Order Code RL33274
CRS Report for Congress
Received through the CRS Web
Financing the U.S. Trade Deficit
February 14, 2006
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library 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 growing U.S. merchandise trade deficit and the associated increase in U.S.
dollar-denominated assets owned by foreigners. This report provides an overview
of the U.S. balance of payments, an explanation of the broader role of capital flows
in the U.S. economy, an explanation of how the country finances its trade deficit or
a trade surplus, and the implications for Congress and the country of the large inflows
of capital from abroad. The major observations indicate that:
! Concerns that foreign private investors were turning away from
acquiring additional dollar-denominated assets that were prevalent
in 2004 as a result of the sharp growth in the shares of foreign
capital inflows from official sources, appear to have ameliorated in
2005 with a strong resurgence of capital inflows from private
sources.
! The inflow of capital from abroad supplements domestic sources of
capital and likely allows the United States to maintain its current
level of economic activity at interest rates that are below the level
they likely would be without the capital inflows.
! Foreign official and private acquisitions of dollar-denominated
assets likely will generate a stream of returns to overseas investors
that would have stayed in the U.S. economy and supplemented other
domestic sources of capital had the assets not been acquired by
foreign investors.
This report will be updated as events warrant.

Contents
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Capital Flows and the Dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The U.S. Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
The U.S. Net International Investment Position . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
List of Figures
Figure 1. Foreign Private and Official Inflows of Capital . . . . . . . . . . . . . . . . . . 5
Figure 2. Foreign Official and Private Investment Positions in the United States,
1983-2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Figure 3. U.S. and Foreign Investment Position, By Major Component, 2004 . 10
List of Tables
Table 1. U.S. International Transactions, Selected Accounts . . . . . . . . . . . . . . . . 3
Table 2. Summary of the Net Balances by Major Accounts in the U.S.
Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 3. U.S. International Investment Position . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Financing the U.S. Trade Deficit
Background
By standard convention, the balance of payments accounts are based on a
double-entry bookkeeping system. As a result, each transaction that is entered into
the accounts as a credit must have a corresponding debit and vice versa. This means
that a surplus or deficit in one part of the accounts necessarily will be offset by a
deficit or surplus, respectively, in another account so that, overall, the accounts are
in balance. This convention also means that a deficit in one account, such as the
merchandise trade account, is not necessarily the same as a debt.1 The trade deficit
can become a debt equivalent depending on how the deficit is financed and the
expectations of those who hold the offsetting dollar-denominated U.S. assets. The
balance of payments accounts are divided into three main sections: the current
account, which includes the exports and imports of goods and services and personal
and government transfer payments; the capital account, which includes such capital
transfers as international debt forgiveness; and the financial account, which includes
official transactions in financial assets and private transactions in financial assets and
direct investment in businesses and real estate.
When the basic structure of the balance of payments was established,
merchandise trade transactions dominated the accounts. Financial transactions
recorded in the capital accounts generally reflected the payments and receipts of
funds that corresponded to the importing and exporting of goods and services. As
a result, the capital accounts generally represented “accommodating” transactions,
or financial transactions associated directly with the buying and selling of goods and
services. During this early period, exchange rates between currencies were fixed, and
private capital flows, such as foreign investment, were heavily regulated so that
nearly all international flows of funds were associated with merchandise trade
transactions and with some limited government transactions.
Since the 1970s, however, private capital flows have grown markedly as
countries have liberalized their rules governing overseas investing and as nations
have adopted a system of floating exchange rates, where the rates are set by market
forces. Floating exchange rates have spurred demand for the dollar. The dollar also
is sought for investment purposes as it has become a vehicle itself for investment and
speculation. This means that the balance of payments record not only the
accommodating flows of capital which correspond to imports and exports of goods
and services, but also autonomous flows of capital that are induced by a broad range
of economic factors that are unrelated directly to the trading of merchandise goods.
1 For additional information about the causes of the U.S. trade deficit, see CRS Report
RL31032, The U.S. Trade Deficit: Causes, Consequences, and Cures, by Craig Elwell.

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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.”
Another aspect of capital mobility and capital inflows is the impact such capital
flows have on the international exchange value of the dollar. Demand for U.S.
assets, such as financial securities, translates into demand for the dollar, since U.S.
securities are denominated in dollars. As demand for the dollar rises or falls
according to overall demand for dollar-denominated assets, the value of the dollar
changes. These exchange rate changes, in turn, have secondary effects on the prices
of U.S. and foreign goods, which tend to alter the U.S. trade balance. At times,
foreign governments have intervened in international capital markets to acquire the
dollar directly or to acquire Treasury securities in order to strengthen the value of the
dollar against particular currencies. In addition, various central banks moved
aggressively following the Asian financial crisis in the 1990s to bolster their holdings
of dollars in order to use the dollars to support their currencies should the need arise.
Furthermore, the dollar is heavily traded in financial markets around the globe
and, at times, plays the role of a global currency. Disruptions in this role have
important implications for the United States and for the smooth functioning of the
international financial system. This prominent role means that the exchange value
of the dollar often acts as a mechanism for transmitting economic and political news
and events across national borders. While such a role helps facilitate a broad range
of international economic and financial activities, it also means that the dollar’s
exchange value can vary greatly on a daily or weekly basis as it is buffeted by
international events. A recent survey by the world’s leading central banks indicate
that the daily trading of foreign currencies totals more than $1.9 trillion, or more than
the annual amount of U.S. exports of goods and services. The data also indicate
that 90% of the global foreign exchange turnover is in U.S. dollars, substantially the
same as the share reported in a similar survey conducted in 2001.2
The U.S. Balance of Payments
Table 1 presents a summary of the major accounts in the U.S. balance of
payments over the last seven quarters. The data indicate that for each quarter the
U.S. current account, or the balance of exports and imports of goods, services and
transfers, was in deficit, or the United States imported more than it exported.
2 Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in
2004
. Bank for International Settlement, March 2005. pp. 1-2. A copy of the report is
available at [http://www.bis.org/publ/rpfx05t.pdf]. The 2001 survey is: Central Bank Survey
of Foreign Exchange and Derivatives Market Activity in April 2001: Preliminary Global
Data
. Bank for International Settlement, October 2001.

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According to the accounts, the United States experienced a deficit in the merchandise
trade goods accounts for all seven quarters, and a surplus in the services accounts.
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
accounts were in surplus except for the second quarter of 2005.
Table 1. U.S. International Transactions, Selected Accounts
(in billions of U.S. dollars)
2004
2005
2004
I
II
III
IV
I
II
III
Current account
Balance on current account
-668
-146
-167
-167
-188
-199
-198
-196
Balance on goods and services
-618
-139
-152
-157
-169
-173
-174
-183
Balance on goods
-665
-151
-164
-168
-182
-186
-187
-198
Exports
808
194
200
205
209
214
224
225
Imports
-1,473
-345
-364
-373
-391
-400
-410
-423
Balance on services
48
13
12
10
13
13
13
15
Exports
344
83
85
86
90
93
94
96
Imports
-296
-71
-73
-75
-77
-79
-80
-80
Balance on income
30
15
6
6
3
1
-2
1
Income Receipts
380
86
91
96
106
107
111
119
Income Payments
-349
-71
-86
-89
-103
-106
-113
-118
Unilateral current transfers, net
-81
-22
-21
-16
-22
-26
-23
-14
Capital account

Capital account transactions, net
-2
-0
-0
-0
-0
-4
-0
-0
Financial account
Balance on financial account
585
128
171
117
169
162
151
273
U.S.-owned assets abroad, net
-856
-295
-134
-138
-289
-82
-225
-124
U.S. official reserve assets, net
3
1
1
0
1
5
-1
5
U.S. Government assets, net
1
1
-0
-0
1
4
1
1
U.S. private assets, net
-860
-296
-135
-138
-290
-91
-225
-129
Foreign-owned assets in the U.S.,
1,440
423
305
254
458
243
376
397
net
Foreign official assets, net
395
147
77
76
94
25
83
38
Foreign private assets, net
1,045
276
228
178
363
218
293
359
Statistical discrepancy
85
19
-4
51
20
41
47
-77
Source: Hoang, Mai-Chi, and Matthew J. Argersinger, U.S. International Transactions, Third
Quarter of 2005. Survey of Current Business, January 2006. p. 20.
The data also indicate that the U.S. financial accounts were in substantial
surplus, because they represent the opposite and offsetting transactions to deficits in
the current account. Indeed, the 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.

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The data in Table 1 also indicate that private capital flows account for the
largest share of both U.S. capital inflows and outflows. Perhaps of more importance,
however, is the data in Table 2 which show the net amount of the flows in the major
accounts, or the difference between the inflows and outflows. In 2004, for instance,
total net capital inflows representing the net balance on the current account, the
capital account, and the statistical discrepancy, were a negative $585 billion. This
deficit was financed by an offsetting net inflow in the financial account. One striking
feature of the flows is the recent change in the composition of the balances in the net
financial account. Prior to 2004, total net private inflows were greater than total net
official inflows, but that trend was reversed in 2004, when net official inflows were
nearly double that of the net private inflows, as indicated in Figure 1. Through the
first three quarters of 2005, official inflows continued to outpace private inflows, but
the difference between them had diminished sharply. At current rates, official
inflows could amount to about $260 billion in 2005 and private inflows could
amount to about $200 billion, a difference of about $60 billion, far below the
difference of over $200 billion recorded in 2004.
Table 2. Summary of the Net Balances by Major Accounts in the
U.S. Balance of Payments
(in billions of U.S. dollars)
1997
1998
1999
2000
2001
2002
2003
2004
Total Net Capital Inflows
$-221
$-76
$-237
$-477
$-416
$-570
$-546
$-585
Total Net Goods
-198
-247
-346
-452
-427
-483
-548
-665
Total Net Services
90
82
83
74
64
61
51
48
Total Net Income
13
4
13
21
24
7
33
30
Total Net Transfers
-40
-48
-47
-56
-47
-59
-67
-81
Total Net Capital Account
-1
-1
-5
-1
-1
-1
-3
-2
Statistical Discrepancy
-84
135
65
-63
-29
-95
-12
85
Total Net Financial Account
221
76
237
477
416
570
546
585
Total Net Official
18
-27
55
42
23
111
251
399
Total Net Private
203
103
182
436
393
460
295
186
Direct Investment
1
36
65
162
25
-62
-134
-145
Portfolio Investment
175
61
138
268
295
402
292
374
Other Private (Banks)
27
6
-21
6
74
120
137
-43
Source: Data developed by CRS from data published by the Department of Commerce.

CRS-5
Figure 1. Foreign Private and Official Inflows of Capital
Billions of dollars
$500
$400
$300
$200
$100
$0
-$100
1997
1998
1999
2000
2001
2002
2003
2004
Official
Private
Source: Department of Commerce
The U.S. Net International Investment Position
As indicated above, the data in Tables 1 and 2 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 would otherwise remain in the U.S. economy.
According to the most commonly accepted approach to the balance of payments,
macroeconomic developments in the U.S. economy are the major driving forces
behind the magnitudes of capital flows, because the macroeconomic factors
determine the overall demand for and supply of capital in the economy. Economists
generally conclude that the rise in capital inflows can be attributed to comparatively
favorable returns on investments in the United States when adjusted for risk, a
surplus of saving in other areas of the world, the well-developed U.S. financial
system, and the overall stability of the U.S. economy. In turn, these net capital

CRS-6
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 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 2004, the latest year for which data
are available, the overseas assets of U.S. residents totaled approximately $8.7
trillion, while foreigners had acquired about $11.3 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 $2.6 trillion, as indicated in
Table 3.
Foreign investors who acquire U.S. assets do so at their own risk and accept the
returns accordingly, unlike the debt owed by developing countries where principle
and debt service payments are guaranteed in advance. While foreign investors likely
expect positive returns from their dollar-denominated assets, the returns on most of
the assets in the international investment position, except for bonds, are not
guaranteed and foreign investors stand to gain or lose on them similar to the way U.S.
domestic investors gain or lose.
As Table 3 indicates, the investments in the international investment position
include such financial assets as corporate stocks and bonds, government securities,
and direct investment3 in businesses and real estate. The value of these assets,
3 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...)

CRS-7
measured on an annual basis, can change as a result of purchases and sales of new or
existing assets; changes in the financial value of the assets that arise through
appreciation, depreciation, or inflation; changes in the market values of stocks and
bonds; or changes in the value of currencies. The Department of Commerce also
uses three different methods for valuing direct investments that yield roughly
comparable estimates for the net position, although the three methods do provide
estimates on U.S. direct investment abroad and foreign direct investment that can be
considerably different at times.4
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 2, the overall foreign official share of
foreign-owned assets in the United States has remained relatively modest.
As Figure 2 indicates, official asset holdings were valued at nearly $2 trillion
in 2004, or about 16% of the total foreign investment position, a share that has
remained relatively stable over the 12-year period of 1993 to 2004. 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.5
3 (...continued)
CFR § 806.15 (a)(1).
4 For additional information, see CRS Report RL32964, The United States as a Net Debtor
Nation: Overview of the Net International Investment Position
, by James K. Jackson
5 For additional information, see CRS Report RL32462, Foreign Investment in U.S.
Securities
, by James K. Jackson.

CRS-8
Table 3. U.S. International Investment Position
(in millions of dollars)
Type of investment
2001
2002
2003
2004
Net international investment position of the United States:
With direct investment at current cost
-1,919,430 -2,107,267 -2,156,703 -2,484,219
With direct investment at market value
-2,339,448 -2,455,114 -2,372,370 -2,542,245
With direct investment at historical cost
-1,977,688 -2,178,482 -2,252,156 -2,605,028
U.S.-owned assets abroad:
With direct investment at current cost
6,308,681
6,645,679
7,640,986
9,052,796
With direct investment at market value
6,930,484
6,807,849
8,296,638
9,972,783
With direct investment at historical cost
6,075,950
6,401,761
7,370,335
8,749,410
U.S. official reserve assets
129,961
158,602
183,577
189,591
U.S. Government assets, other
85,654
85,309
84,772
83,556
U.S. private assets:
With direct investment at current cost
6,093,066
6,401,768
7,372,637
8,779,649
With direct investment at market value
6,714,869
6,563,938
8,028,289
9,699,636
With direct investment at historical cost
5,860,335
6,157,850
7,101,986
8,476,263
Direct investment abroad:
At current cost
1,693,131
1,860,418
2,062,551
2,367,386
At market value
2,314,934
2,022,588
2,718,203
3,287,373
At historical cost
1,460,400
1,616,500
1,791,900
2,064,000
Foreign securities
2,169,735
2,079,891
2,953,778
3,436,718
Bonds
557,062
705,226
874,356
916,655
Corporate stocks
1,612,673
1,374,665
2,079,422
2,520,063
U.S. claims by US nonbanking concerns
839,303
902,002
596,961
801,536
U.S. claims reported by U.S. banks
1,390,897
1,559,457
1,759,347
2,174,009
Foreign-owned assets in the United States:
With direct investment at current cost
8,228,111
8,752,946
9,797,689 11,537,015
With direct investment at market value
9,269,932
9,262,963 10,669,008 12,515,028
With direct investment at historical cost
8,053,638
8,580,243
9,622,491 11,354,438
Foreign official assets in the United States
1,109,072
1,250,977
1,567,124
1,981,992
Foreign private assets:
With direct investment at current cost
7,119,039
7,501,969
8,230,565
9,555,023
With direct investment at market value
8,160,860
8,011,986
9,101,884 10,533,036
With direct investment at historical cost
6,944,566
7,329,266
8,055,367
9,372,446
Direct investment in the United States:
At current cost
1,518,473
1,517,403
1,585,898
1,708,877
At market value
2,560,294
2,027,420
2,457,217
2,686,890
At historical cost
1,344,000
1,344,700
1,410,700
1,526,300
U.S. Treasury securities
375,059
473,503
543,209
639,716
U.S. other securities
2,821,372
2,779,067
3,408,113
3,987,797
Corporate and other bonds
1,343,071
1,530,982
1,707,206
2,059,250
Corporate stocks
1,478,301
1,248,085
1,700,907
1,928,547
U.S. currency
279,755
301,268
317,908
332,735
U.S. liabilities by U.S. nonbanking concerns
798,314
892,574
454,317
581,258
U.S. liabilities reported by U.S. banks
1,326,066
1,538,154
1,921,120
2,304,640
Source: Nguyen, Elena L., The International Investment Position of the United States at Yearend
2004, Survey of Current Business, July 2005. p. 37.

CRS-9
Figure 2. Foreign Official and Private Investment Positions in the
United States, 1983-2004
Trillions
$10
$8
$6
$4
$2
$0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Foreign official assets
Foreign private assets
Source: Department of Commerce
Private asset holdings are comprised primarily of direct investment in businesses
and real estate, purchases of publicly traded government securities, and corporate
stocks and bonds. As indicated in Figure 3, 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.

CRS-10
Figure 3. U.S. and Foreign Investment Position, By Major
Component, 2004
US Assets
Foreign Assets
Total = $9.1 trillion
Total = $11.5 trillion
Official assets
Direct invest.
Govt. securities
Bonds
Stocks
Nonbanks
US banks
$3
$2
$1
$0
$1
$2
$3
Trillions
Trillions
Source: Department of Commerce
Implications
The persistent U.S. trade deficit raises concerns in Congress and elsewhere
because of the potential risks such deficits may pose for the long term rate of growth
for the economy. In particular, some observers are concerned that foreigners will
become saturated with dollar-denominated assets and will become unwilling to
accommodate the trade deficit by holding more dollar-denominated assets. The shift
in 2004 in the balance of payments toward a larger share of assets being acquired by
official sources generated speculation that foreign private investors had indeed
reached the point where they were no longer willing to add more dollar-denominated
assets to their portfolios. This trend may be nearly reversed in 2005, however, as
foreign private investments had rebounded through the first three quarters.
Another concern is with the outflow of profits that arise from the dollar-
denominated assets owned by foreign investors. This outflow arises from the profits
or interest generated by the assets and represent a clear outflow of capital from the
economy that otherwise would not arise if the assets were owned by U.S. investors.
These capital outflows represent the most tangible cost to the economy of the present

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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 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