The U.S. Balance of Payments

 Table 2 presents a summary of the major accounts in the U.S. balance of payments over the four quarters of 2015 and the first two quarters of 2016. The current account balance represents the broadest measure of U.S. trade in goods, services, and certain income flows. The balance worsened by 16% from 2014 to 2015. Indeed, economists generally argue that it is this interplay between the demand for and the supply of credit in the economy, rather than the flow of manufactured goods and services, that drives the broad inflows and outflows of capital and serves as the major factor in determining the international exchange value of the dollar and, therefore, the overall size of the nation's trade deficit or surplus. Despite the drop in the average annual price of imported crude oil and the decline in the role of imported crude oil in the value of the U.S. trade deficit in 2014 to 2016, the U.S. merchandise deficit increased in 2015 over that recorded in 2014. The balance on the financial account (the difference between the net U.S. acquisition of foreign financial assets and the net foreign acquisition of U.S. financial assets) in 2015 fell from that recorded in 2014 due to an increase in U.S. net purchases of assets abroad and a drop in foreign net purchases of assets in the United States. The relative decline in foreign acquisitions of U.S. assets in 2015 below those recorded in 2014 reflects a 180% drop in foreign official purchases of U.S. portfolio assets, including a decline of 200% in official purchases of U.S. Treasury securities. Foreign private purchases of U.S. portfolio assets declined by 40%, reflecting a decline by 33% in foreign private purchases of U.S. treasury securities and an increase year-over-year of 75% in private purchases of corporate bonds. During the same period, U.S. purchases of foreign equities and debt securities fell by 75%, year-over-year. U.S. direct investment abroad rose slightly in 2015 to reach $348.6 billion, and foreign direct investment in the United States rose by 83% to reach $379 billion. Net private inflows by U.S. citizens resumed in the 2012 to 2014 period. According to the Department of the Treasury, the drop in net foreign purchases of U.S. securities reflects adjustments by private investors in their portfolios by reducing their holdings of U.S. corporate stocks and U.S. Treasury securities and increasing their net purchases of corporate bonds and the bonds of U.S. government agencies other than Treasury securities. 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. Depending on the tax convention the United States has with other governments, private foreign investors who own U.S. Treasury securities will owe taxes on the interest income. 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. Another concern is with the outflow of profits that arise from the dollar-denominated assets owned by foreign investors.
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 the following.
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.