United States WT/TPR/S/126 
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I. RECENT ECONOMIC DEVELOPMENTS 
(1) INTRODUCTION  
1. Since 2001, when the previous Review of the United States took place, a number of shocks 
have affected the U.S. economy, including a sharp fall in stock prices, several corporate scandals and 
failures, the 11 September terrorist attack, and wa rs in Afghanistan and Iraq.  The economy also 
underwent a short and shallow recession in 2001, the fi rst in a decade;  with the policy levers geared 
to growth, the recession was followed by slow growth  which seems to be accelerating in 2003.  These 
developments have had global re percussions because the United Stat es remains the world's largest 
import market, a key supplier of goods and services, a major magnet for global savings, and an 
international source of capital and technology.  The lower pace of U.S. growth reflects in part the 
subdued economic performance of several key U.S. tr ade partners, and in turn has affected the 
performance of numerous WTO Members.  Moreove r, the U.S. slowdown may have impinged on 
U.S. trade policy by encouraging demands for import protection and government support (Chapter III), notably in agriculture, steel and air transport (Chapter IV).  
2. Despite the difficulties since 2001, the U.S. ec onomy has remained amongst the world's most 
competitive, and has continued to support global grow th by maintaining its market largely open.  The 
relatively quick recovery from recession reflects in part the use of counter-cyclical fiscal and 
monetary policies to foster growth.  Those policies were buttressed by imports helping to keep U.S. 
prices down even as public expenditure and private consumption have risen, and by the sustained 
interest of foreigners in investing in the United Stat es in the face of record low interest rates.  Large 
inflows of foreign capital have financed widening cu rrent account deficit, which in turn have allowed 
the U.S. market to remain a key outlet for foreign suppliers.  This illustrates the benefits and complex 
interdependencies characteristic of the international trading system. 
3. Recent U.S. macroeconomic policy has been directed, increasingly successfully, towards 
recovering and sustaining growth, with benefits  to the global economy, including through trade 
transmission.  But the situation is not without a certain downside risk.  The return to large fiscal 
deficits, if maintained, could contribute to conti nued substantial current acc ount deficits, although this 
also depends on private savings and investment deci sions, where the efficiency and openness of U.S. 
capital markets is a positive force for U.S. and intern ational growth.  The sustainability of the current 
account deficit remains an open question, but the possibility of a hard landing, including in the absence of improved growth performance by some criti cal partners, is not without risk;  and the 
presently perceived large bilateral trade imbalances  that are now part of the U.S. current account 
situation could give rise to protectionist sentiment.  In this context, the "twin deficits" are of some 
concern;  equally, it is as important for the United States as for other Members that trade not be unduly hindered by administrative and other barriers,  both in the United States and other markets. 
(2) O
UTPUT , EMPLOYMENT AND PRICES  
4. After a period of strong growth between 1996 and 2000, the U.S. economy experienced a 
period of recession in the first three quarters of 2001.  GDP growth picked  up to 2.4% in 2002, 
underpinned by an increase in government expenditu re and resilient consumer spending.  Growth 
slowed down again in the second half of 2002 and early 2003, but rebounded in the second quarter of 
2003, supported by strong private domestic consump tion, private investment, and defense purchases 
(Table I.1).  However, growth remained below its potential in 2002 and the first half of 2003.1 
                                                      
1 The IMF notes that the still considerable gap with respect to potential output could have been further 
increased by the recent gains in productivity (IMF, 2003b). WT/TPR/S/126 Trade Policy Review 
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Table I.1 
Selected macroeconom ic indicators, 1998-03 
(US$ billion and per cent, annuali zed values, except as indicated) 
 1998 1999 2000 2001 2002 IV 2002 I 2003 II 2003
GDP (US$ billion) 8,871.5 9,274.3 9,824. 6 10,082.2 10,446.2 10, 588.8 10,688. 4 10,793.9
 Change in per cent 
Real GDP 4.3 4.1 3.8 0.3 2.4 1.4 1.4 3.3 
Private consumption 4.8 4.9 4.4 2.5 3.1 1.7 2.0 3.8 
 Durable goods 10.5 11.8 8.2 6.0 7.3 -8.2 -2.0 24.3 
 Non-durable goods 4.1 4.7 3.9 2.0 3.2 5.1 6.1 1.4 
 Services 4.0 3.7 3.8 2.0 2.2 2.2 0.9 1.4 
Gross private fixed investment 11.8 6.6 6.2 -10.7 1.0 6.3 -5.3 2.0 
 Fixed investment 11.4 7.8 6.1 -3.8 -3.1 4.4 -0.1 7.1 
     Non-residential 12.5 8.1 7.8 -5.2 -5.7 2.3 -4.4  7.3 
        Structures 6.8 -1.3 6.5 -1.7 -16.4 -9.9 -2.9 4.2 
        Equipment and software 14.6 11.5 8.2 -6.4 -1.7 6.2 -4.8 8.3 
     Residential 0.8 0.6 7.1 1.3 3.9 9.4 10.1 6.6 
 Change in private inventories (contrib. to growth) 0.2 -0.2 0.1 -1.2 0.7 0.3 -0.8 -0.7 
Public consumption and investment  1.9 3.9 2.7 3.7 4.4 4.6 0.4 8.5 
  Federal -0.8 2.3 1.3 4.8 7.5 11.0 0.7 25.5 
    National defence -1.8 2.1 -0.1 5.0 9.3 11.0 -3.3 45.8 
    Non-defence 1.1 2.7 3.6 4.5 4.3 11.1 8.4 -5.4 
  State and local 3.4 4.7 3.5 3.1 2.8 1.2 0.2 -0.2 
Exports of goods and services 2.1 3.4 9.7 -5.4 -1.6 -5.8 -1.3 -1.6 
Imports of goods and services 11.8 10.9 13.2 -2.9 3.7 7.4 -6.2 8.8 
Industrial production (year/year change, end of period) 7.6 5.7 1.8 -5.9 1.4 1.4 0.6 -1.2 
Saving and investment Per cent of GDP  
Gross national saving 18.8 18.4 18.4 16.5 15.0 14.3 13.9 13.7 
Private 15.7 14.6 14.0 13.9 15.2 15.1 14.9 15.2 
 Personal savings rate (% of disposable  income) 4.7 2.6 2.8 2.3 3.7 3.6 3.6 3.2 
Public 3.1 3.8 4.4 2.6 -0.2 -0.7 -1.1 -1.6 
Gross domestic investment 18.4 18.0 17.1 15.3 13.9 13.6 13.1 13.0 
 Private 17.5 17.6 17.9 15.7 15.3 15.4 15.1 15.0 
 Public 3.2 3.3 3.3 3.3 3.4 3.3 3.3 3.3 
 Net foreign investment -2.3 -3.0 -4.0 -3.7 -4.7 -5.1 -5.2 -5.3 
Prices  Change in per cent 
CPI (end-of-period) 1.6 2.7 3.4 1.6 2.4 2.4 3.0 2.1 
GDP deflator (implicit) 1.2 1.4 2.1 2.4 1.1 1.8 2.4 1.0 
Employment/unemployment          
Employment (changes in per cent) 1.5 1.5 2.5 0.0 -0.3 -0.7 -1.0 0.0 
Unemployment rate (end-of-period) 4.4 4.0 3.9 5.8 6.0 6.0 5.8 6.4 
Productivity/labour costs Change in per cent 
Labour productivity (non-farm business sector) 2.6 2.3 3.0 1.9 5.4 1.7 2.1 6.8 
Labour productivity (manufacturing sector) 4.9 5.1 4.1 1.6 6.4 3.6 4.9 4.2 
Unit labour costs (non-farm business sector) 2.7 2.0 3.9 1.7 -2.4 -0.1 2.0 -2.1 
Average weekly earnings 3.6 3.7 4.3 3.3 3.2 3.2 3.3 3.1 
Multifactor productivity (non- farm business sector) 1.2 0.7 1.5 -1.1 .. .. .. .. 
.. Not available. 
Source:  U.S. Department of Commerce,  Bureau of Economic Analysis, Survey of Current Business  [Online].  Available at:  
http://www.bea.doc.gov/bea/pubs. htm;  and Bureau of Labour Statistics (www.bls.gov). 
5. While most aggregate demand components have improved, goods output indicators continue 
to be weak:  industrial production remained stagnant in the first half of 2003 and the rate of capacity 
utilization for total industry, at 74.5% in July 2003,  is 6.8 percentage points below the average for the United States WT/TPR/S/126 
 Page 3 
 
 
1972-02 period.2  This could affect future investment prospects in the industrial sector, although 
investment in other areas, in particular in ser vices, may not be hindered by this constraint.3 
6. Private consumption growth outpaced GDP e xpansion throughout the 2001 to mid 2003 
period.  Private consumption has proven resilient to the decline in wealth experienced during the 
period, partly because of an increase in dis posable income, mainly through tax cuts.4  Consumer 
spending was also bolstered by mortgage refina ncing, which allowed homeowners to reduce their 
payments and cash out part of the equity accumu lated during the upswing in house prices over the 
past few years.5  Government spending has also supporte d growth in the 2001-03 period.  Defence 
spending has been expanding at a particularly fast  pace, contributing significantly to prop up growth, 
especially in the second quarter of 2003.6  Imports of goods and services contracted by almost 3% in 
2001, but grew in 2002.  Real e xports of goods and services contracted throughout the 2001 to mid 
2003 period. 
7. Residential investment has been another GDP  component underpinning growth.  Housing 
activity was robust in 2002 and the first half of 2003, triggered by low mortgage rates.  Gross private 
investment as a whole, however, fell by 10.7% in 2001, mainly due to strong inventory reductions and 
a sharp decline in non-residential investment, and co ntinued to be weak in 2002 and the first quarter 
of 2003, despite low interest rates and rising corporate profits.7  As business balance sheets 
strengthened, non-residential investment gathered  some momentum in the second quarter of 2003. 
8. The personal savings rate increased to 3.7% of disposable income in 2002, over one 
percentage point above that for 2001.  Although it remains low by international standards, the rate 
may be just some one percentage point below its long-run trend.8  However, although personal 
savings increased in 2002 and private savings gained  share of GDP, gross national savings as a whole 
lost share, reflecting the nega tive position in public savings. 
9. Total employment fell during the period of recession, and despite the recovery in economic 
activity, employment has failed to increase.  The unemployment rate increased from 3.9% at the end 
of 2000 to 6.4% in the second quarter of 2003.9  Employment losses have been widespread throughout 
the manufacturing sector;  the metals, machinery, a nd computers and electronics industries have been 
particularly affected.10 
10. Labour productivity continued to expand rapidl y in the 2001 to mid 2003 period;  private non-
farm-business productivity grew by 5.4% in 2002, and continued to increase at a fast pace in the first 
half of 2003 (Table I.1).  This was partly due to a more efficient use of the capital stock in previous 
years, but reflected also a reduction in costs, and la bour shedding.  As they have continued for several 
                                                      
2 Federal Reserve Statistical Release, 15 August 2003 [Online].  Available at:  http://www. federal 
reserve.gov/releases/g17 /current/default.htm. 
3 IMF (2003b).  According to the report there s eems to be no excess capital that would deter future 
investment in the United States. 
4 Board of Governors of the Federal Reserve System (2003a).  The Congressional Budget Office 
estimates that the 2001 and 2003 tax cuts added 8 percentage points to the growth of disposable income in 
FY 2003 (Congressional Budget Office, 2003c). 
5 Board of Governors (2003a). 
6 Defence spending contributed 1.75 percentage points to GDP growth in the second quarter of 2003, 
up from 0.4 percentage points for all of 2002 (Bureau of Economic Analysis 2003a). 
7 In the fourth quarter of 2002, corporate before-tax profits were 11% higher than in the same period 
the previous year (Board of Governors, 2003a). 
8 IMF (2003c). 
9 The average unemployment rates for 2001 and 2002 were 4.7% and 5.8%, respectively. 
10 Board of Governors (2003a). WT/TPR/S/126 Trade Policy Review 
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years now, productivity gains have begun to be viewed as lasting.11  The fast pace of labour 
productivity increase has allowed wages to expand at an annual nominal rate of over 3% over the 
review period without generating inflationary pressures. 
11. Despite the expansionary monetary and fiscal policy stance and the depreciation of the dollar 
vis-à-vis the euro, inflation has remained low, ma inly due to the offsetting effects of productivity 
gains on prices and continued slack in labour and product markets.  In 2002, the CPI rose 2.4%;  although inflation figures in 2002 and the first half of 2003 have been heavily influenced by movements in energy prices, underlying or core inflation has remained subdued and according to 
some measures has even decelerated. 
(3) M
ONETARY AND EXCHANGE RATE POLICIES  
12. The Federal Reserve Act of 1913 gave the Fede ral Reserve responsibility for setting monetary 
policy in the United States.  The Act specifies that, in conducting monetary policy, the Federal Reserve System and the Federal Open Market Committee (FOMC) should seek "to promote effectively the goals of maximum employment, stable  prices, and moderate long-term interest rates."
12  
The Federal Reserve controls three tools of moneta ry policy:  open market operations;  the discount 
rate;  and reserve requirements.  With these tools,  the Federal Reserve influences the demand for and 
supply of balances and in this way alters the fede ral funds rate.  The Federal Reserve does not set a 
specific inflation target.13 
13. During the period under review, monetary po licy remained geared towards expanding 
economic output, since inflationary pressures remain ed subdued.  During 2001, the FOMC decided on 
11 interest rate cuts, lowering the target for the fe deral funds rate from 6.5% at the beginning of the 
year to 1.75%.  The reductions in the target for th e federal funds rate continued in 2002 and the first 
half of 2003, falling to 1% in June  2003, as the Federal Reserve viewed deflation as a more likely risk 
than inflation.14  The cuts in the federal funds rate led to a decline in nominal market interest rates and 
supported growth of the monetary aggregates M2 and M3  (Table I.2).  Real in terest rates also fell, 
with a passive rate providi ng negative real returns. 
14. The dollar depreciated substantially against the euro and the pound sterling in 2002 and in the 
first half of 2003;  the depreciation against the yen was more moderate, and the exchange rate of the 
Chinese yuan stable.  The dollar depreciated in real  and nominal effective terms over the same period 
(Table I.2).  The changes in the exchange rate have  mirrored those of short-term interest rates, which 
have contributed to downw ard pressure on the dollar. 
Table I.2 
Selected monetary and exchange rate indicators, 1998-03  
 1998 1999 2000 2001 2002 IV 2002 I 2003 II 2003
Money stock (end of p eriod, per cent change)    
M1 2.2 2.4 -3.3 8.1 3.2 3.2 4.2 7.0 
M2 8.8 6.1 6.1 10.4 6.4 6.4 6.9 8.2 
M3 10.8 8.3 8.6 12.7 6.4 6.4 6.3 7.1 
Table I.2 (cont'd)
                                                      
11 Council of Economic Advisers (2003), p. 47, and IMF (2003b) p. 9. 
12 Federal Reserve Board, The Federal Reserve System:  Purposes and Functions .  Available at: 
http://www.federalreserve.gov/pf/pf.htm. 
13 The OECD notes that the transparency and accountability of monetary policy could be enhanced by 
the introduction of inflation targeting by the Federal Reserve (OECD, 2002c). 
14 Federal Reserve Board Press Release, 6 May 2003 [Online].  Available at:  http://www. 
federalreserve.gov/boarddocs/ press/monetary/2003/20030506/default.htm. United States WT/TPR/S/126 
 Page 5 
 
 
 1998 1999 2000 2001 2002 IV 2002 I 2003 II 2003
Interest rates (per cent)     
Federal funds rate (effective)a 5.35 4.97 6.24 3.88 1.67 1.44 1.25 1.25 
Prime lending rate 8.35 8.00 9.23 6.91 4.67 4.45 4.25 4.24 
Treasury bill rate (3-months, secondary ma rket) 4.78 4.64 5.82 1. 61 3.40 1.33 1.14 1.04 
Treasury note rate (10-year maturity) 5.26 5.65 6.03 5.02 4.61 4.01 3.92 3.62 
Commercial paper (financial, 1 month)a 5.42 5.11 6.28 3.80 1.68 1.46 1.25 1.19 
Certificates of deposit (CDs, 1 month) 5.49 5.19 6.35 3.84 1.72 1.51 1.27 1.17 
Exchange rate (yearly average)b     
Nominal effective exchange rate (1973= 100) 119.3 116.4 121.1 129.1 127.7 123.7 118.1 113.5
   Per cent change 4.9 -2.5 4.0 6.6 -1.0 -5.1 -12.1 -12.3
Real effective exchange rate (1973= 100) 115.4 113.1 121.4 132.7 131.8 127.9 122.3 117.5
   Per cent change 6.0 -1.9 7.3 9.3 -0.6 -4.6 -11.6 -11.9
US$ per euro n.a. 1.07 0.92 0.90 0.95 1.00 1.07 1.14
US$ per £  1.66 1.62 1.52 1.44 1.50 1.57 1.60 1.62
Yen per US$  131.00 113.73 107.8 121.57 125.22 122.47 118.95 118.53
a The federal funds rate is the cost of borrowing immediately-av ailable funds, primarily for one da y.  The effective rate is a 
weighted average of the reported rates at which different am ounts of the day's trading through New York brokers occurs.  
Financial commercial papers are short-te rm negotiable promissory notes issued by companies and sold to investors. 
b IMF, World Economic Outlook , various issues. 
Source:  Federal Reserve Board online informa tion.  Available at:  http://www.federa lreserve.gov/releases/;  and IMF,  
World Economic Outlook . 
(4) FISCAL POLICY  
15. Fiscal prospects have changed since the last Trade Policy Review of the United States:  a 
surplus of 1.3% in 2001 turned into a deficit of 3.7% in 2003, the largest fiscal turnabout over two 
years in recent history (Chart I.1).  Deficits of up to 4% of GDP are expected for the next few years.  The Federal Government's fiscal balance remained in  surplus in FY 2001 but turned to a 1.5% of GDP 
deficit in FY 2002, both reflecting tax cuts and partly the economic slowdown.  State and local 
governments posted small deficits in both FY 2001 and 2003.  The structural balance, which excludes 
cyclical economic activity and had been in surp lus in FY 2000 and 2001, was in deficit in 2002. 
16. Fiscal deficits have arrested the declining trend in public debt, which grew as a share of GDP 
to 61.9% in FY 2003 (Table I.3).
15 
Table I.3 
Selected fiscal indicators, 1996-03 
 1996 1997 1998 1999 2000 2001 2002 2003e
Fiscal balance (% of GDP)   
Federal government fiscal balance -1.4 -0.3 0.8 1.4 2.4 1.3 -1.5 -3.5
State and local government fiscal balance 0.3 0.4 0.5 0.5 0.6 -0.2 -0.4 ..
Total government balanceb -1.1 0.0 1.3 1.8 2.7 1.0 -2.0 ..
Structural federal government balancea -1.3 -0.9 -0.4 0.0 1.1 0.8 -1.5 ..
Public debt (US$ billion, fiscal year) 5,224.8 5,413.1 5, 526.2 5,656.9 5,674. 2 5,674.2 5,662.2 6,670.1c
Public debt (% of GDP) 66.9 65.1 62.9 60.8 57.0 56.5 56.0 61.9 c
.. Not available. 
e Estimates. 
a As defined in the Historical Tables of the Budget of the United States Government [Online].  Available at:  http://www.
 whitehouse.gov/omb/budget/fy2004. 
b The structural budget balance is defined as the actual budget de ficit (or surplus) less the eff ects of cyclical deviations of  output 
 from potential output. 
c June 2003. 
Source : Budget for FY 2004;  U.S. Treasury, Bureau of the Publ ic Debt online information.  Available at:  http://www. 
 publicdebt.treas.gov/opd/opdpenny.h tm;  and data from IMF, World Economic Outlook . 
                                                      
15 Up-to-date information on the stock of public debt may be found in U.S. Treasury Bureau of the 
Public Debt online information.  Available at:  http://www.publicdebt.treas.gov/opd/opdpenny.htm. WT/TPR/S/126 Trade Policy Review 
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15 . 016 . 017 . 018 . 019 . 020.021 .022.023.0Chart I.1
Fiscal accounts, 1991-03
Percentage of GDP
Source : Congressional Budget Office online information.  Available at:  http://www.cbo.org.1 991 1 992 1 993 1 994 1 995 1 996 1 997 1 998 1 999 2000 2001 2002 2003
Note:  Data for 2003 are projections for fiscal year 2003.Outlays Receipts
Deficit
DeficitSur p lus
 
17. Congress approved the FY 2002 Budget and a te n-year Budget Plan, containing tax cuts 
estimated at US$1.35 trillion over FY 2001-11.16  The measures were to be phased in gradually and 
expire after 2010.  The Budget Plan estimated an overall US$5.6 trillion surplus over FY 2001-11, 
allowing debt retirement of some US$2 trillion over th e period.  Further tax cuts were proposed in 
February 2003, as a part of the FY 2004 Budget Plan, with an estimated cumulative cost of 
US$1.3 trillion over FY 2004-13.  The Jobs and Growth Tax Relief Reconc iliation Act (JGTRRA), 
enacted in May 2003, contained substantial elem ents of the Administration's proposed growth 
package.  Among other things, the JGTRA accelerated certain previ ously enacted tax reductions and 
lowered personal income tax brackets from a maximu m of 38.6% to a maximum of 35% (the measure 
expires in 2010);  it also lowered the general ta x rate on capital gains to 15% and phases out the 10% 
rate on capital gains applicable to low-income hous eholds by 2008 (both measures expire after 2008).  
The estimated cost of the me asures introduced by the Act is  US$350 billion through FY 2013. 
18. Congressional Budget Office (CBO) estimates s how a fiscal deficit of US$374 billion for 
FY 2003, the largest in dollar terms in U.S. history and twice as large as the deficit posted in FY 2002.  However, at some 3.5% of GDP, it is belo w the peak levels of the 1980s relative to the size 
                                                     
 
16 For more information on the ten-y ear Budget Plan and on the Budget for FY 2002 see:  Budget of the 
United States Government, Fiscal Year 2002, ava ilable at:  http://www.whitehouse.gov/omb/budget/. United States WT/TPR/S/126 
 Page 7 
 
 
of the economy, and smaller than initially projected.17  Higher spending accounts for about two thirds 
of the increase in the deficit in FY 2003.  Outla ys increased by about US$146 billion from FY 2002 to 
2003, to reach about 20.1% of GDP.  Defence sp ending rose by some 16%, but outlays for other 
programmes and activities also increased, partly due to emergency payments to states and airlines.  
Reflecting tax cuts, total receipts in FY 2003 we re 3.8% (US$70 billion) lower than in FY 2002.18 
19. Under a CBO baseline scenario, which does not incorporate any possible policy changes, the 
deficit is expected to reach US$480 billion in FY 2004,  before starting to contract;  the fiscal accounts 
are expected to show a deficit until FY 2010.19  The CBO considers that, in the longer term, the 
Federal budget faces significant strains as more of the baby-boom generation reaches retirement age 
without a matching increase in the number of workers paying taxes.  This, added to the fast increase 
in health costs, is expected to raise sharply spending in Medicare, Medicaid and Social Security and, 
in the absence of changes to federal programmes, could lead to unsustainable levels of debt.20 
20. Rising discretionary spending set annually through appropriation acts has been one of the 
main triggers of the increase in the fiscal deficit.  The CBO estimates that th is type of spending grew 
by over 12% (by some US$90 billion) for FY 2003, mainly due to an increase in discretionary 
defence spending.  In this respect, the IMF advo cates restoring the caps on discretionary outlays and 
pay-as-you-go requirements introduced by th e recently expired Budget Enforcement Act.21 
21. The deterioration of the U.S. fiscal accounts h as raised some concerns among international 
observers.  The IMF considers that, despite a rela tively favourable medium-term growth outlook, 
concerns about the United States' fiscal deficit path  have been heightened b ecause recent tax cuts have 
weakened its fiscal position, and made it less prepar ed to cope with the retirement of the baby-boom 
generation later this decade.22  The IMF also considers that sustai ned fiscal deficits would eventually 
crowd out investment and erode U.S. productivity gr owth and would tend to boost the already large 
U.S. current account deficit, further draining global saving and increasing the risk of disorderly exchange market conditions.
23  The U.S. authorities consider that the fiscal position remains 
manageable and that tax cuts and spending in creases will yield both short-term and long-term 
benefits, by ensuring the recovery, lowering the co st of capital, and providing supply-side benefits.24 
(5) BALANCE OF PAYMENTS  
22. The deficit in the current account of the balan ce-of-payments declined somewhat in 2001, to 
3.9% of GDP, largely as a result of lower imports associated with the slowing down of the economy.  
However, it increased in 2002 to a record US$480.9 b illion, or 4.6% of GDP (Table I.4 and Chart I.2).  
As growth accelerates, and demand for imports incr eases, the OECD expects the deficit to increase 
further, to over 5% of GDP in both 2003 and 2004.25  The larger deficits also make the U.S. economy 
                                                      
17 CBO estimates pointed initially to a 3.7% of GDP deficit (Congressional Budget Office, 2003a).  
The Office of Management and Budget (OMB) estimated the deficit for 2003 at US$455 billion, or 4.2% of GDP, reflecting receipts falling short of  original estimates, as well as tax cuts, state fiscal assistance, and 
funding for the war in Iraq.  See:  http://www.whitehouse.gov/omb/budget/fy2004/summary.html. 
18 Congressional Budget Office (2003a). 
19 Congressional Budget Office (2003c). 
20 Congressional Budget Office (2003c), p. 2.  The unfunded actuarial liability of the Social Security 
and Medicare systems is estimated by the CBO at 180% of GDP over a 75-year horizon. 
21 IMF (2003a). 
22 IMF (2003a) p. 3. 
23 IMF (2003a). 
24 IMF (2003b), p. 20. 
25 OECD (2003c), The IMF expects the current acc ount deficit to exceed 5% in 2003, but fall 
somewhat below 5% in 2004 (IMF, 2003d). WT/TPR/S/126 Trade Policy Review 
Page 8 
 
 
more vulnerable, especially since foreign direct inv estment has been falling and a substantial part of 
the deficit has been financed with debt.26 
23. Both exports and imports of goods contracted in 2001 (Table I.4);  while exports continued to 
shrink in 2002, imports increased slightly, by 1. 7%.  Imports were affected by the economic 
slowdown in the United States, while exports felt the e ffect of lower growth in the rest of the world 
and, in 2001, the strength of the U.S. dollar.  The small increase in imports combined with weak 
export performance triggered an increase in the trad e deficit on goods in 2002, to US$483 billion.  
The surplus in services contracted in 2002, with imports continuing to gr ow amidst the economic 
slowdown, but exports falling (see below). 
24. The income balance posted a deficit in 2002, following a surplus in 2001, as income receipts 
fell more than income payments.  The deficit oc curred despite a small increase in earnings on U.S. 
direct investment abroad in contr ast with the sharp fall of earnings in 2001, triggered partly by the 
depreciation of some key currencies against the U.S. do llar in that year;  earnings of U.S. affiliates of 
foreign companies increased, however, by substantially more in 2002. 
25. The surplus in the capital and financial accounts continued to grow, to 5% of GDP in 2002.  
The net inflow of foreign capital into the United States slowed down considerably in 2001 and 2002, 
from a record in 2000, but the slowdown was offset by  a decline in U.S. net outflows of capital and a 
substantial reduction in the growth of foreign assets, particularly in 2002 (Table I.4).  Net inflows for 
foreign direct investment in the United States we re substantially lower than in 2001.  Net foreign 
purchases of stocks fell sharply, to US$55.8 billion in  2002, less than half the level posted in 2001.  
On the other hand, non-U.S. investors shifted to net purchases of US$53.2 billion of U.S. Treasury 
securities in 2002, following three years of net sales. 
Table I.4 
Current and capital accounts, 1998-03 
(US$ billion) 
 1998 1999 2000 2001 2002 2002 
IV 2003  
I 2003  
II 
Current account balance -205 -291 -411 -394 -481 -129 -139 -139 
   Exports of goods, services and income 1,191 1,256 1,417 1,285 1,230 311 310 311 
     Exports of goods 670 684 772 719 682 171 173 174 
     Exports of services 262 282 298 289 292 75 74 76 
    Income receipts 259 290 347 277 256 65 63 63 
   Imports of goods, services and income -1,347 -1,500 -1,773 -1,632 -1,652 -424 -432 -433 
     Imports of goods -917 -1,030 -1,224 -1,146 -1,165 -303 -309 -312 
     Imports of services -179 -197 -221 -219 -227 -59 -60 -59 
     Income payments -252 -273 -327 -267 -260 -62 -63 -61 
   Net unilateral transfers abroad -48 -47 -56 -47 -59 -15 -17 -17 
Balances         
  Goods and services -163 -261 -375 -358 -418 -116 -122 -123 
      Goods -247 -346 -452 -427 -483 -132 -136 -138 
      Non-factor services 84 85 77 69 65 16 14 15 
   Net investment income 7 17 20 11 -4 3 0 2 
   Official transfers -18 -18 -21 -17 -22 -6 -7 -7 
Table I.4 (cont'd)  
                                                      
26 OECD (2003c). United States WT/TPR/S/126 
 Page 9 
 
 
 1998 1999 2000 2001 2002 2002 
IV 2003  
I 2003  
II 
   Private transfers -31 -29 -34 -29 -37 -10 -10 -10 
Capital and financial acco unt balance (+ inflows) 147 184 456 416 528 128 137 148 
   Capital account transactions, net -1 -4 -1 -1 -1 0 0 0 
   U.S. investment abroad, net (increase)a -348 -504 -570 -350 -179 -45 -101 -107 
   Foreign investment in the United States, net 
(increase)b 424 740 1,026 766 707 197 242 255 
Statistical discrepancy  72 -48 1 -21 -46 -24 -10 -8 
Memorandum:         
Current account balance as  a percentage of GDP -2.5 -3.5 -4.5 -3.9 -4.6 .. .. .. 
 
.. Not available. 
 a Capital outflow (-). 
b Capital inflow (+). 
 Note: Figures may not add-up due to rounding. 
 
Source : U.S. Department of Commerce, Bureau  of Economic Analysis on line information.  Availa ble at:  http://www.bea. 
 doc.gov. 
 
101214161820Chart I.2
Current account of the balance of payments , 1991-03
Percentage of GDP
Sourc e: U.S. Department of Commerce, Bureau of Economic Analysis [Online].   Available at:  http://bea.doc.gov.1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Imports of goods and services and 
income payments
Current deficitExports of goods and services and income receipts
2003
 
26. The United States absorbs a considerable part of the world's savings.  The World Bank has 
estimated that in 2002 U.S. external financing accounted  for some 10.3% of the savings of the rest of 
the world.  The World Bank has also  noted the change in the form of financing over recent years, WT/TPR/S/126 Trade Policy Review 
Page 10 
 
 
away from foreign direct investment and other long -term flows towards short-term inflows, mostly 
from East Asia, and debt.27 
(i) Merchandise trade 
27. The composition and direction of U.S. mercha ndise trade are presented in Tables AI.1 to 
AI.4;  these are based on information from the Un ited Nations' Comtrade database, which differs 
somewhat from U.S. balance-o f-payments data.  As shown in the tables, and noted above, the 
slowdown of the economy has had a strong imp act on merchandise imports, which declined 
substantially in 2001, before r ecovering some ground in 2002, when they reached a c.i.f. value of 
US$1.2 trillion.  Exports declined even more sharply during the period under review, to 
US$693.2 billion in 2002.  Export values in 2002 were at about the same level as in 1999. 
28. U.S. trade patterns are amongst the most ge ographically diversified of all major WTO 
Members.  In contrast with the trend observed in previous years, U.S. merchandise exports to Canada 
and Mexico declined in value terms during the 2001-02 period (Table AI.1).  Exports to non-NAFTA 
partners in the Americas also declined during that period, as did exports to the European Union, the 
second largest export market for U.S. products.  Exports  to Asia also fell, particularly to Japan and 
Korea, while exports to China increased.  U.S. expor ts to sub-Saharan Africa advanced considerably 
in 2001, but declined in 2002. 
29. In value terms, merchandise imports from Cana da, the United States' largest supplier, and 
Mexico declined slightly over 2000-02 although both increased their shares (Table AI.2).  Imports 
from non-NAFTA partners in the Americas also fell during the period.  Imports from the EU grew, 
while those from China continued to expand rapidl y, representing 11.1% of total U.S. imports in 
2002.  Imports from Japan declined sharply over 2000-02. 
30. By product, recent figures show a stronger decline in exports of manufactures than primary 
commodities, despite exports of both agricultural a nd mining products falling in value terms over the 
2000-02 period, and agri-food exports standing well below their 1995 levels (Table AI.3).  In manufacturing, there was a strong decline of ex ports of office machines and telecommunications 
equipment. 
31. There was a steep decline in imports of fuels between 2000 and 2002, to 10.1% of total 
imports (Table AI.4).  Imports of agricultural pr oducts increased slightly over the 2000-02 period, 
while imports of manufactures declined in 2001 but in creased in 2002.  However, in general, imports 
of primary products declined at a considerably fa ster rate than imports of manufactures (3.5%).  
Among manufactures, the strongest import decline in value was in office machines and 
telecommunications equipment, although in relativ e terms imports of ir on and steel products 
contracted by as much (some 19%).  On the other hand, imports of chemicals, automotive products 
and products goods classified as other consumer goods increased over 2000-02. 
(ii) Trade in services 
32. Data for U.S. trade in services are estimated  and published by the Bureau of Economic 
Analysis (BEA).
28  Trade in services through cross-borde r trade encompasses cross-border supply 
(GATS mode 1), consumption abroad (mode 2) and movement of natural persons (mode 4).  Trade 
through affiliate transactions established by co mpanies in foreign markets corresponds to GATS 
                                                      
27 World Bank (2003) p. 12. 
28 For BOP and related data see BEA online information.  Available at:  http://www.bea.doc.gov. United States WT/TPR/S/126 
 Page 11 
 
 
mode 3, entails selling services thought affiliates.  Trade in services through mode 3 is measured 
using gross sales before deducti ons for expenses and taxes. 
(a) Trade through cross-border supply 33. In 2002, the surplus in cross-border services trade amounted to US$74.3 billion, in contrast to 
a U.S. merchandise trade deficit of US$483 billion (Tab le I.5).  Since 1999, the U.S. surplus in trade 
in services has been shrinking.  Both exports and imports of services shrank in 2001, mainly due to a 
steep decline in travel, passenger fares, and other tr ansportation, affected by a weak economy and the 
11 September attacks;  both imports a nd exports increased slightly in 2002. 
34. As in the previous Review of the United States,  the largest surplus in services trade continues 
to be in royalties and licence fees, which represen t receipts and payments for intellectual property 
rights (see also Chapter III(4)(v)).  Other important e xporting subsectors are edu cation, financial, and 
business services, where sizeable trade surpluses also prevail.  Financia l sector exports were affected, 
however, in 2001, by a sharp reduc tion in underwriting activities a nd to a falloff in mergers and 
acquisitions which reduced financial advisory an d custody service exports.  In 2001, large non-
recurring losses were recovered from foreign reinsu rers following the 11 September attacks, which 
lowered net payments and boosted the surplus.  In 2002, losses recovered returned to more normal 
levels, and insurance premiums increased strongly as prices on property and casualty policies were 
increased;  both factors boosted insurance payments (Table I.5). 
Table I.5 
Cross-border trade in services, 1998-02 
(US$ billion) 
 Exports Imports 
 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002
Total private services 243.8 264.7 283.5 275.5 279.5 163.6 180.5 204.7 201.6 205.2 
Travel 71.3 74.8 82.400 71.9 66.5 56.5 59.0 64.7 60.2 58.0 
Passenger fares 20.1 19.8 20.7 17.9 17.0 20.0 21.3 24.3 22.6 20.0 
Other transportation 25.6 26.9 29.8 28.4 29.2 30.4 34.1 41.4 38.7 38.5 
Freight 11.0 11.6 12.5 11.7 12.3 19.4 22.2 27.4 25.7 26.0 
Port services 14.6 15.3 17.3 16.7 16.8 10.9 11.9 14.0 12.9 12.6 
Royalties and licence fees 35.6 39.7 43.2 41.1 44.1 11.2 13.1 16.5 16.7 19.3 
Affiliated 26.3 29.3 30.5 29.0 32.2 8.6 10.4 12.6 13.3 15.1 
  U.S. parents' transactions 24.4 27.6 28.3 27.0 29.1 1.8 2.3 2.5 2.5 3.0 
  U.S. affiliates' 
transactions 1.9 1.7 2.2 2.0 3.2 6.8 8.1 10.1 10.8 12.2 
 Unaffiliated 9.3 10.4 12.8 12. 1 11.9 2.7 2.7 3.9 3.4 4.1 
  Industrial processes 3.5 3.9 4.7 4.2 3.9 1.3 1.6 1.7 1.8 1.9 
  Other 5.8 6.5 8.1 7.8 8.0 1.4 1.2 2.2 1.6 2.2 
Other private services 91.2 103.5 107.4 116.1 122.6 45.5 53.0 57.8 63.4 69.4 
 Affiliated services 28.2 32.8 35. 9 39.8 43.5 19.4 25. 8 28.8 30.1 32.4
  U.S. parents' transactions 18.1 22.2 23.1 24.8 25.2 10.4 15.5 16.3 16.8 17.5 
  U.S. affiliates' 
transactions 10.0 10.6 12.8 15.0 18.3 9.0 10.3 12.5 13.3 14.8 
 Unaffiliated services 63.0 70.7 71.5 76.4 79.1 26.1 27.2 29.0 33.3 37.1 
  Education 9.0 9.6 10.3 11.5 12.8 1.6 1.8 2.0 2.3 2.5 
  Financial services 11.3 13.4 15.5 15.3 15.9 3.6 3.4 4.6 4.0 3.7 
  Insurance, net 2.1 2.1 2.5 2.4 2.8 5.3 6.4 7.6 11.6 15.3 
Table I.5 (cont'd)WT/TPR/S/126 Trade Policy Review 
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 Exports Imports 
 1998 1999 2000 2001 2002 1998 1999 2000 2001 2002
  Telecommunications. 5.6 4.5 3.9 4..5 4.1 7.7 6.6 5.4 4.8 4.2 
Business, professional, 
and technical services 22.7 27.7 25.3 28.6 28.8 7.4 8.4 8.8 10.0 10.7 
Other unaffiliated services 12.3 13.4 13.9 14.2 14.7 0.5 0.6 0.6 0.6 0.7 
Memorandum for insurance services 
  Premiums 7.3 6.8 8.5 8.5 11.9 20.4 20.9 26.9 40.4 47.2
    For insurance services 2.1 2.1 2.5 2.4 2.8 5.3 6.4 11.6 7.6 15.3
    For loss settlement 5.2 4. 7 6.0 6.1 9.1 15.1 14.5 19.3 28.8 31.8
  Actual losses 11.2 18.2 18.8 36.0 30.9 5.1 5.8 6.4 8..6 8.6
 
Source : BEA, Department of Commerce.  
35. The main trading partners for U.S. exports in services in 2001 were:  Japan (11.6% of the 
total);  the United Kingdom (10.9%);  Canada (9.1 %);  Germany (5.5%);  and Mexico (5.5%).  The 
main trading partners for impor ts were:  the United Kingdom (11.9%);  Canada (6.8%);  Japan 
(6.4%);  Mexico (4.1%);  and Bermuda (4.0%). 
(b) Trade through commercial presence 
36. Services sold abroad by U.S. compani es through their world-wide affiliates were 
US$411.5 billion in 2000, the most recent year for wh ich data were available.   Affiliates in Europe 
accounted for some 60% of the total, followed by Ca nada, Asia and Pacific, and Latin America.  The 
world-wide value of services sold by foreign mu ltinationals through their U.S. affiliates was 
US$373.7 billion in the same year, of which US$346.7 billion to U.S. persons.  Most sales by affiliates are local sales. 
37. Services delivered through affiliates are growing mu ch faster than cross-border trade:  just in 
2000, the increase in sales of U.S. multinationals  through their affiliates increased by 10% with 
respect to the previous year, wh ile the increase in foreign multin ationals' sales through their U.S. 
affiliates rose by 18%.  This confirms the trend iden tified in the previous U.S. Review for mode 3 to 
become increasingly important both for imports and exports of U.S. services. 
(iii) Foreign direct investment 
38. Net financial inflows for foreign direct invest ment in the United States dropped dramatically 
in 2002, to US$30.1 billion, from US$130.8 billion in the previous year, as net equity capital inflows 
decreased and intercompany debt shifted to net ou tflows, and despite a shift to positive reinvested 
earnings.  Net equity capital inflows in 2002 we re US$57.6 billion, down from US$107.7 billion in 
2001, and a peak of US$245.9 billion in 2000.  The BE A considers that the decline in capital inflows 
to the United States in 2001 and 2002 reflected the world-wide reduction in merger and acquisition 
activity;  concerns about the future earnings prospe cts of acquisition targets in the United States and 
the accuracy of financial reporting;  and weak economic conditions abroad.
29  Other explanations for 
the fall in FDI inflows may be the economic slowdown in the United States and the rest of the world, 
and the repayments of loans by foreign affiliat es in the United States to parent companies. 
39. Financial outflows of U.S. direct investment abroad decreased to US$123.5 billion in 2002 
from US$127.8 billion in 2001, as equity capital outfl ows fell, intercompany debt shifted to net 
outflows, and reinvested earnings increased.  Net equity capital outflows were US$27.3 billion, down 
                                                      
29 Bureau of Economic Analysis (2003b). United States WT/TPR/S/126 
 Page 13 
 
 
from US$49.8 billion in 2001, and co nsiderably below the peak reach ed in 1999 (US$79.2 billion).  
The largest decreases in net equity capital outflows were in depository institutions, and in finance, 
particularly to Europe and to the Caribbean.  Most of the intercompany debt shift was attributable to 
finance affiliates, particularly in Europe and Ca nada.  Reinvested earnings increased US$2 billion in 
2002, to US$81.7 billion.  As was the case for inflow s, the BEA points out that the decline in outflows 
partly reflected the sizeable further reduc tion of large-scale mergers and acquisitions.30 
40. As a consequence of the sharp decline in inflows in 2002, the stock of FDI in the 
United States fell by 0.5% with respect to the previous year to US$1.35 trillion, or some 12.5% of GDP (Table I.6).  The stock of U.S. investment abroad, on the other hand, increased in 2002.  The 
highest stocks of FDI in the United States are owne d by U.K., French, Dutch and Japanese interests.  
The highest stocks of U.S. FDI abroad are in the United Kingdom and Canada. 
41. Foreign direct investment is the source of an increasing share of world commerce, measured 
through sales of foreign affiliates in the United States  and affiliates of U.S. firms abroad.  Total sales 
(of goods and services) in the United States by majo rity-owned affiliates of foreign firms exceeded 
US$2.3 trillion in 2000 (Table I.6), up from US$1.8 trillion in 1998.  Sales by majority U.S.-owned 
foreign affiliates abroad totalled nearly US$2.9 trillion in 2000, up from US$2.5 trillion in 1998. 
Table I.6 
Major indicators of U.S. direct investment abroad and foreign di rect investment in the United States, by selected country and s ector  
 
 U.S. direct investment abroad 
(outbound investment) Foreign direct investment in the 
United States (inbound investment) 
 Stocks US$ billion Salesa US$ billion Stocks US$ billion Salesb US$ billion 
 2002 2000 2002 2000 
All countries 1,521.0 2,891.5 1,348.0 2,334.7 
United Kingdom 255.4 413.5 283.3 363.3 
Canada 152.5 366.7 92.0 168.5 
Netherlands 145.5 145.3 154.8 254.1 
Switzerland 70.1 78.1 113.2 132.4 
Bermuda 68.9 188.3 1.0 35.8 
Japan 65.7 240.2 152.0 477.8 
Germany 64.7 236.1 137.0 320.2 
Singapore 61.4 97.0 0.0 5.5 
Mexico 58.1 124.0 7.9 16.3 
France 44.0 137.5 170.6 193.1 
Ireland 41.6 70.8 26.2 16.0 
Australia 36.4 69.8 24.5 32.0 
Hong Kong, China 35.8 57.5 2.2 8.5 
Luxembourg 35.7 .. 34.3 4.2 
Brazil 31.7 80.0 1.0 5.3 
By industry     
Mining 81.0 103.6 .. .. 
Utilities 20.9 66.1 .. .. 
Manufacturing 392.6 1,380.9 470.9 979.6 
Of which:     
Chemicals 99.4 225.5 112.6 160.5 
Computers and electronic products 69.2 227.1 54.0 129.2 
Transportation equipment 48.4 308.1 61.6 205.2 
Table I.6 (cont'd)
                                                      
30 Bureau of Economic Analysis (2003b). WT/TPR/S/126 Trade Policy Review 
Page 14 
 
 
 
 U.S. direct investment abroad 
(outbound investment) Foreign direct investment in the 
United States (inbound investment) 
 Stocks US$ billion Salesa US$ billion Stocks US$ billion Salesb US$ billion 
 2002 2000 2002 2000 
Wholesale trade 114.9 668.0 188.8 638.0 
Retail trade .. .. 28.3 115.0 
Information 53.8 153.3 185.4 121.7 
Depositary credit intermediation (banking) 52.9 .. 80.7 .. 
Finance (except depositary inst.) and insurance 244.5 207.6 162.9 243.3 
Real estate and rental and leasing .. .. 50.8 25.7 
Professional, scientific, and tec hnical services 38.3 85.5 40.2 32.2 
Other industriesc 522.0 226.5 139.9 179.2 
.. Not available. 
a Sales of non-bank fo reign affiliates. 
b Sales of non-bank U.S.  affiliates abroad. 
c Includes agriculture, forestry, fish ing and hunting, and other services. 
Source : U.S. Department of  Commerce, Bureau of Economic Analysis, Survey of Current Business, various issues  
[Online].  Available at:  http ://www.bea.doc.gov/bea/di1.htm. 
(6) OUTLOOK  
42. U.S. economic growth is expected to accelerate in 2004, in line with what has been observed 
since the second quarter of 2003.  The U.S. admini stration is forecasting GDP growth of 2.2% in 
2003, accelerating to 3.8% in 2004 (Table I.7).  Unem ployment is expected to remain higher that in 
the past, while inflation is not expected to exceed 2.5% per year.  The fiscal deficit is expected to 
exceed 4% in FY 2004, but fall thereafter, alt hough deficits are projected until at least 2008. 
43. The IMF is forecasting real GDP growth of 2. 6% in 2003, and an upturn in 2004, when GDP 
is expected to expand by 3.9%.31  Inflation is expected to remain in the 2-2.5% range.  The current 
account deficit is expected to continue increasing in  value terms and as share of GDP in 2003, before 
stabilizing in 2004.  The IMF forecasts a fiscal deficit of some 6% of GDP in FY 2003 and of 5.6% in 
FY 2004.  OECD projections point to real GDP growth of 2.5% in 2003 and 4% in 2004, with 
inflation remaining below 2% and unemployment falling slightly in 2004.  The current account deficit 
is, however, expected to continue deteri orating and reach 5.5% of GDP in 2004.32 
Table I.7 
U.S. economic projections for 2003-13 
(US$ billion and per cent) 
 Forecast Projected annual average 
Item 2003 2004 2005-08 2009-13 
Nominal GDP (US$ billion) 10,836 11,406 14,098a 17,943a 
Nominal GDP (percentage change) 3.7 5.3 5.4 4.9 
Real GDP (percentage change) 2.2 3.8 3.3 2.7 
CPI (percentage change) 2.3 1.9 2.5 2.5 
Unemployment rate (per cent) 6.2 6.2 5.4 5.2 
Three-month Treasury Bill rate 1.0 1.7 4.2 4.9 
Ten-year Treasury Note rate 4.0 4.6 5.7 5.8 
Federal Government deficit (% of GDP) -3.7 -4.3 -2.3 0.0 
a End of period level. 
Source : Congressional Budget Office online information.  Available at:  http://www.cbo.gov.  
                                                      
31 IMF (2003d). 
32 OECD (2003c).