U.S. international transactions, third quarter 1984 Essay

THE U.S. current-account deficit was a record $32.9 billion in the
third quarter, compared with $24.7 billion in the second. The $8.2
billion increase was largely accounted for by an increase in the
merchandise trade deficit from $25.8 billion to $33.1 billion. Imports
surged after being nearly unchanged in the previous quarter; exports
increased slightly. Net service receipts decreased $0.2 billion to $3.1
billion. A $1.7 billion increase in receipts of income on U.S.
investment abroad was nearly offset by an increase in payments of income
on foreign investment in the United States. Net travel and other
transportation payments increased $0.4 billion. Net unilateral transfers increased $0.6 billion to $2.8 billion.



Among the private capital accounts, claims on foreigners reported
by U.S. banks decreased $18.4 billion, in contrast to an increase of
$20.6 billion in the second quarter. Liabilities to private foreigners
and international financial institutions (excluding U.S. Treasury
securities) reported by banks decreased $3.9 billion, in contrast to an
increase of $20.8 billion. The shifts both in claims and liabilities
reflected reversals of large second-quarter interbank flows. In
addition, low demand for funds in industrial countries and a small
reduction in claims on countries in Latin America contributed to the
third-quarter decrease in claims, and a flattening of U.S. loan demand
to the decrease in liabilities.

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Net inflows on U.S. direct investment abroad were $1.1 billion,
compared with $2.1 billion. Net inflows from Netherlands Antilles finance affiliates slowed as borrowing to finance U.S. mergers subsided.
Net inflows for foreign direct investment in the United States slowed to
$4.3 billion from $8.8 billion; the second-quarter total had been
boosted by an unusually large purchase of additional equity in a U.S.
company.


Net U.S. purchases of foreign securities increased $0.4 billion to
$1.2 billion. Net foreign purchases of U.S. Treasury securities were
$5.2 billion, following $6.5 billion in the second quarter. Net
purchases of U.S. securities other than U.S. Treasury securities were
$1.7 billion, compared with $0.6 billion. A significant decline in
interest rates and a change in withholding tax regulations spurred the
sale abroad of $1.9 billion in new bond issues by U.S. corporations.



The statistical discrepancy (errors and omissions in reported
transactions) was a net inflow of $10.6 billion.



U.S. dollar in exchange markets



The U.S. dollar continued to appreciate in the third quarter; on a
trade-weighted basis, the dollar posted the largest gains in four
quarters against the currencies of industrial countries. Favorable rates of return on U.S. dollar assets compared with other assets and
repeal of the 30-percent withholding tax on interest earned by
nonresidents on U.S. investments more than offset the effects of the
peaking of most U.S. short-term interest rates in July and August. Also
contributing to the dollar’s appreciation were indications during
the quarter that U.S. inflation would not accelerate and that economic
activity in key industrial countries was weaker than expected, partly
the result of prolonged strikes in the United Kingdom and Germany
earlier in the year. Intervention to slow the dollar’s sharp
advance against the German mark was conducted by German and, to a
limited extent, United States authorities in September.



On a trade-weighted quarterly average basis, the U.S. dollar
appreciated 7 percent and 5 percent against the currencies of 10
industrial and 22 OECD countries, respectively (chart 6, table C). The
dollar appreciated 7 to 9 percent against the European Monetary System
currencies, 9 percent against the Swiss franc, 8 percent against the
British pound, and 6 percent against the Japanese yen. The dollar
appreciated less than 2 percent against the Canadian dollar.



Merchandise trade



The merchandise trade deficit was a record $33.1 billion in the
third quarter, compared with $25.8 billion in the second. Imports
increased $8.2 billion to $88.6 billion, and exports increased $0.9
billion to $55.5 billion.



Nonpetroleum imports increased $8.7 billion, or 13 percent, to
$74.2 billion. The increase was all in volume. All major end-use
commodity categories increased substantially, led by increases of $2.8
billion, or 21 percent, in machinery; $1.9 billion, or 14 percent, in
consumer goods; and $1.3 billion, or 8 percent, in nonpetroleum
industrial supplies and materials. Only a small part of the increase
may have been attributable to anticipation of restrictions on textile
and steel imports later in the year. (A tightening of restrictions on
textiles was announced by the U.S. Government in August, and plans to
negotiate limits on certain categories of shipments from steel-exporting
countries were announced in September.)


Cumulative dollar appreciation continued to be a major factor in
the growth of nonpetroleum imports. By the third quarter, the dollar
cost of imports of manufactured goods had increased only 6 percent over
its 1980 quarterly average (chart 7). In contrast, the average producer
price index of manufactured goods in OECD countries, excluding the
United States, had increased more than 30 percent. In the United
States, the producer price index had increased 20 percent.



Petroleum imports decreased $0.4 billion, or 3 percent, to $14.5
billion. The average number of barrels imported daily decreased to 5.67
million from 5.76 million; the average price per barrel was nearly
unchanged at $27.91.



Nonagricultural exports increased $1.2 billion, or 3 percent, to
$46.5 billion; volume increased 4 percent. A $0.6 billion increase in
exports of automotive products to Canada was largely related to strong
sales in the United States of large-size automobiles, many of which are
assembled in Canada. Most other major end-use commodity categories
increased slightly. Nonagricultural exports continued to be restrained
by the dollar’s cumulative appreciation. Although the unit-value
index of U.S. exports of manufactured goods increased 21 percent from
1980 to the third quarter, the foreign currency cost almost doubled
(chart 7).



Agricultural exports decreased $0.2 billion, or 3 percent, to $9.0
billion; volume increased 1 percent. The decrease, mostly to Western
Europe, partly reflected price decreases in soybeans, wheat, and corn.
Supplies from other exporting countries were ample, and harvests in some
importing countries were better than expected.



Increases in imports from Western Europe, Japan, and newly
industrialized countries in Asia more than accounted for the $7.3
billion increase in the trade deficit. Imports from those areas
increased $2.5 billion, $2.8 billion, and $3.1 billion, respectively;
exports to them were nearly unchanged. Imports from Canada decreased
$0.7 billion, and imports from other areas increased $0.5 billion.
Exports to Canada decreased $0.9 billion, and exports to other areas,
largely to Latin America, increased $1.5 billion.



Service transactions



Net service receipts were $3.1 billion, a decrease of $0.2 billion
from the second quarter. Receipts increased $1.8 billion to $36.2
billion. Payments increased $2.1 billion to $33.1 billion. Increases
both in receipts and in payments of income on investments accounted for
most of the changes.



Receipts of income on U.S. direct investment abroad increased $0.8
billion to $5.4 billion. Capital losses (largely currency-related)
remained large at $2.5 billion, but were $0.5 billion less than in the
second quarter; second-quarter losses had included a large nonrecurring
writeoff of an affiliate of a U.S. petroleum company. Weak expansion in
key European countries and weak worldwide petroleum demand continued to
restrain growth in operating earnings of foreign affiliates. Earnings
of nonpetroleum affiliates increased $0.5 billion, and earnings of
petroleum affiliates increased $0.4 billion. Payments of income on
foreign direct investment in the United States increased $0.3 billion to
$3.0 billion.



Receipts on income on other private investment increased $1.0
billion to $15.7 billion, largely the result of higher average interest
rates for the quarter. (Some interest arrears on nonaccruing loans
continued and are reflected in the estimates.) Payments on income
increased $0.9 billion to $10.7 billion, also due to higher average
rates.



Receipts of income on U.S. Government assets decreased $0.1
billion to $1.3 billion. Payments of income increased $0.3 billion to
$5.1 billion.



Net travel payments increased $0.2 billion. Payments increased
$0.1 billion to $4.1 billion. Further dollar appreciation continued to
encourage U.S. travel overseas, although the rate of increase in the
number of travelers slowed from the second quarter. Payments to Canada
and Mexico were nearly unchanged. Receipts decrease $0.1 billion to
$2.8 billion. A decrease of $0.2 billion from overseas and Canada was
partly offset by a $0.1 billion increase from Mexico for travel in the
border area and in the U.S. interior. Passenger fare payments were
unchanged at $1.7 billion, and receipts decreased $0.2 billion to $0.7
billion. Other transportation payments increased $0.4 billion to $3.9
billion, largely the result of increased freight payments for
merchandise imports. Other transportation receipts increased $0.2
billion to $3.6 billion, reflecting increased earnings from port
services.



Transfers under U.S. military sales contracts were $2.7 billion, an
increase of $0.2 billion. Increased deliveries to a number of countries
were partly offset by a decrease in deliveries to the Middle East.
Direct defense expenditures were unchanged at $3.0 billion.



Net unilateral transfers increased to $2.8 billion from $2.2
billion, largely reflecting revisions in U.S. Government procedures
under which appropriated grant funds are made available to foreign
military sales customers.



U.S. assets abroad



U.S. reserve assets increased $0.8 billion in the third quarter,
compared with an increase of $0.6 billion in the second. Foreign
currency holdings increased $0.2 billion as the result of limited
intervention purchases of German marks in September. The U.S. reserve
position in the International Monetary Fund and U.S. holdings of special
drawing rights each increased $0.3 billion.



Claims on foreigners reported by U.S. banks decreased $18.4
billion, compared with an increase of $20.6 billion. The shift
reflected a reversal of large second-quarter interbank transactions. In
addition, low demand for funds in many industrial countries and some
further small reduction in U.S. banks’ loan exposure abroad,
particularly in some developing countries, were contributing factors.
Claims on U.S. banks’ own foreign offices and on unaffiliated
foreign banks each decreased almost equally; together, they accounted
for nearly all of the decrease in bank-reported claims. Partly
offsetting was a slight increase in claims on foreign public borrowers.
The increase, largely in claims on Latin America, was partly related to
an agreement between Argentina and the International Monetary Fund on a
proposed austerity program and to a rescheduling of some external public
debt of Mexico and Venezuela.



The reversal of second-quarter transactions dominated third-quarter
interbank developments. In the second quarter, large withdrawals from
foreign banks, particularly from foreign offices of U.S. banks,
reflected concerns over actual and potential losses from substandard loans by a few large U.S. banks. To offset those withdrawals,
unaffiliated foreign banks borrowed heavily from U.S. banks, and U.S.
parent banks deposited funds in their foreign offices. In the third
quarter, as those concerns abated, unaffiliated foreign banks repaid
some of the funds borrowed from U.S. banks, and U.S. parent banks
withdrew some deposits from foreign offices. In addition, large credits
to foreign banks dropped sharply, as merger-related corporate borrowing
subsided and other U.S. loan demand flattened.



Net U.S. purchases of foreign securities were $1.2 billion,
compared with $0.8 billion in the second quarter. The increase was more
than accounted for by a $0.7 billion increase in net purchases of
stocks, mainly in the United Kingdom, the Netherlands, and Hong Kong,
where prices advanced sharply. Net U.S. purchases of foreign bonds were
$0.5 billion, down from $0.8 billion. Foreign new issues in the United
States were only $0.9 billion–from Canada, France, Finland, and the
Inter-American Development Bank–following extraordinarily large new
issues from Sweden in the previous quarter. Redemptions were nearly
unchanged at $0.7 billion, and transactions in outstanding bonds shifted
to small net purchases of $0.3 billion from net sales of $0.7 billion.



Net inflows on U.S. direct investment abroad were $1.1 billion,
compared with $2.1 billion. Net intercompany debt inflows were $3.6
billion, down from $5.1 billion. Inflows from Netherlands Antilles
finance affiliates decreased $2.0 billion to $1.5 billion–about the
same level of borrowing that prevailed prior to the merger-dominated
borrowing of the second quarter (table D). Also, the repeal in July of
the 30-percent withholding tax on interest earned by nonresidents on
U.S. investments may have led some U.S. companies to issue Eurobonds
directly to supplement or substitute for borrowing through their finance
affiliates (chart 8). Intercompany debt inflows from Western European
affiliates increased $1.5 billion from less than $0.1 billion. Most of
the increase reflected a shift to inflows from trading company
affiliates in Switzerland. Equity capital outflows decreased $1.0
billion to less than $0.1 billion. Outflows to most areas decreased; a
net inflow from Japan was largely due to the sale of a petroleum
affiliate. Reinvested earnings were $2.5 billion, compared with $2.0
billion.



Foreign assets in the United States



Foreign official assets in the United States decreased $1.0 billion
in the third quarter, compared with a decrease of $0.3 billion in the
second (table B). Assets of industrial countries decreased $2.7
billion, in contrast to an increase of $0.9 billion. Decreases largely
reflected intervention to support a few key currencies in exchange
markets, as the dollar reached record highs against many European
currencies in September. Assets of OPEC members decreased $0.6 billion.
Although considerably less than the previous quarter’s $2.2 billion
decrease, the third-quarter decrease was the eighth consecutive
quarterly decrease and reflected continued weakness in world petroleum
markets. Assets of other countries, particularly several newly
industrialized countries in Asia, increased $2.3 billion, compared with
a $0.9 billion increase.



U.S. liabilities to private foreigners and international financial
institutions reported by banks (excluding U.S. Treasury securities)
decreased $3.9 billion, compared with an increase of $20.8 billion. The
shift reflected a reversal of large second-quarter inflows from U.S.
banks’ foreign offices, mainly in the United Kingdom and Caribbean,
and a flattening of domestic loan demand. In addition, financing needs
for large-scale mergers diminished. Partly offsetting the decrease was
an increase in liabilities to unaffiliated foreign banks and other
private foreigners. Those inflows remained relatively strong, despite
the significant decline in U.S. short-term rates by the end of the
quarter and despite the attractiveness of alternative long-term
investments in the United States.



Net foreign purchases of U.S. Treasury securities were $5.2
billion, following record second-quarter purchases of $6.5 billion.
Those purchases partly reflected the continued preference of many
foreign investors for U.S. Treasury securities, although concern about
risks associated with certificates of deposit as alternative investments
lessened.



Net foreign purchases of U.S. securities other than U.S. Treasury
securities were $1.7 billion, compared with $0.6 billion. Much of the
increase was due to the $1.9 billion in new bond issues sold abroad by
U.S. corporations–the first sizable amounts issued directly in the
Eurobond market in 10 years (chart 8). A large decline in long-term
rates in the Eurobond market spurred U.S. corporations to raise capital,
partly to replace relatively expensive short-term bank debt that had
been incurred in the first half of the year. Also, repeal of the
30-percent withholding tax on interest earned by nonresidents on U.S.
investments permitted U.S. corporations to raise funds directly in
Eurobond markets at the same, lower cost as funds raised through
Netherlands Antilles finance affiliates. (Net funds raised by
Netherlands Antilles finance affiliates were about the same in the third
quarter as in the second, after allowance is made for several large
merger-related transactions.) Net foreign purchases of outstanding
corporate bonds and U.S. agency bonds were $0.8 billion, compared with
$0.5 billion. Record net sales of stocks of $1.0 billion by foreigners
were largely from Swiss accounts.



Inflows for foreign direct investment in the United States were
$4.3 billion, compared with $8.8 billion. Intercompany debt inflows
were $1.3 billion, compared with $4.4 billion; the second-quarter inflow
had been boosted by a large loan to a U.S. subsidiary to purchase
additional equity in a U.S. company. Equity capital inflows were $1.8
billion, compared with $3.3 billion. An inflow of $0.7 billion from
Canada was mainly for acquisitions, as were inflows of $0.4 billion from
Japan. There were no net inflows from Australia, after a $1.5 billion
inflow in the previous quarter. Inflows from Western Europe were $0.6
billion, compared with $0.8 billion. Reinvested earnings were unchanged
at $1.2 billion.



Reconciliation of U.S.-Canadian current-account statistics



Reconciliation of the 1983 bilateral current-account statistics of
the United States and Canada and revision of the 1982 current-account
reconciliation were completed in November 1984 (table E). The 1982
United States and Canadian statistics were fully reconciled. Full
reconciliation of the 1983 statistics was not possible because of
differences in investment income transactions that could not be
satisfactorily resolved at this time.



Revisions in the U.S. international transactions data based on the
reconciliations with Canada will be incorporated in the published data
in June 1985 as far as possible. Full substitution of the reconciled
data for the previously published data is not possible because U.S.
transactions with other areas would be affected.



Current-account reconciliations for the years 1970-81 appear in the
June 1975, September 1976, September 1977, December 1979, June 1981,
December 1981, December 1982, and December 1983 issues of the SURVEY OF
CURRENT BUSINESS.

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