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Tuesday, May 31, 2011

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

James K. Jackson
Specialist in International Trade and Finance

Petroleum prices have risen sharply since September 2010, at times reaching more than $100 per barrel of crude oil. Although this is still below the $140 per barrel price reached in 2008, the rising cost of energy is beginning to affect the rate of growth in the economy. While the price of oil has increased, the volume of oil imports, or the amount of oil, has increased slightly, reflecting the increase in economic activity that has occurred since the steepest part of the economic recession in 2009. Turmoil in the Middle East caused petroleum prices to rise sharply in the first three months of 2011 and could add $100 billion to the U.S. trade deficit in 2011. The increase in energy import prices is pushing up the price of energy to consumers and could spur some elements of the public to pressure the 112th Congress to provide relief to households that are struggling to meet their current expenses. With oil prices rising to over $100 per barrel in early 2011, the International Energy Agency cautioned that the rising price of oil was becoming a threat to the global economic recovery. This report provides an estimate of the initial impact of the changing oil prices on the nation’s merchandise trade deficit.


Date of Report: May 13, 2011
Number of Pages: 10
Order Number: RS22204
Price: $29.95

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Friday, May 27, 2011

Dispute Settlement Under the U.S.-Peru Trade Promotion Agreement: An Overview

Jeanne J. Grimmett
Legislative Attorney

The U.S.-Peru Trade Promotion Agreement (PTPA) 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 Parties to the PTPA, and (2) investor-State, applicable to claims by an investor of one State Party against the other State Party for breach of a PTPA investment obligation. A defending Party in a State-State dispute found to be in violation of a PTPA obligation is generally expected to remove the complained-of measure; remedies for noncompliance include compensation and the suspension of PTPA concessions or obligations (e.g., the imposition of a tariff surcharge on the defending Party’s products), with the defending Party having the alternative of paying 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. An investor-State tribunal may only make monetary awards to the claimant and thus may not direct a PTPA Party to withdraw or modify a violative measure. If the defending State Party does not comply with an award, the investor may seek to enforce it under one of the international conventions for the recognition and enforcement of arbitral awards to which the United States and Peru are party. State-State dispute settlement may also be initiated against the non-complying Party.

The PTPA State-State dispute settlement mechanism differs from earlier U.S. FTAs in that it applies to all obligations contained in the labor and environmental chapters of the PTPA 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 in the dispute, 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 agreement on trade policy between Congress and the Administration finalized on May 10, 2007 (May 10 agreement), setting out various provisions to be added to completed or substantially completed FTAs pending at the time. Among the aims of the agreement was to expand and further integrate labor and environmental obligations into the U.S. free trade agreement structure. The same approach to labor and environmental disputes is found in FTAs entered into with Colombia, Korea, and Panama, each of which continue to await congressional approval.

Implementing legislation approving the PTPA and providing legislative authorities needed to carry it out was signed into law on December 14, 2007 (P.L. 110-138). The agreement entered into force on February 1, 2009. A protocol of amendment revising the PTPA to incorporate provisions involving labor, the environment, intellectual property, port services, and investment, as set out in the May 10 agreement, entered into force on the same day.

To date, there have not been any disputes brought under the PTPA State-State dispute settlement mechanism. In general, 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 disputes have occurred more frequently. A notice of intent to initiate an arbitration was submitted by a U.S. firm under the PTPA in late December 2010; the investor is reportedly pursuing the claim further. Claims have also been brought under the North American Free Trade Agreement (NAFTA) against each of the three agreement Parties. In addition, five claims have been filed by U.S. investors under the Dominican Republic-Central America-United States Free Trade Agreement (DR-CAFTA): one against the Dominican Republic, two against El Salvador, and two against Guatemala.



Date of Report: May 18, 2011
Number of Pages: 16
Order Number: RS22752
Price: $29.95

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Tuesday, May 24, 2011

U.S. International Trade: Trends and Forecasts


Dick K. Nanto
Specialist in Industry and Trade

J. Michael Donnelly
Information Research Specialist


The global financial crisis, now officially dated to the 19 months from December 2007 through June 2009, caused the U.S. trade deficit to decrease from August 2008 through May 2009, but since then it has begun to increase again as recovery has commenced. The financial crisis caused U.S. imports to drop faster than U.S. exports, but that has been reversed as U.S. demand for imports recover.

In 2010, the trade deficit in goods reached $646.5 billion on a balance of payments (BoP) basis, more than the $506.9 billion in 2009, but less than the $834.7 billion in 2008. The 2010 deficit on merchandise trade (Census basis) with China was $273 billion, with the European Union (EU27) was $634.6 billion, with Canada was $28.3 billion, with Japan was $59.8 billion, and with Mexico was $66.3 billion. With the Asian Newly Industrialized Countries (Hong Kong, South Korea, Singapore, and Taiwan), the trade balance moved from a deficit of $5.5 billion in 2007 to surpluses of $2.2 billion in 2008, $3.5 billion in 2009, and $14 billion in 2010. Imports of goods of $1,935.6 billion increased by $360.2 billion, 18.5% over 2009. Exports of goods of $1,289.1 billion increased by $220.6 billion or 20.6%. The overall merchandise trade deficit for 2010 increased, or became more negative, by $131 billion or 26% over 2009.

Despite increasing debts, in 2010, the United States ran a surplus of $163 billion in investment income with the rest of the world. With China, however, there was a deficit of $37 billion and with Japan $33 billion. In automotive trade, the U.S. ran deficits of $44 billion with Japan, $37 billion with Mexico, $18 billion with Germany, and $11 billion with South Korea. In energy trade, the U.S. deficit in 2010 of $273 billion was 26% greater than the $217 billion in 2009, but less than the $415 deficit in 2008. We examine in detail: high technology trade; energy trade and the crude oil deficit and sources; and transportation trade.

Trade deficits are a concern for Congress because they may generate trade friction and pressures for the government to do more to open foreign markets, to shield U.S. producers from foreign competition, or to assist U.S. industries to become more competitive. Overall U.S. trade deficits reflect excess spending (a shortage of savings) in the domestic economy and a reliance on capital imports to finance that shortfall. Capital inflows serve to offset the outflow of dollars used to pay for imports. Movements in the exchange rate help to balance trade. The rising trade deficit (when not matched by capital inflows) places downward pressure on the value of the dollar, which, in turn, helps to shrink the deficit by making U.S. exports cheaper and imports more expensive. Central banks in countries such as China, however, have intervened in foreign exchange markets to keep the value of their currencies from rising too fast. The trade agenda of the 112
th Congress centers on three Free Trade Agreements awaiting congressional action and trade with China.

The balance on current account includes merchandise trade plus trade in services and unilateral transfers. In 2010, the deficit on current account grew to $470.2 billion from 2009’s $378.4 billion and from $668.9 billion in 2008. IHS Global Insight forecasts a higher deficit on current account for 2011, at $557 billion, and remaining near $600 billion through 2016.

Selected Legislation: S. 380, S. 433/H.R. 913, S. 308, S. 328/H.R. 639, H.R. 1655, H.R. 29, H.R. 516, H.R. 554, H.R. 833, S. 98, S. 708.



Date of Report: May 13, 2011
Number of Pages: 42
Order Number: RL33577
Price: $29.95

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Reauthorization of the Export-Import Bank: Issues and Policy Options for Congress


Shayerah Ilias
Analyst in International Trade and Finance

The Export-Import Bank (Ex-Im Bank, EXIM Bank, or the Bank), a self-sustaining agency, is the official U.S. export credit agency (ECA). It operates under a renewable charter, the Export-Import Bank Act of 1945, as amended. Ex-Im Bank’s most recent reauthorization (P.L. 109-438) was in 2006, when Congress extended the Bank’s authority through FY2011. Since its inception, Ex-Im Bank programs have supported more than $400 billion in U.S. exports.

The Bank’s charter expires on September 30, 2011. Potential issues for the 112
th Congress as it examines reauthorization of Ex-Im Bank include the following: 
  • The economic rationale for the Bank, including the role of the federal government in export promotion and finance; 
  • Specific Bank policies, such as those relating to content, shipping, economic and environmental impact analysis, and tied aid, including how these policies balance U.S. export and other policy interests; 
  • Statutory requirements directing Ex-Im Bank to support certain types of exports, such as exports of small businesses and “green” technology, including the tension that such requirements can create between desiring to support specific economic sectors and allowing Ex-Im Bank flexibility to fulfill its mission to support U.S. exports and jobs; and 
  • International developments that may affect the Bank’s work, such as the growing role of emerging economies ECAs and the sufficiency of the Organization for Economic Cooperation and Development (OECD) Arrangement on Officially Supported Export Credit to “level the playing field” for U.S. exporters. 
Potential options for Congress include, but are not limited to, the following areas: 
  • Structure of the Bank. Congress could maintain Ex-Im Bank as an independent agency, reorganize or privatize the functions of the Bank, or terminate the Bank. 
  • Length of reauthorization. Congress could extend the Bank’s authority for a few years at a time (as in previous reauthorizations), for a longer period of time, or permanently reauthorize the Bank. 
  • Bank’s policies. Congress could maintain the status quo, or revise the Bank’s policies, such as those related to the requirements and limitations on Ex-Im Bank’s credit and insurance activities. 
International ECA context. Congress could seek to enhance international regulation of official export credit activity through the OECD or other mechanisms, or enhance Ex-Im Bank’s understanding of international export credit activity and trends.


Date of Report: May 20, 2011
Number of Pages: 28
Order Number: R41829
Price: $29.95

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International Monetary Fund: Selecting a Managing Director


Martin A. Weiss
Specialist in International Trade and Finance

On May 14, 2011, Dominique Strauss-Kahn, the Managing Director of the International Monetary Fund (IMF), was arrested at John F. Kennedy Airport and charged with the attempted rape, criminal sexual assault, and unlawful imprisonment of a maid at the New York City Sofitel hotel. He resigned his leadership position on May 18, 2011.

Mr. Strauss-Kahn’s arrest comes at a challenging time for the IMF, which he had led since 2007. Under his leadership, the IMF reasserted its role as the premier international organization for international economic corporation. In the wake of the financial crisis, Mr. Strauss-Kahn persuaded countries to substantially increase their funding to the IMF, enabling the IMF to sharply increase its financial support to troubled economies and its capacity to monitor global economic risks. The IMF is heavily involved in the current economic crisis in Europe.

The resignation has put the selection of Fund leadership back into the spotlight. Controversy focuses on whether a transatlantic “gentlemen’s agreement” reserving the IMF leadership for a European and the World Bank leadership for a U.S. citizen is adequate for the current global economy. Proposals for a more open, transparent, and merit-based leadership selection process have been made consistently in the past, and at times have been incorporated in communiqu├ęs of various leaders summits, but have yet to change the outcome at either of the institutions.

Although Congress can pass legislation directing the U.S. representatives at the IMF or hold oversight hearings, there is no congressional involvement in the selection of Fund management. U.S. participation in the IMF is authorized by the Bretton Woods Agreement Act of 1945. The Act delegates to the President ultimate authority under U.S. law to direct U.S. policy and instruct the U.S. representatives at the IMF. The President, in turn, has generally delegated authority to the Secretary of the Treasury. The largest shareholder of the IMF, United States has a 16.8% voting share.

The formal requirements for the selection of the IMF Managing Director is that the Executive Directors appoint, by at least a 50% majority, an individual who is neither a member of the Board of Governors or Board of Executive Directors. There are no requirements on how individuals are selected, on what criteria, or by what process they are vetted. Moreover, although the IMF Executive Directors may select its Managing Director by a simple majority vote, they historically aim to reach agreement by consensus. With these factors combined, the convention guaranteeing European leadership at the IMF and American leadership at the World Bank has remained in place.

The European-U.S. arrangement on the leadership positions at the IMF and World Bank has created resentment in many developing and emerging economies. Critics of the current selection process make two general arguments. First, the gentlemen’s agreement on IMF and World Bank leadership is a relic of a post-war transatlantic global economy that no longer exists. Second, the IMF and the World Bank aim to be leaders in promoting transparency and good governance practices, which hardly justify the political horse-trading that have dominated past selections. At the same time, European officials and some commentators argue that given the intense IMF involvement in managing the crisis in the peripheral European economies and securing the future of the European Monetary Union, a European leader is needed to maintain the Fund’s prominence and legitimacy.



Date of Report: May 20, 2011
Number of Pages: 13
Order Number: R41828
Price: $29.95

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