.6
3,266.4
4,839.2
10,950.0
50,390
7,023
43,367
15,075.7
136.9
63,976.9
15,640.7
33,700.9
14,635.3
215,925
54,061
161,864
5,866.5
1,258.2
31,666.1
3,540.7
15,369.3
12,756.1
80,480
13,661
66,819
25,438.4
6,944.5
44,553.7
9,771.0
9,240.2
25,542.5
NA
NA
NA
Total
Source: Global Financial Stability Report, International Monetary Fund, October 2012. Statistical Appendix, Table
1; Quarterly Review, Bank for International Settlements, September, 2012, Tables 20b and 21b.
Note: Total derivatives
Exchange Market Derivatives
Gross
Domestic
Product
(GDP)
Total
Official
Reserves
Total
Stock Market
Capitalization
Debt
Securities
Bank
Assets
World
$72,216.4
$11,403.5
$268,585.2
$52,494.9
$99,134.2
European
Union
15,514.8
498.0
82,217.5
9,732.2
Euro
Area
12,199.5
332.5
57,789.6
United
Kingdom
2,476.7
88.6
United
States
16,244.6
Japan
Emerging
markets
Total
OTC
Foreign
Exchange
Derivatives
OTC
Interest
Rate
Derivatives
$116,956.1
$557,061
$67,358
$489,703
29,456.8
43,028.8
NA
NA
NA
5,492.1
21,983.1
30,314.4
211,160
23,797
187,363
19,991.0
3,415.7
5,778.2
10,717.9
50,069
7,823
42,244
139.1
67,068.6
16,855.6
35,155.0
15,058.0
206,276
57,600
148,676
5,960.3
1,227.1
32,397.0
3,638.6
14,592.4
14,166.1
68,923
14,111
54,812
26,975.0
7,384.2
50,666.0
11,196.3
10,870.7
28,599.0
NA
NA
NA
Source: Global Financial Stability Report, International Monetary Fund, October 2013. Statistical Appendix,
Table 1; Quarterly Review, Bank for International Settlements, December, 2013, Tables 20b and 21b.
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
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Financing the U.S. Trade Deficit
the recent global financial crisis, banks and other financial institutions expanded their global
balance sheets from $10 trillion in 2000 to $34 trillion in 2007. These assets were comprised
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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 20102013 indicates that the daily trading of foreign
currencies through traditional foreign exchange markets4 totals $4.0totaled $5.3 trillion, up 2035% from the
$3.34.0 trillion reported in the previous survey conducted in 20072010. In addition to the traditional
foreign exchange market, the over-the-counter (OTC)5 foreign exchange derivatives market
reported that daily turnover of interest rate and non-traditional foreign exchange derivatives
contracts reached $2.17 trillion in April 20102013. The combined amount of $6.18.0 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 84.987.0% of the global
foreign exchange turnover in April 20102013 was in U.S. dollars, slightly higher lower than the 85.6% share
84.9%
share reported in a similar survey conducted in 2007.6
2010.6
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
seven quarters. The data indicate that in 2011 and 2012 the U.S. current account, or the balance of
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
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.
5
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.
6
Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2010. Bank for International
Settlement, September 2010. pp. 1-2. A copy of the report is available at http://www.bis.org/publ/rpfx10.pdf
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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 2010 and 2011 the U.S. current account, or the balance of
Rime, Dagfinn, and Andreas Schrimpf, The Anatomy of the Global FX Market Through the Lens of the 2013
Triennial Survey, Quarterly Review, Bank for International Settlements, December 2013.
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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 varied sharply
from from
quarter t quarter, to quarter, although remaining negative, reflecting a broad range of economic activities.
According to the balance of
payments accounts, the United States experienced deficits in the
merchandise trade goods
accounts through the most recent sixseven quarters from the first quarter of 2011
2012 to the secondthird quarter
of 2012 of 2013 in the range of $180 to $19095 billion to $121 billion and a surplus in the
services accounts during the five
seven quarters in the range of about $46 billion. 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 sixseven-quarter period.
Table 2. U.S. International Transactions, Selected Accounts
(billions of dollars)
2011
2010
2011
I
II
2012
2012
2013
2011
2012
I
II
III
IV
I
II
Current account
III
Balance on current account
$-442
-466
-120
-119
-108
-119
-134
-117458
$-440
$-121
$-111
$-107
$-102
$-105
$-97
$-95
Balance on goods and
services
-495
-560
-137
-142
-135
-146
-148
-139557
-535
-143
-135
-129
-127
-123
-118
-121
Balance on goods
-645
-738
-181
-187
-181
-189
-194
-186
Exports
1289
1497
361
372
382
382
389
394
Imports
-1934
-2236
-542
-559
-563
-571
-583
-580
Balance on services
150
179
44
46
46
43
46
46
Exports
554
606
148
152
155
151
155
157
Imports
-403
-427
-104
-106
-109
-108
-110
-110
Balance on income
184
227
52
56
58
60
47
56
Income Receipts
676
745
181
189
187
187
185
186
Income Payments
-492
-518
-128
-133
-129
-127
-137
-131
Unilateral current transfers
-131
-133
-35
-34
-32
-32
-33
-34
0
-1
0
-1
0
0
0
0
383
556
209
113
171
63
165
89
-939
-484
-373
7
-92
-26
107
207
-2
-16
-4
-6
-4
-2
-1
-3
8
-104
-1
-1
-1
-101
51
17
-945
-364
-369
15
-87
76
57
193
Foreign-owned assets in the U.S.
1308
1001
579
99
266
57
60
-119
Foreign official assets, net
398
212
73
122
20
-3
70
83
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
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Financing the U.S. Trade Deficit
2011
2010
2011
I
II
2012
III
IV
I
II
U.S. Treasury Securities
442
171
56
104
28
-18
85
85
Foreign private assets, net
910
789
506
-23
247
60
-10
-202
U.S. Treasury Securities
298
241
55
-18
121
83
44
7
Financial derivatives
14
39
3
7
-4
33
-1
0
Statistical discrepancy
59
-89
-89
7
-62
55
-31
29
Source: Scott, Sarah P., “U.S. International Transactions: Second Quarter 2012.” Survey of Current Business,
October 2012, p. 68744
-741
-194
-186
-179
-182
-179
-176
-179
Exports
1,496
1,561
388
392
391
390
391
395
398
Imports
-2,240
-2,303
-581
-578
-570
-573
-570
-570
-576
Balance on services
187
207
51
51
50
55
57
58
58
Exports
617
649
160
162
161
166
167
170
171
Imports
-430
-443
-110
-111
-111
-111
-110
-112
-113
Balance on income
233
224
55
57
55
57
51
56
60
Income Receipts
761
776
194
193
192
197
192
195
197
Income Payments
-528
-552
-139
-136
-138
-140
-141
-139
-137
Unilateral current transfers
-134
-130
-33
-33
-32
-32
-33
-34
-34
-1
7
0
0
0
8
0
0
0
Balance on financial account
552
439
264
18
28
129
40
66
67
U.S.-owned assets abroad, net
increase / outflow (-)
-456
-97
94
192
-267
-116
-229
-106
-74
U.S. official reserve assets,
net
-16
-4
-1
-3
-1
1
-1
0
1
U.S. Government assets,
net
-104
85
51
17
15
2
0
3
1
U.S. private assets, net
-333
-178
44
179
-281
-119
-228
-110
-76
Foreign-owned assets in the
U.S. net increase / inflow (+)
969
544
177
-176
301
242
266
168
148
Current account
Capital account
Capital account transactions
Financial account
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2012
2013
2011
2012
I
II
III
IV
I
II
III
Foreign official assets, net
254
394
144
57
108
84
127
-7
69
U.S. Treasury Securities
170
433
143
96
101
93
119
-12
16
Foreign private assets, net
715
150
33
-234
193
158
139
175
80
U.S. Treasury Securities
188
156
65
-5
63
34
51
-6
63
Financial derivatives
35
-7
-7
2
-5
3
4
4
-7
Statistical discrepancy
-93
-6
-143
93
79
-35
65
31
28
Source: Scott, Sarah P., U.S. International Transactions: Third Quarter 2013, BEA Release, December 17, 2013.
Note: By convention, an increase in U.S.-owned assets abroad is represented in the financial accounts by an
outflow, or a negative sign (-), and an increase in foreign-owned assets in the U.S. by an inflow, or a positive sign
(+).
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
the past six quarters indicate that foreign official purchases of U.S. Treasury securities peaked in
the second quarter of 2011, dropped through the fourth quarter of 2011, and then rose in the first
two quarters of 2012. Private foreign purchases of Treasury securities in 2011alternated between
net accumulation and net sales, with net accumulation in the first two quarters of 2012.
The data in Table 2 also indicate that in 2010 and in 2011, private capital outflows generally were
greater than official outflows, while foreign private capital inflows generally were overshadowed
by foreign official capital inflows, likely reflecting the slowdown in private economic activity in
global markets. 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
2011 for instance, total net capital inflows representing the net balance on the current account, the
capital account, and the statistical discrepancy, were a negative $556 billion, which was
equivalent to the $556 recorded in the financial accounts. The 2011 values represent a sharp
increase in the net amount recorded since 2010 and reflect a higher merchandise trade deficit as a
result of the slowdown in economic activity in Europe and elsewhere. These totals, however, are
The
balance on the financial account in 2012 fell 20% from that recorded in 2011 due to a drop in
both U.S. financial outflows and foreign financial inflows. Foreign official purchases of U.S.
Treasury securities more than doubled in 2012 from the value purchased in 2011. Over the past
seven quarters, foreign official purchases of U.S. Treasury securities peaked in the first quarter of
2012. Private foreign purchases of Treasury securities dropped by 17% in 2012, compared with
2011.
The data in Table 2 also indicate that in 2012, U.S. private capital outflows were greater than
official outflows. Foreign private capital inflows, which fell sharply in 2012 compared with 2011,
were overshadowed by large foreign official capital inflows, marking almost a doubling in
foreign official purchases of U.S. Treasury securities. 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 2012 for instance, total net capital inflows
representing the net balance on the current account, the capital account, and the statistical
discrepancy, were a negative $439 billion, which was equivalent to the $439 billion recorded in
the financial accounts. The 2012 values represent a decrease from the net amount recorded in
2011. 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)
2004
2005
2006
2007
2008
2009
2010
2011
-$5322012
Total Net Capital Inflows
-$701
-$809
-$664
-$578
-$240
-$383
-$556
-672231
-$438
-$552
-$439
Total Net Goods
-791
-847
-831
-835
-506
-645
-738511
-650
-744
-741
Total Net Services
62
76
87
130
136
127
150
179151
187
207
Total Net Income
67
72
48
91
152
120
184
227
-88124
178
233
224
Total Net Transfers
-106
-91
-116
-122
-122
-131
-133
1128
-134
-130
Total Net Capital Account
11
-4
-2
6
0
0
-1
977
Statistical Discrepancy
37
-2
65
85
142
59
-89
$532151
12
-93
-6
Total Net Financial Account
$701
$809
$664
$578
$231
$458
$552
$439578
240
383
556
Total Net Official
402
279
496
459
16
969
404
92134
475
Total Net Private
130
422
284
199
594
-775
-35
425783
20
382
-28
Direct Investment
-170
76
-2
-123
-23
-139
-122
-185
305160
-95
-179
-222
Portfolio Investment
331
260
306
193
-241
298
38
-4300
-10
208
Other Private (Banks)
14
26
16
424
-395
-211
573
0
0
30
6
-33
45
14
39
Total Net Capital Inflows
Total Net Goods
Total Net Transfers
Total Net Capital Account
Statistical Discrepancy
Total Net Financial Account
Portfolio Investment
Other Private (Banks)
Financial Derivatives383
-185
571
-15
Financial Derivatives
0
30
6
-33
45
14
35
-7
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 1999 and 2001, in 2006, and again in 2009 as foreign private investors
experienced net sales of Treasury securities, as indicated in Figure 1. In 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 sold off $15 billion
in Treasury securities, down sharply from the $197 billion they accumulated in 2008. Foreign
governments, however, increased their net purchases of Treasury securities in 2009, which rose
from $478 billion in 2008 to $570 billion in 2009. In 2010, foreign private investments in
treasury securities rose to nearly $300 billion, while foreign official purchases fell to $442 billion.
In 2011, foreign privateForeign official purchases of U.S. Treasury
securities exceeded foreign private purchases in 2010 and in 2012, falling just shy of such private
purchases in 2011. In 2012, foreign official purchases of treasury securities rose to $241434 billion,
outpacing foreign
official private purchases of $171156 billion. Over the eleven-year period 2001-20112001-2012 period, net foreign official
official purchases of treasury securities were more than twice as large as net foreign private
purchases.
Congressional Research Service
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Financing the U.S. Trade Deficit
Figure 1. Foreign Private and Official Purchases of
U.S.Treasury Securities, 1997-20112012
Source: Department of Commerce.
As the data in Table 3 indicate, a deficit in the net capital inflow account is financed by an
offsetting net inflow in the financial account. One striking feature of the financial flows over the
2004-20112005-2012 period is the way the composition of the balances in the net financial account has
changed. 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, 2007, 2009, and 2010,2010, and 2012 net official inflows exceeded net private inflows. Recently,U.S.
private capital flows by U.S. citizens shifted from a net outflow of $1.4 trillion in 2007 to a net
inflow of $866 867
billion in 2008, reflecting the financial turmoil during that period. Net private
outflows by U.S.
citizens, however, resumed in the 2009 to 20112012 period. During the same period,
U.S. official
outflows increased from $22 billion in 2007 to $530 billion in 2008. Since then, official outflows
have vacillated between net outflows and net inflows, reflecting the unsettled nature of financial
markets following the 2008-2009 financial crisis. In contrast, In contrast,
foreign private inflows of capital
dropped from $1.6 trillion in 2007 to $47123 billion in 2008.
During the same period, foreign
official inflows increased slightly from $481 billion in 2007 to
$487 $555 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
$47outflow of $20 billion in 2008. In addition, net
private flows increased from a net inflow of $199152 billion in
2007 to a net inflow of $581743 billion in
2008. In 2009, however2012, net privateofficial inflows dropped to a
negative $774 billion, while net official inflows rose to nearly $1 trillionrose to $475 billion from $134 billion recorded in 2011, while
net private inflows dropped to a negative $28 billion from a positive $382 billion in 2011.
Congressional Research Service
7
Financing the U.S. Trade Deficit
Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-20112012
Source: Department of Commerce.
The data in Table 4 show the total net accumulation of long-term U.S. securities, or the amount
of securities purchased less those that were sold, by foreign private and official sources from
2004-20112005-2012. The data indicate that in 2008, the net foreign private accumulation of U.S. securities
dropped by three-fourths as foreign private investors withdrew funds from the U.S. during the
financial crisis. In 2009, however, foreign private purchases of U.S. securities rebounded from a
negative $186.5 billion in 2008 to a positive $51 billion in 2009, and $414 billion in 2010,
reflecting increased net purchases of U.S.
corporate stocks and U.S. Treasury securities. Similar purchases increased eight-fold between
2009 and 2010 as foreign private purchases reached over $400 billion before falling to $140
billion in 2011. In 2011, private foreign investors operating in Europe reduced their purchases of
corporate stocks and bonds and U.S. government agency bonds, but increased their purchases of
Treasury securities by $150 billion. With a few exceptions, foreign private investors from other
areas increased their purchases of all asset classes in 2011.
Similarly, total private purchases of Treasury securities dropped in 2011, but rebounded in 2012,
reaching $ 355 billion. In 2012, private foreign investors increased their holdings of U.S.
corporate stock, while reducing their holdings of corporate bonds. Investors in Europe reduced
their purchases of Treasury securities from the amount they purchased in 2011, although investors
in Asia increased their purchases in 2012 compared with 2011.
Congressional Research Service
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Financing the U.S. Trade Deficit
Table 4. Net Foreign Purchases of Long-Term U.S. Securities
(billions of dollars)
2005
2006
2007
2008
2009
2010
2011
2012
Total private and official net
purchases of U.S. securities
Total private purchases
Congressional Research Service
2004
2005
2006
2007
2008
2009
2010
2011
$767.8
$875.7
$1,099.1
$989.6
$236.3
$484.8
$571.0
$419.1
455.6573.2
$412.9
$726.4
Total private purchases
598.3
611.4
644.8
-186.5
51.1
412.3
143.0
8
Financing the U.S. Trade Deficit
2004
2005
Corporate stocks
59.5
88.3
Europe
36.3
United Kingdom
2007
2008414.5
92.4
354.8
Corporate stocks
88.3
139.7
230.5
57.5
163.4
137.8
12.4139.2
60.9
173.3
Europe
44.0
92.6
90.5
-2.1
79.6
80.8
-36.9
28.981.3
-13.8
55.3
United Kingdom
21.2
73.2
67.9
28.4
33.3
34.9
2.2
Canada
3.9
35.0
9.1
25.9
Canada
21.0
12.6
9.8
6.7
9.5
17.5
14.63
20.9
52.4
Caribbean financial centers
3.1
14.8
34.4
95.4
1.7
34.2
22.6
30.5
-0.423.0
40.3
33.3
Latin America
-0.4
1.8
1.1
3.5
5.2
4.8
0.9
Asia
5.59
2.0
14.6
Asia
8.7
-2.2
27.9
50.7
31.4
10.6
2.011.0
8.6
11.8
Of which: Japan
4.9
-0.1
-1.2
-5.6
21.8
20.6
11.5
3.1
-0.16
7.4
-8.4
Africa
0.3
0.0
-0.4
-4.7
-0.8
-0.4
0.89
0.4
Corporate bonds
254.6
312.3
517.8
383.7
-51.4
-117.3
-24.7
-68.8
Europe
126.35
-106.3
-33.2
Europe
199.8
332.1
225.9
-80.4
-105.7
-64.6
-98.3
69.65
-123.5
-46.2
United Kingdom
144.7
203.6
130.5
-46.3
-56.1
-30.8
-51.0
6.07
-59.0
-55.3
Canada
1.9
7.9
12.4
-2.0
-0.1
9.8
-0.82.1
4.0
Caribbean financial centers
47.1
40.2
106.9
61.9
12.1
-7.4
21.3
16.1
Latin America
20.24
9.1
5.5
Latin America
7.3
9.3
4.7
-13.7
-4.5
3.4
3.8
Asia
51.94
0.1
Asia
54.4
53.7
72.8
32.4
1.6
6.8
14.7
Japan
33.511.6
6.8
Japan
25.6
12.2
39.5
21.7
-1.6
0.8
9.3
Africa
0.67.1
-2.1
Africa
0.6
0.2
-0.4
-0.4
0.1
0.1
0.0
Other
2.6-0.2
Other
8.1
7.7
6.4
0.7
-1.3
-1.4
-4.38
-2.7
U.S. Treasury bonds
74.1
147.9
-71.9
39.2
-20.0
49.2
273.0
199.5
Europe
38.26
146.8
157.9
Europe
65.2
-61.9
57.8
-43.5
-38.0
104.7
156.0
Canada
16.3105.0
137.9
75.7
Canada
21.8
14.7
-1.9
-6.2
19.7
35.8
-4.09
-18.2
25.6
Caribbean financial centers
22.1
44.9
-10.9
-6.2
2.6
-13.8
22.1
12.9
Latin America
-3.46.7
-14.7
Latin America
10.4
-2.1
9.8
-5.0
6.1
0.4
-6.7
Asia
1.05.7
1.2
Asia
1.3
-10.7
-20.8
29.3
71.9
111.0
3926.2
52.2
Africa
0.7
1.7
1.1
1.5
7.0
1.1
5.5
0.1
-1.41.9
Other
-0.8
2.5
-2.1
-1.1
-4.3
2.3
-6.4
-0.2
190.3
Federal agency bonds
67.4
49.8
25.8
-8.6
-172.6
-44.3
26.2
0.0
Europe
13.3-9.1
56.7
Congressional Research Service
9
Financing the U.S. Trade Deficit
2005
2006
2007
2008
2009
2010
2011
2012
Europe
-11.9
-8.1
42.3
-17.4
-46.6
1.1
-1610.3
12.0
United Kingdom
31.4
-1.3
-8.8
70.9
42.4
-30.4
25.0
0.5
5.0
4.9
-2.0
Canada
12.1
9.7
3.0
5.0
1.8
8.1
3.3
11.35
1.3
Caribbean financial centers
3.0
31.3
-21.6
-75.8
7.9
-14.5
5.8
1.82.9
13.7
Latin America
7.1
3.4
2.8
0.8
0.8
5.0
63.6
36.4
40.2
-10.8
-34.6
-81.4
-3.7
28.7
0.6
Latin America
Africa
United Kingdom
Canada
Canada
Caribbean financial centers
Latin America
Asia
Congressional Research Service
2006
2009
2010
2011
9
Financing the U.S. Trade Deficit
2004
2005
Japan
16.5
15.6
Africa
-0.1
Other
2006
2007
2008
2009
2010
2011-0.5
Asia
40.2
-10.8
-34.6
-81.4
-3.7
28.7
-8.1
30.8
Japan
15.6
2.9
-14.9
-39.0
-1.2
21.7
15.94.8
23.6
Africa
-0.3
-0.3
-0.6
-2.9
-2.0
-0.9
-0.2
-0.34
Other
-0.4
0.6
0.1
-1.0
-2.4
-1.2
-0.14
-0.2
Total official purchases
312.2
277.4
487.7
344.8
422.8
433.7
458.7
276.1320.5
371.6
U.S. Treasury bonds
256.8
156.9
233.5
76.6
276.2
512.7
506.8
2749
273.5
417.5
Other U.S. Government
securities
41.7
100.5
219.8
171.5
42.7
-132.6
-88.7
-12.4
Corporate bonds
11.520.7
-118.5
Corporate bonds
19.1
28.6
51.6
35.0
-2.3
0.8
-05.1
13.9
Corporate stocks
2.2
1.0
5.8
45.1
68.9
55.9
39.7
15.072.8
58.7
Source: Scott, Sarah P., “U.S. International Transactions: Second Quarter 2012.” Survey of Current Business,
October, 2012Third Quarter 2013, BEA Release, December 17,
2013. Table 8a.
The U.S. Net International Investment Position
As indicated above, the data in Table 2 and Table 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-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 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
Congressional Research Service
10
Financing the U.S. Trade Deficit
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.
Congressional Research Service
10
Financing the U.S. Trade Deficit
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
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 20112012, the latest year for which data are available, the overseas
assets of U.S. residents totaled $20.621.0 trillion, while foreigners had acquired about $24.825.1 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 $4.21 trillion in 2012, with direct investment
investment measured at historical cost, as indicated in Table 5.
Table 5. U.S. Net International Investment Position
(billions of dollars)
Type of Investment
2008
2008
2010
2011
Net international investment position of the United States:
With direct investment at current cost
$-3,260.2
$-2,321.8
$-2,473.6
$-4,030.32009
2010
2011
2012
With direct investment at current cost
$-2,321.8
$-2,473.6
$-3,730.6
$-3,863.9
With direct investment at market value
-3,995.3
-2,661.3
-2,813.4
-4,812.4510.7
-4,558.7
With direct investment at historical cost
-3,425.4
-2,503.8
-2,656.2
-4,195.3
159.6
126.3
110.4
126.32,503.8
-2,656.2
-3,932.2
-4,081.8
Financial derivatives
126.3
110.4
86.0
57.8
With direct investment at current cost
19,464.7
18,511.7
20,298.4
21,132.4636.2
21,637.6
With direct investment at market value
18,818.6
18,769.4
20,758.3
20,950.821,486.9
21,809.4
With direct investment at historical cost
18,948.7
18,000.9
19,782.5
20,606.4
6,127.521,057.7
21,013.2
Financial derivatives
3,489.8
3,652.3
4,704.7716.6
3,619.8
U.S. official reserve assets
293.7
403.8
488.7
536.0
537.0
572.4
U.S. Government assets, other
624.1
82.8
75.2
178.9
93.6
With direct investment at current cost
12,419.4
14,535.3
16,082.2
15,712.816,203.6
17,351.9
With direct investment at market value
11,773.3
14,793.1
16,542.1
15,531.2
With direct investment at historical cost
11,903.4
14,024.5
15,566.3
15,186.7
—At current cost
3,748.5
4,029.5
4,306.8
4,681.6
—At market value
3,102.4
4,287.2
4,766.7
4,500.0
—At historical cost
3,232.5
3,518.7
3,790.9
4,155.6
Foreign securities
3,985.7
5,565.6
6,336.4
5,922.0
Financial derivatives
U.S.-owned assets abroad:
Financial derivatives
U.S. private assets:
Direct investment abroad:
Congressional Research Service
11
Financing the U.S. Trade Deficit
Type of Investment
2008
2008
2010
2011
—Bonds
1,237.3
1,570.3
1,689.5
1,763.8
—Corporate stocks
2,748.4
3,995.3
4,646.9
4,158.2
930.9
930.3
874.8
796.8
3,754.3
4,009.9
4,564.2
4,312.4
With direct investment at current cost
22,724.9
20,833.5
22,772.0
25,162.6
With direct investment at market value
22,813.9
21,430.7
23,571.7
25,763.2
With direct investment at historical cost
22,374.1
20,504.7
22,438.7
24,801.7
5,967.8
3,363.4
3,541.9
4,578.4
3,943.9
4,402.8
4,912.7
5,250.8
With direct investment at current cost
12,813.2
13,067.2
14,317.4
15,333.4
With direct investment at market value
12,902.2
13,664.5
15,117.1
15,934.0
With direct investment at historical cost
12,462.5
12,738.4
13,984.0
14,972.5
—At current cost
2,397.4
2,398.2
2,597.7
2,908.8
—At market value
2,486.4
2,995.5
3,397.4
3,509.4
—At historical cost
2,046.7
2,069.4
2,264.4
2,547.8
852.5
791.0
1,101.8
1,418.1
U.S. other securities
4,620.7
5,319.9
5,934.0
5,968.2
—Corporate and other bonds
2,770.6
2,825.6
2,915.7
2,910.0
—Corporate stocks
1,850.1
2,494.3
3,018.3
3,058.2
U.S. currency
301.1
313.8
342.1
397.1
U.S. liabilities by U.S. nonbanking concerns
740.6
706.4
643.6
629.7
3,901.0
3,537.9
3,698.2
4,011.6
U.S. claims by US nonbanking concerns
U.S. claims reported by US banks
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 2011,” Survey
of Current Business, July 2012. p. 1816,054.4
17,523.7
Net international investment position of the United States:
U.S.-owned assets abroad:
U.S. private assets:
Congressional Research Service
11
Financing the U.S. Trade Deficit
Type of Investment
2009
2010
2011
2012
14,024.5
15,566.3
15,625.2
16,727.5
—At current cost
4,029.5
4,306.8
4,663.1
5,077.8
—At market value
4,287.2
4,766.7
4,513.9
5,249.5
—At historical cost
3,518.7
3,790.9
4,084.7
4,453.3
Foreign securities
5,565.6
6,336.4
6,441.4
7,531.2
—Bonds
1,570.3
1,689.5
1,939.9
2,140.7
—Corporate stocks
3,995.3
4,646.9
4,501.4
5,390.5
U.S. claims by US nonbanking concerns
930.3
874.8
793.0
844.8
U.S. claims reported by US banks
4,009.9
4,564.2
4,306.2
3,898.2
With direct investment at current cost
20,833.5
22,772.0
25,366.7
25,501.5
With direct investment at market value
21,430.7
23,571.7
25,997.6
26,368.2
With direct investment at historical cost
20,504.7
22,438.7
24,989.8
25,095.0
Financial derivatives
3,363.4
3,541.9
4,630.5
3,562.0
4,402.8
4,912.7
5,256.4
5,692.4
With direct investment at current cost
13,067.2
14,317.4
15,479.8
16,247.1
With direct investment at market value
13,664.5
15,117.1
16,110.7
17,113.7
With direct investment at historical cost
12,738.4
13,984.0
15,102.9
15,840.6
—At current cost
2,398.2
2,597.7
2,879.5
3,057.3
—At market value
2,995.5
3,397.4
3,510.4
3,924.0
—At historical cost
2,069.4
2,264.4
2,502.6
2,650.8
U.S. Treasury securities
791.0
1,101.8
1,386.3
1,541.6
U.S. other securities
5,319.9
5,934.0
6,151.6
6,904.1
—Corporate and other bonds
2,825.6
2,915.7
2,894.6
3,062.0
—Corporate stocks
2,494.3
3,018.3
3,256.9
3,842.1
U.S. currency
313.8
342.1
397.1
454.2
U.S. liabilities by U.S. nonbanking concerns
706.4
643.6
630.9
656.5
U.S. liabilities reported by U.S. banks
3,537.9
3,698.2
4,034.5
3,633.4
With direct investment at historical cost
Direct investment abroad:
Foreign-owned assets in the United States:
Foreign official assets in the United States
Foreign private assets:
Direct investment in the United States:
Source: Nguyen, Elena L., The International Investment Position of the United States at the End of the First
Quarter 2013 and Yearend 2012, Survey of Current Business, July 2013. p. 14.
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
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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 investment7 in
7
The United States defines foreign direct investment as the ownership or control, directly or indirectly, by one foreign
(continued...)
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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, by year-end 20112012, U.S.
private holdings abroad had fallenrisen in value from $15.6 trillion to $15.216.7 trillion, with direct
investment valued at historical cost, due in part to a downwardan upward revaluation in the values of
foreign foreign
corporate stocks, reflecting a decline in stock market values, primarily in Europe,
combined with a rise in the exchange value of the euro, which depreciates the value of assets held
abroad when translated into dollar equivalentsan increase in stock market values. Similarly, the value of foreign
owned corporate
stocks in the United States rose in value in 20112012, pulling up the overall
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.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, foreign official asset holdings were valued at about $5.27 trillion in 20112012, or
about 26% of the total foreign investment position, a share that has rose above 20% in 2008 as
foreign official holdings of U.S. Treasury securities rose during the global financial crisis.
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.9
(...continued)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
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).
8
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.
9
For additional information, see CRS Report RL32462, Foreign Investment in U.S. Securities, by James K. Jackson.
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Figure 3. Foreign Official and Private Investment Positions
in the United States, 1994-20112012
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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Figure 4. U.S. and Foreign Investment Position, By Major Component, 20112012
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.
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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
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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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