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Thursday, July 29, 2010

Currency Manipulation: The IMF and WTO


Jonathan E. Sanford
Specialist in International Trade and Finance


The International Monetary Fund (IMF) and World Trade Organization (WTO) approach the issue of "currency manipulation" differently. The IMF Articles of Agreement prohibit countries from manipulating their currency for the purpose of gaining unfair trade advantage, but the IMF cannot force a country to change its exchange rate policies. The WTO has rules against subsidies, but these are very narrow and specific and do not seem to encompass currency manipulation. Several options might be considered for addressing this matter in the future, if policymakers deem this a wise course of action. To date, while the issue remains a topic of concern, governments have not taken action to address the different ways the IMF and WTO address this topic. 


Date of Report: July 21, 2010
Number of Pages: 9
Order Number: RS22658
Price: $19.95


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Wednesday, July 28, 2010

Tariff Modifications: Miscellaneous Tariff Bills

Vivian C. Jones
Specialist in International Trade and Finance

Importers often request that Members of Congress introduce bills seeking to suspend or reduce tariffs on certain imports on their behalf. The vast majority of these commodities are chemicals, raw materials, or other components used as inputs in the manufacturing process. The rationale for these requests, in general, is that they help domestic producers of the downstream goods reduce costs, thus making their products more competitive. In turn, these cost reductions can be passed on to the consumer. 

In recent congressional practice, House Ways and Means and Senate Finance Committees, the committees of jurisdiction over tariffs, have combined these duty suspension bills and other technical trade provisions into larger pieces of legislation known as miscellaneous tariff bills (MTBs). Before inclusion in an MTB, the individual legislative proposals introduced by Members are reviewed by trade subcommittee staff and several executive branch agencies to ensure that they are noncontroversial (generally, that no domestic producer objects) and relatively revenue neutral (revenue loss of no more than $500,000 per item). 

Late in the 109th Congress, the last time that MTB legislation was passed, the House passed H.R. 6406, a trade package that included suspension of duties on about 380 products until December 31, 2009. The legislation was inserted into H.R. 6111, a previously House-passed tax extension package. The Senate approved H.R. 6111, including the duty suspensions, and the bill was signed by the President on December 20, 2006 (P.L. 109-432). Tariff suspensions on about 300 other products were previously inserted into H.R. 4, The Pension Protection Act of 2006 (P.L. 109- 280). 

In the 110th Congress, congressional ethics and earmark reform legislation also targeted "limited tariff benefit[s]," defined as "a provision modifying the Harmonized Tariff Schedule of the United States in a manner that benefits 10 or fewer entities." This legislation amended House and Senate rules to make it out of order to consider bills containing earmarks, limited tax benefits, or limited tariff benefits unless certain disclosure and reporting requirements are met by the Member proposing the legislation and the committees of jurisdiction. Even though a November 2007 House Ways and Means Trade Subcommittee advisory called for House Members to submit legislative proposals for inclusion in a proposed MTB by December 14, 2007, no omnibus bill was introduced in either House. 

In the 111th Congress, H.R. 4380, the Miscellaneous Trade and Technical Corrections Act of 2009, was introduced on December 15, 2009. This bill temporarily suspends or reduces for three years duties on over 600 products, many of which renew duty suspension or reductions that were already in place. In the Senate, Senate Finance Committee Chairman Max Baucus and Ranking Member Chuck Grassley requested on October 1, 2009, that Senators introduce miscellaneous tariff measures by the end of October—after an agreement was reached regarding additional disclosure requirements for lobbyists recommending MTB provisions. On July 7, 2010, a manager's amendment was introduced. The House passed H.R. 4380, the United States Manufacturing Enhancement Act of 2010, by a vote of 378-43 on July 21, 2010. 
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Date of Report: June 23, 2010
Number of Pages: 14
Order Number: RL33867
Price: $29.95

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Friday, July 23, 2010

The U.S. Trade Deficit: Causes, Consequences, and Policy Options


Craig K. Elwell
Specialist in Macroeconomic Policy

The current account balance is the nation's most comprehensive measure of international transactions. It has three component balances: the goods and services balance, the investment income balance, and net unilateral transfers. These are all transactions thought to be closely related to current production, consumption, and income. For the United States, the size of the current account deficit is largely the refection of a similarly sized goods and services deficit (i.e., trade deficit).

The U.S. current account (trade) deficit grew steadily from 1992 through 2006. In 2007, however, the trade imbalance decreased to $726.6 billion from $803.5 billion in 2006. In 2008 and 2009, the trade deficit continued to decrease, reaching $706.1 billion and $419.9 billion, respectively. These decreases reflected strong export sales and a steady weakening of import purchases. A sizable depreciation of the dollar from 2002 through 2007 made U.S. exports more attractive to foreign buyers and imports less attractive to American buyers. In addition, since 2006, economic growth in the United States slowed relative to that of its major trading partners. As a percentage of GDP, the trade deficit in 2009 decreased to 2.9%, down from a record 6.1% in 2006.

The size of the U.S. trade deficit is ultimately rooted in macroeconomic conditions at home and abroad. U.S. saving falls short of what is sought to finance U.S. investment. Many foreign economies are in the opposite circumstances, with domestic saving exceeding domestic opportunities for investment. This difference of wants will tend to be reconciled by international capital flows. The shortfall in domestic saving relative to investment tends to draw an inflow of relatively abundant foreign savings (capital), seeking to maximize returns and, in turn, the saving inflow makes a higher level of investment possible. For the United States, a net capital (savings) inflow also leads to a like-sized net inflow of foreign goods—a trade deficit. In 2007 and 2008, both saving and investment fell, but in a weakening economy investment fell more, causing the trade deficit to narrow.

The benefit of the trade deficit is that it allows the United States to spend now beyond current income. Since the 1980s, that added spending was largely for investment in real estate, durable goods, and capital equipment. In recent years, the added spending was for consumption. The cost of the trade deficit is a deterioration of the U.S. investment-income balance, as the payment on what the United States has borrowed from foreigners grows with rising indebtedness. Borrowing from abroad allows the United States to live better today, but the payback may cause some decrement to the rate of advance of U.S. living standards in the future. U.S. trade deficits do not now substantially raise the risk of economic instability, but trade deficits can impose adjustment burdens on some trade-sensitive sectors of the economy.

Policy action to reduce the overall trade deficit is problematic. Standard trade policy tools (e.g., tariffs, quotas, and subsidies) do not work. Macroeconomic policy tools can work, but recent and prospective government budget deficits will reduce domestic saving and most likely tend to increase the trade deficit. Most economists believe that, in time, the trade deficit will correct itself, without crisis, under the pressures of normal market forces. But the risk of a more disruptive adjustment cannot be completely discounted.


Date of Report: July 12, 2010
Number of Pages: 27
Order Number: RL31032
Price: $29.95

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Thursday, July 22, 2010

U.S. Trade Deficit and the Impact of Changing Oil Prices


James K. Jackson
Specialist in International Trade and Finance

Petroleum prices rose sharply in the first half of 2008, at one time reaching more than $140 per barrel of crude oil. After July 2008, however, petroleum prices and import volumes fell at a historically rapid pace; in January 2009, prices of crude oil fell below $40 per barrel. Since then, crude oil prices have nearly doubled, while the average monthly volume of imports of energyrelated petroleum products has fallen nearly 10% year over year. Despite the drop in the volume of crude oil imports, the rise in the cost of energy imports through 2009 and early 2010 could add more than $100 billion to the nation's trade deficit in 2010 over that experienced in 2009. Should the U.S. economic recovery continue strongly in the second half of 2010, it could increase both the volume of energy imports and the price of those imports. This report provides an estimate of the initial impact of the changing oil prices on the nation's merchandise trade deficit.


Date of Report: July 13, 2010
Number of Pages: 11
Order Number: RS22204
Price: $29.95

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Wednesday, July 14, 2010

EU-U.S. Economic Ties: Framework, Scope, and Magnitude


William H. Cooper
Specialist in International Trade and Finance


The United States and the European Union (EU) economic relationship is the largest in the world—and it is growing. The modern U.S.-European economic relationship has evolved since World War II, broadening as the six-member European Community expanded into the present 27- member European Union. The ties have also become more complex and interdependent, covering a growing number and type of trade and financial activities.

In 2008, $1,571.2 billion flowed between the United States and the EU on the current account, the most comprehensive measure of U.S. trade flows. The EU as a unit is the largest merchandise trading partner of the United States. In 2008, the EU accounted for $274.5 billion of total U.S. exports (or 21.1%) and for $367.9 billion of total U.S. imports (or 17.5%) for a U.S. trade deficit of $93.4 billion. The EU is also the largest U.S. trade partner when trade in services is added to trade in merchandise, accounting for $198.3 billion (or 36.4% of the total in U.S. services exports) and $152.1 billion (or 37.6% of total U.S. services imports) in 2008. In addition, in 2009, a net $148.2 billion flowed from U.S. residents to EU countries into direct investments, while a net $82.7 billion flowed from EU residents to direct investments in the United States.

Policy disputes arise between the United States and the EU generating tensions which sometimes lead to bilateral trade disputes. Yet, in spite of these disputes, the U.S.-EU economic relationship remains dynamic. It is a relationship that is likely to grow in importance assuming the trends toward globalization and the enlargement of the EU continue, forcing more trade and investment barriers to fall. Economists indicate that an expanded relationship would bring economic benefits to both sides in the form of wider choices of goods and services and greater investment opportunities.

But increasing economic interdependence brings challenges as well as benefits. As the U.S. and EU economies continue to integrate, some sectors or firms will "lose out" to increased competition and will resist the forces of change. Greater economic integration also challenges long-held notions of "sovereignty," as national or regional policies have extraterritorial impact. Similarly, accepted understanding of "competition," "markets," and other economic concepts are tested as national borders dissolve with closer integration of economies.

U.S. and EU policymakers are likely to face the task of how to manage the increasingly complex bilateral economic relationship in ways that maximize benefits and keep frictions to a minimum, including developing new frameworks. For Members during the 111th Congress, it could mean weighing the benefits of greater economic integration against the costs to constituents in the context of overall U.S. national interests.



Date of Report: June 30, 2010
Number of Pages: 11
Order Number: RL30608
Price: $29.95

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Friday, July 9, 2010

Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues


J. F. Hornbeck
Specialist in International Trade and Finance


Economists generally acknowledge that trade liberalization enhances the economic welfare of all trade partners, but with stiffer global competition, many firms and workers also face difficult adjustment problems. Congress has responded to these adjustment costs by authorizing four trade adjustment assistance (TAA) programs to assist trade-impacted workers, firms, farmers, and communities. This report discusses the TAA program for firms (TAAF). The TAAF program provides technical assistance to trade-affected firms to help them develop strategies and make other adjustments to remain competitive in the changing international economy.

Congress first authorized TAA in Title III of the Trade Expansion Act of 1962 (P.L. 87-794), including a new firm and industry assistance program, which is administered by the Economic Development Administration (EDA) of the U.S. Department of Commerce. It provides technical assistance to help trade-impacted firms make strategic adjustments that may allow them to remain competitive in a global economy. Originally firm TAA also included loans and loan guarantees, but Congress eliminated all direct financial assistance in 1986 because of federal budgetary cutbacks and concern over the program's high default rates and limited effectiveness.

Debate early in the 111th Congress over TAA reauthorization led to a February 5, 2009 bipartisan agreement to expand and extend existing programs for workers, firms, and farmers, and to add a fourth program for communities. The agreement became part of the American Recovery and Reinvestment Act of 2009 (P.L. 111-5—the Stimulus Bill). Congress changed the TAA for Firms program in a number of important ways. It expanded eligibility for trade adjustment assistance to include services firms, authorized an extension of the program through December 31, 2010, increasing annual funding levels from $16 million to $50 million, provided greater flexibility for a firm to demonstrate eligibility for assistance, established new oversight and evaluation criteria, created a new position of Director of Adjustment Assistance for Firms, and required submission to Congress of a detailed annual report on the TAAF program.

Historically, program evaluation has been limited, lacking a formal evaluation process. Congress addressed this issue with an annual report requirement. In recent years, EDA has used feedback systems to improve delivery of TAAF services. The petition and adjustment proposal approval process has been automated and streamlined, and over the past two years, the time between submission of petitions for certification and acceptance of the adjustment proposal has fallen. Without more sophisticated analysis to estimate the effectiveness of this program approach, however, the issue of the impact of TAAF remains a somewhat speculative if not open question.

The current TAAF program authorization is in place through December 31, 2010, and the 111th Congress may consider extending and/or amending it prior to its expiration.



Date of Report: July 1, 2010
Number of Pages: 10
Order Number: RS20210
Price: $29.95

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The Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA): Provisions and Implications


William H. Cooper, Coordinator
Specialist in International Trade and Finance

Mark E. Manyin
Specialist in Asian Affairs

Remy Jurenas
Specialist in Agricultural Policy

Michaela D. Platzer
Specialist in Industrial Organization and Business

On June 30, 2007, U.S. and South Korean trade officials signed the proposed U.S.-South Korean Free Trade Agreement (KORUS FTA) for their respective countries. If approved, the KORUS FTA would be the second largest FTA that South Korea has signed to date, after the agreement with the European Union (EU). It would be the second largest (next to North American Free Trade Agreement, NAFTA) in which the United States participates. South Korea is the seventhlargest trading partner of the United States and the United States is South Korea's third largest trading partner. Various studies conclude that the agreement would increase bilateral trade and investment flows. The final text of the proposed KORUS FTA covers a wide range of trade and investment issues and, therefore, could have substantial economic implications for both the United States and South Korea. The agreement will not enter into force unless Congress approves implementation legislation. The negotiations were conducted under the trade promotion authority (TPA), also called fast-track trade authority, that the Congress granted the President under the Bipartisan Trade Promotion Act of 2002 (P.L. 107-210). The authority allows the President to enter into trade agreements that receive expedited congressional consideration (no amendments and limited debate).

On June 26, 2010, President Obama announced that he would direct U.S. Trade Representative Robert Kirk to work with the South Korean trade minister to resolve outstanding issues on the KORUS FTA by the time he and South Korean President Lee Myung-Bak meet again in Seoul for the November 2010 G-20 meeting. The President said that he intends "in the few months" after the November meeting to present Congress with the implementing legislation for the agreement. The President made the announcement at a joint press conference following his meeting with President Lee just before the G-20 meeting in Toronto. In follow-up briefings, Administration officials indicated that the discussions would focus on South Korean measures related to market access for U.S. autos and beef. It was the first time the Administration had assigned a timeframe for dealing with the KORUS FTA. President Lee responded that he and President Obama would talk about "the specific ways to move this [FTA] forward." President Obama announced this step at a time of overall tightening U.S.-South Korean relations in the face of new security threats from North Korea.

In South Korea, however, the politics of the KORUS FTA likely will make it difficult for the government of President Lee to appear to accede to new U.S. demands. This is particularly due to memories of events in 2008, when Lee reached an agreement with the United States to lift South Korea's partial ban on U.S. beef imports, triggering massive anti-government protests that forced the two governments to renegotiate the beef agreement. The South Korean National Assembly has yet to vote on the KORUS FTA, and is debating whether or not to do so before the U.S. Congress acts. It is expected that the Assembly would pass the agreement, at least in its current version.

While a broad swath of the U.S. business community supports the agreement, the KORUS FTA faces opposition from some groups, including some auto and steel manufacturers and labor unions. Some U.S. supporters view passage of the KORUS FTA as important to secure new opportunities in the South Korean market, while opponents claim that the KORUS FTA does not go far enough. Other observers have suggested the outcome of the KORUS FTA could have implications for the U.S.-South Korean alliance as a whole, as well as on U.S. Asia policy and U.S. trade policy, particularly in light of an FTA completed in October 2009 between South Korea and the European Union. 
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Date of Report: July 2, 2010
Number of Pages: 54
Order Number: RL34330
Price: $29.95

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Wednesday, July 7, 2010

Trade Law: An Introduction to Selected International Agreements and U.S. Laws

Emily C. Barbour
Legislative Attorney

U.S. trade obligations derive from international trade agreements, including the General Agreement on Tariffs and Trade (GATT), the other World Trade Organization (WTO) agreements, and additional bilateral and regional trade agreements, as well as domestic laws intended to implement those agreements or effectuate U.S. trade policy goals. This report provides an overview of both sources of U.S. trade obligations, focusing on a select group of agreements, provisions, and statutes that are most commonly implicated by U.S. trade interests and policy. 

Historically, parties to international trade agreements were obligated to reduce two kinds of trade barriers: tariffs and non-tariff trade barriers. Whereas the former may hinder an imported product's ability to compete in a foreign market by imposing an additional cost on the product's entry into the market, the latter has the potential to bar an import from entering that market altogether by, for example, restricting the number of such imports that can enter the market or imposing prohibitively strict packaging and labeling requirements. Consequently, at their most basic, international trade agreements obligate their parties to convert at least some of their nontariff trade barriers into tariffs, set a ceiling on the tariff rates for particular products, and then progressively reduce those rates over time. In addition, international trade agreements have increasingly broadened their scope to target domestic policies that appear to operate as unfair trade practices and to establish elaborate trade dispute settlement mechanisms. As illustrated in this report, the typical international trade agreement today disciplines its parties' use of tariffs and trade barriers, authorizes its parties to use discriminatory trade measures to remedy certain unfair trade practices, and establishes a dispute settlement body. 

Domestic trade laws, meanwhile, can broadly be classified as laws (1) authorizing trade remedies, including remedies for violations of trade agreements, countervailing duties for subsidized imports, and antidumping duties for imports sold at less than their normal value, (2) setting domestic tariff rates and providing special duty-free or preferential tariff treatment for certain products, and (3) authorizing the imposition of trade sanctions to protect U.S. security or achieve other policy goals. In addition to describing these domestic laws, this report summarizes the constitutional authorities of Congress and the executive branch over international trade. Finally, the report identifies many of the federal agencies and entities charged with overseeing the development of new trade agreements and the administration and enforcement of federal trade laws. Among the federal agencies and entities discussed are the United States Trade Representative (USTR), the International Trade Administration (ITA), the International Trade Commission (ITC), the United States Customs and Border Protection (CBP), and the United States Court of International Trade (CIT). 

This report is not intended as a comprehensive review of trade law. It is an introductory overview of the legal framework governing trade-related measures. The agreements and laws selected for discussion are those most commonly implicated by U.S. trade interests, but there are U.S. trade obligations beyond those reviewed in this report.



Date of Report: June 29, 2010
Number of Pages: 63
Order Number: R41306
Price: $29.95

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Tuesday, July 6, 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 recent 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 investors sharply increased their purchases of U.S. Treasury securities in 2009 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 2008. 

• 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: June 22, 2010
Number of Pages: 19
Order Number: RL33274
Price: $29.95

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Monday, July 5, 2010

U.S. Trade Policy and the Caribbean: From Trade Preferences to Free Trade Agreements

J. F. Hornbeck
Specialist in International Trade and Finance

For over 40 years, the United States has relied on unilateral trade preferences to promote exportled development in poor countries. Congressionally authorized trade preferences give market access to selected developing country goods, duty free or at tariffs below normal rates, without requiring reciprocal trade concessions, although their extension is conditioned on extensive eligibility criteria and the use of U.S. inputs in many cases. The Caribbean Basin has benefitted from multiple preferential trade arrangements, the first being the Caribbean Basin Initiative (CBI), passed by Congress in the Caribbean Basin Economic Recovery Act of 1983. Other programs include the Caribbean Basin Trade Partnership Act (CBTPA) of 2000, which provides tariff preferences for imports of apparel products, and the Haiti HOPE Act of 2006 (amended in 2008 and 2010), which gives even more generous preferences to imports of Haitian apparel. 

Since the preferences have been implemented, U.S.-Caribbean trade has grown, but evaluations of the early programs suggest that their effects were not as robust as originally hoped. Benefits tended to be concentrated in a few countries and products, limiting export promotion and deterring product diversification. Over time, benefits have been "eroded" by multilateral trade liberalization and other regional U.S. preference programs. Bilateral free trade agreements, particularly the CAFTA-DR, have actually replaced unilateral preferences with permanent, more attractive tariff reductions and trade rules for former CBI countries such as the Dominican Republic and Central American countries. As the main exporters of apparel in the Caribbean Basin, they were among the primary beneficiaries of the Caribbean trade preference programs. 

In recent years, Congress had leaned toward short-term extensions of the Caribbean and other preference programs. A number of Members seek a comprehensive review of these programs with an eye on harmonizing and revamping their various provisions. Congressional concern over eligibility criteria, simplifying rules of origin, targeting the least developed countries, and standardizing benefits are among a number of broad issues being debated as part of the preference reform agenda. In the 111th Congress, the discussion of extending the Caribbean programs has been part of a broader reauthorization effort for all preference arrangements. In addition, there are a number of issues and circumstances converging that may suggest the need for reorienting U.S. trade policy in the Caribbean region. 

The most effective trade preferences appear to be the apparel provisions provided under the CBTPA and the HOPE Act, as amended. Both were extended through September 30, 2020, in the Haiti Economic Lift Program (HELP) Act of 2010 (P.L. 111-171). These provisions, however, are not well suited to the services- and energy-based economies of the smaller Eastern Caribbean countries. Also, there is a reluctance by these countries to make the transition to an FTA without some guarantee of a "development component" to the agreement. These concerns persist, despite the promise of permanent market access and increased investment that an FTA holds out. The Caribbean countries, long involved in dependent economic relationships, appear content to take a cautious path toward any new trade arrangement with the United States. 

For U.S. trade policy, any thoughts of achieving broader regional integration are challenged by these circumstances. Broader integration may be difficult to reconcile with the needs of very small developing countries, which are highly vulnerable to the vicissitudes of global economic trends and may require new and creative solutions, particularly if U.S. policy is still driven by the historical focus on development and regional security issues in addition to trade liberalization. In the context of continuing with trade preferences in similar or altered form, or opting for an FTA, the solution is not immediately obvious.  


Date of Report: June 22, 2010
Number of Pages: 26
Order Number: RL33951
Price: $29.95

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Foreign Investment in U.S. Securities

James K. Jackson
Specialist in International Trade and Finance


Foreign capital inflows are playing an important role in the U.S. economy by bridging the gap between domestic supplies of and demand for capital. In 2008, as the financial crisis and global economic downturn unfolded, foreign investors looked to U.S. Treasury securities as a "safe haven" investment, while they sharply reduced their net purchases of corporate stocks and bonds. In 2009, foreign capital inflows continued to drop as private investors sharply retrenched, while official purchases of U.S. Treasury securities by foreign governments rose sharply. Foreign investors now hold more than 50% of the publicly held and traded U.S. Treasury securities. The large foreign accumulation of U.S. securities has spurred some observers to argue that this large foreign presence in U.S. financial markets increases the risk of a financial crisis, whether as a result of the uncoordinated actions of market participants or by a coordinated withdrawal from U.S. financial markets by foreign investors for economic or political reasons. 

Congress likely would find itself embroiled in any such financial crisis through its direct role in conducting fiscal policy and in its indirect role in the conduct of monetary policy through its supervisory responsibility over the Federal Reserve. Such a coordinated withdrawal seems highly unlikely, particularly since the vast majority of the investors are private entities that presumably would find it difficult to coordinate a withdrawal. The financial crisis and economic downturn, however, have sharply reduced the value of the assets foreign investors acquired, which may make them more hesitant in the future to invest in certain types of securities. As a result of the financial crisis of 2008, foreign investors curtailed their purchases of corporate securities, a phenomenon that was not unique to the United States. In a sense, the slowdown in the U.S. economy and rise in the personal rate of saving have eased somewhat the need for foreign investment. The importance of capital inflows may well change as the federal government's budget deficits rise over the course of the economic downturn.. This report analyzes the extent of foreign portfolio investment in the U.S. economy and assesses the economic conditions that are attracting such investment and the impact such investments are having on the economy. 

Over the course of the recent recession, foreign investors have often favored dollar-denominated investments due to a number of factors, including the evaluation that such investments are a "safe haven" investment during times of uncertainty; comparatively favorable returns on investments, a surplus of saving in other areas of the world, the well-developed U.S. financial system, and the overall stability and relative rate of growth of the U.S. economy. Capital inflows also allow the United States to finance its trade deficit because foreigners are willing to lend to the United States in the form of exchanging the sale of goods, represented by U.S. imports, for such U.S. assets as U.S. businesses and real estate, stocks, bonds, and U.S. Treasury securities. Despite improvements in capital mobility, foreign capital inflows do not fully replace or compensate for a lack of domestic sources of capital. Economic analysis shows that a nation's rate of capital formation, or domestic investment, seems to have been linked primarily to its domestic rate of saving. 

This report relies on a comprehensive set of data on capital flows, represented by purchases and sales of U.S. government securities and U.S. and foreign corporate stocks, bonds, into and out of the United States, that is reported by the Treasury Department on a monthly basis.



Date of Report: June 22, 2010
Number of Pages: 27
Order Number: RL32462
Price: $29.95

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