CRS — Financing the U.S. Trade Deficit

December 17, 2012

Financing the U.S. Trade Deficit (PDF)

Source: Congressional Research Service (via U.S. State Department Foreign Press Center)

The U.S. merchandise trade deficit is a part of the overall U.S. balance of payments, a summary statement of all economic transactions between the residents of the United States and the rest of the world, during a given period of time. Some Members of Congress and other observers have grown concerned over the magnitude of the U.S. merchandise trade deficit and the associated increase in U.S. dollar-denominated assets owned by foreigners. International trade recovered from the global financial crisis of 2008-2009 and the subsequent slowdown in global economic activity that reduced global trade flows and, consequently, reduced the size of the U.S. trade deficit. Now, however, U.S. exporters face new challenges with economies in Europe and Asia confronting increased risks of a second phase of slow growth. This report provides an overview of the U.S. balance of payments, an explanation of the broader role of capital flows in the U.S. economy, an explanation of how the country finances its trade deficit or a trade surplus, and the implications for Congress and the country of the large inflows of capital from abroad. The major observations indicate that

• Foreign private investors reduced their purchases of U.S. Treasury securities in 2011 after rising sharply in 2010 in response to financial requirements in home markets and continued uncertainty associated with disruptions in global financial markets. During the same period, foreign private investors reduced their purchases of U.S. corporate stocks and bonds in 2011, while foreign official purchases of U.S. Treasury securities continued at a strong pace. The inflow of 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.

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