- 18 -

Reflecting the rise in the external deficits, Korea's gross and
net debt figures rose in 1991. After declining steadily since 1985,
Korea's gross external debt rose to $39.3 billion at the end of
1991, a 24 percent increase from $31.7 billion at the end of 1990.
However, the 1991 figure was equal to only 14.5 percent of GNP,
compared with 52 percent of GNP in 1985. Net external debt hit
$12.5 billion at the end of 1991, up from $4.9 billion in 1990.
Notably, the debt service ratio fell below 10 percent at the end of
1990 -- less than half the level of three years earlier -- and
declined further to roughly 6.4 percent in 1991.

With the negative trends in the current account not fully
offset by capital inflows, reserves fell from $14.8 billion at the
end of 1990 to $13.7 billion by the end of 1991, representing 2.1
months of import coverage.

Exchange Market Developments

Under the "market average rate" (MAR) system of exchange
determination, introduced on March 2, 1990, the won/dollar exchange
rate at the beginning of each business day is equal to the weighted
average of transactions in the inter-bank market on the preceding
business day. Inter-bank and customer rates are allowed to float
freely within specified margins, which were expanded in September
1991, and are to be further expanded this year. Exchange rates
between the won and third currencies are set in accordance with
dollar rates in international currency markets.

During the first twenty-four months of the MAR system (through
April 10, 1992), the won depreciated 11.9 percent in nominal terms
against the U.S. dollar. Foreign banks accounted for a large share
of transactions in the inter-bank markets, generally between 40-60
percent of the total. The Bank of Korea (BOK) was not a direct
participant in the market, and other government-owned banks
accounted for only a small share of inter-bank activity.

The cumulative nominal depreciation of the won against the U.S.
dollar since the first of these reports was issued in October 1988
now stands at 9.7 percent. Since the fall 1991 report, this nominal
depreciation has accelerated; the Korean currency has fallen 3.3
percent against the dollar over the past six months. However,
because of higher inflation in Korea than in the United States, the
won has shown little change in real terms against the dollar over
this period.

Foreign Exchange and Capital Controls

The Korean authorities maintain a comprehensive array of
controls on foreign exchange and capital flows. These controls
prevent market forces of supply and demand from playing a fully
effective role in exchange rate determination, distort trade and
investment flows, and provide the Korean authorities with tools for
indirectly manipulating the exchange rate.


Table 1

ECONOMIC PERFORMANCE
OF MAJOR INDUSTRIAL COUNTRIES

I. Real GNP/GDP (percent change; annual average)

1990 1991 1992
United States 1.0 -0.7 1.6
Japan 5.2 4.5 2.2
Germany* 4.5 1.2 2.0
France 2.8 1.2 1.8
United Kingdom 1.0 2.2 0.8
Italy 2.0 1.0 1.6
Canada 0.5 -1.5 2.3
Total G-7 2.5 0.8 1.7

II. Consumer Prices (percent change; annual average)

United States 5.4 4.2 3.
Japan 3.1 3.3 2.
Germany* 2.7 3.5 3.
France 3.4 3.1 2.
United Kingdom 9.5 5.9 3.
Italy 6.5 6.4 5.
Canada 4.8 5.6 1.

NONNONE

Total G-7 4.8 4.2 3.

RB

III. Current Account ($ billions and percent of GNP/GDP)

United States ~92 “9 -53
(1.7) (0.2) (0.9)
Japan 36 73 93
(1.2) (2.1) (2.6)
Germany* 48 -21 714
(2.9) (1.2) (0.8)
France -8 “4 -4
(0.7) (0.3) (0.4)
United Kingdom -28 8 715
(2.6) (0.8) (1.4)
Italy -14 -19 -20
(1.3) (1.7) (1.7)
Canada ~19 ~2l 718
(3.3) (3.5) (2.9)

SOURCE: Data and forecasts for the U.S., other G-7 countries,
and G-7 totals are from the IMF. The comparable Administration
forecasts for 1992 U.S. growth and inflation are 1.5 percent and
3.0 percent respectively.

* GNP and inflation data cover west Germany only; current account
data cover all of Germany from 7/1/90.


- 35 -

and in fiscal consolidation would create a basis for easing the
burden on monetary policy and lowering interest rates.

While the major industrial countries bear a special
responsibility for promoting global growth and adjustment of
external imbalances, major trading economies like Korea, Taiwan, and
China also have an important role to play in this effort. This
report provides an analysis of economic and exchange rate
developments in Korea, Taiwan, and China, as well as the Treasury
Department's assessments as to whether they are "manipulating" their
exchange rates, within the meaning of Section 3004 of the Omnibus
Trade and Competitiveness Act of 1988, to prevent effective balance
of payments adjustment or gain unfair competitive advantage in
international trade.

Korea's external accounts have adjusted dramatically since
1989, when the country had a current account surplus of 2.5 percent
of GNP. In 1990, a current account deficit of $2.1 billion emerged,
which soared to $8.8 billion in 1991 (larger than that of the United
States). There has been an associated sharp decline in the U.S.
trade deficit with Korea over the period, from $6.3 billion in 1989
to $1.5 billion in 1991. In the first two months of this year the
U.S. recorded a small trade surplus with Korea. Factors
contributing to this turnaround include import increases associated
with strong domestic demand growth and higher oil prices, and rising
wages and other factors adversely affecting Korea export
competitiveness.

The Korean won has depreciated 9.7 percent against the dollar
since the first report in this series (October 1988). Since the
fall 1991 report, the won has depreciated more rapidly in nominal
terms, but has shown little change in real terms against the dollar
because of higher inflation in Korea than in the United States.

There continues to be no basis for concluding that Korea is
"manipulating" its exchange rate within the meaning of the
legislation, given: the emergence of significant trade and current
account deficits in 1991; the decline in Korea's foreign reserves;
the lack of evidence of direct intervention by the Bank of Korea in
the exchange market; and the modest role of other government-owned
foreign exchange banks in the market.

Nevertheless, pervasive Korean exchange and capital controls
significantly constrain market forces in the currency market.
Liberalization of these controls -- especially the "real demand"
rule for foreign exchange transactions -- is imperative to achieve
truly market-determined exchange rates and trade and investment
flows. The Treasury Department will continue to press for
liberalization of Korea's financial, capital, and exchange markets,
and for improved treatment for U.S. financial institutions in Korea.


- 12 -

While monthly data are highly volatile, the pattern of recent
monthly data is consistent with a continuation in 1992 of a gradual
downward trend in the trade deficit, perhaps to the $65 billion
range from $74 billion in 1991. However, prospects for further
declines in the trade deficit are subject to particular uncertainty
this year given the cyclical situation both in the United States and
the other major industrial countries.

Both the strength of U.S. recovery, and the pace of activity in
Western Europe and Japan, will be major determinants of how the
trade balance develops over the year. If the U.S. recovery is
gradual, as the Administration and most private forecasters project,
import growth should remain relatively subdued for the remainder of
the year. With only modest slackening of growth in Europe and
Japan, export growth could be sustained at rates observed in recent
quarters, particularly given the reemergence of Latin America as a
strong-growing U.S. export market. However, any combination of a
severe slowdown in Europe and Japan, or much stronger-than-expected
U.S. recovery, could increase the likelihood of at least a temporary
~~ though modest -- rise in the deficit.

Current account balance: The current account deficit should
continue to be lower than the trade deficit, since net services
performance continues to exhibit a favorable trend. Receipts for a
variety of services -- financial, medical and educational ~- have
grown much more rapidly than payments in recent years. The U.S.
also remains attractive as a tourist destination. Investment income
should also remain in surplus. U.S. direct investment abroad, much
of it long established, has consistently been more profitable than
foreign direct investment in the United States which is of a more
recent vintage. This should remain so in 1992.

If services continue their trend improvement and investment
income remains in surplus, the current account deficit (excluding
Desert Storm receipts) should decline to below $50 billion --
perhaps substantially lower -- in 1992.

The Turnaround in the U.S. Trade Deficit: A Longer Perspective

The trade deficit has undergone two dramatic swings in the last
decade. Between 1980 and 1987, it went from a modest $25 billion
deficit to one of $160 billion. Between 1987 and 1991, over 60
percent of this deterioration has been reversed. The average annual
decline in the deficit ($21.5 billion/year) has been almost
identical to the average annual increase during the run-up ($19.3
billion/year).

Two main factors can be viewed as major elements driving these
swings -- relative growth in the United States and abroad, and the
strength of the dollar, a major influence on U.S. competitiveness.
For example, Europe's recovery in the early 1980s was delayed while
that in the United States was strong. During the early to mid-
1980s, the dollar appreciated sharply in exchange markets. In the
second half of the 1980s, these trends were reversed. Furthermore,


- 22 -

Nonetheless, the exchange rate determination system in place in
Korea, while an improvement over the previous regime, is far from a
truly market-determined one. In particular, we remain seriously
concerned that pervasive Korean exchange and capital controls
significantly constrain supply and demand in the currency market.
Liberalization of these controls -- especially the "real demand"
rule for foreign exchange transactions -- is imperative to
strengthen the role of market forces in exchange rate determination
and in Korea's trade and investment flows.

Therefore, in the period ahead, the Treasury Department will
continue to monitor developments in Korea's external accounts and
the operation of the MAR exchange rate system. We will also
continue to press for liberalization of Korea's financial, capital,
and exchange markets, as well as to seek improved treatment for U.S.
financial institutions in Korea.


Value of the
Dollar in
Terms of:
Japanese yen
German mark
British pound
French franc

Italian lira

Canadian dollar

Table 2

Measurements of Dollar Movements
Vs. G~7 Currencies
Percent Appreciation (+) or Depreciation (~)

through 4/17/92
Since Since Since Since
Dollar Plaza Louvre Previous
Peak Accord Accord Report

2/26/85 9/20/85 2/20/87 10/18/91

48.8% 44.4% 12.8% 3.0%
~52.0% 41.6% -8.7% -1.5%
40.4% 21.8% 12.5% -1.5%
46.8% 35.3% -7.3% ~2.2%
42.2% 34.8% 3.4% ~0.9%
15.8% ~14.1% 11.0% 4.7%

Source: New York 9:00 a.m. exchange rates


Within the G-7, growth patterns in 1991 diverged at the
beginning of the year, but by year-end, slow growth was being
recorded throughout the group. The United States, Canada, and the
United Kingdom were in recession as the year began. They recovered
slightly in the middle of the year, but faltered again in the fourth
quarter.

By contrast, western Germany and Japan began 1991 with strong
growth. But as the year progressed their growth slowed, to the
point that both counties suffered output declines in the fourth
quarter. Finally, in France and Italy growth also slowed in the
second half of the year, influenced by developments in Germany.

For the G-7 as a whole, the IMF expects 1992 growth at around
1.7 percent. While signs of recovery are emerging in the United
States and Canada, these recoveries are expected to be modest,
particularly in comparison with historical averages. Meanwhile,
annual average growth is slowing in Germany and Japan and remains
modest in other European countries.

Growth trends in Europe are being heavily influenced by
developments in Germany. In the past years, German fiscal deficits
have risen sharply as a result of substantial spending increases
associated with reunification. These deficits are projected by the
IMF to remain large in the coming years. Moreover, unlike in the
rest of the G-7 (see below), German inflation on an annual average
basis is projected to rise in 1992 (after rising in 1991), and
lately there have been substantial wage pressures. As a
consequence, German monetary authorities have raised official
interest rates, the latest such increase in December 1991. These
higher interest rates have in turn spilled over into the rest of
Europe, dampening growth and growth prospects.

In Japan, 1992 growth is expected to fall by half (from 4.5 to
2.2 percent) from 1991. The slowdown is in part associated with the
tightening of monetary policies from 1989 to 1991 in an effort to
brake price increases, and in particular, asset price inflation.
Recent cuts in interest rates, however, should moderate the slowdown
in growth. Meanwhile, Japan's fiscal position remains strong. The
IMF estimates that Japan's general government fiscal surplus is on
the order of 3 percent of GNP.

Growth is recovering in the United States and Canada. Indeed,
the IMF projects that the fastest growing G-7 economy will be
Canada, albeit at a modest 2.3 percent. Factors which will
contribute to recovery in the United States and Canada include lower
short-term interest rates associated with significant declines in
inflation. In addition, households and firms have reduced their
debts. Nevertheless, these projected recoveries are quite weak by
historical standards.


- 33 -

The foreign exchange surrender system should be eliminated,
allowing exporters to retain all of their foreign exchange earnings
and to convert existing foreign exchange quotas into cash. China
should also loosen controls on the nation's swap centers, expanding
participation and allowable transactions, to develop the centers
into true markets for foreign exchange. In addition, all existing
laws and regulations pertaining to foreign exchange should be
published, and any proposed changes to the regulations made
available to the public in advance for review and comment by
interested parties.

These and other issues have been the subject of discussions
between the Treasury Department and the Chinese authorities launched
in the summer of 1991. The Department intends to continue to use
this forum to negotiate with China concerning its foreign exchange
policies and to seek a more market-oriented system of exchange rate
determination and foreign exchange allocation. At the same time,
China's trade restrictions are the subject of a U.S. Government
investigation initiated last year under Section 301 of the 1988
Trade Act.


~ 19 -

One of the most onerous controls is the requirement that
foreign exchange banks obtain and review, prior to entering into
most foreign exchange transactions, original documentation of an
underlying commercial transaction. This "real demand" rule
seriously hampers the development of Korea's foreign exchange
market, reflects the government's continued controlling hand in the
foreign exchange market and its fundamental lack of confidence in
market forces, and is inappropriate for a country at Korea's stage
of development.

Other exchange and capital controls severely restrict the use
of short-term trade finance, such as stringent terms for deferred
payments for imports. There are effective limitations on a variety
of current account transactions such as travel and remittances.
Direct portfolio investment in Korea was opened to foreigners for
the first time in January 1992, but a number of restrictions --
including a 10 percent limit on total foreign investment in any
Korean stock and a 3 percent limit on investment by individual
foreigners -- has kept foreign participation in Korea's capital
markets minimal.

Capital inflows in connection with foreign direct investment in
Korea, as well as investment abroad or foreign borrowing by Korean
residents, are also restricted. These and other controls hinder the
ability of branches and subsidiaries of foreign companies located in
Korea to obtain investment and working capital and even import
finance.

The Korean government revised the Foreign Exchange Control Act
(FECA) -- renamed the Foreign Exchange Management Act (FEMA) -- in
the fall of 1991 to adopt a "negative list" approach to the
regulation of foreign exchange transactions. The negative list
approach establishes that all foreign exchange transactions are to
be permitted in principle, with exceptional restrictions explicitly
listed in the regulations.

While the move to a negative list is welcome in principle, it
remains to be seen precisely how the FEMA and its associated
regulations will be revised and how many restrictions will remain.
The U.S. Treasury Department has conveyed to the Korean authorities
the view that the negative list of restrictions should be short and
that it should include significant relaxation or elimination of the
underlying documentation requirement and of the restrictions on
deferred payments for imports.


~ 25 -

Taiwan continues to limit the amount of cash an individual can
carry in and out of Taiwan (NT$40,000 or about $1,600). It also
restricts annual non-trade-related capital inflows and outflows to
$3 million per individual or firm (capital flows for trade purposes
are unlimited). The Central Bank should dismantle these limits as
economic fundamentals are enhancing the stability of Taiwan's
markets and reducing the opportunity for speculation.

Since the last report, Taiwan moved to the internationally
accepted practice of using an accrual basis to calculate foreign
exchange positions for banks, and reopened its forward foreign
exchange market in a limited manner. Since this switch to the
accrual method, overbought (long) and oversold (short) limits no
longer have an effect on forward trading. However, significant
restrictions remain that severely constrain forward trading, and
thus limit the role of market forces in exchange rate determination
and negatively affect a potentially major area of business for
foreign banks.

For instance, forward transactions are permitted only for
trade-related purposes. Similarly, foreign exchange liabilities
ceilings, which vary from bank to bank, still affect forward
trading, and also restrict the ability of foreign branches to offer
foreign currency loans in Taiwan and to use swap funding for local
currency lending. In place of these quantitative limits, prudential
concerns in this ‘area could be addressed through other means, such
as through a risk-based capital requirement that would apply to the
financial institution as a whole.

Financial Talks

The Treasury Department and Taiwan's authorities engage in
financial policy talks under the auspices of the American Institute
in Taiwan and the Coordinating Council on North American Affairs.
These talks provide a forum for addressing specific market access
problems encountered by U.S. banks and securities firms in Taiwan,
and for encouraging Taiwan's authorities to undertake further
liberalization of its financial and exchange markets, and of
restrictions on capital flows. However, progress has come slowly.

We believe the authorities have been excessively cautious in
their efforts to increase foreign participation in the financial
sector. As a result, the international financial community is
receiving mixed signals about Taiwan's commitment to develop as a
regional financial center, with foreign participation.


- 21 -

Treasury has pointed out to the Korean authorities that
financial sector liberalization will be required to reduce interest
rates and domestic costs in order to attain the macroeconomic
preconditions laid out in the plan. Most significant and troubling
is that the plan delays addressing fundamental issues such as
accelerating interest rate liberalization and deregulation of
capital controls until later stages. Treasury has also encouraged
the Korean authorities to incorporate into the blueprint a shift to
indirect tools of monetary control. Action by the Korean
authorities in modifying these policies will be necessary for the
Korean economy to remain competitive internationally.

The Korean government has announced that it will consult with
experts from the International Monetary Fund, the International Bank
for Reconstruction and Development, and other research institutes as
it formulates the final two stages of its financial sector
liberalization blueprint. These institutions can provide detailed
advice on formulating a tightly integrated blueprint with more
timely implementation of the entire range of needed liberalization
measures.

The first stage of the blueprint, which includes measures to be
implemented in 1992 and 1993, was completed at the end of March.
Announced actions include a marginal increase in CD issuance limits;
expansion of CD and call market maturities; national treatment on
stock investment for resident foreign financial institutions; some
easing of the underlying documentation requirement; enhancing
regulatory transparency; foreign membership in the Korean Federation
of Banks and the Korea Financial Telecommunications Institute
(facilitating membership in Korea's ATM network); permitting foreign
exchange hedging by foreign securities firms; permitting over-the-
counter bond trading by foreign financial institutions; and
expansion of the daily foreign exchange fluctuation band. While
these measures address to some extent individual difficulties U.S.
financial institutions operating in Korea face, they do not comprise
substantial liberalization of the market.

Through the Financial Policy Talks, Treasury will continue the
dialogue with the Korean Ministry of Finance as Stages II and III of
the blueprint for financial sector liberalization are formulated.
These issues are also addressed in the financial services
negotiations underway in the Uruguay Round of world trade talks.

Assessment

There continues to be no basis at this time for concluding that
Korea is directly "manipulating" its exchange rate, within the
meaning of the legislation. This assessment is based on the
following factors: the emergence of significant trade and current
account deficits in 1991, the decline in Korea's foreign reserves,
the lack of evidence that the Bank of Korea is intervening directly
in the exchange market, and the modest role of other government
owned foreign exchange banks in the market.


- 34 -

PART VII: CONCLUSIONS

Signs of recovery are emerging in the United States, and there
are a number of other positive developments among the major
industrial economies. Inflation has come down and is continuing to
drop significantly this year. Short-term interest rates have fallen
in some G-7 countries. Consumer and business indebtedness problems
are diminishing. And external imbalances are declining in most G-7
countries.

But, in most of the G-7 countries, current indications on
growth are not encouraging. Europe is laboring under the burden of
high real interest rates, reflecting the spillover effects of German
economic policies throughout Europe. Japan's economy is slowing
down as well.

Substandard growth in the major industrial countries generates
substantial costs for the people in these countries, cutting income
and raising unemployment to unacceptable levels. And healthy G-7
economies are also important to support the major economic reform
efforts which are being pursued in the new states of the former
Soviet Union, Eastern Europe, Latin America, and in parts of Africa
and Asia.

In this context, through the G-7 policy coordination process,
the major industrial countries have agreed on the need to intensify
cooperative efforts to strengthen world growth. A concerted program
of action on fiscal, monetary, and structural policies is required.
All major industrial countries must contribute to the program,
although the contribution of each will vary according to individual
circumstances.

At their April 1992 meeting, the G-7 Ministers and Governors
emphasized the need to reduce fiscal deficits in all countries with
large budget deficits through credible medium-term consolidation
strategies. This will reduce demands on private savings to
facilitate needed capital spending.

Countries with large fiscal deficits, relatively high
inflation, excessive wage developments, and tight monetary policy
should work to reduce budget deficits in order to provide scope for
reductions in interest rates. Other countries with large surpluses
and declining growth should be mindful of the possibilities of
strengthening domestic demand through appropriate measures.

In the United States, we will have to renew progress on deficit
reduction, which was interrupted by the temporary surge in deficits
created by the recession and deposit insurance outlays.

Concerning monetary policy, while lower interest rates are
welcome, real interest rates remain high, hampering global
investment and growth. Satisfactory progress on reducing inflation


-~ 16 -

It also cited Korea's trade and current account deficits, the
decline in foreign exchange reserves, and the lack of government
intervention in the foreign exchange market as evidence that Korea
was not directly manipulating the exchange rate. However, Treasury
remained concerned that pervasive exchange and capital controls
continued to hinder market forces in exchange rate determination.

The Treasury Department has held a number of formal discussions
with both Korea and Taiwan on their respective controls on exchange
activities and capital movements, in addition to general banking and
securities matters. Both Korea and Taiwan, in our judgment, must
liberalize significantly the existing discriminatory restrictions
Placed on foreign institutions and generally let market forces play
a greater role in their economies.

China's large external surpluses, including its growing
bilateral trade surplus with the United States, substantial
depreciation of the renminbi, and administrative controls over
foreign exchange allocation and trade have prompted the Treasury
Department to consider the applicability of Section 3004 to China.
The previous three reports concluded that China's trade surplus with
the United states was primarily due to causes other than exchange
rate manipulation. However, it was noted that China's
administrative controls over the external sector were of serious
concern, and that the United States would pursue these issues with
the Chinese authorities.

The remainder of this chapter provides a summary of economic
and exchange rate developments in Korea, Taiwan, and China, as well
as the Treasury Department's assessment of the applicability of
Section 3004 to these economies. (See Table 5.)


The dollar declined less against the yen due to moderating
economic growth in Japan, which stimulated expectations that
Japanese interest rates would also decline. The Bank of Japan
started easing monetary policy in the summer of 1991, and it has
since cut its official discount rate four times (from 6.0 percent to
3.75 percent) in an effort to revive economic activity. Asa
result, Japanese interest rates declined slightly vis-a-vis those of
the United States during this period.

However, downward pressure on the dollar versus the yen was
generated by sentiment among foreign exchange traders that U.S. and
Japanese authorities might implement measures to strengthen the yen,
to combat the growing Japanese trade surpluses. Japanese officials
repeatedly called for a steady appreciation of the yen. Concern
over a coordinated effort to increase the value of the yen
heightened prior to and during President Bush's trip to Asia.

These expectations waned somewhat when a joint statement by
President Bush and Prime Minister Miyazawa concluded that "recent
exchange movements were consistent with current economic
developments." But in mid-January, the dollar declined in response
to purchases of yen by U.S. and Japanese authorities. By mid-
January, slowing U.S. economic growth and fear of central bank
intervention combined to send the yen briefly under ¥ 123 for the
first time in over three years.

Winter to Mid-March 1992: Dollar Rebound

The dollar rebounded sharply starting in late January 1992,
largely based on market expectations of an economic recovery in the
United States and slowing growth in Germany and Japan. Sentiment
regarding the U.S. economy turned more positive in early January, as
traders anticipated a cyclical rebound in economy activity. The
larger than predicted employment gains in December and February and
strong retail sales in January and February were the most important
factors in this regard.

Yen weakness also emerged in this period. The yen was weakened
by political and financial scandals and sagging Japanese equity
prices. Also, the Bank of Japan continued to ease monetary policy
as it appeared that Japanese economic growth was much weaker than
previously expected. However, dollar appreciation versus the yen
was slowed by reports of intervention by Japanese authorities, with
more limited participation by U.S. authorities, in mid-February and
early March. Japanese officials repeatedly expressed displeasure
with the dollar's rise, fueling concerns that the G-7 countries
opposed strong depreciation of the yen.

The dollar's upward momentum against the mark was strengthened
by the possibility of strikes in Germany and by fear of political
and economic instability in Eastern Europe and the former states of
the Soviet Union.


-31-

Swap Rates: At the end of 1991, the average exchange rate for
the renminbi in China's principal swap centers was roughly 5.9 yuan
to the dollar. This represented a nominal depreciation of 3.5
percent since the end of 1990. The depreciation trend has quickened
in 1992: having broken through the 6 yuan level at the end of March
for the first time in over two years, the Shanghai swap center rate
rose (depreciated) to 6.2 yuan by mid-April.

As a resuit of these trends, the spread between the
administered and swap rates has declined to about 10 percent,
compared with 80 percent in 1989.

Foreign Exchange and External Trade System

China's foreign exchange regime must be viewed within the
framework of the country's broader economic policies. According to
Chinese officials, the primary goal of balance of payments
management is to secure enough foreign exchange to pay for priority
imports and debt service, while ensuring a sufficient level of
reserves. The authorities use a number of tools to accomplish this
goal, including both the foreign exchange system and direct controls
over imports and exports. These tools are often overlapping and
redundant.

For example, an importer wishing to obtain foreign exchange for
non-priority imports must obtain not only approval from the exchange
authorities but also an import license from the trade ministry and
explicit approval from the ministry responsible for enterprises
producing domestic substitutes. The various approval processes do
not necessarily operate consistently. Possession of an import
license does not guarantee that an importer will be allocated
foreign exchange, nor does approval of foreign exchange use
automatically entitle the importer to a license.

In practice, it appears that the strict import licensing system
is often the most significant obstacle to the importer's ability to
obtain foreign exchange. Thus an effort to remove foreign exchange
controls without a complementary effort to address direct trade
restrictions is unlikely to result in a significant adjustment in
China's trade flows. At this time, we see little evidence that the
Chinese authorities are undertaking reforms which would address
either of these sets of controls in a fundamental manner.

Assessment

The size and growth of China's trade and current account
surpluses, including its large bilateral trade surplus with the
United States, are developments of major concern. Surpluses of this
magnitude are destabilizing to the global economy and must be
reduced. A principal cause of China's large surpluses is the
network of pervasive administrative controls over external trade,
which severely inhibit China's imports, including those from the
United States.


- 28 -

CHINA

The size and growth of China's external payments surpluses are
a source of serious concern. These surpluses result in large part
from pervasive administrative controls maintained by the Chinese
authorities over the external sector of the economy, including a
highly regulated system of foreign exchange allocation and direct
controls on imports. At the same time, balance of payments
adjustment in China has been hindered by continued devaluation of
the administered exchange rate and controls on exchange rates in the
nation's foreign exchange swap centers.

Since the last report, the Treasury Department has continued
its consultations with the Chinese authorities on foreign exchange
issues. The goals of these discussions have been to seek a more
market-oriented system of foreign exchange allocation and exchange
rate determination in China, and to promote adjustment in China's
balance of payments.

Trade and Economic Developments

China continued to record large external payments surpluses in
1991. The country's global trade surplus moderated slightly from
$9.2 billion in 1990 to $8.9 billion last year. Merchandise imports
are estimated to have increased over 22 percent, reflecting stronger
domestic demand,’ while exports continued to record solid growth of
nearly 18 percent.

China's current account surplus is estimated to have grown from
$12 billion in 1990 to $12.2 billion last year (3.3 percent of GNP).
Largely as a result, foreign exchange reserves climbed 47 percent
from about $30 billion at the end of 1990 to over $44 billion,
equivalent to about 10 months of imports, at the end of last year.

According to U.S. customs data, China's bilateral trade surplus
with the United States also grew in 1991. The surplus rose from
$10.4 billion in 1990 to $12.7 billion last year, an increase of 22
percent. China thereby surpassed Taiwan as the source of the United
States' second largest bilateral deficit (after Japan).

The continued strength of China's exports lies behind the
growing imbalance in bilateral trade. Chinese exports to the United
States grew 25 percent in 1991, significantly faster than the growth
of China's global exports. Footwear, furniture, and toys led the
export drive to the United States, reflecting the continued transfer
of labor-intensive production facilities from Hong Kong and Taiwan
to the mainland. At the same time, U.S. exports to China rose a
strong 31 percent in 1991 after falling in 1990. Much of the gain
can be attributed to a solid recovery in U.S. exports of
fertilizers, organic chemicals, and plastics following China's
lifting of import restrictions on those products last year.


In 1991, external imbalances of several large G+7 countries
narrowed in dramatic fashion. The U.S. current account deficit fell
from $92.1 billion to only $8.6 billion, while Germany's $47.9
billion current account surplus shifted to a $20.6 billion deficit.
Two other countries, Canada and Italy, suffered modest deterioration
in their current account deficits. By way of contrast, Japan's
current account surplus doubled, from an already large $35.8 billion
to $72.6 billion.

The sharp reduction in the U.S. current account deficit last
year was related to three major factors: oil import prices fell (by
about $2.44 per barrel between 1990 and 1991); one-time transfers in
support of Desert Storm, totalling $42.4 billion, were received; and
the U.S. recession induced stagnation in import growth. While none
of these special factors will recur this year, strong export growth,
import moderation, and a strong services balance are likely to
underpin further underlying improvement in the current account
position. (These developments are discussed further in Part IV.)

For (unified) Germany, reunification led to a sharp rise in
domestic demand in the east that (along with Desert Storm associated
transfers) erased the long-standing German surplus. The shift from
surplus to deficit continued until growth slowed in the second
quarter of 1991. Shortly thereafter, the deficit seemed to
stabilize; current forecasts of the deficit are in the $10 to $15
billion range for 1992.

But Japan's external surplus is large and growing, and it is
projected to exceed $90 billion in 1992 and remain very high
thereafter. On a geographic basis, most of the rise in Japan's
trade and current account surpluses has been accounted for by higher
bilateral surpluses with Europe and East Asia; Japan's trade surplus
with the United States rose by only $2.4 billion. Japan notes that
its current account surplus now represents only some 2 percent of
GNP, down from its surplus in the range of 4 percent in 1986-87.
Nevertheless, the sharp rise in Japan's already large surplus is a
matter of systemic concern.

The G-7 Res ponse

Early in 1991, the United States recognized the risks inherent
in the economic outlook, particularly for world growth, and urged
the adoption of policies consistent with the shift in the balance of
risks towards low growth. Since this time, these views on world
growth have been borne out. In spring 1991, the IMF projected real
G-7 growth of 1.3 percent in 1991 and 2.9 percent in 1992. As
noted, G-7 growth in 1991 was only 0.8 percent, and in its latest
projection, the IMF forecast much lower 1992 G-7 growth of 1.7
percent.


Price Trends

Price trends in the G-7 countries, in contrast, are
encouraging, and further substantial improvement is expected.

In 1991, G-7 (excluding eastern Germany) consumer price
inflation fell to 4.2 percent, from 4.8 percent in 1990. This
improvement reflected the decline in oil prices early in the year in
the wake of the Gulf hostilities as well as the more moderate pace
of economic activity. Among the G-7 countries in 1991, France had
the lowest inflation rate, at 3.1 percent, and surpassed its long-
standing goal of reducing its inflation to the level of German
inflation. The United Kingdom showed the most improvement in 1991,
as inflation fell to 5.9 percent from 9.5 percent the year before.
The only G-7 country to show a significant rise in inflation was
(western) Germany, where the rate rose to 3.5 percent, from 2.7
percent in 1990.

For 1992, the IMF expects aggregate G-7 inflation to fall
sharply further to 3.1 percent. Apart from the period from 1986 to
1988, when inflation was even lower due to the 1986 oil price
decline, the anticipated 1992 inflation rate would be the lowest
since 1967.

The decline in inflation is expected to be shared by all
countries, except Germany. U.S. inflation is projected to be in
line with the G-7 average. Meanwhile, Canada is expected to have
the lowest inflation, 1.7 percent, followed closely by Japan at 2.2
percent. For Canada, this outcome would represent a major
improvement over 1991, when inflation rates were pushed up by the
January inauguration of the Goods and Services Tax. Also U.K.
inflation is expected to register a further major decline. In
contrast, (western) German inflation is expected to rise to 3.8
percent.

External Account Developments

External account developments reflect continued reduction in
the U.S. trade deficit, continuation of the German deficits, and
further sharp increases in Japan's already large external surpluses.
Since 1987, when U.S. trade and current account deficits peaked,
over 60 percent of the deterioration in the U.S. external position
of the early 1980s has been reversed. This reversal has been
associated with strong and continuing gains in U.S. competitiveness.
(For a discussion of this issue and its implications for the U.S.
economy, see Part IV.)


-17-
KOREA

The Korean won has further depreciated against the U.S. dollar
in nominal terms since the fall 1991 report, although it has not
depreciated in inflation-adjusted terms. The nominal depreciation
reflects in part the continued adjustment in Korea's external
accounts, where significant deficits emerged in 1991, as well as
higher Korean inflation. However, the exchange rate continues to be
influenced by pervasive foreign exchange and capital controls in
Korea. These controls constrain the forces of supply and demand in
the exchange market, distort trade and investment flows, and
continue to position the authorities to manipulate the exchange rate
through indirect means.

Trade and Economic Developments

Korea's real GNP registered 8.4 percent growth in 1991,
compared to 9.3 percent in 1990, and was in line with Korea's
historic growth rates over the past three decades. Growth in 1991
was led by private consumption and fixed investment, with the
construction and manufacturing sectors registering particularly
strong performances. Inflation remained a concern, reaching 9.7
percent at end-1991. Unemployment was low at just over 2 percent of
the labor force.

Korea's external accounts have undergone substantial adjustment
since 1989. This adjustment -- which has moved the current account
from a surplus of 2.5 percent of GNP in 1989 to a deficit of 3.2
percent of GNP in 1991 -- has resulted largely from an increase in
imports caused by: the strong growth of the domestic economy;
rising wage demands and other factors adversely affecting Korea's
export competitiveness; and rising oil import prices and the longer
term impact resulting from the Persian Gulf crisis.

A current account deficit of $2.1 billion emerged in 1990 and
grew to a record $8.8 billion in 1991 (3.2 percent of GNP). This
included a trade deficit of $7.1 billion on a balance of payments
basis (2.7 percent of GNP), up from a $1.9 billion deficit in 1990.
However, these deficits do not appear to be structural in nature;
external deficits are expected to be eliminated by mid-decade.

According to U.S. customs data, the U.S. bilateral trade
deficit with Korea in 1991 fell to $1.5 billion, down 63 percent
from 1990. This was based on a 7.6 percent increase in U.S. exports
to Korea and an 8.1 percent decline in imports from Korea. In the
first two months of 1992, U.S. Customs data recorded a trade surplus
with Korea of $126.3 million, compared to a surplus of $13.5 million
during the same period in 1991.


PART IIT: DEVELOPMENTS IN FOREIGN EXCHANGE MARKETS
Overview

Since the fall 1991 report the dollar has, on balance, moved
narrowly against most major currencies, continuing to reflect
generally stable exchange market conditions. The yen weakened
somewhat over the period, while the dollar appreciated steadily
against the Canadian dollar. On a real trade-weighted basis, the
dollar has also showed little net movement. Interest rate
considerations related to cyclical economic developments were the
primary factor in exchange rate fluctuations over the period. (See
Table 2 and chart on real trade-weighted exchange rates.)

G-7 economic cooperation contributed to the relative stability
of exchange markets over the period. At their April meeting, the
G-7 Ministers and Governors noted the general stability of markets
and reaffirmed their commitment to close cooperation in exchange
markets, which can contribute to facilitating recovery. They also
noted that the recent decline in the yen was not contributing to the
adjustment process.

Fall 1991: Dollar Decline

Slower than expected U.S. economic growth in the fall of 1991
caused the dollar to depreciate through the end of the year. The
dollar moved steadily lower as the Federal Reserve eased reserve
market conditions in response to slowing economic growth and
sluggish growth of M2 and M3 monetary aggregates. Market
participants judged inflation to be at low enough levels to allow
room for additional reductions in interest rates, adding to downward
pressure on the dollar. A sharp decline in U.S. equities prices in
late November also contributed to the dollar's depreciation. ~-

The dollar declined most sharply versus the mark. While U.S.
rates fell, German monetary policy tightened and German interest
rates rose relative to those of the United States. In mid-December,
the German central bank hiked its key short-term interest rate
(Lombard) from 9.25 percent to 9.75 percent and its official
discount rate from 7.50 percent to 8.00 percent. At the same time
the Federal Reserve was cutting its target for the Federal funds
rate from 4.5 percent to 4.0 percent. At end year, the dollar was
at its lowest levels (DM 1.5015) since just before the outbreak of
hostilities in the Gulf in February 1991, and only moderately above
post-war lows against the mark (DM 1.4433).


~ 23 -
TAIWAN

The Treasury Department is increasingly concerned about the
lack of appreciable adjustment in Taiwan's persistent external
surpluses and the role of the exchange rate in the adjustment
process. The exchange rate does not fully reflect forces of supply
and demand, as market pressure for appreciation continues to be
impeded by limitations on capital flows and on foreign exchange
transactions, and by central bank intervention to dampen the rate of
appreciation and limit speculation. This combination of practices
contributes directly to Taiwan's efforts to generate the trade
surpluses it views as necessary for reserve accumulation and impedes
further adjustment of Taiwan's external imbalances.

Trade and Economic Developments

After declining in 1990, Taiwan's overall external surpluses
rose in 1991. According to its data, Taiwan's overall trade surplus
for 1991 increased to $13.3 billion, a 6.4 percent increase over
1990. Taiwan's global current account surplus increased by 11.6
percent in 1991 to $12.0 billion, and remained at 6.7 percent of
GNP.

Taiwan's bilateral trade balance with the United States
declined at a modest pace in 1991. According to U.S. statistics,
the U.S. trade deficit with Taiwan in 1991 was, at $9.8 billion,
11.9 percent lower than in 1990. Imports from Taiwan increased by
1.8 percent while U.S. exports to Taiwan increased by 14.8 percent.
In addition to slow growth in the U.S. economy, factors such as the
relocation of Taiwan's labor-intensive export industries overseas,
rising wages and production costs, and inflationary pressures
continue to play an important role in reducing Taiwan's trade
surplus with the United States.

The recent decrease in Taiwan's bilateral trade surplus with
the United States is likely to slow or reverse as the United States
recovers from recession. Taiwan's most recent data indicate that
the bilateral trade surplus increased to $2.6 billion in the first 3
months of 1992, compared to $1.7 billion in the corresponding period
in 1991.

Taiwan's official foreign exchange reserves, already the
world's largest, increased significantly over the last year to reach
$83.2 billion at the end of February 1992 (sufficient to cover more
than 17 months of imports), compared to $76.4 billion (14 months of
imports) at the time of the fall 1991 report. For purposes of
comparison, the industrial countries hold non-gold reserves
equivalent to 2-3 months of import cover.


EMBARGOED FOR RELEASE
AT 10:00 A.M. EDT
MAY 12, 1992

DEPARTMENT OF THE TREASURY
REPORT TO THE CONGRESS
ON
INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICY

MAY 1992


-10-

PART IV: U.S. BALANCE OF PAYMENTS

U.S. external deficits continued to decline in 1991, the fourth
consecutive year of improved performance. This performance was
influenced by both cyclical developments and the effects of Desert
Storm, but it also continued to reflect the underlying strength of
U.S. competitiveness. This strength should again be reflected in
further underlying improvement in 1992 external performance. (See
Tables 3 and 4.)

Developments in 1991

Trade balance: The U.S merchandise trade deficit declined in
1991 for the fourth consecutive year, to $74 billion from $108
billion in 1990. From the peak deficit in 1987 ($160 billion), this
represents a cumulative adjustment of $86 billion -- reducing the
imbalance by more than one-half over the course of 4 years.

Exports grew by $27 billion in 1991, or 7 percent in value
terms, reaching a total of $417 billion. This percentage growth --
reflecting an 8 percent increase in export volume, coupled with a
slight decline in export prices -- is approximately the same result
as in 1990 but under significantly more adverse circumstances.
Growth in real imports by other countries slowed in 1991, so that
maintenance of real growth of exports implies an increase in the
U.S. share of world trade.

As in previous years, capital goods were a major element of
strength in U.S. export performance, accounting for approximately
half ($13 billion) of the increase in dollar value. Civilian
aircraft exports slowed while computer equipment grew at the same
pace as last year. In contrast, exports of oil-drilling equipment,
industrial pumps, and hospital equipment all accelerated.

On a geographic basis, the pattern of U.S. exports shifted in
response to strong economic growth in Latin American and East Asia
and slowing growth in Japan and Western Europe. One third of the
increase in exports went to Latin America, and this area replaced
Europe as our fastest growing market. Exports of consumer goods,
industrial supplies and materials, and even foods, feeds and
beverages did nearly as well as capital goods in these markets.

Imports amounted to $490 billion in 1991, down about $8 billion
from their 1990 level. The decline was more than accounted for by
an $11 billion decline in petroleum imports. The major factor was
the 13-1/2 percent price decline in oil prices, although volume
declined also. Non-oil imports, in contrast, were almost entirely
unaffected by price rises, with the $3 billion value increase
reflecting volume growth. Classified by end-use category, the
increase in overall imports reflected increases in capital goods and
consumer non-durables categories.


Mid-March to Mid-April

The dollar's appreciation paused from mid-March through
mid-April. Despite signs of reviving economic activity in the
United States, exchange traders remained cautious about buying
dollars until unambiguous signs of a strong rebound emerged.

Slowing U.S. money supply growth and only modest gains in some other
economic indicators added to traders' caution.

Moreover, market participants judged that German interest rates
were more likely to rise than fall. These perceptions were fuelled
by statements from German monetary officials indicating that there
was little prospect of an interest rate reduction in the near term,
because of high money supply growth, high bank lending levels, and
high budget deficits.

The U.S. dollar appreciated against the Canadian dollar from
the last report until late March, partly as exchange market
participants responded to slower than expected Canadian growth. The
U.S. dollar reached its highest level (CDOL 1.2002) in over two
years, before depreciating slightly during April.


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- 30-

The authorities also restrict access to the nation's swap
centers for prospective buyers and sellers of foreign exchange.
Domestic firms are permitted to trade only retention quotas among
themselves rather than foreign exchange itself. In addition, there
are restrictions on the purposes for which foreign exchange obtained
in the swap centers may be used. (According to rules published by
the exchange authorities, foreign exchange may be purchased in the
swap centers only for the importation of goods deemed by the state
to be "necessary" for China's development.) Other restrictions
include limitations on trading among different swap centers around
the country and on non-trade-related foreign exchange transactions.

Together these controls on foreign exchange allocation serve to
distort and restrict the underlying demand for and supply of foreign
exchange in the swap centers. This in turn affects the swap rate
itself, which therefore cannot be called a market-determined
exchange rate. Moreover, the authorities are positioned to
influence the swap rate more directly by intervening in the market
er shutting down trading if fluctuations in the rate extend beyond
set bands.

For a more detailed description of China's dual exchange rate
system, see Treasury's fall 1991 exchange rate report.

Exchange Rate Developments

Administered Rate: On April 10, 1992, the official rate of the
renminbi stood at 5.48 yuan to the U.S. dollar. This represents a
nominal depreciation against the dollar of roughly 4 percent since
the adoption of the "managed float" system in April 1991, nearly 5
percent since the last major devaluation in November 1990, and some
47 percent since the first of these reports was issued in October
1988 (when the rate stood at 3.72 yuan to the dollar). The recentTM
exchange rate trends reflect the Chinese government's new policy of
gradually devaluing the renminbi in small steps, rather than
undertaking large, periodic devaluations.

From 1986 to 1989, the nominal devaluation of the renminbi
against the dollar was not sufficient to offset the impact of rising
prices in China. (Inflation averaged 7 percent in 1987, 19 percent
in 1988, and 18 percent in 1989.) In real terms, therefore, the
renminbi appreciated against the dollar over this period. However,
as a result of the significant nominal devaluation since the end of
1989, as well as lower inflation in China over this period (2-5
percent), there has been renewed depreciation in real terms against
the dollar over the past two to three years.


- 29 -

The bilateral trade imbalance has continued to grow in 1992.
In the first two months of this year, the Chinese surplus reached
$2.6 billion, compared with $1.7 billion in the same period of 1991.
A nearly 40 percent surge in Chinese exports to the United States in
the first two months accounts for the widening trade gap.

Domestically, China's real GNP is estimated to have grown 7
percent in 1991, following growth of 5.2 percent in 1990.
Inflation, as measured by the consumer price index (which may
understate inflation in urban areas), averaged only 2.1 percent in
1991 but is expected to reach 5 percent in 1992 as the domestic
recovery continues.

In early 1992, the Chinese authorities announced a renewed
commitment to broad economic reform, adjusting the policy line in
place since late 1988. According to official pronouncements,
further opening of the external sector of the economy is a central
pillar of the new reform program. However, the actual
implementation of the new program, as well as its application to the
foreign exchange system in particular, remains to be seen.

Exchange Rate System

China officially has a dual exchange rate system. The
administered rate, set daily by the central exchange authorities,
generally applies to trade transactions under the state plan. There
is also a second rate determined in foreign exchange adjustment
("swap") centers, where joint ventures and other foreign invested
enterprises, domestic entities that are allowed to retain rights to
their foreign exchange earnings, and certain individuals may buy and
sell foreign exchange or foreign exchange quotas at rates
established through a regulated auction system. Outside the
official dual rate system, there is a sizeable, but diminishing,
black market for foreign exchange.

The authorities use a variety of means to control the
allocation of foreign exchange under the dual rate system. Foreign
currency earned by a state enterprise must initially be surrendered
to the Bank of China in exchange for local currency at the
administered rate. After each sale, the government gives the
enterprise a foreign exchange quota according to a retention ratio
determined by the government. In 1991, it was announced that this
ratio had been universally revised to 80 percent of foreign exchange
earnings; however, it appears that retention ratios continue to vary
greatly among regions, firms, and products, and many exporters
appear to retain rights to considerably less than 80 percent of
their foreign exchange earnings.


In meetings with European officials in April 1991 and in the
June 1991 G-7 meeting, Secretary Brady stressed the need to forge a
growth-oriented policy strategy, building on the substantial gains
made in reducing G-7 inflation. In these meetings, the United
States emphasized that the importance of such a strategy extends
beyond improving the performance of G~7 economies themselves. It
can create a global environment that supports the struggle to create
market economies in the new states of the former Soviet Union and in
Eastern Europe; and it can help facilitate the economic reform
process in Latin America and in parts of Africa and Asia.

In light of increasing concern about the timing and strength of
economic recovery, in January 1992 the G-7 Finance Ministers and
Central Bank Governors agreed to intensify cooperative efforts to
strengthen world economic growth. At the January meeting, each
government set out specific economic policy objectives geared to
improving economic performance.

At the April G-7 meeting, participants noted the emergence of
signs of recovery in some of the G-7 countries. They also noted
additional positive signs: significant declines in inflation in
most of the G-7 countries; substantial cuts in short-term interest
rates in some of G-7 countries; reductions in consumer and business
indebtedness problems; and falling external imbalances in most G-7
countries. But they remained concerned that overall aggregate G-7
growth would be inadequate for 1992, with adverse implications for
reducing unemployment and meeting the challenges presented by reform
movements in much of the rest of the world.

Against this background, they agreed that all countries with
large budget deficits should pursue credible medium-term fiscal
consolidation in order to create the basis for lower real interest
rates and reduce government demands on private savings to facilitate
needed capital spending. Countries with large fiscal deficits,
relatively high inflation, excessive wage developments and tight
monetary policy should follow a balanced policy approach to
facilitate improved growth. They agreed that, in other countries,
with large surpluses and declining growth, policymakers should be
mindful of the possibilities of strengthening domestic demand
through appropriate measures.

The G-7 also stressed the need for vigorous structural reforms
which can make a considerable contribution to growth. Reductions in
subsidies, labor market rigidities, and trade barriers promote
better resource allocation, greater efficiency, and growth without
inflation. In this regard, the Ministers and Governors reemphasized
the importance of bringing the Uruguay Round to a rapid and
successful conclusion.


~ 20 -

Financial Policy Talks

Capital and exchange controls and other financial policy issues
are the subject of the ongoing Financial Policy Talks between the
Treasury Department and the Korean Ministry of Finance. Four formal
rounds of these talks, and several informal rounds, have been held
since February 1990, most recently in March 1992. The purpose of
the talks is to provide a mechanism for addressing specific market
access problems that U.S. banks and securities firms face in doing
business in Korea, and for encouraging broader liberalization of
Korea's financial, capital, and exchange markets. The importance of
financial issues to the U.S.-Korean economic relationship was
reflected by President Bush's and President Roh's agreement in
January 1992 to resolve differences in this area.

Progress in the Financial Policy Talks over the last two years
has been limited. The Ministry of Finance has taken some concrete
measures to improve the treatment of foreign financial institutions
in Korea. These steps include increases in the ceiling on issuance
of certificates of deposit (CDs) by foreign banks, elimination of
the ceiling on foreign banks' paid-in capital in Korea, and
permission for foreign securities firms to establish branches in
Korea.

However, significant denials of national treatment for foreign
financial institutions in Korea remain. In particular, foreign
banks continue to face severe difficulties in securing adequate
access to local currency funding sources to service their
traditional clients. The marginal increases in CD limits, while
helpful, have been inadequate to address the local currency funding
problem; the ceilings should be substantially expanded or eliminated
altogether.

At the same time, discrimination against foreign banks in the
interbank call money market persists, while another potential won
funding source, the trust business, is hindered by the requirement
that a high percentage of trust deposits be invested in low-interest
government bonds. In the securities area, onerous criteria for
branch establishment and a limited scope of permissible activities
effectively limit the attractiveness of the Korean market for
foreign securities firms.

At the March 1992 Financial Policy Talks, the Ministry of
Finance presented an inter-agency workplan for developing a three-
staged blueprint for comprehensive liberalization of the financial
sector. Treasury welcomed the commitment to formulate such a
blueprint as a positive step.

However, concerns remain about the approach of the initial
workplan. In particular, the pace of implementation of later stages
is determined by macroeconomic preconditions, including a balance or
surplus in the current account, lower inflation, and a narrowing of
domestic and international interest rate differentials.


- 37 -

States increased sharply, from $10.4 billion in 1990 to $12.7
billion in 1991.

A principal cause of China's large external surpluses is
China's network of pervasive administrative controls over external
trade, which severely inhibit China's imports, including those from
the United States. But it is Treasury's present judgment that
Chinese authorities also employ exchange rate policy to help attain
their balance of payments objectives. After several large, periodic
adjustments of the administered exchange rate, the authorities have
devalued the renminbi gradually by nearly 5 percent since the last
major devaluation in 1990, and by 47 percent since October 1988 (the
time of the first of these reports). The authorities are using
administered exchange rate devaluation as a substitute for badly
needed measures to eliminate domestic price distortions that
undermine the competitiveness of Chinese producers.

In addition to devaluing the administered rate, the Chinese
authorities are also influencing the exchange rate in the nation's
swap centers, through controls on access to the centers and on the
operation of the centers, so that the rate does not fully respond to
market forces. The fact that the average swap center rate has
fluctuated relatively little over the past two years, despite the
sharp increase in China's surpluses and reserves, is, in Treasury's
view, evidence of the extent of control exerted in the swap centers.

Given the size of China's external payments surpluses and
reserves and based on the information now available to Treasury,
Treasury views continued devaluation of the administered exchange
rate and control of swap center rates, in conjunction with pervasive
trade and exchange controls, as an effort by China to frustrate
effective balance of payments adjustment. Therefore, within the
meaning of Section 3004 of the Omnibus Trade and Competitiveness Act
of 1988, Treasury now considers China to be manipulating its
exchange rate.

To promptly effect adjustment of China's balance of payments,
China should suspend further devaluation of the administered rate
until far-reaching reform of China's trade, exchange, and domestic
price regimes has been undertaken, and take a number of concrete
measures (cited in the previous chapter) to permit exchange rates,
including the swap center rate, to reflect market forces more fully.

The Treasury Department launched discussions with the Chinese
authorities on these and other issues in the summer of 1991. The
Department intends to use this forum to seek Chinese reforms which
will bring about a market-oriented system of exchange rate
determination and foreign exchange allocation in order to help
permit effective balance of payments adjustment. At the same time,
China's trade restrictions are the subject of a U.S. Government
investigation initiated last year under Section 301 of the 1988
Trade Act.


~ 38 -

APPENDIX

TABLES AND CHART

Economic Performance of Key Industrial Countries
Measurements of Dollar Movements Versus G-7 Currencies
Summary of U.S. Current Account

Summary of U.S. Capital Account

Asian NIEs and China: Trade and Currency Changes

Chart: Real Trade-Weighted Exchange Rate Indices for the
Dollar, Yen, and DM


-~26-

In addition to the constraints imposed by Taiwan's controls on
foreign exchange transactions and capital flows, U.S. financial
services firms continue to face significant denials of national
treatment. In many instances, there is outright discrimination
against foreign banks and securities firms. For example, the number
and location of additional foreign bank branches is still
restricted. Foreign banks also cannot deal directly in short
term-money instruments. Substantial restrictions are placed on
foreign institutional investment in the stock market, while
investments by foreign individuals are prohibited altogether.
Foreign firms cannot manage private pension funds.

Assessment

Taiwan's overall external surpluses increased in 1991, and
substantial adjustment does not appear likely this year. While
Taiwan's bilateral trade surplus with the U.S. declined somewhat in
1991, we do not expect this decline to be sustained over 1992 as
growth resumes in the U.S. economy in coming months. Taiwan's
foreign exchange reserves are also excessive, especially given the
investment needs of the economy. These large and growing external
surpluses indicate a need for substantial adjustment. Appreciation
of the NT dollar must play a major role in this process.

In this context, official actions that are impeding market
adjustment of the exchange rate are a matter of increasing concern.
These actions may be motivated by the authorities' concern about a
number of factors, including the declining share of total exports
going to the U.S., a desire to maintain their large stock of foreign
exchange reserves, and fear of speculation.

In addition to official action, limitations on foreign exchange
transactions and capital flows remain far too restrictive and impede
the full operation of market forces in exchange rate determination.
Given the advanced state of economic development on Taiwan, and the
stated desire of Taiwan's authorities to develop Taiwan as a
regional financial center, such limitations should be completely
lifted.

Under Section 3004 of the Omnibus Trade and Competitiveness Act
of 1988, the Secretary of the Treasury must "consider whether
countries manipulate the rate of exchange between their currency and
the U.S. dollar for purposes of preventing effective balance of
payments adjustments or gaining unfair advantage in international
trade." It is Treasury's present judgment that Taiwan is
manipulating its exchange rate within the meaning of the
legislation. In the context of Taiwan's continued large bilateral
and overall trade surpluses and foreign exchange reserves, recent
official actions that directly interfere with the role of market
forces in exchange rate determination, such as intervention in the
foreign exchange market and imposition of controls on capital
inflows, must be viewed as an effort by the authorities to inhibit
effective balance of payments adjustment.


-~2<

PART II: ECONOMIC POLICY COORDINATION
AND THE ECONOMIC SITUATION IN THE INDUSTRIAL COUNTRIES

Since the mid-1980s, the Group of Seven (G-7) has worked
intensively to achieve consistent and compatible policies and
performance necessary for sustained growth with price stability,
reduced external imbalances and greater stability of exchange
markets. The economic policy coordination process grew directly out
of each country's growing recognition that, in an interdependent
world, economic performance at home depends in large part on
economic developments in the rest of the world, and particularly in
the major industrial economies.

As recent experience has once again demonstrated, the
formulation of economic policies -- especially fiscal and monetary
policies -- by individual G-7 countries has a major impact on the
economies of the others. Moreover, no individual G-7 member acting
alone can overcome economic difficulties which affect all of the G-7
economies.

The G-7 record in the second half of the 1980s was one of
success on a broad range of objectives. The G-7 countries achieved
the longest peacetime expansion on record in the context of lower
inflation, reductions in external imbalances, and more stable
exchange markets. In addition, as the usefulness of the G-7 process
became increasingly evident, it was expanded to cover a wide range
of important international economic issues as they emerged.

Beginning in 1991 and continuing into 1992, the G-7 Finance
Ministers and Central Bank Governors have confronted two major
challenges: a growth slowdown in their own economies and the need
to foster a global environment which supports sweeping economic
reforms in Latin America, Eastern Europe, and the new states of the
former Soviet Union.

Below is a description of the current economic situation and
prospects in the major countries, and the G-7's response. (See
Table 1.)

Growth

This year, on an aggregate basis, the major industrial
countries are experiencing their third straight year of substandard
growth.

After the G-7 slowdown in 1990, growth in 1991 was the slowest
in a decade. Aggregate GDP/GNP growth in the major industrial
countries (includes eastern Germany) fell to 0.8 percent in 1991,
from 2.5 percent in 1990. The worst growth quarter in 1991 was the
fourth, when aggregate G-7 output was flat.


- 13 -

secondary factors have affected external performance significantly,
including oil price swings, the debt problems in Latin America, and
the emergence of the Asian "Tigers" as large-scale suppliers of
basic manufactures.

The sharp swings are reflected in export and import data.
Exports (in value terms) grew only 1-1/2 percent annually during
1980-87, but by over 13-1/2 percent per year during 1987-91. The
dramatic improvement in export growth characterized all major
product groups and geographic areas except autos and parts and
Canada where growth was still positive but less striking.

Growth in value of total imports showed a less dramatic shift,
but there were important changes in particular products/areas.
After double-digit annual increases in 1980-87, imports of autos and
parts were virtually flat between 1987 and 1991. While this
reflected the Japanese Voluntary Restraint Agreement initially, in
more recent years the principal factor has been the effect of the
establishment of new plants in the U.S. by Japanese firms.

More generally, growth in imports of manufactures (autos,
capital and consumer goods) fell by over 2/3 (5 percent annually
versus 15-1/2 percent) between the two periods in question. By the
same token, growth in imports from Japan, Europe and the NIES grew
by less than 2 percent annually in 1987-91, compared with nearly 14
percent between 1980-87.

The Relation Between U.S. Growth and the External Sector

The robust external performance since 1987 is yielding major
benefits for the U.S. economy, particularly growth and jobs. The
table below shows that in recent years, the U.S. export sector has
been among the most dynamic in the U.S. economy and has made an
enormous contribution to U.S. growth.

Net_Exports & U.S. Growth
(Billions of 1987 dollars)

1987 1988 1989 1990 1991
Export of Goods
& Services 364.0 421.6 469.2 505.7 537.8
Imports of Goods
& Services 507.1 525.7 544.9 557.0 558.7

Change in Net
Exports from Previous Period

+ 12.1 + 39.0 + 28.3 + 24.4 + 30.4
GDP 4540.0 4718.6 4836.9 4884.9 4848.8

(Change in GDP from
Prior Year) (135.5) (178.6) (118.3) (48.0) (- 36.1)


-15-

PART _V:__ASTAN NEWLY INDUSTRIALIZED
jOMIES Es) AND CHINA

Overview

Under Section 3004 of the Omnibus Trade and Competitiveness Act
of 1988, the Secretary of the Treasury is required to "...consider
whether countries manipulate the rate of exchange between their
currency and the United States dollar for purposes of preventing
effective balance of payments adjustment or gaining unfair
competitive advantage in international trade. If the Secretary
considers that such manipulation is occurring with respect to
countries that (1) have material global current account surpluses
and (2) have significant bilateral trade surpluses with the United
States, the Secretary of the Treasury shall take action to initiate
negotiations...on an expedited basis...for the purpose of ensuring
that such countries regularly and promptly adjust the rate of
exchange between their currencies and the United States dollar."

It was concluded in the October 1988 report that Taiwan and
Korea "manipulated" their exchange rates, within the meaning of the
legislation. Pursuant to Section 3004, Treasury initiated bilateral
negotiations with Taiwan and Korea for the purpose of ensuring that
these two economies regularly and promptly adjust the rate of
exchange between their currencies and the U.S. dollar to permit
effective balance of payments adjustment and to eliminate unfair
competitive advantage.

Treasury concluded that Taiwan in fall 1989 and Korea in spring
1990 were no longer directly "manipulating" their currencies within
the meaning of the legislation. These findings were reaffirmed in
fall 1990 and spring 1991. However, it was noted that Taiwan's
external surpluses remained large and that, in both Taiwan and ~<
Korea, exchange rate policy would continue to have an important role
to play in promoting economic adjustment.

In addition, the reports concluded that in Korea,
liberalization of remaining exchange and capital controls was
required to improve the functioning of the exchange markets and
assure the full operation of market forces in exchange rate
determination. In Taiwan, foreign exchange and capital controls
were cited as impediments to the operation of market forces in
exchange rate determination.

The fall 1991 report noted that Taiwan's external surpluses
continued to remain large, and that controls on capital and flows
and foreign exchange transactions, along with reported central bank
intervention to dampen the rate of appreciation, hindered the
operation of market forces in exchange rate determination. The
report determined that Taiwan's exchange rate policies and foreign
exchange and capital controls contributed to indirect "manipulation"
of its currency.


PART _I: INTRODUCTION

Section 3005 of the Omnibus Trade and Competitiveness Act of
1988 (Pub. L. 100-418) requires the Secretary of the Treasury to
submit to the Committee on Banking, Housing, and Urban Affairs of
the Senate and the Committee on Banking, Finance and Urban Affairs
of the House of Representatives an annual report each October 15 on
international economic policy, including exchange rate policy. In
addition, Section 3005 requires that the Secretary shall provide a
written update of developments six months after the initial report.
Annual reports, pursuant to Section 3005, have been submitted since
1988. This is the fourth update of developments to be submitted to
Congress.

Part II of this report reviews the economic situation in the
industrial countries and efforts by major countries to coordinate
economic policies. Part III analyzes developments in the foreign
exchange markets, including the dollar's movement relative to the
currencies of major trading partners and U.S. foreign exchange
market intervention. Part IV examines the U.S. balance of payments
situation and related economic issues. Part V, prepared pursuant to
Section 3004 of the Omnibus Trade and Competitiveness Act of 1988,
considers whether countries manipulate the rate of exchange between
their currencies and the U.S. dollar within the meaning of the
legislation. In this connection, the report reviews and assesses
developments and policies in Taiwan, Korea, and China. The final
chapter provides conclusions on the principal issues discussed in
the report.


- 36 -

In Taiwan, substantial adjustment of external imbalances has
yet to be achieved. Taiwan's overall current account surplus rose
11.6 percent in 1991 to $12 billion, or 6.7 percent of GNP, and is
likely to rise further in 1992. Foreign exchange reserves, already
the world's largest, rose significantly last year and reached $83.2
billion at end-February 1992 (sufficient to cover more than 17
months of imports). While Taiwan's bilateral trade surplus with the
United States declined from $11.1 billion in 1990 to $9.8 billion in
1991, this shrinkage is expected to slow or reverse this year. U.S.
data indicate that our trade deficit with Taiwan rose 6 percent in
the first 2 months of 1992. From the time of the fall 1991 exchange
rate report to its peak in mid-February, the New Taiwan (NT) dollar
appreciated against the dollar by 5.5 percent. But in the period
from mid-February to mid-April, the NT dollar reversed its upward
trend and depreciated by 1.3 percent.

In the months since the last report, the Central Bank
reportedly intervened in the exchange market to moderate upward
pressure on the NT dollar to boost export competitiveness.
Moreover, earlier this year, the authorities temporarily imposed
greater controls over inward remittances of foreign exchange by
foreign securities firms. These actions were taken in addition to
existing restrictions on foreign exchange transactions and capital
flows, which impede the full operation of market forces in exchange
rate determination and which have been the subject of ongoing
bilateral discussions.

In the context of Taiwan's continued large bilateral and
overall trade surpluses and foreign exchange reserves, appreciation
of the NT dollar must play a major role in achieving substantial
external adjustment. Recent official actions that directly
interfere with market forces in exchange rate determination must be
viewed as an effort by the authorities to inhibit effective balance
of payments adjustment. Therefore, within the meaning of Section
3004 of the Omnibus Trade and Competitiveness Act of 1988, it is
Treasury's present judgment that Taiwan is manipulating its exchange
rate.

To promptly effect adjustment in its external imbalances,
Taiwan's authorities should: cease intervention in the exchange
market; significantly reduce controls on capital flows, while making
a commitment to phase out controls completely; and eliminate limits
on foreign exchange activities in the banking sector. The Treasury
Department will use ongoing bilateral discussions to negotiate for
these reforms, as well as for improved treatment for U.S. financial
institutions in Taiwan.

China's overall current account surplus remained very large in
1991, growing by $200 million to $12.2 billion (3.3 percent of GNP).
By end-1991, China's foreign exchange reserves had risen by 47
percent to over $44 billion (equal to 10 months of import cover).

At the same time, China's bilateral trade surplus with the United


- 24 -

Based on data for the first quarter of 1992, the current
account surplus is likely to increase further in 1992. The economy
should continue to grow rapidly; real GDP is expected to expand by 7
percent in 1992, following 7.2 percent growth in 1991. Inflation
averaged 3.5 percent in 1991 and has increased to 4.4 percent in
March 1992.

Exchange Rate Developments

The cumulative appreciation of the NT dollar since the last
report is 4.2 percent. The currency appreciated 5.5 percent to
reach a record high in mid-February. It has since depreciated by
1.3 percent through April 10, when the exchange rate stood at
NT$25.299/USS1.

In the months since the last report, the Central Bank
reportedly continued to intervene in the exchange market to moderate
upward pressure on the NT dollar in order to control speculation and
to maintain or improve the competitiveness of the export sector in
response to political pressure. In addition, market pressures for
appreciation have been resisted through the temporary imposition
earlier this year of greater controls over inward remittances of
foreign exchange by institutional investors, apparently because of
pressure on the NT dollar.

Given the strength of Taiwan's economic fundamentals -- strong
economic growth, the large and growing trade and current account
surpluses, large and growing foreign exchange reserves, and a stable
political environment -- market pressures for further appreciation
of the NT dollar are likely to persist over the medium term.

Exchange Rate System

While Taiwan has instituted a number of measures over the past
several years to liberalize the exchange rate system and reduce
capital controls, as previous reports have noted, the exchange rate
system does not allow the full effect of market forces to be
reflected in the exchange rate. Though the rate for foreign
exchange transactions is freely determined between buyers and
sellers, intervention by the Central Bank to moderate the pace of
appreciation and continued limitations on foreign exchange
transactions and capital flows impede the full operation of market
forces in exchange rate determination.

These practices are inappropriate and inconsistent for an
economy with the stated objective of becoming a regional financial
center. Several of the limitations are especially harmful to
foreign banks and securities firms.


Part IT

Part II

Part III
Part IV

Part V

Part IV

Appendix:

TABLE OF CONTENTS

Introduction

Economic Policy Coordination and the
Economic Situation in the Industrial
Countries

Developments in Foreign Exchange Markets
U.S. Balance of Payments

Asian New Industrialized Economies (NIEs)
and China

- Korea
-- Taiwan
-- China
Conclusion

Tables and Charts

B
wy
B

10

15

17

23

28

34

38

lo


- 32 -

In Treasury's view, the Chinese authorities also employ
exchange rate policies to help attain their balance of payments
objectives. The administered rate of the renminbi has been
continuously devalued since 1989, first in large, periodic
adjustments, more recently in small, gradual steps. According to
the authorities, the devaluation policy is designed to eliminate
costly export subsidies and to unify China's dual exchange rates.
In this manner, the authorities are using exchange rate policy as a
substitute for badly needed measures to eliminate domestic price
distortions that undermine the competitiveness of Chinese producers
and make export subsidies necessary. As for unification, this is a
desirable goal in the long run; however, in the absence of
fundamental liberalization of China's trade and domestic price
systems, unification will not result in an exchange rate that
reflects the underlying relative cost of China's products.

In addition to devaluing the administered rate, the Chinese
authorities also influence the exchange rate in the nation's swap
centers by controlling both the demand for and supply of foreign
exchange in the centers. As a result, the exchange rate does not
act in response to market forces as a principal determinant of
China's trade flows. The fact that the average swap center rate has
fluctuated relatively little over the past two years,
notwithstanding the tremendous changes in China's trade patterns and
build-up of foreign exchange reserves, is evidence that some form of
control is being exerted by the authorities in the swap centers.
This control in turn impedes effective balance of payments
adjustment in China.

Under Section 3004 of the Omnibus Trade and Competitiveness Act
of 1998, the Secretary of the Treasury must "consider whether
countries manipulate the rate of exchange between their currency and
the U.S. dollar for purposes of preventing effective balance of
payments adjustments or gaining unfair competitive advantage in
international trade." It is the present judgment of Treasury that
China is manipulating its exchange rate within the meaning of the
legislation. Given the size of China's external payments surpluses
and the level of its foreign exchange reserves, continued
devaluation of the administered exchange rate and control of swap
center rates must be viewed as an effort by the authorities to
frustrate effective balance of payments adjustment.

Until far-reaching reform of China's trade and domestic price
regimes has been undertaken, further devaluation of the administered
rate should be suspended. At the same time, the Chinese authorities
should take a number of concrete measures to permit the exchange
rate to reflect market forces more fully. These include steps to
make foreign exchange allocation automatic for companies which
either have import licenses or are authorized to import without
licenses, thus removing a redundant layer of control.


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- 27 -

To promptly effect an appropriate adjustment in its external
surpluses, the authorities should take steps that would allow the
exchange rate to reflect fully market forces. Specifically, they
should cease intervention in the exchange market, significantly
reduce controls on capital inflows and outflows, while making a
commitment to phase out the controls completely, and eliminate
limits on foreign exchange activities in the banking sector.

Given our concerns, we will continue to monitor carefully the
pace of adjustment in the overall and bilateral trade balance and
the role of currency appreciation in that process. We will use our
ongoing discussions to negotiate an end to practices that inhibit
the operation of market forces in exchange rate determination,
capital flows, and foreign exchange transactions. We will also
continue to seek improved treatment for U.S. financial institutions.


-11-

Reflecting these import and export developments by product
and area, the trade surplus vis-a-vis Europe increased
substantially, to nearly $15 billion compared with $2 billion in
1990. The deficit vis-a-vis the Asian NIEs also improved, with the
bulk of the improvement reflecting export gains as was the case for
the balance with Western Europe. However, the deficit in trade with
Japan widened in 1991, to $44 billion from $41 billion, as imports
from Japan rose slightly while exports to Japan were flat.

Current account balance: The 1991 current account deficit, at
$9 billion, was under $10 billion for the first time since 1982.
This result overstates the underlying trend improvement in the
current account, because it includes $42 billion in support from
allies in connection with Operation Desert Storm.

However, even abstracting from these non-recurring receipts,
the current account deficit declined substantially in 1991, to the
$50 billion range, compared with $92 billion in 1990. In addition
to the $34 billion reduction in the trade deficit, the surplus on
services rose by $10 billion, to $36 billion. Investment income
declined slightly, while transfers other than those associated with
Desert Storm were roughly unchanged.

Capital account: There were substantial changes in the
pattern of private capital flows between 1990 and 1991. Securities
transactions showed the largest change, with very substantial
increases in both U.S. purchases of foreign securities, and foreign
purchases of U.S. securities. U.S. purchases of foreign securities
rose by $18 billion, primarily reflecting increases in stock
purchases. Foreign purchases of U.S. securities, after falling to
nearly zero in 1990, rebounded strongly to over $52 billion. By
contrast with the outflow, securities inflows were heavily weighted
to purchases of bonds, while stocks went from net sales in 1990 to
net purchases in 1991.

Foreign direct investment inflows in 1991 continued to decline
from their extremely high levels of 1988-9, though the decline from
1990 to 1991 was only $15 billion, compared with a $35 billion
decline between 1989 and 1990. U.S. direct investment abroad
increased by about $30 billion in 1991, roughly the same as in the
previous two years. Net banking transactions showed a $12 billion
outflow -- probably in part reflecting retrenchment by Japanese
banks -~ compared with net inflows in the $12-15 billion range for
the previous two years.

Prospects for 1992

Trade balance: Trade data for 1992 are available only for
January and February, on a Census basis. The two-month average
deficit, roughly $4-1/2 billion per month, is nearly $2 billion
below the monthly average for the same period in 1990. Exports have
been running over $2 billion above year-earlier levels, while
imports are running $1 billion or so higher.


~ 14 -

Between 1987 and 1991, exports of goods and services grew by
$174 billion (in inflation-adjusted dollars). This increase in
exports accounted for over 56 percent of U.S. GDP growth.
Subtracting (slower) import growth over the same period, the change
in net exports of goods and services accounted for 40 percent of
overall U.S. growth. Furthermore, net exports have grown every year
since 1987, contributing positively to overall U.S. growth.

In particular, the external sector significantly moderated the
trough of the current economic slowdown. In the depths of the
recession, the fourth quarter of 1990 and the first quarter of 1991,
net exports of goods and services made a substantial positive
contribution to U.S. economic activity. While the domestic economy
(in constant dollars) shrank a total of $126.5 billion in this
period, real GDP as a whole fell only $79.3 billion because of the
$47.2 billion boost provided by net exports.

There was, to be sure, substantial quarterly variation in real
net exports in 1991. Nevertheless, the continued strength of real
exports supported growth in 1991 as a whole, continuing the trend
witnessed in past years. In 1991, the change in net exports added
$30.4 billion to GDP, despite the slowdown in major industrial
country growth and a pick-up in U.S. imports in the middle of the
year.

Recent economic estimates also highlight the critical role
exports play in U.S. job creation. U.S. Commerce estimates point
out that from 1986 to 1990 (the latest information available), U.S.
merchandise exports contributed 25 percent, or 2.2 million jobs, to
the growth in U.S. private industry jobs. Moreover, this estimate
does not even include additional jobs created by growth in services
exports. Furthermore, recent trends suggest that job growth in
merchandise export production is faster than job growth in
production for domestic consumption. The share of total private
industry jobs supported by exports rose from 5.7 percent in 1986 to
7.5 percent in 1990.

Investment income data also highlight the benefits of the world
economy to U.S. economic welfare. In recent years, income for U.S.
citizens from investments in other countries has risen considerably
faster than payments to foreigners. From 1987 to 1991, receipts
from abroad from interest, dividends, and reinvested earnings rose
by about $10 billion (in constant dollars), while investment-related
payments to foreigners increased by only about $3 billion. Thus,
net U.S. investment earnings have more than doubled from $5 billion
in 1987 to $11 billion in 1991. As a net debtor, the United States
is benefiting from low international interest rates, and, in
particular, from lower interest rates in the United States than
abroad.