Financing the U.S. Trade Deficit
James K. Jackson
Specialist in International Trade and Finance
February 5, 2010
Congressional Research Service
7-5700
www.crs.gov
RL33274
CRS Report for Congress
P
repared for Members and Committees of Congress

---

Financing the U.S. Trade Deficit

Summary
The U.S. merchandise trade deficit is a part of the overall U.S. balance of payments, a summary
statement of all economic transactions between the residents of the United States and the rest of
the world, during a given period of time. Some Members of Congress and other observers have
grown concerned over the magnitude of the U.S. merchandise trade deficit and the associated
increase in U.S. dollar-denominated assets owned by foreigners. The current slowdown in global
economic activity has reduced global trade flows and, consequently, reduced the size of the U.S.
trade deficit. This report provides an overview of the U.S. balance of payments, an explanation of
the broader role of capital flows in the U.S. economy, an explanation of how the country finances
its trade deficit or a trade surplus, and the implications for Congress and the country of the large
inflows of capital from abroad. The major observations indicate that:
• Foreign official and private investors sharply increased their purchases of U.S.
Treasury securities in 2008 in response to uncertainty associated with disruptions
in global financial markets. During the same period, foreign private investors
sharply reduced their purchases of U.S. corporate stocks and bonds compared
with 2007.
• 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 .................................................................................................... 3
The U.S. Net International Investment Position ........................................................................... 9
Implications .............................................................................................................................. 14

Figures
Figure 1. Foreign Private and Official Purchases of U.S. Treasury Securities, 1997-2008............. 6
Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-2008................................ 7
Figure 3. Foreign Official and Private Investment Positions in the United States, 1994-
2008 ...................................................................................................................................... 13
Figure 4. U.S. and Foreign Investment Position, By Major Component, 2008............................ 14

Tables
Table 1. Selected Indicators of the Size of the Global Capital Markets, 2008 ............................... 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 ................................................................................................................................. 5
Table 4. Net Foreign Purchases of Long-Term U.S. Securities ..................................................... 8
Table 5. U.S. Net International Investment Position................................................................... 10

Contacts
Author Contact Information ...................................................................................................... 15

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. 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
various countries and regions and the relative importance of international foreign exchange

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 K. Elwell.
Congressional Research Service
1

---

Financing the U.S. Trade Deficit

markets. In 2008, these markets amounted to nearly $700 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 $486 trillion in 2008,
50% larger than the combined total of all public and private bonds, equities, and bank assets. For
the United States, such derivatives total nearly 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, 2008
(in billions of U.S. dollars)
Bonds, Equities, and Bank Assets
Exchange Market Derivatives
Gross
OTC
OTC
Domestic Total
Stock
Foreign
Interest
Product
Official
Market
Debt
Bank
Exchange
Rate

(GDP)
Reserves Total
Capitalization Securities Assets
Total
Derivatives Derivatives
World 60,917.3 6,787.8
214,424.0
33,513.1 83,529.6
97,381.4
485,973.0 48,775.0 437,198.0
European
Union 17,037.4 278.4
46,802.4 7,262.8
29,137.0
46,802.4 N.A. N.A. N.A.
Euro
Area
13,538.4
167.7 32,510.8
4,984.7 23,793.3 32,510.8 160,646.0
20,653.0
160,646.0
United
States
14,441.4
66.6 56,391.8
11,737.6 30,657.7 13,996.5 194,904.0
40,737.0
154,167.0
Japan
4,910.7 1,009.4
24,714.4
3,209.0 11,478.4
10,027.0
68,889.0 11,438.0 57,451.o
Emerging
markets 20,605.9 4,286.8
34,394.2
8,558.9 7,815.4
18,020.0 N.A.
N.A.
N.A.
Source: Global Financial Stability Report, International Monetary Fund, December 2009. Statistical Appendix, Table
3. Quarterly Review, Bank for International Settlements, December 2009, Tables 20b and 21b. Total derivatives
does not include equity and commodity-linked derivatives.
Another aspect of capital mobility and capital inflows is the impact such capital flows have on the
international exchange value of the dollar. Demand for U.S. assets, such as financial securities,
translates into demand for the dollar, since U.S. securities are denominated in dollars. As demand
for the dollar rises or falls according to overall demand for dollar-denominated assets, the value
of the dollar changes. These exchange rate changes, in turn, have secondary effects on the prices
of U.S. and foreign goods, which tend to alter the U.S. trade balance. At times, foreign
governments have intervened in international capital markets to acquire the dollar directly or to
acquire Treasury securities in order to strengthen the value of the dollar against particular
currencies. In addition, various central banks moved aggressively following the Asian financial
crisis in the 1990s to bolster their holdings of dollars in order to use the dollars to support their
currencies should the need arise.
The dollar is also heavily traded in financial markets around the globe and, at times, plays the role
of a global currency. Disruptions in this role have important implications for the United States
and for the smooth functioning of the international financial system. During the decade preceding
the current 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 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
Congressional Research Service
2

---

Financing the U.S. Trade Deficit

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 2007 indicates that the daily trading of foreign
currencies through traditional foreign exchange markets4 totals more than $3.2 trillion, up sharply
from the $1.9 trillion reported in the previous survey conducted in 2004. In addition to the
traditional foreign exchange market, the over-the-counter (OTC)5 foreign exchange derivatives
market reported that daily turnover of interest rate and non-traditional foreign exchange
derivatives contracts reached $2.1 trillion in April 2007. The combined amount of $5.3 trillion for
daily foreign exchange trading in the traditional and OTC markets is more than three times the
annual amount of U.S. exports of goods and services. The data also indicate that 86.3% of the
global foreign exchange turnover is in U.S. dollars, slightly lower than the 88.7% share reported
in a similar survey conducted in 2004.6
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 2008 and in the first three quarters of 2009 the U.S.
current account, or the balance of exports and imports of goods, services and transfers, was in
deficit, or the United States imported more than it exported. On a quarterly basis, the deficit in the
current account declined from the second quarter of 2008 through the second quarter of 2009,

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 custom-
tailor agreements to meet the specific needs regarding maturity, payments intervals or other terms that allow the
contracts to meet specific requirements for risk.
6 Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2007. Bank for International
Settlement, September 2007. pp. 1-2. A copy of the report is available at:http://www.bis.org/publ/rpfx07.pdf
Congressional Research Service
3

---

Financing the U.S. Trade Deficit

reflecting the slowdown in global trade. According to the accounts, the United States continued
experiencing deficits in the merchandise trade goods accounts in all four quarters in 2008 and in
the first three quarter of 2009 and a surplus in the services accounts during those seven quarters.
In the income accounts, which represent inflows of income on U.S. assets abroad relative to
outflows of income earned on U.S. assets owned by foreigners, the net balance of the accounts
was in surplus throughout the period.
Table 2. U.S. International Transactions, Selected Accounts
(in billions of U.S. dollars)
2008
2009

2008 I II III IV I II III
Current account








Balance on current account
-706
-179
-188
-184
-155
-104
-98 -108
Balance on goods and services
-696
-183
-183
-186
-144
-92
-81
-97
Balance on goods
-840
-219
-221
-221
-179
-124
-115 -132

Exports
1,277
316 333 338
291 249
245
284

Imports
-2,117
-534 -554 -559
-469 -373
-362
-396

Balance
on
services
144
36 39 35
34 32
34
35

Exports
550
136 140 140
134 123
125
129

Imports
-405 -00 -102 -105 -99 -91 -91 -94
Balance on income
118
37
26
34
21
18
17
24

Income
Receipts
765
203 199 195
168 135
135
140

Income
Payments
-646
-166 -173 -161
-148 -117
-118
-117

Unilateral
current
transfers -128
-33 -31 -32
-32 -30
-33
-34
Capital account








Capital
account
transactions
0
0 0 0
0 0
0
0
Financial account








Balance on financial account
505
167
107
143
88
35
63
38
U.S.-owned assets abroad, net
0
-252
107
29
115
95
37 -294
U.S. official reserve assets, net
-5
0
-1
0
-3
-1
-4
-49
U.S. Government assets, net
-530
3
-42
-226
-265
244
194
58
U.S. private assets, net
534
-254
150
255
383
-148
-153 -303
Foreign-owned assets in the U.S.
534
428
2
118
-12
-68
15
332
Foreign official assets, net
487
209
179
116
-16
71
124
124
U.S. Treasury Securities
478
106
76
116
179
118
124
124
Foreign private assets, net
47
217
-177
2
4
-139
-110
209
U.S. Treasury Securities
197
16
19
80
81
54
-23
-9
Financial
derivatives
-29
-8 -2 -4
-15 8
11
0
Statistical discrepancy
200
13 81 38
67 70
35
70
Congressional Research Service
4

---

Financing the U.S. Trade Deficit

Source: Weinberg, Douglas B., U.S. International Transactions: Third Quarter of 2009. Survey of Current
Business, January, 2010. P. 18.
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
2008 indicate that foreign official purchases of U.S. Treasury securities nearly quadrupled from
similar purchases in 2007 and private foreign purchases of Treasury securities in 2008 more than
doubled from the amount recorded for 2007. Foreign official purchases of U.S. Treasury
securities remained strong through the first three quarters of 2009, while foreign private
purchases of such securities turned negative in the second and third quarters,
The data in Table 2 also indicate that official capital flows at times accounted for the largest share
of both U.S. capital inflows and outflows in 2008. 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 2008 for instance, total net capital inflows representing the
net balance on the current account, the capital account, and the statistical discrepancy, were a
negative $505 billion, markedly less than the deficit of $664 in 2007. This decrease in the overall
net capital inflows occurred in part because of an increase in the surplus in the services account
and in the income account. These totals may change, however, since they are subject to periodic
revisions.
Table 3. Summary of the Net Balances by Major Accounts in the U.S. Balance of
Payments
(in billions of U.S. dollars)

2001 2002 2003 2004 2005 2006 2007 2008
Total Net Capital Inflows
-$400 -$501 -$533 -$532 -$701 -$809 -$664 -$505

Total
Net
Goods
-430 -483 -549 -672 -791 -847 -831 -840

Total
Net
Services
64 61 54 62 76 87 130 144

Total
Net
Income
32 27 45 67 72 48 91 118

Total
Net
Transfers
-64 -65 -72 -88 -106 -91 -116 -128
Total Net Capital Account
12
-1
-3
1
11
-4
-2
1

Statistical
Discrepancy
-14 -40 -8 97 37 -2 65 200
Total Net Financial Account
$400 $501 $533 $532 $701 $809 $664 $505

Total
Net
Official
23 113 280 402 279 496 459 -47

Total
Net
Private
378 388 253 130 422 313 205 553

Direct
Investment
24 19 11 13 8 2 -11 29

Portfolio
Investment
289 335 165 305 331 260 306 131
Congressional Research Service
5

---

Financing the U.S. Trade Deficit


2001 2002 2003 2004 2005 2006 2007 2008

Other
Private
(Banks)
65 34 77
-188 82 51 -90 393

Financial
Derivatives
0 0 0 0 0 30 6
-29
Source: Data developed by CRS from data published by the Department of Commerce.
Commerce Department data indicate that foreign private purchases of Treasury securities turned
negative between 1998 and 2001 and in 2006 as foreign private investors experienced net sales of
Treasury securities, as indicated in Figure 1. By 2002, foreign private investors returned to
acquiring Treasury securities, but the amount they acquired remained relatively level at $100
billion per year from 2002 to 2005. In contrast, foreign official net acquisitions of Treasury
securities trended slightly upward between 2000 and 2002, but such net acquisitions more than
doubled over the 2002 to 2004 period, rising to $273 billion in 2004. In 2005, though, official
purchases of Treasury securities plummeted to $112 billion and were less than private purchases.
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 2008, foreign private investors accumulated $197 billion in Treasury securities, as
foreign governments sharply increased their net purchases of Treasury securities, which rose from
$98 billion in 2007 to $478 billion in 2008.
Figure 1. Foreign Private and Official Purchases of U.S. Treasury Securities, 1997-
2008
Billions of dollars
$500
$400
$300
Official
$200
$100
$0
Private
-$100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Department of Commerce
The deficit in the net capital inflow account was financed by an offsetting net inflow in the
financial account. One striking feature of the financial flows is the way the composition of the
balances in the net financial account have changed over the period since 2002. Net private and net
official capital inflows have changed abruptly since the period prior to 2002, when private
Congressional Research Service
6

---

Financing the U.S. Trade Deficit

inflows were greater than official inflows, as indicated in Figure 2. In 2004, 2006, and 2007, net
official inflows exceeded net private inflows. In 2007, foreign private inflows of capital increased
by more than 2%, but similar private outflows by U.S. citizens increased by more than 11%, so
that the overall net private flows fell in 2007. In 2008, however, private capital flows by U.S.
citizens shifted from a net outflow of $1.4 trillion in 2007 to a net inflow of $500 billion in 2008.
During the same period, U.S. official outflows increased from $22 billion in 2007 to $530 billion
in 2008. In contrast, foreign private inflows of capital dropped from $1.6 trillion in 2007 to $47
billion in 2008. During the same period, foreign official inflows increased slightly from $481
billion in 2007 to $487 billion in 2008. As a result of these changes, net official flows, or the
combination of U.S. and foreign officials flows dropped from a net outflow of $458 billion 2007
to a net inflows of $47 billion in 2008. In addition, net private flows increased from a net inflow
of $199 billion in 2007 to a net inflow of $581 billion in 2008.
Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-2008
Billions of dollars
$600
$500
Private
$400
$300
$200
$100
Official
$0
-$100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: Department of Commerce
The data in Table 4 show the total net accumulation of U.S. securities, or the amount of securities
purchased less those that were sold, by foreign private and official sources from 2001-2008. The
data indicate that in 2008, the net accumulation of U.S. securities fell sharply from the amount
recorded in 2007, largely due to a shift in net private purchases from a net accumulation in 2007
of $644 billion to a net sales of $114 in 2008. Private foreign investors operating in every area but
Asia reduced their accumulation of U.S. corporate stocks, Similarly, foreign private investors
reduced their accumulation of corporate bonds, reflecting the deteriorating economic and profit
conditions of most U.S. firms in 2008. In addition, both private and official investors reduced
their net accumulation of other U.S. government agency bonds.
Congressional Research Service
7

---

Financing the U.S. Trade Deficit

Table 4. Net Foreign Purchases of Long-Term U.S. Securities
(in billions of dollars)

2001 2002 2003 2004 2005 2006 2007 2008
Total private and official net
$430.3 $428.3 $520.5 $767.8 $875.7 $1,099.1 $989.6 $245.6
purchases of U.S. securities









Total private purchases
370.7 361.7 311.7 455.6 598.3 611.4 644.8 -113.7









Corporate stocks
119.5 56.1 34.3 59.5 88.3 139.7 230.5 57.1

Europe
86.8 31.5 22.1 36.3 44.0 92.6 90.5 4.3

United
Kingdom
37.3 14.4 0.2 28.9 21.2 73.2 67.9 28.5

Canada
11.7 12.9 11.5 3.9 21.0 12.6 9.8 6.7
Caribbean financial centers
-5.8
-17.1
-2.3
3.1
14.8
34.4
95.4
3.0
Latin America
6.8
0.8
0.5
-0.4
-0.4
1.8
1.1
3.7

Asia
20.2 23.0 2.8 5.5 8.7 -2.2 27.9 44.0
Of which: Japan
6.6
12.2
-2.3
4.9
-0.1
-1.2
-5.6
20.7

Africa
-0.4 -0.1 0.2 -0.1 0.3 0.0 -0.4 -4.7









Corporate bonds
191.6 145.4 223.2 254.6 312.3 517.8 383.7 1.0

Europe
108.4 78.9 130.9 126.3 199.8 332.1 225.9 -62.5

United
Kingdom
84.1 55.8 89.0 69.6 144.7 203.6 130.5 -38.0

Canada
3.3 -0.0 5.2 6.0 1.9 7.9 12.4 7.0

Caribbean
financial
centers
49.6 35.5 54.0 47.1 40.2 106.9 61.9 22.2

Latin
America
5.0 4.6 6.7 20.2 7.3 9.3 4.7 1.7

Asia
24.2 22.7 24.2 51.9 54.4 53.7 72.8 32.3

Japan
6.1 10.8 10.5 33.5 25.6 12.2 39.5 21.6

Africa
0.3 0.1 0.4 0.6 0.6 0.2 -0.4 -0.4

Other
0.9 3.6 1.7 2.6 8.1 7.7 6.4 0.7









U.S. Treasury bonds
-23.2 78.4 91.0 74.1 147.9 -71.9 39.2 13.0

Europe
-30.2 38.7 18.1 38.2 65.2 -61.9 57.8 -65.9

Canada
0.2 -5.0 11.4 16.3 21.8 14.7 -1.9 -5.7

Caribbean
financial
centers
1.0 14.8 6.2 22.1 44.9 -10.9 -6.2 17.6
Latin America
-3.3
3.1
3.0
-3.4
10.4
-2.1
9.8
-5.1

Asia
8.1 22.3 46.4 1.0 1.3 -10.7 -20.8 69.3

Africa
0.0 1.1 -0.2 0.7 1.7 1.1 1.5 7.1

Other
1.0 3.6 6.1 -0.8 2.5 -2.1 -1.1 -4.3









Federal agency bonds
82.8 81.8 -36.8 67.4 49.8 25.8 -8.6
-184.8
Congressional Research Service
8

---

Financing the U.S. Trade Deficit


2001 2002 2003 2004 2005 2006 2007 2008

Europe
29.6 4.7 -29.4 13.3 -11.9 -8.1 42.3 0.9

United
Kingdom
33.4 22.4 14.6 31.4 -1.3 -8.8 70.9 59.2

Canada
-0.7 -1.9 -4.0 5.0 12.1 9.7 3.0 4.9
Caribbean financial centers
6.4
23.2
6.0
11.3
3.0
31.3
-21.6
-100.1

Latin
America
4.6 7.5 4.9 1.8 7.1 3.4 2.8 0.8

Asia
45.3 49.3 -11.9 36.4 40.2 -10.8 -34.6 -87.8

Japan
12.6 16.8 -16.4 16.5 15.6
2.9 -14.9 -37.2

Africa
0.2 0.3 0.2 -0.1 -0.3 -0.3 -0.6 -2.8

Other
-2.6 -1.2 -2.7 -0.3 -0.4 0.6 0.1 -0.8









Total official purchases
59.6 66.5 208.7 312.2 277.4 487.7 344.8 359.3
U.S. Treasury bonds
32.9
32.4
163.5
256.8
156.9
233.5
76.6
205.2
Other U.S. Government securities
20.9
30.5
39.9
41.7
100.5
219.8
171.5
65.8

Corporate
bonds
3.8 5.6 5.6 11.5 19.1 28.6 51.6 35.0
Corporate stocks
2.0
-2.0
-0.3
2.2
1.0
5.8
45.1
53.4
Source: Weinberg, Douglas B., U.S. International Transactions: Third Quarter of 2009. Survey of Current
Business, January, 2010. Table 8a.
The U.S. Net International Investment Position
As indicated above, the data in Tables 2 and 3 show that the trade deficit is accompanied by an
equal capital inflow that represents an accumulation of 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, the
overall stability of the U.S. economy, and the generally held view that U.S. securities, especially
Treasury securities, are high quality financial instruments that are low risk. In turn, these net
capital inflows (inflows net of outflows) bridge the gap in the United States between the amount
Congressional Research Service
9

---

Financing the U.S. Trade Deficit

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 2008, the latest year for which data are available, the overseas
assets of U.S. residents totaled $19.4 trillion, while foreigners had acquired about $23 trillion in
assets in the United States, with direct investment measured at historical cost. As a result, the U.S.
net international investment position was about a negative $3.6 trillion, with direct investment
measured at historical cost, as indicated in Table 5.
Table 5. U.S. Net International Investment Position
(in billions of dollars)
Type
of
Investment
2005 2006 2007 2008
Net international investment position of the United States:



With direct investment at current cost
-1,925.1
-2,225.8
-2,139.9
-3,469.2

With direct investment at market value
-1,850.9
-1,849.3
-1,506.6
-4,006.9

With direct investment at historical cost
-2,129.9
-2,399.4
-2,334.2
-3,638.1
Financial
derivatives
57.9
59.8
71.5
159.6
U.S.-owned assets abroad:



With direct investment at current cost
11,961.6
14,381.3
18,278.8
19,888.2

With direct investment at market value
12,947.8
15,900.0
20,055.3
19,260.6

With direct investment at historical cost
11,445.3
13,900.0
17,744.3
19,351.4

Financial
derivatives
1,190.0 1,239.0 2,559.3 6,624.5
U.S. official reserve assets
188.0
219.9
277.2
293.7
U.S. Government assets, other
77.5
72.2
94.5
624.1
U.S. private assets:




With direct investment at current cost
10,506.0
12,850.3
15,347.8
12,345.8

With direct investment at market value
11,492.2
14,368.9
17,124.3
11,718.2

With direct investment at historical cost
9,989.7
12,369.0
14,813.3
11,809.0
Congressional Research Service
10

---

Financing the U.S. Trade Deficit

Type
of
Investment
2005 2006 2007 2008

Direct investment abroad:



—At
current
cost
2,651.7 2,936.0 3,451.5 3,698.8

—At
market
value
3,638.0 4,454.6 5,228.0 3,071.2

—At historical cost
2,135.5
2,454.7
2,916.9
3,162.0

Foreign
securities
4,329.3 5,604.5 6,835.1 4,244.3

Bonds
1,011.6 1,275.5 1,567.1 1,392.9

Corporate
stocks
3,317.7 4,329.0 5,248.0 2,851.4

U.S. claims by US nonbanking concerns
1,018.5
1,163.1
1,239.7
991.9

U.S. claims reported by US banks
2,506.5
3,146.7
3,821.5
3,410.8



Foreign-owned assets in the United States:



With direct investment at current cost
13,886.7
16,607.1
20,418.8
23,357.4

With direct investment at market value
14,798.7
17,749.2
21,561.9
23,267.4

With direct investment at historical cost
13,575.2
16,299.4
20,078.5
22,989.4

Financial
derivatives
1,132.1 1,179.2 2,487.9 6,465.0
Foreign official assets in the United States
2,306.3
2,825.6
3,404.0
3,871.4
Foreign private assets:



With direct investment at current cost
10,446.3
12,602.3
14,526.9
13,021.1

With direct investment at market value
11,360.3
13,744.4
15,670.1
12,931.1

With direct investment at historical cost
10,136.6
12,294.6
14,186.6
12,653.1

Direct investment in the United States:



—At
current
cost
1,906.0 2,151.6 2,450.1 2,646.8

—At
market
value
2,818.0 3,293.7 3,593.3 2,556.9

—At historical cost
1,594.5
1,843.9
2,109.9
2,278.9

U.S.
Treasury
securities
643.8 567.9 639.7 885.0

U.S.
other
securities
4,353.0 5,372.4 6,190.1 4,703.5

—Corporate and other bonds
2,243.1
2,824.9
3,289.1
2,865.9

—Corporate
stocks
2,109.9 2,547.5 2,901.0 1,837.6

U.S.
currency
280.4 282.6 272.0 301.1

U.S. liabilities by U.S. nonbanking concerns
658.2 797.5
1,000.4 873.2

U.S. liabilities reported by U.S. banks
2,606.9
3,430.3 3,974.6 3,611.4
Source: Nguyen, Elena L., The International Investment Position of the United States at Yearend 2008, Survey
of Current Business, July 2009. p. 10-18.
Foreign investors who acquire U.S. assets do so at their own risk and accept the returns
accordingly, unlike the debt owed by developing countries where principle and debt service
payments are guaranteed in advance. While foreign investors likely expect positive returns from
their dollar-denominated assets, the returns on most of the assets in the international investment
Congressional Research Service
11

---

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
businesses and real estate. The value of these assets, measured on an annual basis, can change as
a result of purchases and sales of new or existing assets; changes in the financial value of the
assets that arise through appreciation, depreciation, or inflation; changes in the market values of
stocks and bonds; or changes in the value of currencies. For instance, in 2008, U.S. private
holdings abroad declined in value $15.3 trillion to $12.3 trillion due to a large decline in the value
of foreign corporate stocks, reflecting the decline in stock market values in nearly all exchanges,
combined with a decline in the exchange value of the dollar, which depreciates the value of assets
held abroad when translated into dollar equivalents. Similarly, the value of foreign owned
corporate stocks in the United States fell sharply in value in 2008, pulling down 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, official asset holdings were valued at about $3.8 trillion in 2008, or about
17% of the total foreign investment position, a share that has remained relatively stable over the
14-year period of 1994 to 2008. 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
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
12

---

Financing the U.S. Trade Deficit

Figure 3. Foreign Official and Private Investment Positions in the United States,
1994-2008
Trillions of dollars
$16
$14
$12
$10
$8
$6
$4
$2
$0
1994
1996
1998
2000
2002
2004
2006
2008
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 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
13

---

Financing the U.S. Trade Deficit

Figure 4. U.S. and Foreign Investment Position, By Major Component, 2008
US Assets
Foreign Assets
Total = $19.4 trillion
Total = $23.0 trillion
Official assets
Direct invest.
Govt. securities
Bonds
Stocks
Nonbanks
US banks
$5
$4
$3
$2
$1
$0
$1
$2
$3
$4
$5
Trillions
Trillions

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 dollar-
denominated 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.
Congressional Research Service
14

---

Financing the U.S. Trade Deficit

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.

Author Contact Information

James K. Jackson

Specialist in International Trade and Finance
jjackson@crs.loc.gov, 7-7751


Congressional Research Service
15

---