United States WT /TPR/S/200/Rev.1 
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I. RECENT ECONOMIC DEVELOPMENTS 
(1) OVERVIEW  
1. After a prolonged period of expansion, the shor t-run growth prospects of the U.S. economy 
deteriorated appreciably from late 2007.  During mo st of the period under review the performance of 
the U.S. economy remained robust, with average growth  of nearly 3% a year.  However, in late 2007, 
GDP growth slowed down considerably reflecting the negative effects of the housing downturn and 
credit turmoil.  These problems have triggered a vigorous monetary policy response by the Federal 
Reserve that has significantly lowered short-term interest rates.  Although inflation remained 
relatively subdued during the period under review, an  upward tendency became perceptible in late 
2007, mainly a consequence of higher oil and food pr ices.  Thus, in early 2008 policymakers faced the 
dual challenge of restoring growth while  curbing rising inflationary pressures. 
2. The federal fiscal deficit contracted steadily be tween 2004 and 2007, to some 1.2% of GDP in 
FY2007.  However, as a result of the economi c slowdown in late 2007 and the fiscal measures 
adopted to address it, the deficit is likely to increase in  2008.  In the longer run, further reform in the 
fiscal area is likely to be needed to  ensure fiscal sustainability, partic ularly with respect to entitlement 
programmes. 
3. During the period under review, both U.S. impor ts and exports conti nued to expand, on 
average, faster than GDP.  As a share of GDP, the de ficit in the U.S. current account of the balance of 
payments fell from just over 6% in 2005 and 200 6 to some 5.3% in 2007.  The willingness of 
foreigners to invest in the Unite d States has been vital in generati ng the large inflows of external 
capital required to finance the current account defic it.  However, the sustainability of the deficit 
cannot be taken for granted, and as such carries certain downside risks including an increase in 
protectionist sentiment.  The U.S. current account defi cit reflects a savings-investment gap;  thus, to 
the extent that this requires a policy response, tr ade restrictive measures are not appropriate.  The 
United States may require to raise its savings ra te while maintaining its traditional openness, which 
allows U.S. producers and consumers to access goods, services, and capital from abroad at the best 
conditions.  Reducing the current account deficit is  also likely to require expanding U.S. exports, 
which would be facilitated by a more liberal tradi ng system and stronger demand growth outside the 
United States. 
(2) OUTPUT AND EMPLOYMENT  
4. During most of the period under review (mid 2005-end 2007), the performance of the 
U.S. economy remained robust, with average grow th of some 3% a year between 2005 and 2007.  
However, economic growth slowed somewhat in late  2006 and early 2007, affected to a large extent 
by plummeting residential investment.  Growth picked up in the second and third quarters of 2007 but weakened in the fourth quarter due to slower  consumer expenditure and a moderation in non-
residential investment (Table I.1).  Economic grow th appears to have slowed since the beginning of 
2008
1;  the Congressional Budget Office (CBO) considers that there is a strong possibility of at least a 
few quarters of very slow growth, and that, alt hough the economy may avoid a recession in 2008, the 
risk of a recession has risen.2 
5. The CBO has also observed that the system of  automatic stabilizers built into the federal 
budget may help to mitigate any economic downturn.  It has also been noted, by the OECD, that, 
historically, the U.S. economy has proved relatively resilient to domestic and external shocks, as a 
                                                      
1 Federal Reserve Board (2008). 
2 CBO (2008). WT/TPR/S/200/Rev.1 Trade Policy Review 
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result of the effects of past regulatory reforms th at created a competitive environment and contributed 
to efficiency gains over the past decade.3 
Table I.1 
Selected macroeconom ic indicators, 2002-07 
(US$ billion and per cent, annuali zed values, except as indicated) 
 2002 2003 2004 2005 2006 2007 II 2007 III 2007 IV 2007
GDP (US$ billion) 10,469.6 10,960.8 11,685.9 12,433.9 13,194.7 13,841.3 13,768.8 13,970.5 14,074.2
 Change (per cent)  
Real GDP 1.5 2.7 3.8 3.0 2.8 2.2 3.8 4.9 0.6
Private consumption 2.7 2.8 3.6 3.2 3.1 2.9 1.4 2.8 2.3
 Durable goods 7.1 5.8 6.3 4.9 3.8 4.7 1.7 4.5 2.0
 Non-durable goods 2.5 3.2 3.5 3.6 3.6 2.4 -0.5 2.2 1.2
 Services 1.9 1.9 3.2 2.7 2.7 2.8 2.3 2.8 2.8
Gross private fixed investment -2.6 3.6 9.7 5.6 2.7 -4.9 4.6 5.0 -14.6
 Fixed investment -5.2 3.4 7.3 6.9 2.4 -2.9 3.2 -0.7 -4.0
     Non-residential -9.2 1.0 5.8 7.1 6.6 4.7 11.0 9.3 6.0
        Structures -17.1 -4.1 1.3 0.5 8.4 12.9 26.2 16.4 12.4
        Equipment and software -6.2 2.8 7.4 9.6 5.9 1.3 4.7 6.2 3.1
     Residential 4.8 8.4 10.0 6.6 -4.6 -17.0 -11.8 -20.5 -25.2
 Change in private inventories 
(contribution to growth) 0.4 0.0 0.4 -0.2 0.1 -0.7 0.2 0.9  -1.8
Public consumption and investment 4.4 2.5 1.4 0.7 1.8 2.0 4.1 3.8 2.0
  Federal 7.0 6.8 4.2 1.5 2.2 1.7 6.0 7.1 0.5
    National defense 7.4 8.7 5.8 1.5 1.9 2.8 8.5 10.1 -0.5
    Non-defense 6.3 3.4 1.1 1.3 2.8 -0.4 0.9 1.1 2.8
  State and local 3.1 0.2 -0.2 0.3 1.6 2.2 3.0 1.9 2.8
Exports of goods and services -2.3 1.3 9.7 6.9 8.4 8.1 7.5 19.1 6.5
Imports of goods and services 3.4 4.1 11.3 5.9 5.9 1.9 -2.7 4.4 -1.4
Industrial production ( period average) 0.0 1.1 2.5 3.2 3.9 2.1 3.5 3.6 -1.0
Saving and investment  Per cent of GDP  
Gross national saving 14.3 13.3 13.8 13.9 14.1 13.3 13.8 13.3 12.5
Private 14.9 14.9 14.7 13.5 13.6 13.0 13.2 13.0 12.3
Public -0.7 -1.6 -1.2 -0.4 0.5 0.3 0.6 0.3 0.2
Net national saving 1.9 1.1 1.5 1.0 1.9 1.2 1.7 1.2 0.4
Personal savings rate (% disp. income) 2.4 2.1 2.1 0.5 0.4 0.3 0.3 0.6 0.0
Gross domestic investment 18.4 18.4 19.4 19.9 20.0 18.7 18.9 18.8 18.2
 Private 15.1 15.2 16.2 16.7 16.7 15.4 15.5 15.5 14.8
 Public 3.3 3.2 3.2 3.2 3.3 3.3 3.4 3.3 3.4
 Net domestic investment 0.1 6.2 7.1 7.0 7.8 6.6 6.6 6.8 6.1
 Net foreign investment -4.4 -4.8 -5.5 -6.1 -6.2 .. .. .. ..
Prices Change (per cent same period the previous year)  
CPI (end-of-period) 2.4 1.9 3.3 3.4 2.5 4.1 2.7 2.8 4.1
CPI (period average) 1.6 2.3 2.7 3.4 3.2 2.8 5.2 1.0 5.6
GDP deflator (implicit) 1.7 2.1 2.9 3.2 2.7 4.2 2.6 1.0 2.6
Employment Per cent  
Unemployment rate 5.8 6.0 5.5 5.1 4.6 4.6 4.5 4.7 4.8
Productivity/labour costs  Change (per cent from previous period)  
Labor productivity (non-farm) 4.1 3.7 2.8 1.9 1.6 1.8 2.6 6.3 1.9
Labor productivity: manufacturing 6.9 6.2 2.3 4.7 4.3 3.7 3.4 4.1 2.3
Unit labour costs (non-farm) -0.5 0.3 0.9 2.0 2.9 3.1 -1.3 -2.7 2.6
.. Not available. 
Note: Quarterly per cent changes are annualized. 
Source:  U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business , various issues;  and 
Bureau of Labor Statistics online informa tion.  Available at:  http://www.bls.gov. 
                                                      
3 OECD (2007c). United States WT /TPR/S/200/Rev.1 
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6. Private consumption growth outpaced GDP expa nsion during 2006 and ear ly 2007, supported 
by a steady labour market, disposable income growth, and higher equity prices.4  Starting in the 
second quarter of 2007, private consumption growth weakened, affected by turmoil in the housing 
market5  Federal Government spending growth moderated in 2005 and 2006,  fell in the first quarter of 
2007, mainly due to a decline in defence expenditure, but picked up in the rest of 2007.  Imports of 
goods and services expanded above GDP growth during 2005 and 2006, but increased less than GDP 
in 2007.  Exports of goods and services have gene rally been growing faster than GDP since 2004.  
The increase in the third quarter of 2007 w as the largest since the fourth quarter of 1996.6  T h e  
contribution of net exports to GDP growth was 1.32 percentage points in the third quarter of 2007 and 
1.38 in the fourth quarter. 
7. Since the previous U.S. review there has been  the sharp decline in residential investment, 
following several years of buoyancy.  Residential investment detracted from growth in 2006 and in 
2007, reflecting a decline in housing demand and a re duction in property prices, which triggered the 
turmoil in the sub-prime mortgage market.  On the other hand, non-residential investment, particularly 
in structures has been expanding generally faster th an GDP.  In 2007, there was a slight downturn in 
inventory investment, which made a negative contribution to GDP. 
8. The savings-investment gap remained large duri ng the review period.  The personal savings 
rate has remained low, at belo w 1%, despite measures adopted in 2005 aimed at raising the personal 
saving rate, such as lowering tax rates on dividends and capital gains.  Gross national savings as a 
whole remained broadly stable during the period, but current levels (13.5% of GDP in the third 
quarter of 2007) are well below those of the beginning of the decade.  The savings-investment gap 
widened in 2005 and 2007, before contracting some in  2007, but at 5.3% of GDP in the third quarter, 
it remained substantial. 
9. The current account deficit continues to refl ect a global imbalance, with counterpart 
imbalances found in surplus countries.  In the context of the Multilatera l Consultation on Global 
Imbalances in the IMF's International Monetary and Financial Committee (IMFC), the United States, 
along with other countries, presented individual count ry policy plans to tackle global imbalances, 
which, for the United States, included:  further fi scal consolidation over th e medium term, including 
eliminating the unified federal budget deficit by 2012, reforming the budget process to contain 
spending growth;  entitlement reform to strengthe n long-term fiscal sustainability;  further tax 
incentives to support private saving;  enhancing energy efficiency;  improving capital market 
competitiveness;  and pro-growth investment policies.7 
10. Despite the moderate slowdown in activity, em ployment has continued to increase, and the 
unemployment rate declined from 5.1% in 2005 to 4.8% in the fourth quarter of 2007.  Labour 
productivity continued to expand during the period, although less rapidly than in previous years 
(Table I.1);  however, productivity in creased less than unit labour costs. 
(3) MONETARY AND EXCHANGE RATE POLICIES  
11. The Federal Reserve is responsible for setting monetary policy in the United States, in 
accordance with the Federal Reserve Act of 1913,  which specifies that, in conducting monetary 
                                                      
4 IMF (2007b). 
5 Noting that the sub-prime mortgage turmoil has eroded consumer confidence, the IMF points out that 
some of the risks from the current turmoil stem fro m the possibility of further denting broader consumer 
confidence, which could cause a disproportionate impact on consumption (IMF, 2007b).  
6 BEA (2007c). 
7 IMF (2007a). WT/TPR/S/200/Rev.1 Trade Policy Review 
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policy, the Federal Reserve System and the Fede ral Open Market Committee (FOMC) should seek "to 
promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates".
8  The Federal Reserve uses open market operations, the discount rate, and reserve 
requirements to influence the demand for and supply of  balances, and in this way alters the federal 
funds rate, which is the pivot interest rate.  The Fe deral Reserve does not set a specific inflation target. 
12. During the period under review, monetary policy initially tightened to contain inflationary 
pressures.  The FOMC increased the target for the federal funds rates four times in the first half of 
2006, increasing the target for the federal funds ra te from 4.25% at the beginning of the year to 
5.25%.  In the second half of 2006 and the first half of 2007, the FOMC left interest rates unchanged, 
as available economic information pointed to a relatively favourable outlook for both economic 
growth and inflation.9 
13. Monetary policy became more accommodative in the wake of the credit turmoil associated 
with sub-prime mortgages, and the federal funds ra te was lowered three times during the second half 
of 2007, to end the year at 4.25%.10  The federal funds rate was further reduced by 75 basis points in 
early January 2008, to 3.5%, and again in late January, to 3%11.  A further reduction to 2.25% took 
place in March 200812.  The Federal Reserve's interventions we re intended to help forestall some of 
the adverse effects from the disruptions in financ ial markets caused by the sub-prime mortgage 
turmoil and to promote moderate growth.13  They were also intended to  help support credit levels and 
contain defaults.14  On announcing the first January 2008 reduc tion, the FOMC noted that is had taken 
this action in view of a weakening of the econo mic outlook and increasing downside risks to growth.15  
The decrease in the federal funds rate has led to lower nominal mark et interest rates and laid the 
foundations for a faster rate of expansion of  the monetary aggregate M2 (Table I.2). 
14. In a further measure to address the sub-prime mort gage turmoil, in April, July, and September 
2007, the Federal Reserve along with the other federa l financial agencies and the Conference of State 
Bank Supervisors (CSBS) issued statements encouragi ng federally regulated institutions to work with 
residential borrowers at risk of default to r each arrangements to avoid unnecessary foreclosures.16  In 
December 2007, the Federal Reserve, together with  the Bank of Canada, the Bank of England, the 
European Central Bank (ECB), and the Swiss Na tional Bank (SNB) announced measures designed to 
                                                      
8 Federal Reserve Board online information.  View ed at:  http://www.federalreserve.gov/pf/pf.htm. 
9 Federal Reserve Board (2007). 
10 Sub-prime mortgages are residential loans that do  not conform to the criteria for prime mortgages, 
and have a lower expected probability of full repayment.  The share of sub-prime loans increased substantially 
in 2005-06, and represent, according to  IMF estimates, some 12-15% of outs tanding U.S. mortgages.  Sub-prime 
loans carry higher interest rates than prime loans, and ma y be subject to rate resets after an initial period of 
lower rates (IMF, 2007b). 
11 Board of Governors of the Federal Reserve System , Press Release, 30 Janu ary 2008.  Viewed at:  
http://www.federalreserve.gov/newsev ents/press/monetary/20080130a.htm. 
12 Board of Governors of the Federal Reserve System , Press Release, 18 March 2008.  Viewed at:  
http://www.federalreserve.gov/newsev ents/press/monetary/20080318a.htm. 
13 Federal Reserve System, 12 CFR Part 201, [Regulation A], Extensions of Credit by Federal Reserve 
Banks, Federal Register, 27 September 2007 (Vol. 72, No. 187) [Rules and Regulations], pp. 54813-54815. 
14 The Federal Reserve notes that over 17% of sub- prime adjustable-rate mortgages were in serious 
delinquency at the end of September 200 7, over three times the rate of mid-2005.  See:  Federal Reserve online 
information:  Loan modifications and foreclosure prevention .  Testimony of Governor Randall S. Kroszner 
Before the Committee on Financial Services, U.S. House of Representatives, 6 Decemb er 2007.  Viewed at:  
http://www.federalreserve. gov/newsevents/testimony/kroszner20071206a.htm. 
15 Board of Governors of the Federal Reserve System , Press Release, 22 Janu ary 2008.  Viewed at:  
http://www.federalreserve.gov/newsev ents/press/monetary/20080122b.htm. 
16 Board of Governors of the Federal Reserve System (2007b). United States WT /TPR/S/200/Rev.1 
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address pressures in short-term funding markets, mainly through the establishment of a temporary 
Term Auction Facility in the United States to pr ovide liquidity when interbank markets are under 
stress, and through the establishment of foreign ex change swap lines with the ECB and SNB.  The 
first two auctions of US$20 billion each took place in December 2007. 
15. The dollar continued to depreciate in nominal a nd real terms during the review period, as it 
has since 2002 following a seven-year period of appreciation.  The depreciation over 2005-07 was despite increasing interest rates up to mid 2007 (Table I.2) and an interest rate (positive) differential 
with respect to the euro and the yen. 
Table I.2 
Selected monetary and exchange rate indicators, 2002-07 
 2002 2003 2004 2005 2006 2007 II 2007 III 2007 IV 2007
M1 (seasonally adjusted annual growth rate) 3.4 6.3 5.4 -0.1 -0.8 -0.2 -0.9 -3.4 -1,9
M2 (seasonally adjusted annual growth rate) 6.5 4.3 5.5 4.1 5.4 6.1 5.2 5.8 4.7
Interest rates (per cent)    
Federal funds rate (effective)a 1.67 1.13 1.35 3.22 4.97 5.02 5.25 4.94 4.24
Prime lending rate 4.67 4.12 4.34 6.19 7.96 8.05 8.25 8.03 7.33
Treasury bill rate (3-months, secondary 
market) 1.61 1.01 1.37 3.15 4.73 4.36 4.61 3.70 3.00
Treasury note rate (10-year maturity) 4.61 4.01 4.27 4.29 4.80 4.63 5.10 4.52 4.10
Commercial paper (financial, 1 month) 1.68 1.12 1.41 3.27 5.00 5.07 5.25 5.04 4.51
Certificates of deposit (CDs, 1 month) 1.72 1.15 1.45 3.34 5.06 5.23 5.30 5.46 5.07
Exchange rate (end of period)    
Nominal effective exchange rate (1997=100) 126.7 119.1 113.6 110.7 108.5 103.4 104.1 101.9 99.3
Per cent change -2.0 -4.7 -4.6 -2.6 -2.0 -4.7 -2.4 -2.1 -2.5
Real effective exchange rate (1997=100) 110.83 104.12 100.24 97.85 96.70 91.32 93.99 88.42 88.00
Per cent change 0.18 -6.1 -3.72 -2.4 -1.8 -5.6 -0.9 -5.9 -0.5
US$ per euro 0.95 1.13 1.24 1.24 1.26 1.37 1.34 1.39 1.46
US$ per £ 1.5 1.63 1.83 1.82 1.84 2.00 1.99 2.02 2.02
Yen per US$ 125.22 115.94 108.15 110.11 116.31 117.76 122.69 115.04 112.45
Yuan per US$ 8.28 8.28 8.28 8.19 7.97 7.61 7.63 7.52 7.37
 
a The federal funds rate is the cost of borrowing immediately av ailable funds, primarily for one day.  The effective rate is a 
weighted average of the reported rates at which different am ounts of the day's trading occurs through New York brokers.  
Financial commercial papers are short-te rm negotiable promissory notes issued by companies and sold to investors. 
 
Source:  Federal Reserve Board online information.  Ava ilable at:  http://www.federalreserve.gov/releases. 
16. Inflation has remained subdued during most of  the period under review, despite rising oil 
prices.  In the 12 months to December 2006, the CP I rose 2.5%, compared with an increase of 3.4% in 
the twelve months to December 2005.  However, it accelerated during the fourth quarter of 2007:  in January 2008, the CPI was 4.3% higher than a year  earlier, triggered mainly by high advances in 
energy and food prices.
17 
(4) FISCAL POLICY  
17. The results of the fiscal accounts improved in  2006 and 2007.  In FY2007, the federal 
government deficit reached US$162 billion, or an estim ated 1.2% of the GDP;  this is half of the 40-
year average (1967-2007) of 2.4% of GDP.18  The structural federal government deficit, which 
excludes cyclical economic activity, and the sta ndardized budget balance, which includes some 
                                                      
17 BLS, Consumer Price Index :  January  2008.  Viewed at:  http://www.bls.gov/news.release/pdf 
/cpi.pdf. 
18 OMB Press Release.  11 October 2007.  Joint Stat ement of Henry M. Paulso n, Jr., Secretary of the 
Treasury, and Jim Nussle, Director of the OMB, on Budget Results for Fiscal Year 2007 .  Viewed at:  
http://www.treasury.gov/press/releases/hp603.htm. WT/TPR/S/200/Rev.1 Trade Policy Review 
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further adjustment, also declined, to 0.9% and 1% of GDP.  Receipts rose from 18.4% of GDP in 
FY2006 to 18.8% of GDP in FY2007;  outlays decreased as a percent of GDP, from 20.4% to 20.2%.
19  The reduction in the Federal Government's fiscal  deficit was accompanied by a slight fall in 
State and local government deficits in 2005 and 2006  (as at March 2008 no data were available for 
2007).  This led to a reduction in the overall Govern ment deficit to some 3% of GDP in FY2006.   
Table I.3 
Selected fiscal indicators, FY2002-07 
 2002 2003 2004 2005 2006 2007
Fiscal balance (% of GDP)   
Federal government fiscal balance -1.5 -3.5 -3.6 -2.6 -1.9 -1.2
State and local government fiscal balance -1.6 -1.6 -1.3 -1.2 -1.1 ..
Total government balance -3.1 -5.1 -4.9 -3.8 -3.0 ..
Structural federal government balance a -0.8 -2.5 -3.0 -2.3 -1.8 -0.9
Standardized budget balanceb -1.1 -2.5 -2.4 -1.9 -1.8 -1.0
Public debt   
Public debt (US$ billion, fiscal yea r) 6,198.4 6,760.0 7,354.7 7 ,905.3 8,451. 4 9,007.8
Public debt (% of GDP) 59.7 62.5 63.9 64.4 64.7 65.5
 
.. Not available. 
 a The structural budget balance is defined as the actual balance less the effects of cyclical de viations from potential output.  
b The standardized budget balance is the cycl ically adjusted balance, w ith adjustments, to account for discrepancies between ta x 
payments and liabilities, swings in cap ital gains taxes collections, and others. 
 
Source : Budget for FY2008;  CBO and OMB online informa tion (http//www.cbo.gov, and http://www.whitehouse.gov 
/omb);  U.S. Treasury, Bureau of the Public Debt onlin e information.  Viewed at:  http://www.pub licdebt.treas. 
gov/opd/opdpenny.htm;  and CBO,  The Cyclically Adjusted and Standar dized Budget Measures:  An Update , 
August 2007.  Viewed at:  http://www.cbo. gov/ftpdocs/85xx/doc8589/08-30-StandardizedBudget.pdf. 
18. Lower fiscal deficits have not been able to st op the increasing trend in public debt observed in 
recent years.  The share of public debt in GDP  rose to almost 65.5% in FY2007 (Table I.3).20 
19. A fiscal stimulus package evaluated in some US$168 billion was put in place in 
February 2008, through the Economic Stimulus Act of 2008 (P.L. 110-185).  The Act grants tax 
rebates to individual taxpayers, increases the expens ing allowance for depreciable business assets, and 
envisages actions aimed at dealing with the sub-prime mortgage turmoil.21 
20. The FY2008 Budget is aimed at obtaining a balanced budget by 2012.  The United States also 
set this goal in the context of the Multilateral C onsultation on Global Imbalances.  The 2008 Budget 
proposes to hold the rate of growth for non-security discretionary spending to 1%, below the rate of 
inflation.22  Budget projections may need to be revised , however, to take into account any further 
economic slowdown and the effect of the fiscal stimulus package. 
21. Tax relief continued to be pr ovided during the review period under the Economic Growth and 
Tax Relief Reconciliation Act of 2001 (EGTRRA), th e Jobs and Growth Ta x Relief Reconciliation 
Act of 2003 (JGTRRA), and the Working Families Tax Relief Act of 2004.23  Many provisions of 
                                                      
19 Office of Management and Budget online info rmation.  Viewed at::  http://www.whitehouse. 
gov/omb. 
20 U.S. Treasury online information.  Viewed at:  http://www.publicdebt.treas.gov/opd/opdpenny.htm. 
21 Library of Congress online information.  Viewed at:  http://thomas.loc.gov/cgi-bin/query/z?c110 
:H.R.5140: 
22 CBO (2007). 
23 EGTRRA lowered the tax rate on dividend income, starting in 2003, to 5% for those in the 10% or 
15% brackets, falling to 0% in 2008;  the rate was lowere d to 15% for all other tax brackets.  The capital gains 
tax on qualified gains of property or stock held for five years was reduced from 10% to 8%. United States WT /TPR/S/200/Rev.1 
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these Acts will sunset on 1 January 2011 unless furt her legislation is enacted to make the changes 
permanent.  In this respect, the Administration h as proposed a permanent extension of the entire tax 
relief programme on the grounds that it would foster  sustained growth.  Howe ver, Congress has been 
implementing a pay-as-you go rule for new bills exam ined by both the House and the Senate.  The 
rule prohibits Congress from considering any legislat ion that would cut taxes or increase entitlement 
spending unless the costs of those provisions are o ffset by increases in other taxes or reductions in 
other entitlements.24 
22. While noting that the U.S. federal budget deficit has narrowed, the OECD has stressed that  
eliminating it requires increased spending discipline.  On the revenue side, the OECD considers that 
priority should be given to reforms that would br oaden the tax base by reducing tax preferences, but 
consideration should also be given to consumption-based indirect taxes.25  It also considers that the 
reform of entitlement programmes, which w ill come under increasing pressure from population 
ageing and medical cost increases, is essential to ensure fiscal sustainab ility in the longer run.  In this 
respect, the IMF has noted that a sustainable corr ection of the deficit requires a reform of the 
Medicare, Medicaid, and Social Security programmes,  and that early action would reduce the cost of 
adjustment.26 
(5) BALANCE OF PAYMENTS  
23. Despite a major increase in exports, the defic it in the current account of the balance of 
payments continued to expand th roughout 2005 and 2006, reaching a record US$811.5 billion, or 
6.2% of GDP in 2006 (Table I.4).  In 2007, however, the deficit came down to 5.3% of GDP 
(US$738.6 billion). 
24. Fast export growth did not prevent a deteriora tion of the merchandise trade balance in 2006, 
but the deficit declined somewhat in 2007 (Table I. 4).  The surplus in services was maintained in 2006 
and widened in 2007, when exports expanded faster than imports.  The income balance remained in 
surplus in 2006 and 2007, reflecting an increase in ear nings on U.S. direct investment abroad.  The net 
inflow of foreign capital into the United States and U.S. investment abroad expanded in 2006, with 
the balance remaining favourable to the United Stat es.  The net foreign indebtedness position of the 
United States was US$2.54 trillion, or some 19.2% of GDP in 2006, slightly less than in 2002:  the authorities note that this was due main ly to currency and valuation changes. 
25. There is a variety of views on what drives the U. S. current account deficit.  The U.S. current 
account deficit has been linked to factors such as th e fiscal imbalance, or stronger demand growth in 
the United States than in trading partners.  A r ecent study suggests that the U.S. current account 
deficit is due partly to an autonomous rise  in the quantity of saving made available to 
the United States by its trading partners.
27  A Federal Reserve staff paper notes that historical 
evidence points to a low probability of disorderly external adjustment, and that U.S. external 
adjustment could help stabilize the global economy,  cushioning declines in U.S. demand and limiting 
overheating in foreign economies.28  On the other hand, a study by IMF staff notes that correcting the 
current account imbalances will require a further de preciation of the U.S. dollar over the long run, 
since, even taking account of the attractiveness of U.S.  financial assets, inflows are likely to diminish 
over time as portfolio demand is satisfied, impl ying a lower long-term value for the dollar.29 
                                                      
24 Horney et al. (2007). 
25 OECD (2007c). 
26 IMF (2007b). 
27 Gruber and Kamin (2005). 
28 Kamin et al. (2007). 
29 Balakrishnan et al.(2007).  A similar result is obtained by Obstfeld and Rogoff (2005). WT/TPR/S/200/Rev.1 Trade Policy Review 
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Table I.4 
Current and capital accounts, 2002-07 
(US$ billion) 
 2002 2003 2004 2005 2006 2007  II 2007 III 2007 
Current account balance -460 -522 -640 -755 -811 -739 -190 -177 
Exports of goods, services and income 1,256 1,338 1,559 1,789 2,096 2,411 591 626 
Exports of goods 682 713 808 895 1,023 1,149 279 297 
Exports of services 292 304 350 388 423 479 117 123 
Income receipts 281 321 402 505 650 782 195 204 
Imports of goods, services and income -1,652 -1,790 -2,115 -2,455 -2,818 -3,045 -758 -781 
Imports of goods -1,167 -1,264 -1,477 -1,682 -1,861 -1,965 -484 -512 
Imports of services -231 -250 -292 -316 -343 -372 -91 -98 
Income payments -254 -275 -346 -457 -614 -708 -183 -171 
Net unilateral transfers abroad  -64 -71 -84 -89 -90 -104 -23 -28 
Balances         
Goods and services -424 -497 -612 -714 -759 -709 -178 -173 
Goods -485 -551 -670 -787 -838 -815 -205 -201 
Non-factor services 61 54 57 73 80 107 26 28 
Net investment income 28 45 56 48 37 74 13 21 
Official transfers -17 -12 -17 -22 -23 -41 -7 -9 
Private transfers -42 -40 -47 -49 -58 -65 -16 -18 
Capital account transactions, net -1 -3 -2 -4 -4 -2 -1 -1 
U.S. investment abroad, net (increase) -294 -325 -905 -427 -1,055 -1,206 -466 -174 
Foreign investment. in the U.S., net 
(increase) 798 864 1,462 1,204 1,860 1,864 623 277 
Statistical discrepancy  -42 -13 86 -18 -18 84 35 67 
Memorandum:         
Current account balance as a % of GDP -4.4 -4.8 -5.5 -6.1 -6.2 -5.3 -5.5  
 
Source : U.S. Department of Commerce, Bureau of Economic Analysis online information, at:  http://www.bea.doc.gov. 
26. As pointed out in the WTO 2007 World Trade Report, a reduction in the U.S. current account 
deficit does not need to have an adverse effect on world trade if the adjustment occurs through an 
acceleration of U.S. merchandise export growth, with a modest adjustment on imports;  there is historical evidence to suppor t this "soft-landing" scenario.
30  This does not imply that there will be no 
costs linked to the adjustment:  the speed a nd economic effects depend on how much of the 
adjustment takes place through changes in asset valua tion, a reduction in abso rption, or expenditure 
switching, and on international coordination among finance and central bank authorities to ensure a 
supportive policy environment.  Also, the soft-l anding scenario requires that the acceleration of 
U.S. export growth be matched by increased dema nd for U.S. goods from the rest of the world. 
(6) DEVELOPMENTS IN TRADE AND INVESTMENT  
(i) Merchandise trade 
27. The depreciation of the U.S. dollar, coupled with  strong growth in the rest of the world, has 
had a positive impact on U.S. exports during the period under review.  Total exports increased by 
almost 15% in 2006 while imports grew by about 11%.31  Merchandise exports (including re-exports) 
totaled US$1.04 trillion in 2006 and imports reac hed US$1.92 trillion (Tables AI.1 and AI.2).  
Manufactures represented the main export category, w ith some 80% of the total in 2006;  machinery 
and transport equipment, and computers and electronic products were the main exported 
                                                      
30 WTO (2008). 
31 Based on data in the U.N. Comtrade database, wh ich differs from U.S. balance-of-payments data.  
Exports grew by over 40% between 2003-06, compared wi th nominal effective depreciation of some 10%. United States WT /TPR/S/200/Rev.1 
 Page 9 
 
 
manufactures, but their share declined over 2004-06.  At the same time, the share of primary products 
grew to 15.8% in 2006, due mainly to the growing importance of mining.   
28. Manufactures also represented the main import category, with just over 70% of the total in 
2006.  Among manufactures, strongest import growth  was in iron and steel, but the main product 
groups were machinery and transport equipment, which accounted for 37.7% of imports.  Overall, 
imports of primary products expanded significan tly faster than imports of manufactures.   
29. U.S. trade is geographically diversified.  NAFTA  partners continued to account for the largest 
share of exports in 2006, with 22.2% going to Canada  and 12.9% to Mexico (Table AI.3).  Brazil and 
Venezuela were the main non-NAFTA partners in th e Americas.  The European Union is the second 
largest export market for U.S. products;  its share stayed at the same level over 2005-06.  Among 
Asian partners, exports to China showed to strong growth both in value terms and percentages, to 
reach 5.3% of the total in 2006.  Japan remained the main Asian market, although its share declined 
continuously between 2000 and 2006.   
30. Canada remained the largest U.S. supplier, accounting for 16% of U.S. imports in 2006, 
although its share declined by one percentage poi nt between 2004 and 2006 (Table AI.4).  However, 
imports from China expanded strongly over 2004-06 (fro m 13.8% to 15.9% of total imports), almost 
equaling Canada's share as the U.S. main supplier. 
(ii) Trade in services 
31. In 2006, the surplus in cross-border services tr ade amounted to US$96.6 billion;  the surplus 
increased in both 2005 and 2006, as exports grew fast er than imports.  The largest surpluses are in 
business, professional, and technical services, and in royalties and licence fees, which represent 
receipts and payments for intellectual property right s, followed closely by financial services, other 
private services, and education;  the largest deficit is  in insurance (Table AI.5).  The fastest growing 
exports were in telecommunications services, fina ncial services, insurance services, and business and 
professional services;  transport exports, consisting of travel and passenger fares, also expanded 
during the period.  In imports, the largest incr eases were in research and development and testing 
services, management consulting services, and computer and information services.   
32. The main trading partners for U.S. services e xports in 2006 were the United Kingdom (11.8% 
of the total), Japan (10.2%), Canada (9.7%), Mexico  (5.6%), and Germany (5.1%).  The main partners 
for imports were the United Kingdom (12%), Japan  (7.8%), Canada (7.6%), Germany (6.8%), and 
Bermuda (4.9%).32 
33. Services sold abroad by U.S. companies through their majority-owned foreign affiliates to 
foreigners reached US$528.5 billion in 2005, the mo st recent year for which data were available.33  
Affiliates in Europe accounted for some 52% of the total, followed by the Asia Pacific region (24%), 
and Latin America (11%).  The value of services  sold by foreign multinationals through their 
U.S. majority-owned affiliates to U.S. persons was US$389 billion.  In 2005, sales of services by 
U.S. multinationals through their majority-owned aff iliates increased by 9.4% over the previous year, 
while foreign multinationals' sales of services thr ough their majority-owned U.S. affiliates to 
U.S. persons rose by 1.9%. 
                                                      
32 BEA online information.  Viewed at:  ht tp://www.bea.gov/international/xls/pos_06.xls. 
33 BEA (2007f). WT/TPR/S/200/Rev.1 Trade Policy Review 
Page 10 
 
 
(iii) Foreign direct investment 
34. The United States' foreign direct investment position increased to US$1.79 trillion in 2006, in 
line with the 11% average annual growth in 1994-2004.34  Foreign direct investment inflows for 2006 
totaled US$180.6 billion35.  Net equity capital inflows were the largest contributor to this flow, with a 
surge of 73% in nominal terms, after declining for five consecutive years.  Reinvested earnings, which 
remained above historical norms for a third consecuti ve year, contributed to the increase in the inward 
position;  valuation adjustments and inter-company debt investment made smaller contributions.  
The United Kingdom remained the largest source, w ith an investment position of US$303.2 billion, or 
17% of the total, followed by Japan with US$21 1 billion (12%), and Germ any and the Netherlands 
accounting for 11% each.  The largest equity capital increases by foreign investors in 2006 were in 
finance and insurance, chemicals, computers and electronic products, manufacturing, and machinery 
manufacturing. 
35. U.S. direct investment abroad increased by 12%  in 2006 to US$2.38 trillion;  this was above 
the (less than 1%) increase in 2005,  and in line with the average annual growth rate of 13% in 1994-
2004.  Foreign direct investment outflows for 2006  totaled US$235.4 billion.  Reinvested earnings 
were the largest contributor to the increase in 2006;  net equity capital investment also contributed to 
the increase but was the sm allest recorded since 1996.36  Three host countries:  the United Kingdom 
(U$364.1 billion, or 15% of the total), Canada (US$246.5 billion or 10%), and the Netherlands 
(US$215.7 billion, or 9%), accounted for over a third of the total investment position.  Equity capital increases for the acquisition or establishment of new affiliates in 2006 were largest in 
the United Kingdom, the Netherlands, and Luxembourg.  Over two-thirds of capital contributions to 
existing foreign affiliates were to affiliates in Eu rope.  Among industries, the largest contributions 
were to affiliates in finance and insurance.  The largest stocks of FDI in the United States are owned 
by United Kingdom, Japan, Dutch, and German interest s.  The highest stocks of U.S. FDI abroad 
continue to be in the United Kingdom and Canada (Table AI.6). 
(7) O
UTLOOK  
36. In mid 2007, the CBO forecast GDP growth of 2. 9% for 2008, accelerating to 3.2% in 2009 
and 2010.37  Unemployment is expected to remain low in 2008 and 2009 at 4.7% and 4.8%, 
respectively, while inflation as measure d by the CPI is expected to slow from 2.8% in 2007 to 2.3% in 
2008, and to 2.2% in 2009 and 2010.  The total budge t deficit is expected to decline from 1.2% of 
GDP in 2007 to 1.1% in 2008, and increase slightly in 2009 and 2010, before falling again and turning 
into a surplus in 2012. 
37. The Federal Reserve Board is expecting GDP to  grow at between 1.3% and 2% in 2008, a 
pace appreciably below its trend rate, owing primarily  to a deepening of the housing contr action and a 
tightening in the availability of household and business credit.  Given the substantial reductions in the 
target federal funds rate, the Boar d is expecting GDP growth to accelerate further, to some 2.1%-2.7% 
in 2009 and 2.5%-3% in 2010.  Inflation is expected to decline in 2008 (to between 2.1%-2.4%) and 
2009 (1.7%-2%) from its recent levels as energy prices are forecast to level out and economic slack to 
contain cost and price increases.  The unemployment rate is forecast to remain in the 5%-5.3% range 
in 2008 and 2009, before declining somewhat in 2010.38 
                                                      
34 BEA online information.  Viewed at:  http://www.bea.doc.gov/bea. 
35 BEA (2007b). 
36 Ibarra and Koncz (2007). 
37 CBO (2007). 
38 Federal Reserve Board (2008). United States WT /TPR/S/200/Rev.1 
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38. In October 2007, the IMF forecast real GDP growth of 1.5% for 2008.39  Previously, it had 
noted that difficulties in the mortgage market were  expected to extend the decline in residential 
investment, while lower house prices were e xpected to moderate private consumption.40  CPI inflation 
was anticipated to reach 2.3% in 2008, and unempl oyment to climb to 5.7%.  The expected general 
government deficit for FY2008 was expected to in crease to 2.9% of GDP and the current account 
deficit to around 5.5% of GDP. 
                                                      
39 IMF (2008). 
40 IMF (2007c).