United States WT/TPR/S/56 
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 I. ECONOMIC ENVIRONMENT 
(1) MAIN ECONOMIC DEVELOPMENTS  
1. During the period under review (1996-98), U.S. economic performance has continued to be 
outstanding, even in the wake of the financial turmoil that erupted in Asia in July 1997 and 
subsequently spread to other parts of the world.   Since 1991, the United States has enjoyed the second 
longest period of sustained economic growth sin ce records began in 1854, with real GDP growth 
averaging over 2.8% during the years 1992-96 before accelerating to 3.9% in 1997 and 1998 (Table I.1).  The main factors contributing to this  impressive growth have been private consumption 
and especially investment, both of which outstri pped GDP growth in 1998, thereby drawing in 
imports.  In real terms, imports too grew much fast er than GDP, not only in 1998, but in the previous 
two years, while exports, after experiencing similarl y rapid growth in 1996 and 1997, barely increased 
in 1998.  In addition, the unemployment rate fell to  4.3% at the end of 1998 (having remained below 
5% for the previous 18 months) and consumer price inflation to 1.6% 
1, their lowest levels since the 
1960s.  These extremely beneficial economic developm ents have followed the considerable trade and 
investment liberalization that resulted from the Uruguay Round Agreements and the North American 
Free Trade Agreement (NAFTA) with Canada and Mexico. 
2. This outstanding macroeconomic performance has been greatly facilitated by a large and 
growing current account deficit, which, in 1998, reached a record level of US$233 billion (2.7% of 
GDP), thereby exceeding the previous record  of US$168 billion in 1987 (3.6% of GDP).2  The trade 
deficit has enabled the U.S. economy to sustain its strong rate of growth in the face of domestic 
constraints on its productive capacity and a labour market  that is at its tightest for nearly 30 years.  
Imports, often at lower prices, have provided a saf ety valve, helping to satisfy domestic demand.  
They have also contributed to lower domestic pr ices and wider choice for U.S. consumers.  U.S. 
producers too have benefited from lower costs and wider choice of inputs, thereby increasing their 
competitiveness, which has resulted in more jobs a nd higher wages, especially in exporting activities, 
where average wages are higher than for other j obs.  Competition from imports also helps enhance 
productivity.  Indeed, labour productivity grew at  an average annual rate of 2.4% during the 
period 1996-98, more than double the rate of im provement in 1990-95;  total factor productivity 
(TFP) increased by an average annual rate of 1. 2% in 1996-97, compared to  0.1% per annum during 
the period 1990-95.3  In general, imports have helped su bdue inflationary pressure that might 
otherwise have emerged as a result of the ve ry strong growth of domestic demand and low 
unemployment rate, thereby supporting low market interest rates. 
                                                      
1One of the main reasons for the recent marked d ecline in the CPI is the external supply shock 
involving a sharp fall in energy prices .  If energy and food are excluded from  the CPI, the core CPI has stopped 
falling.  Another reason for the recent decline in the CPI involves methodological changes made from 1995 
through 1998, which reduced the annual rate of CPI inflation by 0.44 percentage points; changes to be 
introduced in 1999 and 2000 will reduce it by a further 0.24  percentage points.  According to the GDP deflator, 
inflation is currently as low as 1%. 
2The size of the deficit is apparently over-stated.  The Foreign Trade Division of the U.S. Bureau of 
Census readily admits that export statistics are inaccurate.   The Bureau estimates that 3% to 7% of the value of 
U.S. exports is missed because exporter s fail to file a key document known as  the Shippers Export Declaration, 
which means that exports are under-reported by US $19 billion to US$44 billion a year.  The Commerce 
Department estimated that in 1997, U.S. exports were underestimated by one third owing to mis-measurement of fast-growing areas of trade such as services and electronic commerce. 
3TFP reflects the efficiency with which all factors of production, including labour and capital, are used.  
It should be distinguished from labour productivity, which is the amount of output per employee (or per hour).  Among the determinants of improvements in labour productivity are changes in the volume of investment and 
TFP.  Investment contributes to improvements in labour productivity by increasing the amount of capital that 
employees have to work with. WT/TPR/S/56 Trade Policy Review 
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 Table I.1 
Selected macroeconom ic indicators, 1990-98  
(US$ billion and per cent) 
 1990 1991 1992 1993 1994 1995 1996 1997 1998
Real economy (changes in per cent)         
Real GDP 1.2 -0.9 2.7 2.3 3.5 2.3 3.4 3.9 3.9
Real domestic demand 0.8 -1.6 2.8 2.9 3.9 2.1 3.6 4.2 5.0
Private consumption 1.7 -0.6 2.8 2.9 3.3 2.7 3.2 3.4 4.9
Gross private fixed investment -3.1 -8.0 5.7 7.6 8.6 5.5 8.8 8.3 11.4
Public consumption and i nvestment 3.0 0.6 0.5 -0.9 0.0 0.2 1.1 1.3 0.9
Real exports of goods and services 8.5 6.3 6.6 2.9 8.2 11.3 8.5 12.8 1.5
Real imports of goods and services 3.9 -0.7 7.5 8.9 12.2 8.8 9.2 13.9 10.6
         
Prices (changes in per cent)         
CPI (end of year) 5.4 4.2 3.0 3.0 2.6 2.8 2.9 2.3 1.6
GDP deflator (implicit) 4.3 4.0 2.8 2.6 2.4 2.3 1.9 1.9 1.0
         
Employment/unemployment                            
Employment (changes in per cent ) 1.2 -0.9 0.7 1.5 2.3 1.5 1.4 2.2 1.5
Unemployment rate (end-year) 5.6 6.8 7.5 6.9 6.1 5.6 5.4 4.9 4.3
         
Productivity (changes in per cent)         
Labour productivity 0.7 0.6 3.4 0.1 0.5 0.4 2.7 1.7 2.4f
Capital productivity -1.6 -3.5 1.4 0.7 1.6 -0.5 0.4 0.3 ..
Total factor productivity -0.4 -1.5 1.9 0.1 0.5 0.1 1.7 0.7 ..
         
Money stock (end of year, per cent change)         
M1 4.7 8.7 14.2 10.2 1.8 -1.9 -4.1 -0.6 1.5
M2 3.8 3.1 1.6 1.5 0.4 4.2 4.8 5.8 9.0
M3 1.5 1.3 0.3 1.6 1.8 6 7.3 9 11.3
         
Interest rates (per cent)         
Treasury Bill Rate (3-months) 7.5 5.4 3.5 3.0 4.3 5.5 5.0 5.1 4.8
Treasury Note Rate (10 year maturity) 8.6 7.9 7.0 5.9 7.1 6.6 6.4 6.4 5.3
         
Exchange ratea         
Nominal effective exchange rate (1973=100)  88.4 86.9 85.4 87.7 86.2 81.4 85.2 91.9 96.5
Per cent change -4.3 -1.7 -1.7 2.7 -1.7 -5.6 4.7 7.9 5.0
Real effective exchange rate (1973=100)b 85.1 83.4 82.3 85.0 84.6 80.8 85.8 93.2 98.3
Per cent change -3.4 -2.0 -1.3 3.3 -0.5 -4.5 6.2 8.6 5.5
         
Fiscal balance (per cent of GDP)         
Total government fiscal balancec -1.3 -2.0 -3.1 -2.5 -1.3 -0.9 0.2 1.4 2.6
Federal government fiscal balance -2.7 -3.3 -4.5 -3.8 -2.7 -2.4 -1.4 -0.3 0.9
(excluding social security contributions) -10.7 -11.5 -12.6 -11.9 -10.7 -10.4 -9.4 -8.2 -7.2
State and local government fiscal balan ce 1.4 1.3 1.4 1.3 1.4 1.5 1.6 1.7 1.8
      Table I.1 (cont'd) United States WT/TPR/S/56 
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  1990 1991 1992 1993 1994 1995 1996 1997 1998
Structural balanced, e -2.7 -2.1 -3.1 -2.3 -1.4 -1.1 -0.5 0.1 0.6
         
Saving and investment (per cent of GDP)         
National saving (gross) 15.7 15.8 14.5 14.5 15.5 16.3 16.6 17.3 17.2
Private 15.0 15.7 15.5 14.9 14.8 15.2 14.5 14.1 12.8
Personal savings rate (% of disp. income) 5.1 5.6 5.7 4.4 3.5 3.4 2.9 2.1 0.5
Public 0.7 0.1 -1.1 -0.5 0.7 1.1 2.1 3.2 4.4
Domestic investment (gross) 17.4 15.8 16.0 16.5 17.5 17.4 17.8 18.4 18.9
Private 13.9 12.4 12.7 13.4 14.5 14.4 14.8 15.5 16.1
Public 3.5 3.4 3.3 3.1 3.0 3.0 3.0 2.9 2.8
         
Balance-of-payments         
Current account (billions of $US) -91.6 -4.4 -51.4 -86.1 - 123.8 -115.3 -134. 9 -155.2 -233.4
Current account (per cent of GDP) -1.6 -0.1 -0.8 -1.3 -1.8 -1.6 -1.8 -1.9 -2.7
Balance on goods (billions of $US)  -109.0 -74.1 -96.1 -132.6 - 166.2 -173.7 -191. 3 -198.0 -248.0
Balance on services (billions of $US) 27.9 43.2 57.4 60.7 65. 3 73.8 82.7 87.7 78.9
Balance on goods and services (billions of 
$US) -81.1 -30.9 -38.7 -71.9 -100.9 -99.9 -108.6 -110.2 -169.1
Net investment income (billions of $US) 24.2 21.5 22.5 23. 9 16.5 19.2 14.3 -5.3 -22.4
Net transfers (billions of $U S) -34.7 5.0 -35.2 -38.1 - 39.4 -34.6 -40. 6 -39.7 -41.9
         
Exports of goods and services (per cent of 
GDP) 9.7 10.2 10.2 10.0 10.4 11.3 11.4 11.9 11.3
Imports of goods and services (per cent of 
GDP) 10.9 10.5 10.7 11.0 11.7 12.4 12.6 13.1 13.0
.. Not available. 
a Major currencies index (includes G-10 countries plus Spai n, Ireland, Austria, Finland, Portugal and Australia). 
b Adjusted for changes in CPI. 
c Data on a budget basis. d The structural budget balance is defined as the actual budget de ficit (or surplus) less the eff ects of cyclical deviations of  output 
from potential output. 
e International Monetary Fund (1998), World Economic Outlook , October. 
f Preliminary estimates reflects annual rate of change in the 3
rd quarter of 1998. 
Source:  Survey of Current Business  (available from:  http://www.bea.doc.gov/bea/ pubs.htm),  Bureau of Labour Statistics ( Monthly 
Review  and website:  www.bls.gov) and Council of Economic Advisors (1999), Economic Report of the President,  February. 
3. On the other hand, the widening of the trade deficit has provoked allegations in the 
United States that some foreign producers are engagi ng in "unfair" trading practices to the detriment 
of U.S. producers.  Such allegations have, in tu rn, led to a certain protectionist pressure from some 
sectors, aimed at persuading the U.S. Government to implement unilateral measures to curb imports 
of some products from specific countries and to move to further open foreign markets to U.S. 
exporters;  by and large, the Administration has resi sted their pressures, much to the benefit of the 
multilateral trading system. 
4. However, the trade deficit merely reflects the gap between national saving and domestic 
investment (see Box I.1).  That gap has widened si nce 1995 as national saving has failed to keep pace 
with investment.  While national saving rose as a proportion of GDP from 16.3% in 1995 to 17.2% 
in 1998, domestic investment climbed from 17.4% to 18.9%.  National savin g has risen despite the 
sharp decline of personal saving as a consequence of  U.S. consumers increased willingness to spend.  
After its steady decline from 5.7% in 1992, a rate th at was already low by international standards, WT/TPR/S/56 Trade Policy Review 
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 personal saving as a percentage of disposable income is now close to zero;  indeed, it was negative in 
the latter part of 1998.  The current, historically low personal saving rate is  probably due in measure 
to the positive "wealth effect" of the rise in the va lue of personal equity portfolios relative to personal 
incomes owing to the rise in U.S. stock market pric es to record levels.  Th e "wealth effect" involves 
the tendency for consumption to rise by a fracti on of the capital gains on existing assets owned by 
households; as unrealized capital gains add to wealth  but are not included in income or saving, 
properly measured personal saving may not have fa llen as dramatically as would appear.  In any 
event, the decline in personal saving has been more  than offset by stronger corporate saving and the 
turnaround in the government budget position from a pe rsistent deficit (govern ment dissaving) to a 
surplus (government saving) in 1998.  At the same time, business investment in plant and equipment 
has been up sharply as a consequence, among other f actors, of the ready availability of external 
financing owing to the dramatic reduction in government borrowing, which has left more resources 
available for private use.4 
5. An additional source of funds for domestic invest ment has been capital inflows from abroad.  
Indeed, the shortfall of national savings relativ e to domestic investment was made up by foreign 
investors who have continued to be attracted to th e United States by its liberal investment regime, 
profitable investment opportunities and its attractiv eness as a safe haven following the financial crisis 
that erupted in Asia.  Foreign investment has t hus enabled the U.S. economy to grow faster than 
would have been the case had it relied solely on domestic saving.  Foreign investment has also 
contributed to the recent marked improvement in labour productivity, which remains higher than most 
other countries, thus reflecting the extremely efficien t nature of the U.S. econom y.  As a consequence, 
average living standards in the United States, as measured by a per capita GNP of US$28,740, are the 
second highest in the world (after Singapore).5 
6. Since 1995, services' shares of GDP and, to a lesser extent, total employment have continued 
to grow, mainly at the expense of manufacturing (especially manufacturing of non-durable goods), whose shares of GDP and employment have both d eclined (Table I.2).  Much of the growth of 
services' share in GDP has occurred in finance, insurance and real  estate; the latter's share of 
employment has remained unchanged, however, wh ich suggests a relative improvement in this 
particular service sector's labour productivity.  The shares of other services in both GDP and employment have also grown substantially.
 6  As regards other sectors, the shares of construction in 
GDP and total employment have risen slightly, whil e the shares of agriculture, forestry, fishing and 
mining have hardly changed. 
                                                      
4Council of Economic Advisers (1999). 
5World Bank (1999), p. 191. 
6Services other than transportation and public utilitie s, wholesale and retail trade, finance, insurance 
and real estate. United States WT/TPR/S/56 
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 Box I.1:  Accounting for the Unit ed States' current account deficit 
In an open economy, the total output of goods and services available for purchase consists of gross domestic 
product (GDP) plus imports (M).  Total expenditure consists of domestic demand, which is the sum of 
consumption (C), investment (I) and government purchases (G), together with foreign demand, namely 
exports (X).  As the value of total output must equa l total expenditure, the equilibrium condition for GDP is: 
 GDP = C + I + G + X – M.       (1) 
Gross national product (GNP) is GDP plus net income  received by domestic resi dents from abroad.  Net 
income from abroad (NIA) consists of interest and in vestment earnings received on  foreign assets (net of 
payments on foreign liabilities) plus net unila teral transfers abroad.  It follows that 
 GNP = C + I + G + X – M + NIA.       (2) 
Thus, whereas exports add to the GNP of the U.S. economy, imports do not do so directly;  imports add 
instead to the GNPs of foreign countries. 
The net trade position of a country is commonly summa rized by the current account (CA), which is the 
difference between export and imports of goods and servi ces (X-M) plus net income from abroad (NIA); that 
is 
 C A  =  X  –  M  +  N F I .         ( 3 )  
When the imports exceed exports plus NIA, a country ha s what is known as a current account deficit (CA-).  
By contrast, when exports plus NIA exceed imports it has a current account surplus (CA+). 
The difference between government purchases of goods and services (G) and taxes (T) is known as the 
government budget (or fiscal) balance;   a budget deficit arises when G ex ceeds T, while a budg et surplus, or 
government saving, occurs when T exceeds G. 
As GNP is, by definition, equal to disposable income (DI), which can be either consumed or saved, plus 
taxes (T) collected from households and firms, 
 G N P  =  C  +  S  +  T .          ( 4 )  
It follows from the GNP identity (2) and equations (3) and (4) that: 
 CA = X – M + NIA = S + (T - G) – I or CA = NS - I,      (5) 
where national saving (NS) is the sum of private saving (S) plus government saving (T-G).  In other words, 
the current account deficit (CA-) must  be equal to the amount by which i nvestment exceeds national saving.   
This equation highlights the close relation betwee n the current account deficit and the gap between 
investment and national saving. 
As the sum of the current and capital accounts te nd to zero under floa ting exchange rates, 
 CA- + Net Capital Inflow = 0,        (6) 
which, when substituted into equation (5) gives: 
 I – NS = Net Capital Inflow.       (7) 
The last equation demonstrates that if U.S. savers (including the Government) do not save enough to meet 
domestic investment needs, then the gap must be bridged by foreign savers.  The resulting inflow of capital 
into the United States tends to drive up the exchange rate leading to a current account deficit.  As federal and 
state governments are currently runni ng an overall budget surplus, the fund amental cause of the present wide 
U.S. current account deficit is  the fact that investment exceeds private saving.  It follows that measures to 
increase national saving could reduce the current account deficit and help to defuse protectionist pressures. 
Source:   WTO Secretariat. WT/TPR/S/56 Trade Policy Review 
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 Table I.2 
Shares of GDP and employment by sector, 1990-97 
(Current US$ billion and per cent) 
 1991 1992 1993 1994 1995 1996 1997 1995-97 
(%)a
S h a r e  o f  G D P         
Total (US$ billion) 5916.7 6244.4 6558.1 6947 7269. 6 7661.6 8110.9 5.6
Agriculture, forestry and fishing 1.7 1.8 1.6 1.7 1.5 1.7 1.6 9.7
Mining  1.7 1.5 1.4 1.4 1.4 1.5 1.5 10.5
Construction 3.9 3.7 3.7 3.9 3.9 4.1 4.1 7.1
Manufacturing 17.4 17.0 17.0 17.5 17.6 17.1 17.0 3.7
Durable goods 9.4 9.2 9.4 9.8 9.8 9.6 9.7 5.0
Non-durable goods 7.9 7.9 7.6 7.7 7.8 7.5 7.3 2.1
Services 75.1 75.3 75.4 75.3 75.9 76.1 76.5 6.0
Transport and public utilities 8.6 8.5 8.6 8.6 8.5 8.5 8.3 4.7
Wholesale trade 6.6 6.5 6.5 6.7 6.8 6.8 6.9 7.0
Retail trade 8.7 8.7 8.7 8.9 8.8 8.8 8.8 5.5
Finance, insurance and real esta te 18.3 18.4 18.6 18.2 18.7 18.9 19.4 7.4
Other services 18.7 19.2 19.3 19.4 19.9 20.2 20.4 7.1
Government 14.2 14.0 13.8 13.4 13.2 13.0 12.7 3.3
Otherb 0.2 0.7 0.8 0.2 -0.4 -0.4 -0.7 …
        
Share of employmentc        
Total (million) 117.5 118.0 120.0 123.0 124. 6 127.0 130.0 2.1
Agriculture, forestry and fishing 1.6 1.6 1.6 1.6 1.6 1.6 1.6 3.2
Mining  0.6 0.5 0.5 0.5 0.5 0.5 0.5 1.1
Construction 4.1 4.0 4.0 4.2 4.3 4.5 4.6 5.1
Manufacturing 15.8 15.4 15.1 15.0 14.9 14.6 14.4 0.4
Durable goods 9.0 8.8 8.6 8.5 8.6 8.5 8.5 1.5
Non-durable goods 6.7 6.7 6.6 6.4 6.3 6.1 5.9 -1.1
Services 78.0 78.6 78.8 78.8 79.1 79.2 79.3 2.3
Transport and public utilities 4.9 4.9 4.9 4.9 5.0 5.0 5.0 2.3
Wholesale trade 5.2 5.2 5.0 5.1 5.2 5.2 5.2 2.0
Retail trade 16.9 17.0 17.0 17.2 17.6 17.5 17.4 1.7
Finance, insurance and real estate 5.8 5.7 5.7 5.7 5.6 5.6 5.6 2.2
Services 25.7 26.5 27.2 27.3 28.2 28.8 29.2 3.9
Government 19.3 19.3 18.9 18.5 17.6 17.3 17.0 0.3
a Annual average growth rate over the period. 
b Statistical discrepancy. 
c Full-time and part-time employment based on 198 7 Standard International Classification (SIC). 
… Not applicable. Source:  WTO Secretariat estimates based on Council of Economic Advisors (1999), Economic Report of the President , February, 
 Table B-12 (p.342) and U.S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business  (various 
 issues). 
(2) MACROECONOMIC POLICIES  
(i) Monetary and exchange rate policies 
7. The twin objectives of U.S. monetary polic y are to ensure price stability and high 
employment.  When the unemployment rate fell below 5% and wages began to accelerate in mid 1997, there was widespread concern that the Fe deral Reserve would have to tighten monetary 
policy in order to restrain demand and thereby slow the U.S. economy.  In the event, the onset of the United States WT/TPR/S/56 
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 financial crisis in Asia, and the decline in world oil and commodity prices, obviated the need for such 
tightening.  The crisis also increased the flow of  liquidity into U.S. financial markets, thus 
contributing to a further rise in equity prices, whic h in turn boosted domestic consumption.  In the 
autumn of 1998, when the crisis spread to Russia,  U.S. financial market experienced considerable 
instability as liquidity dried up, leading to increased risk premia and sharp falls in share prices.  
However, an easing of monetary policy involving th ree cuts of 25 basis points in the federal-funds 
rate to 4.75% between the end of  September and mid November largely restored financial stability .  
Subsequently, share prices returned to their previ ous record highs.  Falling nominal interest rates and 
rising share prices during the period under review have reduced the cost of capital and thus stimulated 
investment.  Nonetheless, as a result of the decline in inflation, depending on the price index used, 
real short-term interest rates are still in the range of  3-4%, which is slightly higher than the average of 
the past 15 years. 
8. After rising during the period under review, the U. S. dollar exchange rate declined in the 
fourth quarter of 1998 as short-term interest rates fell.  The depreciation in the dollar amounted to 
around 5% of both the real and nominal effective exch ange rates; it followed a marked appreciation in 
both these rates since 1995 (Table I.1).  This downwar d adjustment in the last quarter of 1998 may be 
related to expectations of lower returns in U.S. markets and the possible increased risk that it might 
not be possible to continue to finance the curre nt account deficit at current interest rates.7  Indeed, the 
net asset position of the United States has become increasingly negative;  that is, foreign asset 
holdings in the United States exceeded U.S. holding s abroad by 16.3% of GDP in 1997 compared to 
7.4% in 1995.8  Moreover, net investment income turned negative in 1997 and 1998 and looks set to 
decline even further (Table I.3).9  While foreign investors have hitherto been more than willing to 
purchase U.S. assets (particularly since the onset of  the Asian financial crisis), because of their 
relative liquidity and safety, and thereby contributed to the strength of the U.S. dollar, their attitude 
could change. 
(ii) Fiscal policy 
9. U.S. fiscal policy has complemented monetary policy in exerting a stabilizing influence on 
the economy during the period under review.  Since 1992 the federal budget deficit has fallen steadily 
from 4.5% of GDP, with a surplus amounting to 0.9%  of GDP emerging in 1998, only the second 
surplus in the past 30 years.  The marked improve ment in the budget position has moderated the rise 
in the current account deficit and contributed to the fa ll in interest rates.  Although some of this fiscal 
consolidation has been due to the strength of  the economic recovery since the 1990-91 recession, 
policies implemented in connection with the Om nibus Budget Reconciliati on Act (OBRA) of 1993 
and subsequent legislation, including the Ba lanced Budget Act 1997, have also been major 
contributing factors.10  Somewhat less than half of the improvement was cyclical.  Almost half of the 
improvement in the structural budget deficit was the result of a higher than expected increase in tax 
revenues.11  A large part of this increase was due to the unexpected growth of the economy;  rising 
                                                      
7OECD (1999a), p. 28. 
8OECD (1999a), Table 4. 
9The fact that net investment income of the United States turned negative only in 1997, several years 
after its net asset position became negative, may seem incongruous.  However, it reflects the fact that U.S. 
investments abroad earn higher rates of return than foreign investments in the United States, which suggests that U.S. investments abroad may be either under-valued or used more efficiently than foreign investments in the 
United States.   
10IMF (1998a). 
11The structural fiscal balance refers to that part of the balance that would have existed had GDP been 
maintained at its potential level.  In other words, the stru ctural balance eliminates the part of the balance that is 
attributable to the stage in business cycle. WT/TPR/S/56 Trade Policy Review 
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 real incomes have raised federal and state tax reve nues, as marginal tax rates are well above average 
tax rates.  The high level of share prices, which caused a surge in tax r eceipts from realized capital 
gains, also contributed to the increase in tax revenu es.  The remainder was due to cuts in defence and 
non-defence spending.  Almost all States are also  running substantial budget surpluses, which in 
aggregate were equivalent to 1.8% of GDP in 1 998.  As a result, net federal public debt, which 
reached a peak of 46.7% of GDP in  1995, had fallen to 42.8% in 1998.12 
Table I.3 
Current and capital accounts 
(US$ billion, annual rate) 
 1993 1994 1995 1996 1997 1998 
Current account balance -86 -124 -115 -135 -155 -233 
Exports of goods, services and income 770 862 999 1,064 1,179 1,174 
Imports of goods, services and income 818 946 1,080 1,158 1,295 1,366 
Net unilateral transfers abroad 38 39 35 41 40 42 
Balances:       
Goods and services -72 -101 -100 -108 -110 -169 
Goods -133 -166 -174 -191 -198 -248 
Non-factor services 60 65 74 83 88 79 
Net investment income 24 17 19 14 -5 -22 
Official transfers -21 -20 -15 -19 -16 -17 
Private transfers -17 -19 -20 -21 -23 -25 
Capital account bala nce (+ inflows) 85 134 138 195 255 237 
U.S. investment abroad, net (increase)a -195 -171 -327 -369 -479 -305 
Foreign investment in the United States, net (increase)b 280 305 465 563 733 542 
Official assets balance 71 39 100 134 15 -30 
Other foreign assets in the United States 15 89 38 61 240 267 
Statistical discrepancy -1 10 -23 -60 -100 -4 
M e m o r a n d u m :        
Current account balance as a percentage  of GDP .. .. -1.6 -1.8 -1.9 -2.9 
.. Not available. 
a Capital outflow (-). 
b Capital inflow (+). 
Source : U.S. Department of Commerce, Bureau of Economic Analysis,  Survey of Current Business,  various issues.  
(iii) Saving-investment gap 
10. Fiscal consolidation and the emergence of a federal budget surplus have eliminated 
government dissaving, a major factor that has long contributed to the relatively low rate of national 
saving in the United States.  Nevert heless, investment has remained strong; indeed, fixed investment 
currently accounts for much more GDP  growth than in previous long expansions (such as in 1961-69 
and 1982-90).  This strong investment growth is the consequence of, inter alia :  strong GDP growth 
(via the accelerator effect); the low cost of capital owing to declining interest rates and higher stock 
market prices;  and strong corporate profits and th erefore the availability of retained earnings for new 
investment.  It may also be related to the ec onomic collapse in Asia and elsewhere, which has 
enhanced the attractiveness of the United States to foreign investors.  The boom in investment has 
included purchases of relatively s hort-lived computer equipment,  partly due to considerably lower 
                                                      
12OECD (1999a), Table 10. United States WT/TPR/S/56 
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 prices, but also possibly motivated by the desire to  replace old equipment susceptible to the year 2000 
bug.  National saving has failed to keep pace wi th investment, however, owing to the apparent 
collapse in personal saving, which is probably relate d to the surge in share prices to record levels. 
(The decline in the personal saving rate is somewh at exaggerated because it does not take into account 
saving in the form of unrealized capital gains; su ch gains have added to personal wealth, thereby 
raising wealth in relation to income.)  The outco me is that national saving fell short of domestic 
investment by an amount equivalent to 1.2% of GDP  in 1998. The resulting excess of investment over 
national saving is manifested in a current account de ficit (Box III.1), which grew to 2.7% of GDP in 
1998.  This aspect of globalization has been espe cially beneficial for the United States economy 
because it has allowed it to invest heavily in capital equipment and thus to maintain its high growth 
rate despite the relatively low national saving rate.13 
(3) MAIN DOMESTIC STRUCTURAL POLICY ISSUES  
(i) Taxation 
11. While the personal saving rate's decline has clea rly helped the world economy in the wake of 
the Asian financial crisis, the United States' tr aditionally low rate of saving has also caused 
widespread domestic concerns over its adverse impl ications, not just for the current account, but for 
investment, growth and productivity, not to mention the financial security of individual households.  
These concerns have prompted calls by several prominent tax experts and congressmen for a shift 
away from corporate and personal income taxes to a broad-based consumption tax.14  It is argued that 
comprehensive income taxation results in savings bei ng taxed twice;  first saving is usually made out 
of after-tax income, and then return s on such saving, when they are realized, are taxed again.  Such 
double taxation constitutes a potential disincentive to save, which would not arise under a broad-based 
consumption tax .  However, double taxation only affects about on e half of total personal saving.  This 
is because contributions to individual retirement accounts (IRAs), Keogh plans and 401(k) plans are 
deductible from personal tax;  c ontributions plus any returns are instead taxable upon withdrawal.15  
This tax treatment is similar to that under a consumption tax, such as the RST or VAT. 16 
12. As the treatment of much of current saving is similar to that under a consumption tax, the 
negative effect of the present tax system on saving is  less than often supposed. Furthermore, there is 
some ambiguity about the size of the behavioural response to after-tax rates of return on saving.17  
Consequently,  it is unclear whether a shift to consum ption-based taxation would raise saving 
substantially.  Even if it did, this would not necessarily result in a reduction of the current account 
deficit.  The shift to a consumption tax would reduce taxes on income from capital and thus likely 
increase the attractiveness of the United States as a destination for foreign investment, at least in the 
short run.18  Insofar as foreigners actually pay U.S. inco me taxes, a switch to a consumption-based tax 
                                                      
13Council of Economic Advisers (1999). 
14Among the academics, see Bernheim (1997).  The main proposals by congressmen that have been 
introduced as legislation include the Armey-Shelby flat tax, the Shaefer-Tauzin and Lugar national retail sales 
taxes, and the Nunn-Domenici unlimited savings allowance (USA) tax.  For more details concerning these and 
other proposals, see USITC (1998). 
15Also contributing to the low overall taxation of saving is the tax exemption of the implicit rental 
income of owner-occupied ho using, the deferral of taxes on accruing capital gains (together with selective loss 
realization) and the recently enacted preferential tax rate on  realized capital gains.  
16Under the "unlimited saving allowance" (USA) tax, proposed by Senators Nunn and Domenici, such 
treatment would be extended to all new saving. 
17 Much current evidence, including that reviewed  by the OECD (1994a), suggests that aggregate 
saving may not be sensitive to the after tax return. 
18USITC (1998). WT/TPR/S/56 Trade Policy Review 
Page 10 
 
 
 system would attract foreign equity investment  to the United States as well as encourage U.S. 
multinational enterprises (MNEs) to locate projects in the United States that might otherwise have 
gone abroad.  On the other hand, it could also enc ourage U.S. MNEs to shift debt capital to other 
countries.  While the net outcome of these two effects is theoretically ambiguous, most studies 
suggest that net capital inflows are more likely.  Th e consequent rise in net capital inflows would tend 
to widen the current account deficit, which would mitigate, if not outweigh, the reduction in the 
deficit brought about by any increase in savings indu ced by the switch to consumption taxation.  Nor 
are the border tax adjustments tied to a destinati on-based consumption tax lik ely to have a long-run 
effect on the trade balance because this effect would ultimately be offset by a real appreciation of the 
U.S. dollar.  Hence, if the present gap between na tional saving and domestic investment, and thus the 
current account deficit, is indeed a concern, perhap s a more viable way of reducing the gap might be 
for the Government to run an even larger budget surp lus or increase the funding of social security (see 
below). 
13. While a switch to a broad-based consumption tax would not necessarily reduce the saving-
investment gap, it is likely to increase the total U.S capital stock, with a significant part of this 
increase arising from inflows of foreign investment attracted by lower taxation of income from 
capital.  The rise in U.S. capital stock would, in turn, contribute to higher wages as a result of 
increased labour productivity and higher GDP.  The switch would also be expected to change the 
composition of U.S. trade, increasing net exports of capital-intensive goods relative to those of 
labour-intensive goods. 
(ii) Social security and related measures 
14. Another potential drag on national saving, particul arly in the long term, involves the social 
security system.  According to official projections, social security pension payments and health care costs for the elderly are likely to expand consider ably during the next four decades leading to the 
exhaustion of the Social Security Trust Fund by 2032 and, as a consequence, contribute to an eventual 
deterioration in the budget position.  In order to a ddress this situation, in his State of the Union 
message in January 1999, the President outlined proposals to ensure that the Fund would have 
sufficient resources to provide benefits until 2050.  The proposals involve allocating 62% of projected 
budget surpluses during the next 15 years (nearly US$2.8 trillion) to the reserve Fund.  Clearly, maintenance of such budget surplu ses and their allocation to the Social  Security Trust Fund would not 
only improve the financial position of the social security system, but add to national saving.  
Furthermore, in an attempt to raise the return s on the Fund's assets, roughly 15% of the Fund would 
be invested in the stock market (a practice alr eady followed by state and local government pension 
funds, which currently own about one tenth of liste d stocks);  this proposal has raised issues of 
corporate governance, particularly fears of political interference in investment decisions.  In order to 
allay such fears, equity investments would be managed independently , and without political 
interference, by private sector managers selected  by competitive bidding procedures.  Equity 
investments would be broad-based, neutral and non- discretionary as in widely used equity index 
mutual funds.  The Fund's equity holdings would represen t less than 4% of the U.S. equity market on 
average over the next 40 years. 
15. An additional 12% of the projected annual budget surpluses (US$536 billion) over the next 
15 years would be used to provide a progressive ta x subsidy for voluntary cont ributions, particularly 
by low income groups, to newly created "universal saving accounts", (USA)
19 thus expanding the 
scope of tax incentives for saving;  these tax incentiv es already include individual retirement accounts 
                                                      
19The tax subsidy involves a refundable tax credit for USA contributions together with a matching of 
such contribution by the Federal Government.  Universal saving accounts should not be confused with the 
"unlimited saving allowance" (USA) tax proposed by Senators Nunn and Domenici.  United States WT/TPR/S/56 
 Page 11 
 
 
 (IRAs) and Keogh plans, which currently cost  the Federal Government US$10.8 billion and 
US$3.7 billion, respectively, in annual tax revenue  losses (Chapter III(4)(i)).  Notwithstanding these 
existing incentives, which were introduced in the 1970s, the personal saving rate not only remained 
low by international standards, but virtually di sappeared in 1998, thereby casting some doubt on the 
effectiveness of such incentives. 
(iii) Labour market policies 
16. Clearly, the continued strong growth of the U. S. economy throughout the period under review 
has been the main reason for th e increase in the number of jobs.  The continuing growth in 
employment and the decline in the unemployment rate to 4.3% of the labour force at the end of 1998 
is also a reflection of the labour market's high degree of flexibility in the face of globalization.20  Part 
of this flexibility is perhaps due to the success of  welfare reform, undertaken since 1996, in increasing 
labour force participation.  Such reform includes in particular the Persona l Responsibility and Work 
Opportunity Reconciliation Act, which replaced th e previous open-ended federal entitlement to 
welfare assistance with a block grant to states to provide time-limited benefits.  As a result of this reform and various tax incentives, such as the Earned  Income Tax Credit (EITC) together with Work 
Opportunity Tax Credit and Welfare to Work Tax Cr edit, 1996, both of which were prolonged by the 
1998 OBRA, the number of welfare beneficiaries has fallen markedly with many people finding 
work.
21  As well as encouraging welfare recipients to  work, the Government has taken steps recently 
to lower the barriers that the low-skilled and the disabled face in finding employment.22  In 1998, 
Congress re-authorized "Head Start", a programme aimed at improving the quality and availability of 
child-care services, thereby helping one-parent fami lies to work.  Another 1998 Act overhauled and 
consolidated federal job training programmes into state-administered block grants, thus extending 
vocational rehabilitation programmes serving over one  million disabled persons.  Furthermore, the 
private sector has developed voluntary networks  aimed at facilitating the transitions from 
welfare to work, and school to work. 
17. Policies that further opened up the U.S. econom y to foreign trade and investment have 
contributed to higher wages as jobs related to e xports pay wages or salaries that are 10-15% higher 
than jobs unrelated to trade, while foreign i nvestment raises labour productivity.  The resulting 
booming economy has greatly improved job opportun ities for marginal/low-sk illed workers.  While 
trade liberalization appears to have caused little, if any, reduction in the absolute level of unskilled 
wages, by raising skilled wages it seemingly contributed to the rise in wage inequality during the 
period 1973-93.23  However, the bulk of the increase in wage inequality during this period probably 
arose from skill-based technological change, with additional significant contributions from declining 
                                                      
20The present unemployment is well below the no n-accelerating inflation rate of unemployment 
(NAIRU), which is estimated at 5.3%.  The (presumabl y temporary) fall in the unemployment rate below the 
NAIRU may be attributed, inter alia , to external shocks in the form of th e recent sharp falls in the import prices 
of oil and other commodities and the jump in labour productivity. 
21The EITC has become a major weapon in the fight ag ainst poverty.  According to the latest estimate 
by the Bureau of the Census, the credit lifted 4.3 milli on persons – workers themselves and family members - 
out of poverty in 1997.  The EITC is refundable  so that any amount of the credit in excess of the family's tax 
liability is returned in the form of a cash payment.  With nearly 20 million beneficiaries, costing the federal 
government US$6.4 billion in 1998 (Table III.14), the EITC is the largest cash-tr ansfer programme for lower-
income families with children.  Advocat es of the credit argue that redistribu tion occurs with much less distortion 
to labour supply than that resulting from other elements of the welfare system.  In particular, the credit is 
thought to encourage labour force particip ation, although some recent evid ence suggests that it may be 
effectively subsidizing married mothers to remain at home (Eissa and Hoynes, 1998). 
22OECD (1999a). 
23Kline (1997). WT/TPR/S/56 Trade Policy Review 
Page 12 
 
 
 real minimum wages and the drop in trade union member ship.  It follows that the threat of unskilled 
wage reduction posed by trade liberalization is gro ssly exaggerated.  The basic policy implication is 
that trade liberalization needs to be accompanied by  an array of domestic structural policies that 
enable society to evolve in an equ itable rather than an inequitable di rection.  Interestingly, there has 
been no increase in income inequality sin ce 1993 (judging from the Gini coefficient).24  On the 
contrary, recent evidence shows that, in 1998, wages at the bottom end of the wage distribution grew 
more quickly than those in the top end.25  This may be partly explained by the success of labour 
market policies, including those mentioned above. 
(iv) Competition policies 
18. A fundamental feature of U.S. structural policy is its reliance on competition, particularly 
antitrust policy, which applies to multinational as we ll as to domestic companies.  In this regard, 
antitrust authorities have increased their enforcemen t activity during the period under review, paying 
particular attention to those sectors, such as information technology and communications, where 
so-called "network effects" can impair competition.26  Largely as a consequence of the surge in 
merger activity, the number of merger investigati ons (under the Clayton Act) rose sharply in FY 1996 
(October-September) and FY 1997 (Chapter III(4)(viii)).  These included several high-profile cases, 
one of which resulted in defence contractors Lo ckheed-Martin and Northrop Grumman abandoning a 
proposed merger that was challenged by the Departme nts of Justice and Defense.  Moreover, although 
the number of investigations of anti-competitive practices (under the Sherman Act) in FY 1997 was 
lower than in each of the previous six years, the am ount of criminal fines collected by the Department 
of Justice jumped to US$205 million, five times as much as the previous high (the figure for FY 1998 
was higher, US$265 million);  most of these fines related to international price fixing.27  Particular 
attention has been paid to the high-technology sect or, where the Department of Justice has been 
involved in an ongoing case against Microsoft, a nd the Federal Trade Commission initiated a more 
narrow complaint against Intel (which was settled in March 1999 on the eve of the antitrust trial).28 
(4) TRADE PERFORMANCE  
19. During the period under review (1996-98), the Unite d States ran a merchandise trade deficit, 
which stood at US$248.0 billion in 1998;  this contrasts with the surplus in services of US$79 billion.
29  Continuing the trend observed since the beginning of the decade, the ratio of both exports 
and imports of goods and non-factor services to GDP increased during the period to reach 11.3% and 
13% respectively.  Since 1995, imports of goods a nd services in the United States have grown more 
rapidly than exports, reflecting rapid growth in pr ivate consumption and fixed investment.  In 1996, 
export growth slowed to a rate of 8.5%, before ri sing to 12.8% in 1997.  However, 1998 figures show 
a considerable slow-down in the growth of expo rts of goods and services, to 1.5%, while imports 
grew by 10.6% in the same period.   The slow-down can be attributed  to weaker demand, especially by 
Asian economies, in the aftermath of the crisis in the region.  Lower export growth has contributed to 
the rise in the current account deficit. 
                                                      
24OECD (1999b). 
25OECD (1999a). 
26Network effects arise in a market where a consumer's demand for a product is positively related to the 
consumption of others owing to either technological constraints or market dynamics (OECD, 1999a, p. 53). 
27In each of the years, nearly half of the total involved fines on single companies. 
28Microsoft is accused of predatory and exclusiona ry practices.  Intel was accused of not sharing 
intellectual property on prototype co mputer chips and technical information with three customers (Intergraph, 
Compaq Computer, and Digital Equipm ent Corporation) in an attempt to  obtain access to their technology. 
29U.S. Department of Commerce (April 1999). United States WT/TPR/S/56 
 Page 13 
 
 
 (i) Composition of merchandise trade 
20. The shift in the composition of U.S. merchandise trade away from primary products towards 
manufactures has continued during the period under re view.  U.S. exports of primary products as a 
percentage of total exports declined from 19% in 1995 to 15.8% in 1997.  By contrast, exports of 
manufactures rose from 76.4% to 79.9% (Table AI.1). 
21. Machinery and transport equipment continue to be the United States' most important 
merchandise export, accounting for 50% of total expor ts of goods in 1997 (Chart I.1).  Nevertheless, 
exports of other products such as office machines and telecommunication equipment have grown at a 
faster rate (11%) since 1995.  Exports of auto motive products and transport equipment, after a 
substantial slow-down in 1995, increased in 1996-97 ;  growing at 12.2% and 24.5%, respectively, 
in 1997. 
22. The share of manufactures in U.S. merchandise imports has undergone a slight decline 
since 1995, from 78.9% to 77.8% in 1997.  There has been a corresponding increase in the share of 
primary imports from 17.7% to 18.5%.  Machinery a nd transport equipment continue to be the most 
important U.S. merchandise import, with a share of 44.9% in 1997, down from 46.4% in 1995.  
Growth in imports of manufactures has been led by  chemicals (11.2%), and other electrical machines 
(10.6%) (Table AI.2). 
(ii) Pattern of merchandise trade 
23. During the period 1995-97, there was no substantial change in the destination of U.S. exports, 
nor in the origin of U.S. imports.  The main destin ation of exports is the Americas, especially Canada 
and Mexico whose combined importance has slightly  increased, attracting 31.6% of total U.S. exports 
in 1997.30  Over the period, Canada's share remained re latively constant, at an average just over 20%, 
but that of Mexico rose at a higher rate after the 1995 crisis, to exceed its pre-crisis level (10.6%) 
in 1997.  Other main destinations for U.S. exports  are East Asia and Europe both of whose shares 
decreased.  The main suppliers of imports in 1997 were Canada, the European Union (EU), Japan and 
Mexico.  The relative importance of Asia a source of imports declined throughout the period, while 
that of Mexico increased slightly (Tables AI.3 and AI.4). 
24. NAFTA's share in U.S. trade remained rela tively unchanged during the period under review.  
However, in terms of value, exports to Me xico increased from over US$40 billion in 1993, to 
US$68 billion in 1997.  Thus Mexico has displaced  Japan as the second largest market (after Canada) 
for U.S. exports.  Imports from Me xico and Canada have also incr eased in value terms since 1993.  
The increase in trade between Mexico and the United States is partly due to NAFTA preferences, but 
also to the existence of production-sharing opera tions, which is a consequence of the deeper 
integration between the two countries. 
(iii) Composition of trade in services 
25. In 1997, U.S. cross-border sales (exports) of ser vices grew more slowly, at 7%, than U.S. 
cross-border purchases (imports) of services, at 10%.  In contrast, over the decade 1986-96, U.S. sales 
grew much faster than purchases, averaging 11% annually versus 8%.31  This longer term pattern 
seems consistent with the United States' comparative advantage in the provision of services, as evidenced by the growing surplus in trade in service s each year since 1985.  Despite the faster growth 
in purchases in 1998, this surplus reached US$79 bil lion.  The largest surplus was in royalties and 
license fees, which represent receipts and payments fo r intellectual property rights, such as patents, 
trade-marks, and copyrights (Chapter III(4)(iii)).  Large surpluses were also  recorded for travel, 
                                                     
 
30In 1996 Canada and Mexico purchased 29.9% of total U.S. exports compared to 28.9% in 1995. 
31U.S. Department of Commerce (October 1998). WT/TPR/S/56 Trade Policy Review 
Page 14 
 
 
 business, professional and technical services; financ ial services and education.  Transportation, 
including travel, passenger fares, and other trans portation remains the most important export earner, 
accounting for 45% of total services earnings in 1998.  Transport (defined in the same way) is also the 
predominant element on the import side, with a share of some 56.7%.32  Royalties and license fees, 
even though a small share of service imports, have grown since 1995.  As shown, in Chart I.2 the 
composition of trade in services has remained stable since the previous U.S. Review. 
26. Further evidence of the United States' compe titive position in the provision of services is 
provided by the amount of services sold abro ad through commercial presence, which reached 
US$221.1 billion in 1996 up from US$190.1 billion in 1995.  In 1996 the value of services sold 
abroad through commercial presen ce exceeded the value of services so ld in the United States through 
commercial presence, resulting in a surplus of US$60. 1 billion.  In the same year, U.S. exports of 
services through commercial presence increased by  16%, while purchases increased by 8%.  Cross-
border transactions used to be the most common mode of trading services in the United States; 
however, sales through the two modes (cross-border and commercial presence) were about equal in 
1996.33  While some services can be delivered equally well through either mode, in other instances the 
mode of delivery may be largely determined by the nature of the services.  For instance, in the 
insurance sector commercial presence is a more important mode of trade than cross-border trade; exports of insurance through commercial presence  were US$41.3 billion, while exports through 
cross-border supply accounted for US$1.9 billion.
34 
(iv) Direction of trade in services 
27. U.S. exports of services to Japan continued to substantially exceed those to any other country, 
accounting for 14.2% of total services exports in 1997 .  The United Kingdom and Canada are the next 
largest destinations, with shares of 9.9% and 8. 6% respectively.  The United Kingdom is also the 
single most important source of U.S. imports of services, with imports increasing at a faster rate than those of any other country.  On a regional basis Western Europe continues to be the U.S. predominant trading partner in trade in services, followed by Asia and the Pacific (Chart I.2). 
 
                                                     
 
32U.S. Department of Commerce (April 1999). 
33Exports through cross-border supply amounted to US$224.2 billion in 1996, while exports through 
commercial presence reached US$221.1 billion in the same year.  Imports through commercial presence are higher 
at US$161 billion than those through cross-border supply at US$142 billion. 
34However, for specific services, it is difficult to a ssess the relative importance of the two channels because 
the available data on U.S. cross-border transactions are genera lly classified by type of service, whereas data on sales 
of services through commercial presence are classified by primary industry. United States WT/TPR/S/56 
 Page 15 
 
 
 0% 20% 40% 60% 80% 100%19931994199519961997
0% 20% 40% 60% 80% 100%19931994199519961997
0% 20% 40% 60% 80% 100%19931994199519961997
0% 20% 40% 60% 80% 100%19931994199519961997Chart I.1
Composition and direction of merchandise trade , 1993-97
Food Fuel Chemical
Other machinery & 
transport equipTextile and 
clothingOffice machines & 
telecom. e quip.Automotive 
products
OtherImports Exports
Canada Mexico Other America
a
Source:Mining includes fuels, ores and other minerals and non-ferrous metals.
UNSD, Comtrade database.EU15 China JapanFood MiningaChemical
Other machinery & 
transport equipTextile and 
clothingOffice machines & 
telecom. e quip.Automotive 
products
Other
Other Asia Africa OtherCanada Mexico Other America
EU15 Other Asia Japan
Africa OtherWT/TPR/S/56 Trade Policy Review 
Page 16 
 
 
 0% 20% 40% 60% 80% 100%19931994199519961997
0% 20% 40% 60% 80% 100%19931994199519961997
0% 20% 40% 60% 80% 100%19931994199519961997
0% 20% 40% 60% 80% 100%19931994199519961997Chart I.2
Composition and direction of trade in services, 1993-97
Travel Passenger fares Other transportation Royalties and licence fees
Insurance, net Telecommunications Financial services
Other services Business, professional and technical servicesImports Exports
Canada Europe Latin America and other Western hemisphere
Source:U.S. Department of Commerce (1998), Bureau of Economic Analysis, Survey of Current Business, October.Africa Asia and the Pacific Middle East OtherUnited States WT/TPR/S/56 
 Page 17 
 
 
  
(v) Foreign direct investment 
28. The United States has traditionally been an attrac tive destination for foreign direct investment 
(FDI), due to its bilateral regime , the large size of its market, labour market flexibility, deregulated 
services and good infrastructure, as well as strong intellectual property protection and competition 
policy.  In 1997, the United States recorded US $90.7 billion in FDI inflows and US$114.5 billion in 
outflows35;  inflows were 19% higher than in 1996 and outflows 53% higher.  The European Union 
continued to be the most important partner of  the United States, both for inward and outward 
investment.  However, its share in inward FDI declined in 1997 to 55.4% from 62.9% in 1996.  
Japan's share also declined, while  Switzerland's share both of inward and outward investment more 
than doubled in 1997.  Developing countries inward investment amounted to 10% of the total.  However, these countries attracted more than 30% of the United States' outward investment in 1997.  
Among developing countries, Latin America and the Ca ribbean as a region, attracted some 21% of 
U.S. outward investment in 1997 (Table I.4). 
29. Historically, the manufacturing sector has attracted most foreign capital, followed by the 
services sector.  In 1997, some 40%  of total inward investment w as in manufacturing;  however, the 
relative importance of manufacturing as a destination for investment continues to decline, while that 
of services, particularly financial services, continu es to increase.  U.S. direct investment abroad has a 
similar pattern; the share of investment in manufact uring has declined substantially since 1995, when 
it stood at 48%, to reach 28% in 1997, while investme nt in financial services in the same period 
increased from 25% to 42%.  In contrast, the share of wholesale and retail trade in total outward 
investment declined during the period, to 3% in 1997. 
Table I.4 
Inward and outward FDI flows, 1995-97  
 Inward FDI Outward FDI 
Item 1995 1996 1997 1995 1996 1997 
Total (US$ billion) 58. 8 76.5 90.7 92. 1 74.8 114.5 
By industry (percentage) 
Petroleum 6.6 11.6 4.9 0.7 6.8 10.0 
Manufacturing 48.9 45.1 39.9 48.3 33.6 28.2 
Wholesale and retail tradea 13.4 14.1 13.9 9.6 7.6 3.0 
Finance and insuranceb, c  25.0 16.2 24.3 25.0 32.8 42.2 
Other industries 6.1 13.0 17.0 16.3 19.2 16.6 
By country/region (percentage)d 
Developed countries 92.9 96.5 89.7 75.8 62.5 65.0 
Canada 8.2 10.8 10.4 9.3 9.7 9.4 
European Union 59.8 62.9 55.4 53.0 43.3 46.2 
Other Western Europee  7.8 4.7 10.8 3.7 4.8 6.7 
of which:  Switzerland 6.9 4.0 9.1 2.0 1.1 4.4 
Other developed countries 17.2 18.2 10.8 9.4 4.7 2.8 
of which:  Japan 13.8 13.4 10.4 2.5 -0.4 0.7 
Table I.4 (cont'd) 
                                                      
35It follows that the United States is a net exporter of FDI;  therefore, ne t capital investment is 
attributed to portfolio investment. WT/TPR/S/56 Trade Policy Review 
Page 18 
 
 
  Inward FDI Outward FDI 
Item 1995 1996 1997 1995 1996 1997 
Developing countries 7.1 3.5 10.3 26.9 34.8 34.3 
Africa -0.2 -0.6 1.1 0.1 0.7 2.3 
Latin America and the Caribbean 4.9 4.3 6.5 17.4 21.5 20.8 
West Asia -0.6 0.7 0.1 1.0 0.7 1.0 
South, East and South-East Asiaf 3.0 -0.9 1.7 6.2 11.9 10.3 
of which:  China - - - 0.3 1.3 1.1 
Central and Eastern Europe - - - 1.0 2.0 1.3 
a For outflows, distributive trade includes onl y wholesale trade (excludes retail trade). 
b Finance and insurance includes depositary institutions. c For outflows, finance and insurance includes real estate. 
d For outflows, totals do not necessarily add up to 100 per cent due to investments in  international affiliates that are not cl assified 
 under specific countries. e Includes developing Europe.  For inflows,  includes also Central and Eastern Europe. 
f Includes the Pacific. 
Source : Based on data from the United States, De partment of Commerce, Bureau of Econ omic Analysis webpage (www.bea.doc.gov., 
 (undated)) [18 and 19 June 1998].
 