International Financial Law Prof Blog

Editor: William Byrnes
Texas A&M University
School of Law

Tuesday, June 26, 2018

U.S. International Transactions: First Quarter 2018 and Annual Update

Current-Account Balance

The U.S. current-account deficit increased to $124.1 billion (preliminary) in the first quarter
of 2018 from $116.1 billion (revised) in the fourth quarter of 2017, according to statistics
released by the Bureau of Economic Analysis (BEA). The deficit was 2.5 percent of current-dollar
gross domestic product (GDP) in the first quarter, up from 2.4 percent in the fourth quarter.

Quarterly U.S. Current-Account and Component Balance

The $8.0 billion increase in the current-account deficit reflected an $8.1 billion increase in
the deficit on goods and relatively small and nearly offsetting changes in the balances on
services, primary income, and secondary income.

Quarterly U.S. Current-Account Transactions

                           Current-Account Transactions (tables 1-5)

Exports of goods and services and income receipts

Exports of goods and services and income receipts increased $23.0 billion in the first quarter
to $913.4 billion.

   * Primary income receipts increased $9.8 billion to $258.8 billion, reflecting increases in
     direct investment income, portfolio investment income, and other investment income. For
     more information on direct investment income, see the box “Effects of the 2017 Tax Cuts
     and Jobs Act on Components of Direct Investment.”

   * Goods exports increased $9.5 billion to $411.4 billion, mostly reflecting increases in
     automotive vehicles, parts, and engines, in consumer goods, primarily jewelry and collectibles,
     and in nonmonetary gold.

Imports of goods and services and income payments

Imports of goods and services and income payments increased $30.9 billion in the first quarter
to $1,037.5 billion.

   * Goods imports increased $17.6 billion to $631.9 billion, mostly reflecting increases in
     industrial supplies and materials, primarily petroleum and products, and in consumer goods,
     primarily medicinal, dental, and pharmaceutical products.

   * Primary income payments increased $10.2 billion to $196.8 billion, reflecting increases in
     direct investment income, portfolio investment income, and other investment income.

BOX.___________________________________________________________________________________________

          Effects of the 2017 Tax Cuts and Jobs Act on Components of Direct Investment

In the international transactions accounts, income on equity, or earnings, of foreign affiliates
of U.S. multinational enterprises in a period typically consists of a portion that is repatriated
to the parent company in the United States in the form of dividends and a portion that is reinvested
in foreign affiliates. At times, repatriation of dividends exceeds current-period earnings,
resulting in negative values being recorded for reinvested earnings. In the first quarter of 2018,
direct investment earnings were $130.6 billion, reflecting dividends and withdrawals of $305.6
billion and reinvested earnings of -$175.0 billion (table 4).

The large magnitudes for dividends and withdrawals and the negative reinvested earnings reflect
the repatriation of accumulated earnings by foreign affiliates of U.S. multinational enterprises
to their parent companies in the United States in response to the 2017 Tax Cuts and Jobs Act
(TCJA). The TCJA requires U.S. parent companies to pay a one-time tax on their accumulated earnings
held abroad, but generally eliminates taxes on repatriated earnings. The negative reinvested
earnings of -$175.0 billion reflect the fact that dividends exceeded earnings in the first quarter
and U.S parent companies withdrew accumulated prior earnings from their foreign affiliates. The
negative reinvested earnings are also reflected in the net acquisition of direct investment assets
in the financial account, which was -$119.6 billion in the first quarter of 2018 (table 6).

For more information, see “How does the 2017 Tax Cuts and Jobs Act affect BEA's business income
statistics?” and “How are the international transactions accounts affected by an increase in
direct investment dividend receipts?

Direct Investment Income Receipts and Components

_______________________________________________________________________________________________

                           Financial Account (tables 1, 6, 7, and 8)

Net U.S. borrowing measured by financial-account transactions was $180.6 billion in the first
quarter, an increase from net borrowing of $31.3 billion in the fourth quarter.

Financial assets

Net U.S. acquisition of financial assets excluding financial derivatives increased $127.6 billion
in the first quarter to $254.7 billion.

   * Net U.S. acquisition of portfolio investment assets increased $277.2 billion to $365.5
     billion, reflecting net U.S. purchases of foreign equity and investment fund shares following
     net sales in the fourth quarter.

   * Net U.S. acquisition of other investment assets was $8.9 billion following net liquidation
     of $50.9 billion in the fourth quarter. This change mostly reflected net U.S. provision of
     loans to foreigners following net foreign repayment in the fourth quarter.

   * Net U.S. withdrawal of direct investment assets was $119.7 billion following net U.S.
     acquisition of $91.3 billion in the fourth quarter. This change partly offset the changes
     in portfolio investment assets and other investment assets. The net withdrawal of direct
     investment assets reflected U.S. parent repatriation of previously reinvested earnings in
     response to the TCJA. For more information, see the box “Effects of the 2017 Tax Cuts and
     Jobs Act on Components of Direct Investment.”

Liabilities

Net U.S. incurrence of liabilities excluding financial derivatives increased $304.9 billion in the
first quarter to $464.1 billion.

   * Net U.S. incurrence of portfolio investment liabilities increased $210.5 billion to $292.1
     billion, mostly reflecting net foreign purchases of U.S. equity and investment funds shares
     following net foreign sales in the fourth quarter.

   * Net U.S. incurrence of direct investment liabilities increased $59.1 billion to $97.3 billion,
     mostly reflecting net U.S. incurrence of debt instrument liabilities following net repayment
     in the fourth quarter.

   * Net U.S. incurrence of other investment liabilities increased $35.3 billion to $74.6 billion,
     reflecting partly offsetting changes in transactions in loan and deposit liabilities. Net
     U.S. incurrence of loan liabilities in the first quarter followed net repayment in the fourth
     quarter. Net foreign withdrawal of deposits in the United States followed net incurrence in
     the fourth quarter.

Financial derivatives

Transactions in financial derivatives other than reserves reflected first-quarter net lending of
$28.7 billion, a $27.9 billion increase from the fourth quarter.

                               Statistical Discrepancy (table 1)

The statistical discrepancy was -$56.5 billion in the first quarter following a statistical
discrepancy of $84.9 billion in the fourth quarter.

         Updates to Fourth Quarter 2017 International Transactions Accounts Aggregates
                            Billions of dollars, seasonally adjusted

                                                      Preliminary estimate     Revised estimate

Current-account balance                                       -128.2                -116.1
   Goods balance                                              -214.3                -212.4
   Services balance                                             60.4                  64.6
   Primary-income balance                                       57.2                  62.4
   Secondary-income balance                                    -31.5                 -30.7
Net lending (+)/borrowing (-) from
   financial-account transactions                              -29.8                 -31.3
Statistical discrepancy                                         98.4                  84.9

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