United States WT /TPR/S/160/Rev.1 
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I. RECENT ECONOMIC DEVELOPMENTS 
(1) OVERVIEW  
1. Since the last Review of the United States in early 2004, the performance of its economy has 
been strong.  This has had global consequences be cause the United States is the world's largest import 
market and a key supplier of goods and services.  The U.S. economy has also remained amongst the 
world's most competitive, and has continued to s upport global growth by maintaining its market 
largely open.  This openness is one of the factors th at contributes to U.S. competitiveness, as it allows 
U.S. producers and consumers to access required go ods, services, and capital from abroad at the best 
conditions.  In this respect, imports have helped  to keep U.S. prices down in a context of strong 
private consumption, while large inflows of fo reign capital have financed wide current account 
deficits. 
2. U.S. economic growth has been supported by  accommodative fiscal and monetary policies.  
However, the fiscal deficit, low rate of savings , and widening current account deficit are sources of 
concern.  Additionally, signs of overheating in th e housing market may have further implications for 
monetary policy.  As a response to these concerns, measures to curtail spending, reduce the fiscal 
deficit, and tighten monetary policy have been adopted. 
(2) OUTPUT AND EMPLOYMENT  
3. U.S. economic growth has been strong and steady since its last Review.  After low growth in 
2001 and 2002, economic e xpansion gathered pace in the second quarter of 2003, supported by strong 
private domestic consumption, private investment, and defence purchases (Table I.1).  Growth 
solidified in 2004 spurred by productivity gains,  high corporate profits and expanding exports.  
Preliminary figures for 2005 indicate a slightly slower growth rate but GDP growth in the United States is expected to outpace that of most other industrial countries (section (7) below). 
4. Private consumption growth outpaced GDP expa nsion during 2001 to mid 2003, fell behind 
in 2004 and kept pace with GDP growth in the firs t three quarters of 2005.  Private consumption has 
been bolstered by changes in wealth between 2000 and 2005, and partly because of an increase in 
disposable income, mainly through tax cuts.  Cons umer spending has also received impetus from the 
wealth effect triggered by mortgage refinancing.
1  Government spending, which supported growth 
during the 2001-03 period, trended downwards until the first quarter of 2005.  Imports of goods and 
services expanded strongly in 2004 (section (5) belo w).  Exports grew faster than GDP in 2004 and 
the first two quarters of 2005, making a positive contribution to overall growth.  Export growth 
moderated in the third quarter of 2005. 
5. Residential investment has been another GDP  component underpinning growth.  Housing 
activity has been extremely robust since 2003, growing by over 10% in 2004 and at similar rates in the first two quarters of 2005.
2  Gross private investment recove red strongly after 2002, growing by 
11.9% in 2004 and by 8.6% in the first quarter of  2005.  In the second quarter of 2005, however, there 
was a downturn in inventory investment, with a nega tive effect on gross fixed investment;  investment 
gathered strength again in the third quarter, when the negative effect of inventories was less pronounced. 
                                                     
 
1 IMF (2005a). 
2 IMF (2005a) and IMF Public Information Notice (PIN) No. 05/100, 29 July 2005.  Available at:  
www.imf.org. WT/TPR/S/160/Rev.1 Trade Policy Review 
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Table I.1 
Selected macroeconom ic indicators, 1998-05 
(US$ billion and per cent, annuali zed values, except as indicated) 
 1998 1999 2000 2001 2002 2003 2004 I 2005a II 2005a III 2005a
GDP (US$ billion) 8,747.0 9, 268.4 9,817.0 10,128. 0 10,469.6 10,971.2 11,734.3 12,198.8 12,378.0 12,605.7
 Change (per cent) 
Real GDP 4.2 4.5 3.7 0.8 1.6 2.7 4.2 3.8 3.3 4.1 
Private consumption 5.0 5.1 4.7 2.5 2.7 2.9 3.9 3.5 3.4 4.1 
 Durable goods 11.3 11.7 7.3 4.3 7.1 6.6 6.0 2.6 7.9 9.3 
 Non-durable goods 4.0 4.6 3.8 2.0 2.5 3.2 4.7 5.3 3.6 3.5 
 Services 4.2 4.0 4.5 2.4 1.9 2.0 3.0 2.8 2.3 3.3 
Gross private fixed investment 9.8 7.8 5.7 -7.9 -2.6 3.9 11.9 8.6 -3.7 5.3 
 Fixed investment 10.2 8.3 6.5 -3.0 -5.2 3.6 9.7 7.0 9.5 8.0 
     Non-residential 11.1 9.2 8.7 -4.2 -9.2 1.3 9.4 5.7 8.8 8.5 
        Structures 5.1 -0.4 6.8 -2.3 -17.1 -4.2 2.2 -2.0 2.7 2.2 
        Equipment and software 13.3 12.7 9.4 -4.9 -6.2 3.2 11.9 8.3 10.9 10.6 
     Residential 7.6 6.0 0.8 0.4 4.8 8.4 10.3 9.5 10.8 7.3 
 Change in private 
inventories (contribution to 
growth) 0.2 -0.2 0.1 -1.2 0.4 0.1 0.4 0.3 -2.1 -0.4 
Public consumption and 
investment 1.9 3.9 2.1 3.4 4.4 2.8 2.2 1.9 2.5 2.9 
  Federal -1.1 2.2 0.9 3.9 7.0 6.9 5.2 2.4 2.4 7.4 
    National defence -2.1 1.9 -0.5 3.9 7.4 8.8 7.0 3.0 3.7 10.0 
    Non-defence 0.7 2.8 3.5 3.9 6.3 3.4 1.8 1.1 -0.2 2.4 
  State and local 3.6 4.7 2.7 3.2 3.1 0.6 0.4 1.6 2.6 0.2 
Exports of goods and services 2.4 4.3 8.7 -5.4 -2.3 1.8 8.4 7.5 10.7 2.5 
Imports of goods and services 11.6 11.5 13.1 -3.2 3.7 4.9 11.0 7.4 -0.3 2.4 
Industrial production ( period 
average) 5.9 4.5 4.3 -3.5 0.1 0.6 4.7 3.8 1.6 1.3 
Saving and investment  Per cent of GDP  
Gross national saving 18.2 18.1 18.1 16.3 14.3 13.5 13.4 13.4 13.2 13.5 
Private 15.2 14.4 13.6 13.8 14.9 15.2 15.0 13.8 13.4 14.7 
 Personal savings rate (% of 
 disposable income) 4.7 2.6 2.8 2.3 2.4 2.1 1.8 0.5 -0.3 -1.8 
Public 3.1 3.7 4.6 2.5 -0.7 -1.7 -1.6 -0.4 -0.3 -1.3 
Gross domestic investment 20.3 20.6 20.8 19.1 18.4 18.6 19.6 20.0 19.8 19.9 
 Private 17.3 17.5 17.7 15.9 15.1 15.2 16.4 16.9 16.6 16.7 
 Public 3.0 3.1 3.1 3.2 3.3 3.4 3.2 3.1 3.2 3.2 
 Net domestic investment 8.5 8.8 8.7 6.5 .1 6.3 7.4 8.1 8.0 3.1 
 Net foreign investment -2.3 -3.0 -4.0 -3.8 -4.5 -4.7 -5.7 .. .. .. 
Prices  Change (per cent same period the previous year) 
CPI (end-of-period) 1.6 2.7 3.4 1.6 2.4 1.9 3.3 3.1 3.5 4.7 
GDP deflator (implicit) 1.1 1.4 2.2 2.4 1.7 2.0 2.6 3.0 2.6 3.3 
Employment, 
productivity/labour costs Change (per cent) 
Unemployment rate (end-of-
period) 4.4 4.0 3.9 5.7 6.0 5.7 5.4 5.2 5.0 4.9 
Labour productivity (non-farm) 2.8 2.8 2.7 2.5 4.0 3.8 3.4 3.2 2.1 4.7 
Labour productivity 
(manufacturing) 4.8 3.6 4.7 2.1 7.5 5.2 5.3 4.2 3.6 3.4 
Unit labour costs (non-farm) 3.1 1.8 4.2 1.4 -0.5 0.2 1.1 2.2 1.8 -0.5 
 
.. Not available. 
 
a Annualized figures.  
Source:  U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business , various issues;  and 
Bureau of Labour Statistics online informat ion.  Available at:  http://www.bls.gov. United States WT /TPR/S/160/Rev.1 
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6. The personal savings rate has declined consiste ntly since 2000, dropping below 1% in the first 
quarter of 2005, and becoming negative thereafter.3  This rate is low by international standards, and 
well below its long-run trend.4  Gross national savings as a whole have remained stable during the 
period under review, although at leve ls (13.5% of GDP in the third quarter of 2005) well below those 
posted at the beginning of the decade, while the share of gross domestic investment in GDP has 
increased, leading to a widening of the savings-investme nt gap.  This widening gap is reflected in the 
worsening of the deficit of the current account of th e balance of payments.  This situation responds in 
part to high foreign investor demand for U.S. bonds  and other long-term pape r, which is keeping long-
term interest rates low even as short-term rates in crease.  This has discouraged domestic savings by 
making them less interesting due to their low yield.  The Administration adopted measures in 2005 
aimed at raising the personal saving rate, such as lowering tax rates on dividends and capital gains.   
7. Employment has increased moderately.  The une mployment rate declined from 6% in 2002 to 
4.9% in September 2005.  The IMF attributes the drop in official levels of unemployment in recent 
months largely to lower levels of participation.5 
8. Labour productivity continues to show solid gr owth, although this has moderated since 2002;  
private non-farm-business productivity grew by 3.4%  in 2004, but expanded less rapidly in the first 
half of 2005, before picking up strength in the thir d quarter (Table I.1).  Productivity gains remain 
well above the increases of the past  two decades, which is partly due to a more efficient use of the 
capital stock as well as a reduction in costs, and labour shedding.  The authorities note that the openness of the economy may have also played a role  in triggering productivity gains.  Salaries have 
not increased beyond labour productivity gains:  average changes in weekly earnings were 1% and 
1.5% in 2003 and 2004. 
(3) M
ONETARY AND EXCHANGE RATE POLICIES  
9. Under the Federal Reserve Act of 1913, the Federal Reserve is responsible 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."
6  
The Federal Reserve controls three tools of moneta ry policy:  open market operations, the discount 
rate, and reserve requirements.  It uses these tools to  influence the demand for and supply of balances 
and in this way alters the federa l funds rate.  Unlike some other central banks, the Federal Reserve 
does not set a specific inflation target. 
10. During the period under review, monetary policy has remained accommodative, although it 
has been progressively tightened to contain inflationary pressures.  During 2004, the FOMC decided 
raised interest rate five times, raising the target for the federal funds rate from 1.25% at the beginning 
of the year to 2.25% at its end.  The increases in the target continued in the first half of 2005, with the 
rate rising to 3.5% in August 2005.7  The increase in the rate led to  an increase in nominal market 
                                                      
3 The U.S. authorities note that the personal savings ra te may under-report personal savings as that rate 
is based on a definition of personal disposable income which does not include retiree pension income and subtracts contributions for social insurance. 
4 IMF (2003). 
5 IMF (2005b). 
6 Federal Reserve Board online information.  Availa ble at:  http://www.federalreserve.gov/pf/pf.htm, 
The Federal Reserve System:  Purposes and Functions . 
7 Federal Reserve Board online information.  Av ailable at: http://www.federalreserve.gov/fomc/ 
fundsrate.htm. WT/TPR/S/160/Rev.1 Trade Policy Review 
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interest rates and laid the foundations for a decline in  the rate of expansion of the monetary aggregates 
M1 and M2 (Table I.2).  Real interest rates also rose, as did treasury note rates. 
11. The dollar depreciated against both the euro and the pound sterling during 2004.  It 
depreciated slightly in the first quarter of 2005 be fore gaining some ground in the second quarter;  the 
depreciation against the yen was more moderate, but mirrored the dollar's movements against other 
major currencies.  The exchange rate of the Chin ese yuan remained stable until the appreciation of the 
yuan in mid 2005.  The dollar depreciated both in real and nominal effective terms over the 2003-04 
period (Table I.2).  The rise in short-term interest  rates may have contributed to the solidity of the 
dollar in the second quarter of 2005. 
Table I.2 
Selected monetary and exchange rate indicators, 1998-05 
 1998 1999 2000 2001 2002 2003 2004 I 2005 II 2005 III 2005
Money stock (end of period, % change)  
M1 2.1 2.5 -3.2 8.7 3.1 7.0 5.2 2.9 0.1 -2.2 
M2 8.7 6.0 6.1 10.6 6.5 4.9 5.7 4.5 2.6 3.2 
M3 10.8 8.3 8.6 12.9 6.7 3.6 6.4 4.5 6.3 8.5 
Interest rates (per cent)      
Federal funds rate (effective)a 5.35 4.97 6.24 3.88 1.67 1.13 1.35 2.63 3.04 3.62 
Prime lending rate 8.35 8.00 9.23 6.92 4.68 4.12 4.34 5.35 6.25 6.75 
Treasury bill rate (3-months, 
secondary market) 4.81 4.66 5.85 3.45 1.62 1.02 1.38 2.79 2.99 3.47 
Treasury note rate (10-year maturity) 5.26 5.65 6.03 5.02 4.61 4.01 4.27 4.50 4.00 4.20 
Commercial paper (financial, 
1 month) 5.42 5.11 6.28 3.80 1.68 1.12 1.41 2.21 3.15 3.69 
Certificates of deposit (CDs, 1 month) 5.49 5.19 6.35 3.84 1.72 1.15 1.45 2.77 3.20 3.74 
Exchange rate (end of period)      
Nominal effective exchange rate 
(1997=100) 114.3 115.3 122.9 127.2 125.0 114.3 108.8 109.1 111.6 110.6
   Per cent change 1.6 0.9 6.6 3.5 -2.0 -8.5 -4.8 0.3 2.3 -1.4
Real effective exchange rate 
(1997=100) 99.2 100.5 107.7 111.5 109.1 99.5 95.4 96.2 99.0 99.3
   Per cent change -0.7 1.3 7.2 3.5 -2.2 -8.8 -4.1 0.8 2.9 0.3
US$ per euro n.a. 1.07 0.92 0.90 0.95 1.13 1.24 1.31 1.26 1.22
US$ per £ 1.66 1.62 1.52 1.44 1.50 1.63 1.83 1.89 1.86 1.81
Yen per US$ 131.00 113.73 107.8 121.57 125.22 115.94 108.15 104.51 107.51 111.20
 
n.a. Not applicable. 
 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 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. 
12. Higher oil prices, the possible lagged effect of previously expansionary monetary and fiscal 
policies, and the depreciation of the dollar vis-à-vis  the euro, may have had an effect on inflation.  In 
the 12 months to December 2004, the CPI rose 3.3%, compared to an increase of 1.9% in the 12 months to December 2003;  although inflation fi gures since 2002 have been heavily influenced by 
movements in energy prices, particularly since 2004, underlying or core inflation has remained 
subdued.  The CPI increased somewhat more rapidly in the second and third quarters of 2005.  The risk of acceleration of inflation led to a policy response by the Federal Rese rve as mentioned above. 
(4) F
ISCAL POLICY  
13. The results of the fiscal accounts worsened in 2003 and 2004;  the fede ral government deficit 
reached US$412 billion or 3.6% of GDP in 2004 (Chart I.1), and the total government deficit United States WT /TPR/S/160/Rev.1 
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accounted for 4.6% of GDP.  The deterioration in ab solute terms of the Federal Government's fiscal 
balance partly reflects the effect of tax cuts and increased spending on defence and social security.8  
State and local government deficits widened si gnificantly between mid 2000 and mid 2003, before 
narrowing somewhat.  The structural federal govern ment balance, which excludes cyclical economic 
activity and had been in surplus in FY 1999-01, c ontinued to be in deficit in 2004.  The federal 
government deficit as a percentage of GDP narro wed in FY 2005 to 2.6% of GDP (see below). 
15.016.017.018.019.020.021.022.023.0Chart I.1
Fiscal accounts, 1991-04
Percentage of GDP
Source :         Congressional Budget Office online information.  Available at:  http://www.cbo.org.1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003Outlays Receipts
Deficit
DeficitSurplus
2004
 
14. Fiscal deficits have undermined the declining tr end in public debt, which returned to increase 
in FY 2003.  The share of public debt in GDP rose to almost 63% in FY 2005 (Table I.3).9 
15. The Administration has been conducting a policy of fiscal stimulation.  In 2001, Congress 
approved a ten-year Budget Plan, containing tax cuts estimated at US$1.35 trillion over FY 2001-11 
and projecting an overall US$5.6 trillion fede ral government surplus over the same period.10  Further 
tax cuts were proposed in February 2003, with an estimated cumulative cost of US$1.3 trillion over 
FY 2004-13.  Among other things, th e Jobs and Growth Tax Relief Reconciliation Act, of May 2003, 
accelerated certain previously enacted tax reductions , and lowered personal in come tax brackets and 
the general tax rate on capital gains;  the estimat ed cost of the measures was US$350 billion through 
                                                      
8 Congressional Budget Office online information.  Available at:  http://www.cbo.gov/showdoc.cfm? 
index=6598&sequence=0. 
9 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. 
10 For more information on the ten- year Budget Plan and on the Budget for FY 2006 see Congressional 
Budget Office online information.  Available at:  http://www.whitehouse.gov/omb/budget/. WT/TPR/S/160/Rev.1 Trade Policy Review 
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FY 2013.  The Working Families Tax Relief Act of 2 004 extended tax relief for working families;  the 
estimated cost of the reductions was US$146 billion for 2004.11 
Table I.3 
Selected fiscal indicators, FY 1998-05 
 1998 1999 2000 2001 2002 2003 2004 2005
Fiscal balance (% of GDP)   
Federal government fiscal balance 0.8 1.4 2.4 1.3 -1.5 -3.5 -3.6 -2.6
State and local government fiscal balance -0.5 -0.6 -0.7 -1.0 -1.6 -1.5 -1.1 -1.0
Total government balancea 0.3 0.8 1.8 0.3 -3.1 -5.0 -4.6 -3.5
Structural federal government balanceb -0.4 0.4 1.1 0.6 -0.9 -2.5 -3.0 ..
Public debt   
Public debt (US$ billion, fiscal ye ar) 5,526 5,657 5,674 5,674 5,662 6,670 7,379 7,933
Public debt (% of GDP) 62.9 60.8 57.0 56.5 58.6 60.5 61.0 62.9
 
.. Not available. 
 
a As defined in the Historical Tables of the Budget of the United States Government [Online].  Available at:  http://www.
 whitehouse.gov/omb/budget/fy2006. 
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.  
Source : Budget for FY 2006;  CBO and OMB online information;  U.S. Treasury, Bureau of the Public Debt online 
 information.  Available at:  ht tp://www.publicdebt.treas.gov/opd/opdpenny.ht m;  and IMF (various issues) 2005, 
 World Economic Outlook . 
16. Since the FY 2005 Budget the Administration' s policy has been of spending restraint, 
particularly in the non-defence area.  The Presi dent's 2006 Budget proposed reforms that would 
produce savings of US$85 billion over five years;  Congress agreed to US$35 billion of these savings.  Additionally, Congress passed a 2006 Budget Resolution that restrains overall discretionary spending 
to an increase of 2.1%, less than th e 2.4% projected rate of inflation.  This constitutes an important 
measure to rein in spending, since discretionary sp ending has been one of the main triggers of the 
fiscal deficit.  As a consequence of the changes in discretionary spending, baseline projections of 
discretionary spending by the Congressional Budget O ffice (CBO) have declined by US$31 billion for 
FY 2005 and by more than US$1 trillion for the 2005-14 period.
12 
17. The CBO estimated a federal Government fiscal deficit of US$333 billion, or 2.7% of GDP 
for 2005.13  The aim is to achieve a deficit of 1.1% of  GDP by 2009, below the historical average for 
the past 40 years (2.3%).  The final result for 20 05 was a deficit of US$319 billion, or 2.6% of GDP, 
below both the CBO's initial and revised estimates.14  The overall Government deficit was an 
estimated 3.5% of GDP in 2005.  Higher receipts from income, corporation and social security and Medicare payroll taxes explain part of the decrease in the deficit projected for FY 2005.
15  Outlays 
increased by 7.9% in FY 2005.  Despite their sh arp increase in FY 2005 (14.6%), receipts as a 
percentage of GDP remain below their 40-year hi storical average of 18.2% and are expected to 
remain so until at least 2010.16  Outlays are projected to fall, due mainly to decreases in social security 
                                                      
11 Congressional Budget Office (2005d). 
12 Congressional Budget Office (2005d). 
13 This is a revised estimate, down from the US$427 billion or 3.5% of GDP initially estimated for 
FY 2005. 
14 Congressional Budget Office (2005c). 
15 Congressional Budget Office (2005a) . 
16 The IMF in its Staff Report for the Article IV Consultation of 2005 notes that medium term budget 
projections do not account for funding of operations in Iraq and Afghanistan beyond FY 2006 or of pressure to limit the Alternative Minimum Tax. United States WT /TPR/S/160/Rev.1 
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and farm programme payments.  Under the CBO base line scenario, the fiscal a ccounts are expected to 
show a deficit until FY 2015, although on a declining scale.17 
18. The IMF considers that, despite recent measures towards fiscal consolidation, there is a case 
for a bolder reduction of the deficits, including measures to bolster revenue.18  The IMF has noted that 
recent fiscal consolidation reflects mainly cyclical  gains, and that U.S. budget projections assume 
unprecedented compression of non-defence discretiona ry spending, take no account of funding for 
operations in Iraq and Afghanistan after 2006, or of  the growing scope of the Alternative Minimum 
Tax.  The IMF recommends balancing the budget ex cluding Social Security by early in the next 
decade;  this would support national saving, dom estic investment, and the external position, and 
would lower the federal debt ratio.  The U.S. aut horities consider that the Administration has made 
substantial progress in improving spending efficien cy and see no need to strengthen their fiscal 
objective.19  In the context of this review they expre ssed concern about the potential for lower U.S. 
growth in the face of a unilateral reduction in the fiscal imbalance. 
(5) BALANCE OF PAYMENTS  
19. The deficit in the current account of the bala nce of payments continued to expand through 
2004, reaching a record US$668 billion, or 5.7% of GDP  (Table I.4 and Chart I.2).  In the first three 
quarters of 2005, the current account deficit reached US$593 billion, which is equivalent, at an annualized rate, to slightly over 6% of GDP.  The IMF expects the deficit to stabilize at 6% of GDP in 
2006.
20 
20. Both exports and imports of goods expanded in 2004 (Table I.4);  this pattern seemed to be 
recurring for 2005.  Imports were boosted by the rela tively strong performance of the U.S. economy  
The faster increase in imports than exports triggere d an increase in the trade deficit on goods in 2004, 
to US$665 billion. 
21. The surplus in services was mainta ined in 2004 with export grow th in services tending to lag 
behind the rate for services imports.  The income balance remained in surp lus in 2004 and into the 
first-quarter of 2005, as income receipts grew more  than income payments.  The surplus reflects an 
increase in earnings on U.S. direct investment abroad , triggered partly by the depreciation of the U.S. 
dollar against key currencies. 
22. The surplus in the capital and financial accounts declined considerably in 2004.  The net 
inflow of foreign capital into the United States expanded dramatically, almost doubling from 2003 to 2004 (Table I.4).  Net foreign direct investment in flows in the United States increased in 2004, while 
net foreign purchases of stocks fell to US$102.4 billi on, approximately two-thirds the 2003 level.  Net 
purchases of U.S. Treasury Securities by non-U.S. in vestors fell sharply, to US$4.6 billion, following 
two years of strong net purchases. 
                                                     
 
17 Congressional Budget Office (2005b). 
18 IMF (2005a). 
19 IMF (2005a), Table 1. 
20 IMF (2005d). WT/TPR/S/160/Rev.1 Trade Policy Review 
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101214161820
19 91 19 92 1 99 3 1 99 4 19 95 19 96 1 99 7 199 8 19 99 20 00 2 00 1 200 2 20 03 20 04Chart I.2
Current account of the balance of payments, 1991-04
Percentage of GDP
Sourc e:  U.S. Department of Commerce, Bureau of Economic Analysis [Online].  Available at:  http://www.bea.doc.gov.Imports of goods and services and 
income payments
Cu rr ent d efici tExports of goods and services and income receipts
 
Table I.4 
Current and capital accounts, 1998-05 
(US$ billion) 
 1998 1999 2000 2001 2002 2003 2004 I 2005 II 2005 III 2005 
Current account balance -215 -300 -416 -389 -475 -520 -668 -199 -198 -196 
Exports of goods, services 
and income 1,195 1,260 1,422 1,295 1,248 1,332 1,531 413 428 440 
Exports of goods 933 684 772 719 682 713 808 214 224 225 
Exports of services 263 282 299 288 295 309 344 93 94 96 
Income receipts 262 294 351 288 271 310 380 106 111 119 
Imports of goods, services 
and income 1,356 -1,500 -1,773 -1,632 -1,652 -1,853 -2,199 -586 -604 -622 
Imports of goods -917 -1,030 -1,224 -1,146 -1,165 -1,261 -1,473 -400 -410 -423 
Imports of services -181 -200 -225 -224 -234 -257 -296 -79 -80 -80 
Income payments -258 -280 -330 -263 -261 -264 -349 -106 -113 -118 
Net unilateral transfers 
abroad -53 -51 -59 -52 -64 -71 -81 -26 -23 -14 
Balances           
Goods and services -165 -263 -378 -363 -421 -495 -617 -173 -174 -183 
Goods -247 -346 -452 -427 -482 -547 -665 -186 -187 -198 
Non-factor services 82 83 74 64 61 52 48 13 13 15 
Net investment income 4 14 21 25 10 46 30 1 -2 -1 
Official transfers -53 -14 -17 -12 -17 -22 -23 -11 -7 -8 
Private transfers -36 -37 -42 -40 -47 -49 -58 -16 -15 -6 
Table I.4 (cont'd) United States WT /TPR/S/160/Rev.1 
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 1998 1999 2000 2001 2002 2003 2004 I 2005 II 2005 III 2005 
Capital and fina ncial account 
balance (+ inflows)           
Capital account transactions, 
net -1 -5 -1 -1 -1 -3 -2 -4 0 0 
U.S. investment abroad, net 
(increase)a -354 -504 -561 -383 -294 -328 -856 -82 -225 -124 
Foreign investment in the 
United States, net (increase)b 424 740 1,047 783 794 889 1,440 243 376 397 
Statistical discrepancy  145 69 -69 -10 -24 -38 85 41 48 -77 
Memorandum:           
Current account balance as a 
percentage of GDP -2.5 -3.2 -4.2 -3.8 -4.5 -4.7 -5.7. -6.4 -6.3 -6.3 
 
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. 
23. The depreciation of the U.S. dollar against major currencies has not improved the current 
account deficit.  This may stem from the enlarged cap acity of the United States to fund deficits due to 
strong demand for dollar-denominated assets abroad, tri ggered partly by the higher real rates of return 
on U.S. dollar investments compared with investment s in other major currencies.  The Chairman of 
the Federal Reserve Board has noted that it may al so be caused by exporters to the United States 
absorbing the exchange rate depreciation through compressed gross profit margins to avoid rising 
prices and losing market share.21  Other factors cited by the IMF as having an effect on pass-through 
include the declining share of commodities as a proportion of overall U.S. trade and productivity 
growth allowing exporters to the United States  to preserve profit margins despite currency 
fluctuations.22 
24. The U.S. current account deficit has been linked to several factors:  the fiscal deficit, a drop-
off in private saving rates, the surge in productivit y growth, the slowdown in foreign demand, and the 
narrowing of risk premiums on global-denominated assets.  The results of a simulation conducted using the Federal Reserve Board staff's macroeconom ic model led the Federa l Reserve to conclude 
that many of those factors are not unrelated and may be part of a broader evolution of the global 
economy, requiring a global adjustment, since government policies such as budget-cutting or 
encouragement of private saving are unlikely, by th emselves, to correct the current account deficit, 
much as they might be desirable for other reasons.
23  The simulation accorded the greatest roles to 
increased productivity growth, which has made the Un ited States a magnet for foreign saving, and to 
the slump in foreign domestic demand, which has led to an excess of saving in foreign economies.  It 
found that larger fiscal deficits increase the G overnment's draw on available credit and dampen 
private consumption and investment spending, th ereby limiting the deterioration of the current 
account. 
                                                      
21 Federal Reserve Board (2005a).  For example, from 2002 to early 2004, about three quarters of the 
decline in the dollar's exchange rate relative to the euro was absorbed by compressed profit margins:  while the dollar's exchange rate against the euro  and the sterling, on aver age, declined about 30% in nominal terms, dollar 
prices of imported goods from the European Union rose by only 9%. 
22 IMF (2005a) and Federal Reserve Board (2005a). 
23 Federal Reserve Board (2005c), Appendix. WT/TPR/S/160/Rev.1 Trade Policy Review 
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25. Observers have expressed concern with respect to the sustainability of the current account 
deficit.  The Federal Reserve has noted that, "alt hough views differ as to when a correction will take 
place, nearly all agree that the current trajectory of  the U.S. current account deficit is unsustainable", 
since the deficit is causing the net indebtedness of the U.S. economy to rise more rapidly than U.S. 
income.24  The IMF, noting that the counterpart of the current account deficit has been massive 
foreign capital inflows, has stated that "financial  flows in the United States have departed from long-
term trends and appear unsustainable, with fo reign savings and corporate profits increasingly 
financing government and household spending".25 
(6) DEVELOPMENTS IN TRADE AND INVESTMENT  
(i) Merchandise trade 
26. The upturn in the economy has had a strong im pact on merchandise imports, which expanded 
by 15% in 2004.  In general, imports of primary products grew at a considerably faster rate than 
imports of manufactures (28% versus 15%).  There was a particularly sharp increase in imports of 
fuels between 2002 and 2004.  Among manufactures, th e strongest import growth was iron and steel.  
Exports also expanded sharply, reaching a historical  peak in 2004.  Exports of mining products, fuels 
(especially coal), and chemicals displayed particular ly strong growth in that year (Tables AI.1 to 
AI.4).26 
27. U.S. trade patterns are amongst the most ge ographically diversified of all major WTO 
Members.  NAFTA partners continued to account fo r the largest share among export destinations in 
2004, with 23% of U.S. exports going to Canada  and 13.5% to Mexico.  Exports to non-NAFTA 
partners in the Americas increased in value terms during the period, particularly Brazil, Colombia, 
and Venezuela.  Exports to the European Union,  the second largest export market for U.S. products, 
also increased in value terms, although market sh are declined slightly.  Among the United States' 
Asian partners, exports to China, and Singapore, showed strong growth in value and percentage terms.  
The share of U.S. exports to Africa advanced strongl y in value, but the percentage share of overall 
exports to Africa remained the same. 
28. Merchandise imports from Canada and Mexico  were higher over 2003-04 (up 14% and 13% 
respectively) in value terms, although the shar es of both decreased.  Canada remained the 
United States' largest supplier, accounting for 17%  of imports in 2004.  Imports from non-NAFTA 
partners in the Americas increased, though import shar e remained stable during the period.  Imports 
from China expanded 29%, to almost 14% of total U.S. imports in 2004.  Imports from Japan rose 
10% in 2004, but import share declined. 
(ii) Trade in services 
29. Data for U.S. trade in services are estimated  and published by the Bureau of Economic 
Analysis (BEA).27  In 2004 (the latest year for which figu res are available), the surplus in cross-border 
                                                      
24 Federal Reserve Board (2005c). 
25 IMF (2005b). 
26 Tables AI.1 to AI.4 are based on data in the United Nations Comtrade database, which differs 
somewhat from U.S. balance-of-payments data. 
27 For BOP and related data see Bureau of Economic Analysis online information (BEA).  Available at:  
http://www.bea.doc.gov.  Trade in services through cros s-border 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 companies in foreign market s corresponds to GATS mode 3, entails selling services United States WT /TPR/S/160/Rev.1 
 Page 11 
 
 
services trade amounted to US$65.3 billion.28  The U.S. surplus in trad e in services has been shrinking 
since 1999.  From 2002 to 2003 imports of private services increased 8%, while exports increased 5%. 
30. The largest surplus in services trade continu es to be in royalties and licence fees, which 
represent receipts and payments for intellectua l property rights (see Chapter III(4)(v)), closely 
followed by other private services, such as educat ion, financial services, insurance and business, 
professional and technical services (Table AI.5).  Transport exports, consisting of travel and 
passenger fares, were affected by a sharp reductio n in travel in 2003, b ecause of the commencement 
of the war in Iraq and the outbreak of severe acute  respiratory syndrome.  In imports, the largest 
increases were in the other transportation, which co nsists of freight charges and port services, and in 
other private services.  There was al so a large increase in insurance. 
31. The main trading partners for U.S. services e xports in 2003 were the United Kingdom (11.7% 
of the total), Japan (10.1%), Canada (9.1%), German y (6.0%), and Mexico (5.6%).  The main partners 
for imports were the United Kingdom (13.4%), Cana da (8.4%), Japan (7.61%), Bermuda (7.2%), and 
Germany (7.2%).29 
32. Services sold abroad by U.S. companies through their world-wide affiliates to foreigners 
reached US$477.5 billion in 2003, the most re cent year for which data were available.30  Affiliates in 
Europe accounted for some 56% of the total, followed by the Asia Pacific region, and Latin America.  
The value of services sold by foreign multinationals through their U.S. affiliates to U.S. persons was 
US$381.4 billion.  Most sales by affiliates are local .  In 2003, sales of U.S. multinationals through 
their world-wide affiliates increased by 13% over the previous year, while foreign multinationals' 
sales through their U.S. affiliates to U.S. persons rose by 4%. 
(iii) Foreign direct investment 
33. Foreign direct investment in the United St ates increased by US$115.6 billion in 2004, to 
US$1.53 trillion.31  Net equity capital inflows decreased fo r the fourth consecutive year, however, 
declining US$17 billion from 2003 to a total of US $68.7 billion in 2004. Equity capital inflows, 
which reflect new acquisitions and additional fund ing to existing affiliates, reached a peak of 
US$259.6 billion in 2000 a nd have been decreasing since then.  The largest acquisitions by foreign 
investors were in finance and insurance.  The cap ital inflows to the United States in 2004 reflected 
merger and acquisition activity, reinvested earnings  and a decrease of intercompany debt outflows. 
34. U.S. direct investment abroad increased  15% in 2004 to US$2.06 trillion, growing from 
US$1.71 trillion in 2003.32  These outflows consisted mostly of equity outflows for the purpose of 
acquiring or establishing foreign affiliates, or reinv ested earnings.  Net equity capital outflows were 
US$80.7 billion in 2004, up from US$19.2 billion in 2003.  The largest movements in net equity capital outflows were in the Asia Pacific region, with media, medical equipment and supplies manufacture featuring significantly.  There was also a significant inflow of inter-company debt, most of it attributable to borrowing by U.S. parent compan ies from their affiliates, particularly in Europe.  
                                                                                                                                                                    
 
thought affiliates.  Trade in services through mode 3 is measured using gross sales before deductions for 
expenses and taxes. 
28 BEA online information.  Available at:  h ttp://www.bea.gov/bea/ARTICLES/2005/10October/1005_ 
xborder.pdf. 
29 BEA online information.  Available at:  http ://www.bea.doc.gov/bea/di/1001serv/1004serv/tabD.xls. 
30 BEA online information.  Available at:  http://www.bea.doc.gov/bea. 
31 BEA online information.  Available at:  http://www.bea.doc.gov/bea. 
32 BEA online information.  Available at:  http://www.bea.doc.gov/bea/ARTICLES/2005/07July/0705 
_DIP_WEB.pdf.  See Table A. WT/TPR/S/160/Rev.1 Trade Policy Review 
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Reinvested earnings increased US$44 billion in 2004, to US$153.8 billion, accounting for two thirds 
of the total capital outflows and totalling nearly triple their 2001 value.  The BEA points out that the increase in outflows partly reflected strong host -country growth and the low U.S. dollar/euro 
exchange rate. 
35. The increase in inflows in 2004, raised the stock of FDI in the United States to 
US$1.53 trillion, or some 13% of GDP in 2004 (Table  AI.6).  The largest stocks of FDI in the 
United States are owned by U.K., Japan, Dutch, and Ge rman interests.  The stock of U.S. investment 
abroad, also increased in 2004.  The highest stocks of U.S. FDI abroad continue to be in the United 
Kingdom and Canada. 
(7) O
UTLOOK  
36. In mid 2005, the CBO forecasted GDP growth of  3.7% in 2005, decelerating to 3.4% in 
2006.33  These estimates for 2005 did not reflect the effects of Hurricane Katrina although the three 
States most affected (Louisiana, Alabama, and Mississippi) account for just 3.1% of U.S. GDP.34  
Unemployment is expected to remain stable at 5.2% , while inflation is expected to slow from 3.1% in 
2005 to 2.5% in 2006.  The total deficit is expected to exceed 2. 7% of GDP in 2005, but to fall 
thereafter. 
37. The IMF is forecasting real GDP growth  of 3.5% in 2005, and 3.3% in 2006.35  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 a share of GDP in 2005, before stabilizing in 2006.  The IMF forecasts a general government defic it of 3.7% of GDP in FY 2005. 
                                                     
 
33 Congressional Budget Office online information.  Available  at:  http://www.cbo.gov/showdoc.cfm? 
index=1824&sequence=0. 
34 For these figures and an explanation of the possibl e effects of Hurricane Katrina, see:  BEA online 
information.  Hurricane Katrina Frequently Asked Questions (FAQs ).  Available at:  http://www.bea.gov/ 
Katrina/index2.htm#katrina1. 
35 IMF (2005d).