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1 (October 12, 2004)

handle is hein.crs/crsmthabcsf0001 and id is 1 raw text is: Order Code RS21951 October 12, 2004 CRS Report for Congress Received through the CRS Web Changing Causes of the U.S. Trade Deficit Marc Labonte and Gail Makinen Government and Finance Division Summary The nation's trade deficit is equal to the imbalance between national investment and national saving. National saving is the sum of household saving, business saving, and public sector saving (a budget deficit equals public sector borrowing). In the 1990s, this imbalance was largely due to a private investment boom and decline in private saving. In the 2000s, private investment fell and private saving rose. All else equal, this should have led to a smaller trade deficit. However, all else was not equal during this period - the public sector budget moved from a surplus of 2.4% of GDP in 2000 to a deficit of 3.3% in 2003. Thus, while the borrowing needs of the U.S. private sector declined, the public sector borrowing needs increased, and a stable U.S. national saving- investment gap continued to be filled by foreign lending as a result. The composition of capital inflows has also changed from the 1990s. While capital inflows were from mostly private sources through 2001, since then they have come increasingly from official sources. This is largely the result of a few Asian countries purchasing U.S. assets to mitigate or prevent their currencies from appreciating against the dollar. If official capital inflows slowed sharply, the dollar and trade deficit would likely decline, U.S. interest rates would rise, and U.S. spending on capital investment and consumer durables would fall, all else equal. This report will be updated as events warrant. By accounting identity, the current account balance (which primarily consists of the trade balance) must equal the capital account balance, or net international capital flows. That is because a country can borrow from abroad only if it imports more than it exports.1 Capital outflows are investments abroad by Americans while capital inflows are investment in U.S. assets by foreigners. Capital flows can take the form of direct investment or portfolio investment in financial securities. Also by identity, U.S. investment spending must equal national saving plus net capital flows. National saving consists of private saving (household and business saving) and public sector saving (federal, state, and local government saving). When the public sector runs a budget deficit, it has a negative saving rate and reduces national saving. 1 For more information, see CRS Report RL30534, America's Growing Current Account Deficit, by Marc Labonte and Gail Makinen; and CRS Report RL31032, The Trade Deficit: Causes, Consequences, and Cures, by Craig Elwell. Congressional Research Service *** The Library of Congress

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