Financing the U.S. Trade Deficit

Financing the U.S. Trade Deficit
Updated July 22, 2008
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

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:
^!Foreign private investors sharply increased their purchases of U.S.
Treasury securities in 2007 as they also increased their purchases of
U.S. corporate stocks and bonds. At the same time, foreign official
purchases of U.S. Treasury securities rose slowly in 2007 as foreign
governments curtailed their purchases of such securities.
^!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........................................3
The U.S. Net International Investment Position..........................9
Implications .....................................................13
List of Figures
Figure 1. Foreign Private and Official Purchases of U.S. Treasury Securities,
1997-2007 ...................................................6
Figure 2. Net Inflows of Private and Official Sources of Capital,
1997-2007 ...................................................7
Figure 3. Foreign Official and Private Investment Positions in the United States,
1994-2007 ..................................................12
Figure 4. U.S. and Foreign Investment Position, By Major Component,
2007.......................................................13
List of Tables
Table 1. Selected Indicators of the Size of the Global Capital Markets, 2006...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
P aym ent s ....................................................5
Table 4. Net Foreign Purchases of Long-Term U.S. Securities..............7
Table 5. U.S. Net International Investment Position.....................10

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.

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 markets. In
2006, these markets amounted to nearly $600 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 $396 trillion in 2006, 50% larger than the combined total of all public and private
bonds, equities, and bank assets. For the United States, such derivatives total three
as much as all U.S. bonds, equities, and bank assets.
Table 1. Selected Indicators of the Size of the Global Capital
Markets, 2006
in billions of U.S. dollars
^Gross^To^ta^l^B^oⁿ^d^s^,^Eq^uⁱ^ti^es,^an^d^B^aⁿ^k^Assets^Ex^ch^an^g^e^M^a^rk^{et Deri}^vati^v^es
^Dom^e^stic^Officia^l^To^ta^l^S^to^ck^Deb^t^Baⁿ^k^To^ta^l^O^TC^OTC
^P^r^oduc^t^Reserves^M^a^rk^et^S^ecu^ri^ti^es^Assets^F^o^rei^gⁿ^In^terest
^(GDP)^Ca^pⁱ^ta^li-^Ex^ch^aⁿ^g^e^Rate
^zati^on^Deri^v-^Deri^v-
^atⁱ^v^es^atⁱ^v^es
^W^o^r^l^d^48,434.4⁵^,091.5^194,452.7^50,826.6^68,200.9^74,465.2^395,557.⁰^48,620.0^211,970.0
^E^u^ro^p^ean
^Uⁿ^ion^13,658.0^252.7^73,983.7^13,068.⁸^23,192.3^37,736.3^N^.A^.^N^.A^.^N^.A^.
^Eur^o^A^r^e^a^10,586.1^157.5^54,129.5⁸^,419.1^18,761.1^26,719.2^145,903.⁰^18,280.0^81,442.0
^Unite^d
^Sta^t^e^s^13,194.7^54.9^56,822.0^19,569.0^27,^050.1^10,202.9^154,799.⁰^40.488.0^74,441.0
^J^a^paⁿ⁴^,377.1^879.7^20,109.5⁴^,795.8⁸^,^723.7⁶^,590.0^58,329.⁰^10,579.0^25,605.0
^Em^e^r^gⁱ^ng
^Ma^rk^e^t
^C^ountrⁱ^e^s^14,262.9¹^,932.0^30,984.4^11,^692.4⁶^,072.7^13,219.4^N^.A^.^N^.A^.^N^.A^.
^So^urce^:^{Global Financial Stability Repor}^t^{, In}^t^e^rn^atⁱ^oⁿ^a^l^Mon^e^t^a^ry^F^uⁿ^d^{, A}^p^ri^l^{2008. S}^t^atⁱ^s^tⁱ^cal
^A^ppen^dⁱ^x^{, T}^a^bl^{e 3.}^Quar^ter^l^{y Review}^{, B}^aⁿ^k^f^o^{r In}^tern^ation^a^{l Settlem}^eⁿ^t^s^,^March^{2008, T}^a^bles^20b
^an^{d 21b. T}^o^t^a^l^deri^v^a^tⁱ^v^es^doesⁿ^o^tⁱⁿ^cl^u^d^{e equ}ⁱ^t^y^an^{d com}^m^odi^t^y^-^lⁱⁿ^k^e^{d deri}^v^a^tⁱ^v^es^.
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 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 markets²
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)³ 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 2004.⁴
The U.S. Balance of Payments
Table 2 presents a summary of the major accounts in the U.S. balance of
payments over the last six quarters. The data indicate that in 2007 and the first
quarter of 2008 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. According to the accounts, the United States experienced a deficit in the
merchandise trade goods accounts in all four quarters in 2007 and the first quarter of
2008 and a surplus in the services accounts during those five quarters. In the income
accounts, which represent inflows of income on U.S. assets abroad relative to

² 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.
³ 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.
⁴ 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]

outflows of income earned on U.S. assets owned by foreigners, the net balance of the
accounts was in surplus in all four quarters of 2007 and the first quarter of 2008.
Table 2. U.S. International Transactions, Selected Accounts
(in billions of U.S. dollars)
²⁰⁰⁷²⁰⁰⁸
²⁰⁰⁶²⁰⁰⁷^I^I^I^I^I^I^I^V^I
^{Current account}
^B^a^lan^{ce on}^cu^rren^{t accou}ⁿ^t^-⁷⁸⁸^-⁷³¹^-¹⁹⁷^-¹⁹⁴^-¹⁷³^-¹⁶⁷^-¹⁷⁶
^Bal^aⁿ^{ce on}^g^oods^an^{d s}^e^rvⁱ^ces^-⁷⁵³^-⁷⁰⁰^-¹⁸⁰^-¹⁷⁹^-¹⁶⁸^-¹⁷⁴^-¹⁷⁵
^Bal^aⁿ^{ce on}^g^oods^-⁸³⁸^-⁸¹⁹^-²⁰³^-²⁰⁶^-²⁰¹^-²⁰⁹^-²¹¹
^Ex^port^s^1,023^1,148²⁷⁰²⁷⁹²⁹⁵³⁰³³¹⁸
^Im^port^s^-¹^,861^-¹^,968^-⁴⁷⁴^-⁴⁸⁵^-⁴⁹⁷^-⁵¹²^-⁵²⁹
^B^a^lan^{ce on}^s^e^rv^ices⁸⁵¹¹⁹²⁴²⁷³³³⁵³⁶
^Ex^port^s⁴³⁴⁴⁹⁷¹¹⁵¹²⁰¹²⁹¹³²¹³⁶
^Im^port^s^-³⁴⁹^-³⁷⁸^-⁹¹^-⁹³^-⁹⁶^-⁹⁷^-¹⁰⁰
^B^a^lan^{ce on}ⁱⁿ^com^e⁵⁷⁸²¹³¹⁰²³³⁶³⁰
^In^com^e^R^eceipts⁶⁸⁵⁸¹⁸¹⁸⁷²⁰²²¹⁴²¹⁵¹⁹⁹
^In^com^e^P^a^y^m^en^ts^-⁶²⁸^-⁷³⁶^-¹⁷⁴^-¹⁹²^-¹⁹¹^-¹⁷⁹^-¹⁷⁰
^Un^ilater^a^{l cu}^r^r^eⁿ^t^tr^an^sf^er^s^-⁸²^-¹¹³^-³⁰^-²⁵²⁸³⁰^-³¹
^Ca^pit^a^{l a}^cco^unt
^C^a^{pital accou}ⁿ^t^tran^s^action^s^-4^-2^-1^-0^-1^-1^-1
^Fⁱ^na^ncia^{l a}^cco^unt
^B^a^lan^{ce on}^fⁱⁿ^aⁿ^c^{ial accou}ⁿ^t⁸³⁹⁷⁷⁴²⁶⁵¹⁹⁴¹⁰²²¹³¹²⁴
^U.S.-^o^wⁿ^{ed as}^s^e^ts^{abroad, n}^e^t^-¹^,252^-¹^,290^-⁴⁴²^-⁵²⁴^-¹⁷⁰^-¹⁵⁴^-²⁸⁷
^{U.S. of}^fⁱ^{cial res}^e^rv^{e as}^s^e^ts^{, n}^e^t²^-⁰^-⁰⁰^-0^-0^-0
^U^.^S.^G^o^ve^rⁿ^m^e^nt^a^sse^t^s^,^ne^t^5-²⁰^-¹¹^-²³³
^{U.S. priv}^{ate as}^s^e^ts^{, n}^e^t^-¹^,259^-¹^,267^-⁴⁴²^-⁵²³^-¹⁷¹^-¹³¹^-²⁹⁰
^Fo^r^e^igⁿ^-^o^wⁿ^e^d^{assets in}^th^{e U.S.}^2,061^2,058⁶⁹³⁷¹⁸²⁶⁶³⁸⁰⁴¹¹
^Foreigⁿ^of^fⁱ^{cial as}^s^e^ts^{, n}^e^t⁴⁸⁸⁴¹¹¹⁶³⁸⁹¹³¹⁴⁵¹⁷⁴
^{U.S. T}^r^easu^r^y^Secu^r^ities²⁰⁹⁵⁹⁴⁰²^-²⁶⁴³⁸⁹
^Foreigⁿ^priv^{ate as}^s^e^ts^{, n}^e^t^1,573^1,647⁵²⁹⁶²⁹²⁵³²³⁵²³⁷
^{U.S. T}^r^easu^r^y^Secu^r^ities^-⁵⁸¹⁵⁷⁴³^-¹⁴⁶⁷⁶⁰⁶⁹
^Fin^aⁿ^c^{ial deriv}^a^tiv^es³⁰⁶¹⁵^-¹⁶^-¹³⁰
^Statis^{tical dis}^crepancy^-4⁷^-⁴¹^-6⁸¹⁷²^-4⁶⁵³
^Source:^Sau^e^r^s^{, Ren}^ee^{M., an}^d^Kr^isty^L^.^Ho^w^e^ll,^U^.^{S. Int}^e^r^natⁱ^onal^T^r^ans^actⁱ^ons^{: Fi}^r^s^t^Q^uar^t^e^r^of
²⁰⁰⁸^{. S}^u^rv^ey^of^C^u^rren^t^Bu^sⁱⁿ^e^s^s^,^Ju^l^y^{, 2008.} P. 67.
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 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 2007 indicate that foreign official
purchases of U.S. Treasury securities were down substantially from similar purchases
in 2006 and private foreign purchases of Treasury securities in 2007 rose sharply

from the negative amount recorded for 2006. Data for first quarter of 2008, however,
show a strong increase in foreign official purchases of U.S. Treasury securities, while
foreign private purchases of U.S. Treasury securities increased slightly over the
previous quarter.
The data in Table 2 also indicate that private capital flows account for the
largest share of both U.S. capital inflows and outflows. 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 2007, for instance,
total net capital inflows representing the net balance on the current account, the
capital account, and the statistical discrepancy, were a negative $774 billion,
markedly less than the record deficit of $839 set in 2006. This decrease in the overall
net capital inflows occurred in part because of a slight decrease in the deficit in trade
in manufactured goods and an increase in the surplus in trade in services.
Table 3. Summary of the Net Balances by Major Accounts in the
U.S. Balance of Payments
(in billions of U.S. dollars)
²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
^T^o^tal^{Net Cap}ⁱ^tal^Iⁿ^fl^ow^s^$-⁴⁷⁷^$-⁴¹⁶^$-⁵⁷⁰^$-⁵⁴⁶^$-⁵⁸⁵^$-⁷⁷⁷^$-⁸³⁹^$-⁷⁷⁴
^T^o^t^a^l^N^e^t^G^oods^-⁴⁵²^-⁴²⁷^-⁴⁸³^-⁵⁴⁸^-⁶⁶⁵^-⁷⁸⁷^-⁸³⁸^-⁸¹⁹
^T^o^{tal Net Ser}^v^ices⁷⁴⁶⁴⁶¹⁵¹⁴⁸⁷³⁸⁵¹¹⁹
^T^o^{tal Net I}ⁿ^co^m^e²¹²⁴⁷³³³⁰⁴⁸⁵⁷⁸²
^T^o^{tal Net T}^r^an^sf^er^s^-⁵⁶^-⁴⁷^-⁵⁹^-⁶⁷^-⁸¹^-⁸⁹^-⁹²^-¹¹³
^T^o^{tal Net Cap}^{ital A}^cco^uⁿ^t^-1^-1^-1^-3^-2^-4^-4^-2
^{Statistical Discr}^e^p^aⁿ^c^y^-⁶³^-²⁹^-⁹⁵^-¹²⁸⁵^-¹⁸^-⁴⁷^-⁴¹
^To^t^a^{l Net}^Fⁱ^na^ncia^{l Acco}^unt⁴⁷⁷⁴¹⁶⁵⁷⁰⁵⁴⁶⁵⁸⁵⁷⁷⁷⁸³⁹⁷⁷⁴
^T^o^{tal Net Of}^fⁱ^cial⁴²²³¹¹¹²⁵¹³⁹⁹²⁷⁹⁴⁹⁶³⁸⁹
^T^o^{tal Net P}^r^iv^ate⁴³⁶³⁹³⁴⁶⁰²⁹⁵¹⁸⁶⁴⁹⁸³¹⁴³⁷⁹
^Dⁱ^r^e^c^t^I^nve^st^m^e^nt¹⁶²²⁵^-⁶²^-¹³⁴^-¹⁴⁵¹¹⁷¹^-⁹⁶
^P^o^r^t^fo^lⁱ^o^I^nve^st^m^e^nt²⁶⁸²⁹⁵⁴⁰²²⁹²³⁷⁴³⁸⁶²⁶⁰⁴⁴²
^Oth^e^{r P}^r^iv^{ate (B}^an^k^s⁾⁶⁷⁴¹²⁰¹³⁷^-⁴³^-⁴⁵³³³
^Fin^aⁿ^c^{ial Der}ⁱ^v^a^tiv^es^n.^a^.^n.^a^.^n.^a^.^n.^a^.^n.^a^.^n.^a^.³⁰⁶
^Source:^D^a^t^a^dev^e^l^{oped by}^C^R^S^f^r^om^dat^a^pu^blⁱ^s^h^e^{d by}^t^h^{e D}^e^part^m^eⁿ^t^of^C^o^m^m^e^rce.
Commerce Department data indicate that foreign private purchases of Treasury
securities turned negative between 1998 and 2001 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 $261 billion in 2004. In 2005, though, official
purchases of Treasury securities plummeted to less than $100 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 2007,

however, foreign private investors accumulated more than $157 billion in Treasury
securities, as foreign governments sharply reduced their net purchases of Treasury
securities from$209 billion in 2006 to $59 billion in 2007.
Figure 1. Foreign Private and Official Purchases of U.S. Treasury
Securities, 1997-2007

Billions of dollars
$300
$250
Official
$200
$150
Private
$100
$50
$0
-$50
-$100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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
recent change in the composition of the balances in the net financial account. Except
for 2004, total net private inflows were greater than total net official inflows. This
trend was reversed in 2004, when net official inflows were nearly double that of the
net private inflows, as indicated in Figure 2. In 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, or were sightly more than
half of those received in 2005. The decline in net private inflows in 2007 reflects a
higher level of U.S. direct investment abroad, rising to over $335 billion in 2007,
from $241 billion in 2006, which is entered into the balance of payments accounts
as a negative amount and lower holdings of foreign assets by U.S. banks. Data for
2007 also indicate that the United States again experienced a net positive income
inflow from U.S. assets held abroad as U.S. investors received more in income on
their investments held abroad than foreign investors received from their investments
in the United States.

Figure 2. Net Inflows of Private and Official Sources of Capital, 1997-

2007

Billions of dollars
$600
$500
Private
$400
$300
$200
$100
Official
$0
-$100
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
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 2000-2007. The data indicate that in 2007, the net
accumulation of U.S. securities fell in 2007 from the amount recorded in 2006,
largely due to reduced official purchases of U.S. Treasury securities and corporate
stocks. Private foreign investors operating in Asia and through financial centers in
the Caribbean increased their net purchases of corporate stocks, while European
investors sharply reduced their net accumulations of corporate bonds, which
experienced a 40% drop in the net accumulation of such securities. In addition,
foreign investors, both private and official reduced their net accumulation of other
U.S. government agency bonds.
Table 4. Net Foreign Purchases of Long-Term U.S. Securities
(in billions of dollars)
²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
^T^o^tal^p^rⁱ^{vate an}^d^offi^ci^al
^net^purcha^s^{es o}^f^U.S.^$437.3^$430.3^$428.3^$520.5^$767.8^$875.7^$982.5^$807.4
^s^ecurities
^T^o^{tal private purchas}^es^394.6^370.7^361.7^311.7^455.6^598.3^542.5^528.4
^C^o^rp^{orate s}^t^ock^s^192.5^119.5^56.1^34.3^59.5^88.3^142.8^183.4
^Eu^rope^181.6^86.8^31.5^22.1^35.3^44.0^94.2^91.6
^Uⁿⁱ^t^e^{d K}ⁱⁿ^g^dom^71.8^37.3^14.4⁰^.2^28.9^24.2^74.8^68.8
^C^aⁿ^a^da^7.7^11.7^12.9^11.5³^.9^21.0^12.8⁹^.3
^C^a^ribbean^fⁱⁿ^aⁿ^c^ial^-^20.7^-^5.8^-^17.1^-^2.3³^.1^14.8^34.3^47.4
^cen^ters

²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
^L^a^tin^A^m^erica³^.5^6.8⁰^.8^0.5^-^0.4^-^0.4¹^.9^1.3
^A^sⁱ^a^20.0^20.2^23.0²^.8^5.5⁸^.7^-¹^.1^29.1
^Of^w^h^ich^:^J^a^pan¹^.9^6.6^12.2^-^2.3⁴^.9^-⁰^.1^-⁰^.8^-⁵^.1
^A^f^rica^0.4^-^0.4^-^0.1⁰^.2^-⁰^.1^0.3⁰^.1^-⁰^.3

^Co^rpo^r^a^t^{e bo}^nds^166.4^191.6^145.4^223.2^254.6^312.3^412.3^246.7
^Eu^rope^111.7^108.4^78.9^130.9^126.3^199.8^242.1^111.2
^Uⁿⁱ^t^e^{d K}ⁱⁿ^g^dom^95.2^84.1^55.8^89.0^69.6^144.7^192.4^121.4
^C^aⁿ^a^da^3.0³^.3^-⁰^.0^5.2⁶^.0^1.9⁷^.9^12.6
^C^a^ribbean^fⁱⁿ^aⁿ^c^ial^25.0^49.6^35.5^54.0^47.1^40.2^91.1^41.4
^cen^ters
^L^a^tin^A^m^erica⁴^.3^5.0⁴^.6^6.7^20.2⁷^.3^9.3⁴^.6
^A^sⁱ^a^21.4^24.2^22.7^24.2^51.9^54.4^53.9^71.1
^Japan^15.6⁶^.1^10.8^10.5^33.5^25.6^12.3^38.5
^A^f^rica^0.1⁰^.3^0.1⁰^.4^0.6⁰^.6^0.2^-^0.4
^Oth^e^r⁰^.9^0.9³^.6^1.7²^.6^8.1⁷^.7^6.2

^{U.S. Trea}^sury^bo^nds^-^65.3^-^23.2^78.4^91.0^74.1^147.9^-^49.5^136.5
^Eu^rope^-^54.9^-^30.2^38.7^18.1^38.2^65.2^-^37.8^153.4
^C^aⁿ^a^da^2.1⁰^.2^-⁵^.0^11.4^16.3^21.8^14.7^-^2.9
^C^a^ribbean^fⁱⁿ^aⁿ^c^ial^-⁵^.1^1.0^14.8⁶^.2^22.1^44.9^-^10.6³^.8
^cen^ters
^L^a^tⁱⁿ^A^m^eri^c^a^-^1.2^-^3.3³^.1^3.0^-^3.4^10.4⁵^.5^24.5
^A^sⁱ^a^-⁷^.2^8.1^22.3^46.4¹^.0^1.3^-^20.3^-^42.8
^A^f^rica^-⁰^.0^0.0¹^.1^-⁰^.2^0.7¹^.7^1.1¹^.5
^Oth^e^r¹^.1^1.0³^.6^6.1^-^0.8²^.5^-²^.1^-¹^.1

^F^e^dera^{l a}^g^e^ncy^bo^nds^101.0^82.8^81.8^-^36.8^67.4^49.8^36.9^-^38.2
^Eu^rope^36.8^29.6⁴^.7^-^29.4^13.3^-^11.9^11.6^53.0
^Uⁿⁱ^t^e^{d K}ⁱⁿ^g^dom^28.5^33.4^22.4^14.6^31.4^-^1.3^13.6^81.0
^C^aⁿ^a^da^7.6^-^0.7^-^1.9^-^4.0⁵^.0^12.1⁹^.6^2.2
^C^a^ribbean^fⁱⁿ^aⁿ^c^ial^17.5⁶^.4^23.2⁶^.0^11.3³^.0^29.8^-^21.9
^cen^ters
^L^a^tin^A^m^erica⁵^.7^4.6⁷^.5^4.9¹^.8^7.1³^.4^1.9
^A^sⁱ^a^33.0^45.3^49.3^-^11.9^36.4^40.2^-^17.7^-^73.7
^Japan^21.3^12.6^16.8^-^16.4^16.5^15.6^-^5.4^-^22.4
^A^f^rica^0.1⁰^.2^0.3⁰^.2^-⁰^.1^-⁰^.3^-⁰^.2^-⁰^.1
^Oth^e^r⁰^.3^-²^.6^-¹^.2^-²^.7^-⁰^.3^-⁰^.4^0.5⁰^.3

^T^o^{tal official purchas}^es^42.8^59.6^66.5^208.7^312.2^277.4^440.0^279.0
^U^.^S^.^T^r^eas^u^r^y^bon^ds^-¹^.3^32.9^32.4^163.5^256.8^156.9^214.1^30.3
^Oth^e^{r U.S. Go}^v^e^rn^m^eⁿ^t^40.9^20.9^30.5^39.9^41.7^100.5^191.6^182.0
^secu^r^ities
^C^o^rporat^{e bon}^ds^2.0³^.8^5.6⁵^.6^11.5^19.1^28.6^51.6
^C^o^rporat^{e s}^t^ock^s^1.1²^.0^-²^.0^-⁰^.3^2.2¹^.0^5.8^15.1
^Source:^Sau^e^r^s^,^Ren^{ee, an}^d^Kr^isty^L^.^Ho^w^e^ll,^U^.^{S. Int}^e^r^natⁱ^onal^T^r^ans^actⁱ^ons^{: Fi}^r^s^t^Q^uar^t^e^r^of²⁰⁰⁸^.
^S^u^rv^ey^of^C^u^rren^t^Bu^sⁱⁿ^e^s^s^,^Ju^l^y^{2008. T}^a^bl^{e 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, and the overall stability of the U.S. economy. In turn, these net capital
inflows (inflows net of outflows) bridge the gap in the United States between the
amount of credit demanded and the domestic supply of funds, likely keeping U.S.
interest rates below the level they would have reached without the foreign capital.
These capital inflows also allow the United States to spend beyond its means,
including financing its trade deficit, because foreigners are willing to lend to the
United States in the form of exchanging goods, represented by U.S. imports, for such
U.S. assets as stocks, bonds, U.S. Treasury securities, and real estate and U.S.
businesses.
While this exchange of assets is implicit in the balance of payments, the
Department of Commerce explicitly accounts for this broad flow of dollar-
denominated assets through the nation’s net international investment position. The
U.S. net international investment position 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 2007, the latest year for which data

are available, the overseas assets of U.S. residents totaled $17.1 trillion, while
foreigners had acquired about $20 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, with direct investment
measured at historical cost, as indicated in Table 5.
Table 5. U.S. Net International Investment Position
(in billions of dollars)
^T^y^p^e^{of I}ⁿ^ves^t^m^eⁿ^t²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
^Net^int^erna^t^io^na^{l inv}^e^st^m^e^nt^po^sitⁱ^oⁿ^o^f^t^h^{e Unit}^{ed St}^a^t^es:
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^cu^rren^t^cos^t^-²^,245.4^-^1,925.1^-^2,225.8^-^2,441.8
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^m^a^rk^et^v^a^l^u^e^-^2,355.8^-^1,850.9^-^1,849.3^-^1,727.5
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^hⁱ^s^t^ori^cal^cos^t^-²^,470.7^-^2,129.9^-^2,399.4^-^2,653.6
^Fⁱⁿ^aⁿ^cⁱ^a^l^deri^v^a^tⁱ^v^es^57.9^59.8^83.5
^U^.^S^.^-owⁿ^ed^as^s^e^ts^ab^road^:
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^cu^rren^t^cos^t^9,340.6^11,961.6^14,381.3^17,640.0
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^m^a^rk^et^v^a^l^u^e^10,204.6^12,947.8^15,900.0^19,455.1
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^hⁱ^s^t^ori^cal^cos^t^8,893.3^11,445.3^13,900.0^17,098.4
^Fⁱⁿ^aⁿ^cⁱ^a^l^deri^v^a^tⁱ^v^es^1,190.0¹^,239.0²^,284.6
^U^.^S^.^of^fⁱ^ci^al^res^e^rv^{e as}^s^e^t^s^189.6^188.0^219.9^277.2
^U^.^S^.^G^o^v^e^rn^m^eⁿ^t^as^s^e^t^s^{, ot}^h^e^r^83.1^77.5^72.2^94.5
^{U.S. priv}^{ate as}^s^e^ts^:
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^cu^rren^t^cos^t^9,068.0^10,506.0^12,850.3^14,983.7
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^m^a^rk^et^v^a^l^u^e⁹^,932.3^11,492.2^14,368.9^16,798.8
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^hⁱ^s^t^ori^cal^cos^t^8,620.7⁹^,989.7^12,369.0^14,442.1
^{Direct in}^v^e^s^t^m^eⁿ^t^abroad:
^—^A^t^cu^rren^t^cos^t^2,498.5²^,651.7²^,936.0³^,332.8
^—^A^t^m^a^rk^et^v^a^l^u^e³^,362.8³^,638.0⁴^,454.6⁵^,148.0
^—^A^t^hⁱ^s^t^ori^cal^cos^t^2,051.2²^,135.5²^,454.7²^,791.3
^Foreigⁿ^s^ecu^rities³^,545.4⁴^,329.3⁵^,604.5⁶^,648.7
^Bon^d^s^985.0¹^,011.6¹^,275.5¹^,478.1
^C^o^rporat^{e s}^t^ock^s^2,560.4³^,317.7⁴^,329.0⁵^,170.6
^U^.^S^.^cl^ai^m^s^by^U^Sⁿ^oⁿ^b^an^kⁱⁿ^g^con^cern^s^793.6¹^,018.5¹^,163.1¹^,176.0
^U^.^S^.^cl^ai^m^s^report^e^{d by}^U^S^ban^k^s^2,230.5²^,506.5³^,146.7³^,826.2
^Foreign-owⁿ^{ed as}^s^e^tsⁱⁿ^{the United States}^:
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^cu^rren^t^cos^t^11,586.1^13,886.7^16,607.1^20,081.8
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^m^a^rk^et^v^a^l^u^e^12,560.7^14,798.7^17,749.2^21,182.6
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^hⁱ^s^t^ori^cal^cos^t^11,364.1^13,575.2^16,299.4^19,752.0
^Fⁱⁿ^aⁿ^cⁱ^a^l^deri^v^a^tⁱ^v^es^1,132.1¹^,179.2²^,201.1
^F^o^rei^gⁿ^of^fⁱ^ci^al^as^s^e^t^sⁱⁿ^t^h^{e U}ⁿⁱ^t^e^{d S}^t^at^es^2,011.9²^,306.3²^,825.6³^,357.0
^Foreigⁿ^priv^{ate as}^s^e^ts^:
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^cu^rren^t^cos^t^9,574.2^10,448.3^12,602.3^14,543.7
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^m^a^rk^et^v^a^l^u^e^10,548.8^11,360.3^13,744.4^15,644.5
^Wi^t^h^di^rectⁱⁿ^v^e^s^t^m^eⁿ^t^at^hⁱ^s^t^ori^cal^cos^t^9,352.2^10,136.8^12,294.6^14,214.0
^{Direct in}^v^e^s^t^m^eⁿ^tⁱⁿ^th^{e Un}^{ited States}^:
^—^A^t^cu^rren^t^cos^t^1,742.7¹^,906.0²^,151.6²^,422.8
^—^A^t^m^a^rk^et^v^a^l^u^e²^,717.4²^,818.0³^,293.7³^,523.6
^—^A^t^hⁱ^s^t^ori^cal^cos^t^1,520.7¹^,594.5¹^,843.9²^,093.0
^{U.S. T}^r^eas^u^r^y^s^ecu^rities^561.6^643.8^567.9^734.8
^{U.S. oth}^e^{r s}^ecu^rities³^,995.5⁴^,353.0⁵^,372.4⁶^,132.4
^—^C^o^rporat^{e an}^{d ot}^h^e^{r bon}^ds^2,035.1²^,243.1²^,824.9³^,299.3
^—^C^o^rporat^{e s}^t^ock^s^1,960.3²^,109.9²^,547.5²^,833.1

^T^y^p^e^{of I}ⁿ^ves^t^m^eⁿ^t²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
^U^.^S^.^cu^rren^c^y^272.0^280.4^282.6^272.0
^{U.S. liabilities}^by^{U.S. n}^oⁿ^b^aⁿ^kⁱⁿ^g^con^cern^s^600.2^658.2^797.5^959.5
^{U.S. liabilities}^{reported by}^U.S.^ban^k^s^2,402.2²^,606.9³^,430.3⁴^,022.2
^Source:^Ng^u^y^eⁿ^,^E^l^eⁿ^a^{L., T}^h^{e I}ⁿ^terⁿ^atioⁿ^a^{l I}ⁿ^v^e^stm^eⁿ^t^P^o^sitioⁿ^o^f^th^{e Un}^ited^{States at Year}^en^d
^2007,^Sur^{vey of C}^u^r^r^e^{nt Bus}ⁱ^nes^s^{, Ju}^l^y^{2008. p. 9.}
Foreign investors who acquire U.S. assets do so at their own risk and accept the
returns accordingly, unlike the debt owed by developing countries where principle
and debt service payments are guaranteed in advance. While foreign investors likely
expect positive returns from their dollar-denominated assets, the returns on most of
the assets in the international investment position, except for bonds, are not
guaranteed and foreign investors stand to gain or lose on them similar to the way U.S.
domestic investors gain or lose.
As Table 5 indicates, the investments in the international investment position
include such financial assets as corporate stocks and bonds, government securities,
and direct investment⁵ 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. 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.⁶
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 $3.4 trillion
in 2007, or about 17% of the total foreign investment position, a share that has
remained relatively stable over the 13-year period of 1993 to 2007. Official assets

⁵ 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).
⁶ 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.

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.⁷
Figure 3. Foreign Official and Private Investment Positions in the
United States, 1994-2007

Trillions of dollars
$16
$14
$12
$10
$8
$6
$4
$2
$0
1994 1996 1998 2000 2002 2004 2006
Foreign official assetsForeign 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.
⁷ For additional information, see CRS Report RL32462, Foreign Investment in U.S.
Securities, by James K. Jackson.

Figure 4. U.S. and Foreign Investment Position, By Major
Component, 2007

US AssetsForeign Assets
Total = $17.1 trillionTotal = $19.8 trillion
Official assets
Direct invest.
Govt. securities
Bonds
Stocks
Nonbanks
US banks
$0$1$2$3$4$5 $1 $2 $3 $4 $5
Trillio n s Trillio n s
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 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 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.