The latest edition of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance, The Income Implications of Rising U.S. International Liabilities, is available.
After years of heavy borrowing from other nations, the United States has accumulated the world’s largest stock of international liabilities, with net claims equal to 22 percent of GDP at the end of 2004. Despite this large net liability position, however, the country’s income receipts on its foreign assets have continued to exceed its payments on foreign liabilities. Authors Matthew Higgins, Thomas Klitgaard and Cédric Tille note that differential rates of return on foreign direct investment holdings account for the positive U.S. investment income balance: U.S. firms operating abroad earn a substantially higher rate of return than foreign firms operating in the United States.
At present, these positive net income receipts work to reduce the current account deficit, acting as a partial offset to the large U.S. trade deficit. Higgins, Klitgaard and Tille warn, however, that the ongoing rapid buildup of U.S. liabilities will soon push the net income balance into deficit. At that point, the authors say, the U.S. trade deficit would have to narrow just to prevent the current account deficit from increasing. Such a reduction in the trade deficit would be very challenging for the United States, since it would require exports to grow significantly faster than imports.
Matthew Higgins is an assistant vice president in the Development Studies and Foreign Research Function of the Emerging Markets and International Affairs Group; Thomas Klitgaard is a research officer and Cédric Tille a senior economist in the International Research Function of the Research and Statistics Group.