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Wednesday, March 3, 2010

Financing the U.S. Trade Deficit

James K. Jackson
Specialist in International Trade and Finance

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. 

Date of Report: February 5, 2010
Number of Pages: 18
Order Number: RL33274
Price: $29.95

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