LegiStorm

Summary:

The U.S. merchandise trade deficit is a part of the overall U.S. balance of payments, a summary statement of all economic transactions between the residents of the United States and the rest of the world, during a given period of time. Some Members of Congress and other observers have grown concerned over the magnitude of the U.S. merchandise trade deficit and the associated increase in U.S. dollar-denominated assets owned by foreigners. International trade recovered from the global financial crisis of 2008-2009 and the subsequent slowdown in global economic activity that reduced global trade flows and, consequently, reduced the size of the U.S. trade deficit. Now, however, U.S. exporters face new challenges with an increase in the international exchange value of the dollar relative to other key currencies and the slow rate of economic growth in important export markets in Europe and Asia. 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  The current account balance, the broadest measure of U.S. trade in goods, services, and certain income flows, worsened by 18% in 2015 from that recorded in 2014. Foreign-owned assets in the United States continued to outpace U.S. ownership of foreign assets, reflecting the deficit in the current account, but the net amount, or the difference between U.S.-acquisition of foreign assets and foreign acquisition of U.S. assets, dropped by about one-third in 2015 compared with 2014 and down by over half since 2012. The relative decline in foreign acquisitions of U.S. assets in 2015 reflected a drop in the net private purchases of U.S. corporate stocks and a decline by one-third in net private purchases of U.S. treasury securities. In addition, foreign official purchases of U.S. portfolio purchases shifted from positive net purchases in 2014 to negative net purchases in 2015, including a 38% decline in purchases of corporate stocks and a 58% decline in official purchases of U.S. Treasury securities. Foreign private net purchases of U.S. Treasury securities in 2015 fell by one-third from those in 2014, but foreign private purchases of U.S. equities increased by 20% in 2015 compared with 2014. At the same time, foreign direct investment increased by 83% in 2015 compared with 2014, rising from $207 billion in 2014 to $379 billion in 2015; U.S. direct investment abroad in 2015 rose slightly above the amount invested in 2014, although U.S. net purchases of foreign equities and debt securities in 2015 fell by 75%, compared with net purchases in 2014. 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. In general terms, foreign private holders of U.S. Treasury securities are taxed on their interest income, depending on U.S. tax conventions with other countries.