Financing the U.S. Trade Deficit
James K. Jackson
Specialist in International Trade and Finance
December 23, 2013March 24, 2014
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 increased their net purchases of U.S. Treasury securities
in 2013 by nearly 30% over the amount they purchases in 2012. During the same
period, foreign private investors reduced their net purchases of U.S. corporate
stocks, but increased their net purchases of corporate bonds, likely reflecting the
growth in corporate profits. During 2013, foreign official purchases of U.S.
Treasury securities fell by almost half from the amount purchased in 2012. The
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 increased their purchases of U.S. corporate stocks, 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 likely
allows the United States to maintain its current level of economic activity
at 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 ........................................................................................................ 34
The U.S. Net International Investment Position ............................................................................ 10
Implications ................................................................................................................................... 15
Figures
Figure 1. Foreign Private and Official Purchases of U.S. Treasury Securities, 1997-20122013 ............. 7
Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-20122013................................. 8
Figure 3. Foreign Official and Private Investment Positions
in the United States, 1994-2012.................................................................................................. 14
Figure 4. U.S. and Foreign Investment Position, By Major Component, 2012 ............................. 15
Tables
Table 1. Selected Indicators of the Size of the Global Capital Markets, 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.....
of Payments .................................................................................................................................. 6
Table 4. Net Foreign Purchases of Long-Term U.S. Securities ....................................................... 98
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. In these accounts, exports are recorded as a
positive amount even though they represent an outflow of goods and services from the economy,
because they represent a credit for which there is a specific obligation of repayment. Similarly,
although imports represent an inflow of goods and services to the economy, they are recorded as a
negative amount, because they represent a debt that must be repaid.
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
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.
Congressional Research Service
1
Financing the U.S. Trade Deficit
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.
Congressional Research Service
1
Financing the U.S. Trade Deficit
various countries and regions and the relative importance of international foreign exchange
markets. In 2012, these markets amounted to over $800 trillion, or more than 3050 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 $557 trillion in 2012, 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, 2012
(billions of dollars)
Bonds, Equities, and Bank Assets
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
$72,216.4
$11,403.5
European
Union
15,514.8
Euro
Area
World
United
Kingdom
United
States
Japan
Emerging
markets
Stock Market
Capitalization
Debt
Securities
$268,585.2
$52,494.9
498.0
82,217.5
12,199.5
332.5
2,476.7
Exchange Market Derivatives
OTC
Foreign
Exchange
Derivatives
OTC
Interest
Rate
Derivatives
Bank
Assets
Total
$99,134.2
$116,956.1
$557,061
$67,358
$489,703
9,732.2
29,456.8
43,028.8
NA
NA
NA
57,789.6
5,492.1
21,983.1
30,314.4
211,160
23,797
187,363
88.6
19,991.0
3,415.7
5,778.2
10,717.9
50,069
7,823
42,244
16,244.6
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.
Congressional Research Service
2
Financing the U.S. Trade Deficit
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
balance sheets from $10 trillion in 2000 to $34 trillion in 2007. These assets were comprised
Congressional Research Service
2
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 2013 indicates that the daily trading of foreign
currencies through traditional foreign exchange markets4 totaled $5.3 trillion, up 35% from the
$4.0 trillion reported in the previous survey conducted in 2010. 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 $2.7 trillion in April 2013. The combined amount of $8.0 trillion for daily
foreign exchange trading in the traditional and OTC markets is more than threefour times the annual
amount of U.S. exports of goods and services. The data also indicate that 87.0% of the global
foreign exchange turnover in April 2013 was in U.S. dollars, slightly higher lower than the 84.9%
share reported in a similar survey conducted in 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
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.
Congressional Research Service
3
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 four
quarters of 2013. The data indicate that in 2011, 2012, and 2013 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 more goods and services than it exported. On a quarterly basis, the deficit in the
current account has varied from
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 seven quarters from the first quarter of
2012 to the third quarter of four quarters of
2013 in the range of $9581 billion to $121105 billion and a surplus in the
services accounts during the seven quarters
same period in the range of about $4658 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 seven-quarter period.
Table 2. U.S. International Transactions, Selected Accounts
(billions of dollars)
2012
2013
2013
2011
2012
2013
I
II
III
IV
I
II
III
$-81
Current account
Balance on current account
$-458
$-440
$-121
$-111
$-107
$-102379
$-105
$-97
$-95
Balance on goods and
services
-557
-535
-143
-135
-129
-127475
-123
-118
-121
Balance on goods
-744
-741
-194
-186704
-179
-182176
-179
-176
-179172
Exports
1,496
1,561
388
392
391
3901,590
391
395
398
405
Imports
-2,240
-2,303
-581
-5782,294
-570
-573
-570
-570
-576576
-577
Balance on services
187
207
51
51
50
55
57229
57
58
58
58
Exports
617
649
160
162
161
166682
167
170
171
174
Imports
-430
-443
-110
-111
-111
-111453
-110
-112
-113
-116
Balance on income
233
224
55
57
55
57229
51
56
60
64
Income Receipts
761
776
194
193
192
197789
192
195
197
206
Income Payments
-528
-552
-139
-136
-138
-140560
-141
-139
-137
-142
Unilateral current transfers
-134
-130
-33133
-33
-32
-32
-3334
-34
-3432
-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
Congressional Research Service
4
Financing the U.S. Trade Deficit
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, 20130
0
552
439
351
40
66
67
174
-456
-97
-553
-229
-106
-74
-149
-16
-4
3
-1
0
1
3
-104
85
2
0
3
1
-1
-114
Capital account
Capital account transactions
Financial account
Balance on financial account
U.S.-owned assets abroad, net
increase / outflow (-)
U.S. official reserve assets,
net
U.S. Government assets,
net
Congressional Research Service
4
Financing the U.S. Trade Deficit
2013
2011
2012
2013
I
II
III
IV
U.S. private assets, net
-333
-178
-558
-228
-110
-76
-151
Foreign-owned assets in the
U.S. net increase / inflow (+)
969
544
906
266
168
148
325
Foreign official assets, net
254
394
284
127
-7
69
97
U.S. Treasury Securities
170
433
236
119
-12
16
115
Foreign private assets, net
715
150
622
139
175
80
228
U.S. Treasury Securities
188
156
202
51
-6
63
93
35
-7
-2
4
4
-7
-3
-93
-6
28
65
31
28
-93
Financial derivatives
Statistical discrepancy
Source: Scott, Sarah P., U.S. International Transactions: Fourth Quarter and Year 2013, BEA Release, March 9,
2014.
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. The
balance on the financial account in 20122013 fell 20%sharply from that recorded in 2011 due to a drop in
both U.S. financial outflows and foreign financial inflows2012 due to a 10-fold
drop in the value of cross-border financial derivatives. 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 Treasury
securities also dropped by almost half in 2013 from that recorded in 2012, falling from $433
billion in 2012 to $236 billion in 2013.
The data in Table 2 also indicate that in 20122013, U.S. private capital outflows were greater than
official outflows. ForeignSimilarly, foreign private capital inflows, which fellhad fallen 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
compared with 2011, quadrupled in 2013 to $633 billion from the $150 billion in private foreign
inflows in 2012, primarily as a result of an increase in direct investment and a net investment in
Treasury securities over 2012, and a large turn-around from outflows to inflows in banks account
holdings. Another way of viewing the balance of payments 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 20122013 for instance, total net capital inflows
representing the net balance on the
current account, the capital account, and the statistical
discrepancy, were a negative $439351 billion,
which was equivalent to the $439351 billion recorded in
the financial accounts. The 20122013 values
represent a decrease from the net amount recorded in
2011 2012. These totals, however, are subject to
periodic revisions.
Congressional Research Service
5
Financing the U.S. Trade Deficit
Table 3. Summary of the Net Balances
by Major Accounts in the U.S. Balance of
Payments
(billions of dollars)
2005
20062006
Total Net Capital Inflows
2007
2008
2009
2010
2011
2012
Total Net Capital Inflows
-$7012013
-$809
-$664
-$578
-$231
-$438
-$552
-$439
Total Net Goods
-791$-351
-847
-831
-835
-511
-650
-744
-741
-704
Total Net Services
76
87
130
136
127
151
187
207
229
Total Net Income
72
48
91
152
124
178
233
224
Total Net Transfers
-106229
-91
-116
-122
-122
-128
-134
-130
-133
Total Net Capital Account
11
-4
-2
6
0
0
-1
7
0
Statistical Discrepancy
37
-2
65
85
151
12
-93
-6
Total Net Financial Account
$70128
$809
$664
$578
$231
$458
$552
$439
$351
Total Net Official
279
496
459
16
969
404
134
475
289
Total Net Private
422
284
199
594
-783
20
382
-28
Direct Investment
7664
-2
-123
-23
-160
-95
-179
-222
-166
Portfolio Investment
331
260
306
193
-241
300
-10
208
-142
Other Private (Banks)
14
26
16
424
-383
-185
571
-15
373
Financial Derivatives
0
30
6
-33
45
14
35
-7
-2
Total Net Goods
Total Net Transfers
Total Net Financial Account
Direct Investment
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 the 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. Foreign 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, 2012, and in 2013. In 2013, foreign official
purchases of treasury securities rosefell to $434236 billion,
outpacing but still outpaced foreign private purchases of $156
$202 billion. Over the 2001-20122013 period, net foreign
official purchases of treasury securities were
more than twice as large as net foreign private
purchases.
Congressional Research Service
6
Financing the U.S. Trade Deficit
Figure 1. Foreign Private and Official Purchases of
U.S.Treasury Securities, 1997-20122013
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
2005-20122006-2013 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, 2010, 2012, and 2013and 2012 net official inflows exceeded net private inflows.
In contrast, U.S. U.S.
private capital flows shifted from a net outflow of $1.4 trillion in 2007 to a net
inflow of $867
billion in 2008, reflecting the financial turmoil during that period. Net private
outflows by U.S.
citizens, however, resumed in the 2009 to 20122013 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, foreign
Foreign private inflows of capital
dropped from $1.6 trillion in 2007 to $123 billion in 2008.
During the same2009-2013 period, foreign
official inflows increased slightly from $481 billion in
2007 to $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
outflow of $20 billion in 2008. In addition, net
as U.S. firms and others brought capital back to the United States.
In addition, net private flows increased from a net inflow of $152 billion in 2007 to a net inflow
of $743 billion in
2008. In 2012, net official inflows rose 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
billion in 2011. In 2013, net official inflows dropped to $298 billion, while net private inflows
recorded a net inflow of $64.
Congressional Research Service
7
Financing the U.S. Trade Deficit
Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-20122013
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
2005-20122006-2013. The data indicate that in 2008, the net foreign private accumulation of U.S. securities
dropped by three-fourths from that recorded in 2007 as foreign private investors withdrew funds
from the U.S. during the
financial crisis. In 2009, however, total foreign private and official
purchases of U.S. securities rebounded from a
negative $186.5 billion in 2008 to a positive $51 billion in 2009 and $414increased to reach $485 billion, propelled primarily by net foreign
official purchases. Total foreign purchases of U.S. securities grew to reach $573 billion in 2010,
reflecting increased net purchases of U.S. corporate stocks and U.S. Treasury securities. Such
foreign continued to grow in 2012 to reach $726 billion, before falling in 2013 to $435 billion.
Similarly, total private purchases of Treasury securities dropped in 2011 and 2012, but rebounded
somewhat in 2013, in 2012,
reaching $ 355205 billion. In 20122013, private foreign investors increased their holdings of U.S.
decreased their net
purchases of U.S. corporate stock, while reducing their holdingsincreasing their net purchases of corporate bonds.
Investors in Europe reduced
theirnearly doubled their net purchases of Treasury securities in 2013 from the amount they purchased in 2011, although investors
in Asia increased their purchases in 2012 compared with 2011.
Congressional Research Service
8
Financing the U.S. Trade Deficit
amount they purchased in 2012.
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
$875.72013
$1,099.1
$989.6
$236.3
$484.8
$573.2
$412.9
$726.4
$435.1
Total private purchases
598.3
611.4
644.8
-186.5
51.1
414.5
92.4
354.8
249.4
Corporate stocks
88.3
139.7
230.5
57.5
163.4
139.2
60.9
173.3
Europe
44.0-71.0
Europe
92.6
90.5
-2.1
79.6
81.3
-13.8
55.3
1.2
United Kingdom
21.2
73.2
67.9
28.4
33.3
35.0
9.1
25.9
Canada
21.0-2.9
Total private and official net
purchases of U.S. securities
Congressional Research Service
8
Financing the U.S. Trade Deficit
2006
2007
2008
2009
2010
2011
2012
2013
Canada
12.6
9.8
6.7
9.5
17.3
20.9
52.4
41.9
Caribbean financial centers
14.8
34.4
95.4
1.7
34.2
23.0
40.3
33.3
Latin America
-0.4-29.0
1.8
1.1
3.5
5.2
4.9
2.0
14.6
Asia
8.7
-4.7
Asia
-2.2
27.9
50.7
31.4
11.0
8.6
11.8
-71.6
Of which: Japan
-0.1
-1.2
-5.6
21.8
20.6
11.6
7.4
-8.4
Africa
0.3-59.4
0.0
-0.4
-4.7
-0.8
-0.4
0.9
0.4
Corporate bonds
312.30.5
Corporate bonds
517.8
383.7
-51.4
-117.3
-24.5
-106.3
-33.2
Europe
199.8177.3
Europe
332.1
225.9
-80.4
-105.7
-64.5
-123.5
-46.2
United Kingdom
144.7133.4
United Kingdom
203.6
130.5
-46.3
-56.1
-30.7
-59.0
-55.3
Canada
1.9-7.8
7.9
12.4
-2.0
-0.1
9.8
-2.1
4.0
Caribbean financial centers
40.218.0
106.9
61.9
12.1
-7.4
21.4
9.1
5.5
Latin America
7.320.0
9.3
4.7
-13.7
-4.5
3.4
3.4
0.1
Asia
54.4-2.1
Asia
53.7
72.8
32.4
1.6
6.8
11.6
6.8
Japan
25.62.3
Japan
12.2
39.5
21.7
-1.6
0.8
7.1
-2.1
Africa
0.6-5.2
Africa
0.2
-0.4
-0.4
0.1
0.1
0.0
-0.2
Other
8.10.3
Other
7.7
6.4
0.7
-1.3
-1.4
-4.8
-2.7
5.4
U.S. Treasury bonds
147.9
-71.9
39.2
-20.0
49.2
273.6
146.8
157.9
Europe
65.2205.1
Europe
-61.9
57.8
-43.5
-38.0
105.0
137.9
75.7
Canada
21.8145.4
Canada
14.7
-1.9
-6.2
19.7
35.9
-18.2
25.6
Caribbean financial centers
44.9-11.8
-10.9
-6.2
2.6
-13.8
22.1
6.7
-14.7
Latin America
10.45.1
-2.1
9.8
-5.0
6.1
0.4
-5.7
1.2
Asia
14.3
-10.7
-20.8
29.3
71.9
111.0
26.2
52.2
Africa
1.762.5
Africa
1.1
1.5
7.0
1.1
5.5
0.1
-1.4
Other
2.50.0
Other
-2.1
-1.1
-4.3
2.3
-6.4
-0.2
19.3
-0.5
Federal agency bonds
49.8
25.8
-8.6
-172.6
-44.3
26.2
-9.1
56.7
Congressional Research Service
9
Financing the U.S. Trade Deficit
2005
2006
2007
2008
2009
2010
2011
2012
Europe
-11.9-62.0
Europe
-8.1
42.3
-17.4
-46.6
1.1
-10.3
12.0
1.8
United Kingdom
-1.3
-8.8
70.9
42.4
-30.4
25.0
4.9
-2.0
Canada
12.114.6
9.7
3.0
5.0
1.8
8.1
3.5
1.3
Caribbean financial centers
3.0-0.1
31.3
-21.6
-75.8
7.9
-14.5
2.9
13.7
Latin America
7.1-32.9
3.4
2.8
0.8
0.8
5.0
3.6
-0.5
Asia
40.2-1.4
-10.8
-34.6
-81.4
-3.7
28.7
-8.1
30.8
Japan
15.6-28.0
Japan
2.9
-14.9
-39.0
-1.2
21.7
4.8
23.6
Africa
-0.3-50.6
Africa
-0.3
-0.6
-2.9
-2.0
-0.9
-0.2
-0.4
Other
-0.4
0.6
0.1
-1.0
-2.4
-1.2
-0.4
-0.2
Total official purchases
277.4
487.7
344.8
422.8
433.7
458.7
320.5
371.6
U.S. Treasury bonds
156.9
233.5
76.6
276.2
512.7
506.9
273.5
417.5
Other U.S. Government
securities
100.5
219.8
171.5
42.7
-132.6
-88.7
-20.7
-118.5
Corporate bonds
19.1
28.6
51.6
35.0
-2.3
0.8
-5.1
13.9
Corporate stocks
1.0
5.8
45.1
68.9
55.9
39.7
72.8
58.7
Source: Scott, Sarah P., “U.S. International Transactions: Third Quarter 2013, BEA Release, December 17,
2013-0.3
Other
0.6
0.1
-1.0
-2.4
-1.2
-0.4
-0.2
-1.2
Latin America
Africa
Canada
Caribbean financial centers
Latin America
Caribbean financial centers
Latin America
Asia
Canada
Caribbean financial centers
Latin America
Asia
Congressional Research Service
9
Financing the U.S. Trade Deficit
2006
2007
2008
2009
2010
2011
2012
2013
Total official purchases
487.7
344.8
422.8
433.7
458.7
320.5
371.6
185.8
U.S. Treasury bonds
233.5
76.6
276.2
512.7
506.9
273.5
417.5
209.8
Other U.S. Government
securities
219.8
171.5
42.7
-132.6
-88.7
-20.7
-118.5
-30.9
Corporate bonds
28.6
51.6
35.0
-2.3
0.8
-5.1
13.9
26.0
Corporate stocks
5.8
45.1
68.9
55.9
39.7
72.8
58.7
-19.2
Source: Scott, Sarah P., “U.S. International Transactions: Fourth Quarter and Year 2013, BEA Release, March 9,
2014. 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.
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
Congressional Research Service
10
Financing the U.S. Trade Deficit
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 2012, the latest year for which data are available, the overseas
assets of U.S. residents totaled $21.0 trillion, while foreigners had acquired about $25.1 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 $4.1 trillion in 2012, 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
2009
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
-2,661.3
-2,813.4
-4,510.7
-4,558.7
With direct investment at historical cost
-2,503.8
-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
18,511.7
20,298.4
21,636.2
21,637.6
With direct investment at market value
18,769.4
20,758.3
21,486.9
21,809.4
With direct investment at historical cost
18,000.9
19,782.5
21,057.7
21,013.2
Financial derivatives
3,489.8
3,652.3
4,716.6
3,619.8
U.S. official reserve assets
403.8
488.7
537.0
572.4
U.S. Government assets, other
82.8
75.2
178.9
93.6
With direct investment at current cost
14,535.3
16,082.2
16,203.6
17,351.9
With direct investment at market value
14,793.1
16,542.1
16,054.4
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
2012With direct investment at historical cost
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 banks930.3
874.8
793.0
844.8
Net international investment position of the United States:
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:
U.S. claims by US nonbanking concerns
Congressional Research Service
11
Financing the U.S. Trade Deficit
Type of Investment
U.S. claims reported by US banks
2009
2010
2011
2012
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:
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 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
Congressional Research Service
12
Financing the U.S. Trade Deficit
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
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
(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, by year-end 2012, U.S.
private holdings abroad had risen in value from $15.6 trillion to $16.7 trillion, with direct
investment valued at historical cost, due in part to an upward revaluation in the values of foreign
corporate stocks, reflecting an increase in stock market values. Similarly, the value of foreign
owned corporate stocks in the United States rose in value in 2012, 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 $5.7 trillion in 2012, 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
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(...continued)
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.
Congressional Research Service
13
Financing the U.S. Trade Deficit
Figure 3. Foreign Official and Private Investment Positions
in the United States, 1994-2012
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.
Congressional Research Service
14
Financing the U.S. Trade Deficit
Figure 4. U.S. and Foreign Investment Position, By Major Component, 2012
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
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
Congressional Research Service
15
Financing the U.S. Trade Deficit
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
Congressional Research Service
16