Sovereign Debt in Advanced Economies: Overview and Issues for Congress

Rebecca M. Nelson
Analyst in International Trade and Finance

Sovereign debt, also called public debt or government debt, refers to debt incurred by governments. Since the global financial crisis of 2008-2009, public debt in advanced economies has increased substantially. A number of factors related to the financial crisis have fueled the increase, including fiscal stimulus packages, the nationalization of private-sector debt, and lower tax revenue. Even if economic growth reverses some of these trends, such as by boosting tax receipts and reducing spending on government programs, aging populations in advanced economies are expected to strain government debt levels in coming years.

High levels of debt in advanced economies are a new global concern. High public debt levels have become unsustainable in three Eurozone countries: Greece, Ireland, and Portugal. These countries turned to the International Monetary Fund (IMF) and other European governments for financial assistance in order to avoid defaulting on their loans. Japan’s credit rating was downgraded by Standard and Poor’s (S&P) in January 2011 over concerns about debt levels, and its rating was put on a negative outlook in April 2011. In August 2011, S&P downgraded longterm U.S. government debt from AAA (the highest possible rating) to AA+.

To date, many advanced-economy governments have embarked on fiscal austerity programs (such as cutting spending or increasing taxes) to address historically high levels of debt. This policy response has been criticized by some economists as possibly undermining a weak recovery from the global financial crisis. Others argue that the austerity plans do not go far enough, and do not share the burden of adjustment with creditors who, they argue, engaged in reckless lending. 

Issues for Congress 

·         Is the United States headed for a Eurozone-style debt crisis? Some economists and Members of Congress fear that, given historically high levels of U.S. public debt, the United States is headed towards a debt crisis similar to those experienced by some Eurozone countries. Others argue that important differences between the United States and Eurozone economies, such as growth rates, borrowing rates, and type of exchange rate (floating or fixed), put the United States in a different, if not much stronger, position. The United States has a long historical record of debt repayment, and bond spreads indicate that investors currently view the United States as far less risky than Greece, Ireland, or Portugal. 

·         Impact on U.S. economy. How other advanced economies address their debt levels has implications for the U.S. economy. Currently, most advanced economies are focused on austerity programs to lower debt levels. This could slow growth in advanced economies and, because they are among the United States’ main trading partners, depress demand for U.S. exports. If advanced economies shift to restructuring debt, U.S. creditors exposed overseas could face losses on their investments. As of March 2011, U.S. bank exposure to Greece, Ireland, and Portugal (to governments and the private sector) was $175 billion, less than 3% of total direct U.S. bank exposure overseas. However, U.S. banks and other financial institutions may have other potential exposures that could increase the effects of a financial crisis in the Eurozone.

·         Policy options for Congress. Congress is currently debating proposals to reduce the federal debt. Multilaterally, Congress could urge the Administration to coordinate fiscal policies to avoid simultaneous austerity measures that undermine the economic recovery.

Date of Report: October 19, 2011
Number of Pages: 38
Order Number: R41838
Price: $29.95

Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.

Trade Deficit and the Dollar

Title: Trade Deficit and the Dollar

Congress, as part of its oversight of economic policy, has a continuing interest in the trade deficit and its potential consequences for the national economy. A persistently large U.S. trade deficit raises concerns among the public and in Congress about the trade deficit’s effect on economic growth, as well as the associated capital inflow on domestic credit conditions. There are also concerns about the burden of repaying the foreign debt that finances the trade deficit.

Key issues for Congress include: What economic policies will give the best prospect for raising the U.S. saving rate, an accomplishment that is arguably of central importance for reducing the trade deficit on the most favorable terms for the United States? What effects will long-term fiscal consolidation have on the dollar and the trade deficit? What policy adjustments in other countries, particularly those with large global trade surpluses, would help to achieve an orderly depreciation of the dollar, rebalancing of domestic and external demand in the deficit and surplus countries, continued reduction of the U.S. trade deficit, and sustained world economic recovery? How important is it to an orderly global rebalancing for countries that manage their currencies to allow their exchange rates to adjust? What is the risk of a disorderly adjustment out of dollar assets by foreign
investors? How can this risk best be managed?

Date of Compendium: September 29, 2011
Number of Pages: 157
Order Number: IS30400
Price: $39.95 (Subscribers to Congressional Research Report newsletter pay $19.97)

Trade Adjustment Assistance (TAA) and Its Role in U.S. Trade Policy

J. F. Hornbeck
Specialist in International Trade and Finance

Laine Elise Rover
Research Associate

Congress created Trade Adjustment Assistance (TAA) in the Trade Expansion Act of 1962 to help workers and firms adjust to dislocation that may be caused by increased trade liberalization. It is justified now, as it was then, on grounds that the government has an obligation to help the “losers” of policy-driven trade liberalization. In addition, TAA is presented as an alternative to policies that would restrict imports, and so provides assistance while bolstering freer trade and diminishing prospects for potentially costly tension (retaliation) among trade partners. As in the past, critics strongly debate the merits of TAA on equity, efficiency, and budgetary grounds. Nonetheless, TAA still appears to serve what is now a historically pragmatic legislative function: it remains important for forging a compromise on national trade policy.

TAA was most recently expanded in the American Recovery and Reinvestment Act (ARRA) of 2009, although the higher funding levels and program enhancements expired on February 12, 2011, leaving TAA programs to operate at pre-ARRA levels until February 12, 2012, when all TAA program authorizations are scheduled to expire. TAA program authorizations are set to expire on February 13, 2012, and the 112th Congress is taking legislative action to extend them. Based on an understanding between House and Senate leaders, and the White House, a compromise TAA reauthorization bill (H.R. 2832) is being considered as part of a deal for voting on three implementing bills for the proposed free trade agreements (FTAs) with Colombia (H.R. 3078), Panama (H.R. 3079), and South Korea (H.R. 3080).

The TAA extension would reauthorize the workers, firms, and farmers programs through December 31, 2013. TAA for communities would be repealed, considered duplicative of other federal programs. Many, but not all, of the enhanced programs and funding levels contained in the ARRA would be reauthorized, including extending benefits to services workers and firms, and requiring expanded evaluation and reporting requirements on the programs. The provisions of the bill would apply retroactively to the expiration date of the ARRA enhancements.

Congressional Democrats and the White House insisted that consideration of the three FTA implementing bills be contingent upon passage of TAA reauthorization legislation. To accommodate concerns on all sides over legislative procedure, an elaborate process was agreed to that ensures consideration of the four bills within a relatively short time span. The House passed a bill on September 7, 2011, reauthorizing the Generalized System of Preferences (H.R. 2832), sending it to the Senate, where it was amended with TAA reauthorization. On September 22, 2011, the Senate agreed to the amended bill, 70-27, after which it was sent to the House. In separate action, the House Ways and Means Committee favorably reported out all three FTA implementing bills on October 3, 2011.

On October 6, 2011, the House Committee on Rules issued a closed rule covering all four bills. Senate amendment to H.R. 2832 is expected to be taken up by the House on October 12, 2011, along with implementing bills for the three FTAs. H.R. 2832, as amended, will be considered under a rule that waives all points of order and allows for one hour of debate. The bill requires simple majority to pass, and having already been agreed to in the Senate, House passage would then allow it to be sent to the President for signature.


Date of Report: October 7, 2011
Number of Pages: 16
Order Number: R41922
Price: $29.95

Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.

Dispute Settlement in the Proposed U.S.-South Korea Free Trade Agreement (KORUS FTA)

Jeanne J. Grimmett
Legislative Attorney

The proposed U.S.-South Korea Free Trade Agreement (KORUS FTA) follows current U.S. free trade agreement (FTA) practice in containing two types of formal dispute settlement: (1) State- State, applicable to disputes between the KORUS FTA Parties, and (2) investor-State, applicable to claims by an investor of one KORUS FTA Party against the other Party for breach of an agreement investment obligation. An unsuccessful defendant in a State-State dispute would generally be expected to remove the complained-of measure; remedies for non-compliance include compensation and the suspension of KORUS FTA obligations (e.g., the imposition of a tariff surcharge on the defending Party’s products) and, as an alternative, payment of a fine to the prevailing Party or, in some cases, into a fund that may be used to assist the defending Party in complying with its obligations in the case. The KORUS FTA also contains special procedures for State-State disputes relating to motor vehicles that would grant the prevailing complainant an automatic right to increase tariffs on motor vehicles of the other Party to most-favored-nation (MFN) rates. If a Party were found to have violated an investment obligation in an investor-State dispute, the tribunal would be authorized only to make a monetary award to the claimant and thus could not direct the State defendant to withdraw the violative measure. If the defending Party did not comply with the award, the investor might seek to enforce it under one of the international arbitral conventions to which the United States and South Korea are party.

The KORUS FTA State-State dispute settlement mechanism differs from most earlier U.S. FTAs in that it applies to all obligations contained in the labor and environmental chapters of the KORUS FTA instead of only domestic labor or environmental law enforcement obligations. In addition, in the event a Party is found to be in breach of one of these obligations and has not complied, the prevailing Party may impose trade sanctions instead of, as under earlier agreements, being limited to requesting that a fine be imposed on the non-complying Party with the funds to be expended for labor or environmental initiatives in that Party’s territory. The changes stem from a bipartisan understanding on trade policy between congressional leaders and the George W. Bush Administration finalized on May 10, 2007, setting out provisions that were to be added to completed or substantially completed FTAs pending at the time. Among the aims of the understanding was to expand and further integrate labor and environmental obligations into the U.S. FTA structure. The same approach to labor and environmental disputes is found in FTAs entered into with Colombia and Panama, each of which continue to await congressional approval, and in the U.S.-Peru Trade Promotion Agreement, which entered into force in 2009.

Resort to panels under FTA State-State dispute settlement has been uncommon, and thus there has been relatively little experience with the operation of this mechanism over a range of agreements and issues. FTA investor-State claims have been filed under the North American Free Trade Agreement (NAFTA), the Dominican Republic-Central America-U.S. Free Trade Agreement, and the U.S.-Peru Trade Promotion Agreement. As is the case with its NAFTA partners – particularly Canada – the United States imports capital from South Korea to a greater degree than it does from parties to other U.S. investment agreements, and South Korean investment in the United States may indeed grow over time. While this situation may create a greater potential for investor-State disputes than exists under most other U.S. investment agreements, the extent to which disputes involving South Korean investors will in fact arise would seemingly depend upon a variety of factors and interests unique to an investor’s individual situation and thus for now remains only a matter for conjecture. To date, the United States has prevailed in all investor-State cases brought against it. H.R. 3080 (Cantor) and S. 1642 (Baucus) would approve the KORUS FTA and provide legislative authorities needed to carry it out.


Date of Report: October 7, 2011
Number of Pages: 24
Order Number: R41779
Price: $29.95

Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.

Trade Preferences for Developing Countries and the World Trade Organization (WTO)

Jeanne J. Grimmett
Legislative Attorney

Article I:1 of the General Agreement on Tariffs and Trade 1994 (GATT 1994) requires World Trade Organization (WTO) Members to grant most-favored-nation (MFN) treatment “immediately and unconditionally” to the like products of other Members with respect to tariffs and other trade-related measures. Programs such as the Generalized System of Preferences (GSP), under which developed countries grant preferential tariff rates to developing country goods, are facially inconsistent with this obligation because they accord goods of some countries more favorable tariff treatment than that accorded to like goods of other WTO Members. Because such programs have been viewed as trade-expanding, however, parties to the GATT provided a legal basis for one-way tariff preferences in a 1979 decision known as the Enabling Clause. The Enabling Clause was formally incorporated into the GATT 1994 upon the entry into force of the GATT Uruguay Round agreements on January 1, 1995. In 2004, the WTO Appellate Body ruled that the Clause allows developed countries to offer differing treatment to developing countries in a GSP program, but only if identical treatment is available to all similarly situated beneficiaries.

In addition to GSP programs, some WTO Members may also grant preferences to products of particular groups of countries that are more generous than GSP benefits. In such cases, Members have generally obtained time-limited WTO waivers of GATT Article I:l and, if needed, other GATT obligations. The United States holds temporary WTO waivers for tariff preferences granted to the former Trust Territory of the Pacific Islands and for three regional preference schemes: (1) the Caribbean Basin Economic Recovery Act (CBERA), as amended; (2) the Andean Trade Preference Act (ATPA), as amended, and (3) the African Growth and Opportunity Act (AGOA).

Congress has made the CBERA program permanent and has authorized through September 30, 2020, the expanded tariff benefits contained in the Caribbean Basin Trade Partnership Act and subsequent legislation particular to Haiti. The AGOA program is authorized through September 30, 2015. In December 2009, Congress extended the GSP and Andean trade preference programs to December 31, 2010, continuing an existing denial of benefits to Bolivia. While Congress did not renew the GSP program, it enacted legislation in December 2010 extending Andean trade preferences, as accorded to Colombia and Ecuador, through February 12, 2011. Andean benefits for Peru, which has been a party to a free trade agreement with the United States since February 2009, were terminated as of December 31, 2010, in the same enactment.

In the 112th Congress, H.R. 2832 (Camp), as passed the House and Senate, would extend the GSP program through July 31, 2013, and authorize the retroactive application of duty-free rates and other GSP benefits to entries of goods made after December 31, 2010. H.R. 3078 (Cantor) and S. 1641 (Baucus), bills to implement the U.S-Colombia Trade Promotion Agreement, would extend ATPA benefits to Colombia and Ecuador through July 31, 2013, with retroactive application to February 12, 2011. H.R. 913 (Aderholt), and S. 433 (Sessions) would extend the GSP program through June 30, 2012, with retroactive application to entries made after December 31, 2010; make certain sleeping bags ineligible for GSP benefits; and extend ATPA benefits to Colombia and Ecuador through June 30, 2012, with the extension effective as of February 12, 2011. S. 308 (Casey) would extend the GSP and ATPA programs to June 30, 2012, with retroactive application to their current expiration dates, and make certain sleeping bags ineligible for GSP benefits, with exceptions for higher-value bags and certain kits. S. 380 (McCain) would extend ATPA benefits to Colombia and Ecuador through November 30, 2012, with retroactive application to entries made after February 12, 2011.


Date of Report: October 5, 2011
Number of Pages: 12
Order Number: RS22183
Price: $29.95

Follow us on TWITTER at http://www.twitter.com/alertsPHP or #CRSreports

Document available via e-mail as a pdf file or in paper form.
To order, e-mail Penny Hill Press or call us at 301-253-0881. Provide a Visa, MasterCard, American Express, or Discover card number, expiration date, and name on the card. Indicate whether you want e-mail or postal delivery. Phone orders are preferred and receive priority processing.