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U.S. international transactions, first quarter 1988.

US International Transactions, First Quarter 1988

THE U.S. current-account deficit increased to $39.8 billion in the first quarter of 1988 from 33.5 billion in the fourth quarter of 1987.(1) the increase was more than accounted for by a $12.7 billion shift in the net services balance to a deficit of $0.7 billion from an unusually high fourth-quarter surplus of $12.0 billion. The shift was primarily due to changes in direct investment income transactions. Receipts of income in U.S. direct investment abroad were sharply lower due to a substantial reduction in capital gains from currency translation; payments of income on foreign direct investment in the United States were higher due to a shift form capital losses to small gains and a change in a financial accounting standard. The merchandise trade deficit decreased to $35.9 billion from $41.2 billion, as a strong increase in exports exceeded the increase in imports. Net unilateral transfers decreased $1.2 billion to $3.2 billion.

(1.) Quarterly estimates for U.S. current- and capital-account components are seasonally adjusted when statistically significant seasonal patterns are present.

A large increase in foreign official assets in the United States mostly reflected placement of dollars in the United States by foreign monetary authorities. U.S. official reserve assets decreased.

In the parivate capital accounts, large reductions in both U.S. bank claims on foreigners and U.S. liabilities to foreigners mostly reflected repayments of earlier borrowing in the interbank market.

In securities transactions, net purchases of U.S. Treasury securities by private foreigners increased strongly, partly reflecting rising bond prices and the relative stability of the dollar during the quarter. There was a shift to net foreign purchases of other U.S. securities after a record selloff in the fourth quarter. Net U.S. purchases of foreign securities increased.

Outflows for U.S. direct investment abroad decreased sharply, mostly because smaller capital gains resulted in lower reinvested earnings. Inflows for foreign direct investment in the United States slowed somewhat but remainder strong.

The statistical discrepancy (errors and omissions in reported transactions) was an inflow of $3.0 billion, following an inflow of $16.3 billion.

Technical notes, which follow the text, describe revisions to the estimates of U.S. international transactions, including changes to the end-use classification system for merchandise trade.

U.S. dollar in exchange markets

In the first quarter, the U.S. dollar depreciated 2 percent on a trade-weighted quarterly average basis against the currencies of 10 industrial countries, but appreciated 6 percent against the currencies of 22 OECD countries. This relative stability as in contrast to the dollar's sharp depreciation in the fourth quarter.

The dollar began the quarter at historic lows against many major currencies. It sharply appreciated early in the quarter, partly due to concerted intervention purchases of U.S. dollars and to interest rate reductions in several European countries. Also, in mid-January, a joint United States-Japanese statement pledged support adequate to maintain stability between the dollar and yen.

From mid-January until mid-March, the dollar was essentially stable against the yen and the European Monetary System (EMS) currencies, but depreciated against the currencies of several countries with robust growth and high interest rates. The Canadian dollar was particularly attractive for these reasons and rose against thhe U.S. dollar despite extensive intervention by Canadian authorities. The British pound was also attractive for these reasons and because of indications that British authorities would not intervene to prevent some appreciation of the pound relative to the mark and other EMS currencies. The pound appreciated nearly 7 percent against the dollar between mid-February and mid-March, before a drop in U.K. interest rates and intervention sales of pounds by Bristish authorities (mostly against the mark) began to slow the rise in the pound.

Depreciation of the dollar against the yen resumed during the last 2 weeks of the quarter, possibly because Japanese coroporations sold dollars in preparation for their end-of-fiscal-year accounting.

On a quarterly average basis, the dollar depreciated 6 percent against the Japanese yen, 3 percent against the Canadian dollar and British pound, and 1 to 2 percent against the EMS currencies.

Merchandise trade

The merchandise trade deficit decreased to $35.9 billion in the first quarter from $41.2 billion in the fourth, as a stong increase in exports exceeded the increase in imports. Both exports and imports rose to record levles.

Exports. -- Exports increased $6.7 billion, or 10 percent, to $74.7 billion; volume increased 8 percent. Both agricultural and nonagricultural exports in increased. Spurred by the cumulative effect of the depreciation of the U.S. dollar, which has sharply lowered the foreign currency cost of U.S. exports, exports have increased 31 percent in value and 28 percent in volume since the first quarter of 1987. The share of U.S. goods production that is exported has increased to a record 18.8 percent from 15.9 percent in the first quarter of 1987.

The values and volumes of all major end-use categories have increased during the past year (charts 3 and 4). The similarity between the value and volume pattern since the first quarter of 1987 indicates that commodity export prices have been relatively stable ove the period. This stability suggests that U.S. exporters in general have taken advantage of the depreciation of the dollar to build export volume and market share abroad rather than to increase profit margins on exported goods. The exceptions to the general picture of price stability are in industrial supplies and materials excluding non-monetary markets worldwide have contributed to higher U.S. export prices, and in computers and other office and business machines, where rapid improvements in productivity and technology have contributed to price decreases.

Agricultural exports increased $1.4 billion, or 18 percent, to $9.0 billion; volume increased 14 percent. Wheat increased by $0.4 billion to $1.3 billion; the increase was entirely in shipments to the Soviet Union under a U.S. export promotion program. Since the first quarter of 1987, wheat exports have doubled; two-2thirds of the increasd has been accounted for by the Soviet Union Corn increased $0.2 billion, and soybeans, $0.1 billion. Industrial supplies and materials increased $0.3 billio, led by a $0.2 billion increased in tobacco.

Nonagricultural exports increased $5.3 billion, or 9 percent, to a record $65.7 billion; volume increased 8 percent. Industrial supplies and materials increased $2.5 billion to $19.4 billion. The increase was broadly based; an exception was a small decrease in fuels and lubricants. Nonmonetary gold increased $1.0 billion to $1.9 billion. Continuing purchasd by Taiwan accounted for most of the increase; several other Southeast Asian countries made smaller purchases.

Capital good increase $2.3 billion to $26.4 billion. The broadly based increase was led by computers and peripheral equipment, up $0.6 million, and civilian aircraft, up $0.4 billion.

Automatic products decreased slightly to $7.6 billion. Exports to Canada remained strong, but were $0.3 billion less than the record shipments of $5.7 billion in the fourth quarter. Recent strength in exports of complete cars to Canada may reflect both the strength of the Canadian economy and some shift in Canadian imports from more expensive Japanese cars. Exports to other areas increased $0.3 billion to a record $2.2 billion.

Consumer goods increased $0.5 billion to $5.3 billion. Durables increased 15 percent, and nondurables, 7 percent.

Imports. -- Imports increased $1.4 billion, or 1 pecent, to $110.6 billion; vloume increase 1 percent. Nonpetroleum imports increased, and petroleum imports decreased.

Import volume increases have slowed in recent quarters (charts 5 and 6). Volume increases have been held down by the increased dollar cost of imports and, for consumption-oriented imports, by stable real consumer demand, as measured by personal consumption expenditures for goods in constant (1982) dollars. The share of imports in real gross domestic purchase in the first quarter, virtually unchanged over the last three quarters. Prices increased have continued to push imports values higher.

Nonpetroleum imports increased $2.7 billion, or 3 percent, to a record $100.6 billion; volume increased less than 1 percent. Industrial supplies and materials increased $1.5 billion to $21.4 billion. Much of the large amount of nonmonetary gold imported during the last two quarters was subsequently exported to Taiwan and several other Southeast Asian countries, as previously mentioned.

Capital goods increased $0.8 billion to $24.1 billion. Computers and other office and business machine increased $0.2 billion to $5.4 billion, and other capital goods increased $0.6 billion to $18.7 billion, reflecting continued strength in business investment. Consumer goods increased $0.6 billion to $23.6 billion. Food, feeds, and beverages increased $0.2 billion to $6.5 billion; meat and poultry increased $0.3 billion to $1.1 billion.

Automotive products decreased $0.3 billion to $21.9 billion. An increased in new cars from Canada was more than offset by a decrease in new cars from other areas. The number of cars from Japan decreased 30 percent. For the year ending March 1988, Japan did not export as many cars to the United States as allowed under Japan's voluntary export restraint program. Passenger cars from Germany decreased 15 percen; cars from South Korea increased 27 percent.

Petroleum imports decreased $1.3 billion, or 12 percent, to $10.0 billion, entirely due to lower prices. The average price per barrel decreased to $15.24 from $17.46; the average number of barrels imported daily increased to 7.16 million from 7.08 million. High production quotas for OPEC members, increase in production by non-OPEC countries, and possible price discounting contributed to the price decline. Domestic inventories rose strongly and production was unchanged.

Service transactions

The net services balance shifted to a deficit of $0.7 billion in the first quarter, compared to an unusually large surplus of $12.0 billion in the fourth. Receipts decreased $7.1 billion to $44.2 billion, and payments increased $5.6 billion to $44.8 billion; both changes were primarily due to direct investment income.

Receipts of income on U.S. direct investment abroad decreased to $11.1 billion from a record $19.2 billion. Nearly all the record was accounted for by a decrease in capital gains to $1.1 billion from $9.0 billion in the fourth quarter, when currency translation gains, espically in Western Europe, were exceptionally large. Operating earnings slipped $0.2 billion to $10.5 billion.

Payments of income on foreign direct investment in the United States increased $5.3 billion to a record $5.6 billion, as fourth-quarter capital losses shifted to small gains and as earnings increased. The increased partly reflected a change in a financial accounting standard that increased report income of some foreign-owned U.S. affiliates.

Receipts of income on other private investment aboard decreased $1.0 billion to $11.9 billion; the decrease was due to lower interest rates and a decrease in bank-reported claims. U.S. Government income receipts increased $0.9 billion to $2.1 billion; a rescheduling of interest receipts with Egypt accounted for most of the increase.

Payments of income on other private investment in the United States decreased $0.6 billion to $13.4 billion; most of the decrease was due to lower interest rates and a large decrease in U.S. bank liabilities to foreigners. U.S. Government income payments increased $0.4 billion to $6.6 billion.

Travel receipts increased slighly to $4.0 billion. Rceipts from overseas visitors were up 10 percent; a continued icreased in the number of visitors was probably associated with the depreciation of the dollar. Receipts from Canada increase, and those from Mexico decreased. Travel payments increased $0.2 billion to $3.6 bilion; most of the increase was accounted of by increase was accounted for by increased was accounted for by increased air and land travel to the Mexican interior. Payments to Canada and overseas areas were up slightly.

Passenger fare receipts increasd $0.2 billion to $1.7 billion. During the past year, the number of travelers on U.S. flag carriers from developed countries increased by 50 percent, due largely to the depreciation of the dollar. Lesser depreciation on appreciation of the dollar against the currencies of many developing countries has contributed to an increase in travelers from developing countries of less than 20 percent, including an increase of only 2 percent from Latin American. Passenger fare payments decreased slightly to $2.2 billion.

Other transportation receipts increased $0.3 billion to $4.7 billion. Payments increased $0.2 billion to $5.0 billion.

Receipts from unaffiliated foreingners for other private service (e.g. reinsurance, securities commissions, communications, etc.) were unchanged at $2.8 billion. Receipts of commissions on securities transactions decreased, due to a decrease in the volume of stock transactions. Payments decreased $0.1 billion to $2.0 billion; the decrease was more than accounted for by lower securities commissions.

Transfers under U.S. military agency sales contracts increase $0.4 billion to $2.6 billion; the increase mostly reflected increased deliveries of aircraft and missiles. Direct defense expenitures abroad were unchanged at $3.4 billion.

Unilaterl transfers

Net unilateral transfers decreased $1.2 billion to $3.2 billion due to lower U.S. Government grants. A few countries had recieved large portions of their annual grants in the fourth quarter, the first quarter of the U.S Government fiscal year.

U.S. assets abroad

U.S. assets broad decreased $8.9 billion in the first quarter of 1988, compared to an increased of $38.9 billion in the fourth quarter of 1987.

U.S. official reserve assets -- U.S. official reserve assets decreased $1.5 billion in the first quarter, compared to $3.7 billion in the first quarter, compared to $3.7 billion in the fourth. Most of the decrease reflected intervention sales of foreign currency holdings.

Claims reported by banks -- U.S. claim on foreigners reported by U.S. banks decreased $17.4 billion in contrast to an increase of $23.5 billion. U.S. banks' dollar claims on own foreign offices and on unaffiliated banks decreased $13.6 billion, mostly in January; earlier borrowing was repaid and interest rate differentials, which had favored depositing abroad in the fourth quarter, narrowed. Claims on most areas decreased; an increase in claim on Japan was a notable exception.

U.S. banks' dollar claims on foreign public borrowers and other private foreigners decreased $5.1 billion compared to $1.8 billion. Claims on foreign public borrowers in Latin America continued to decrease. A decrease with Mexico partly reflected the exchange of some U.S. banks claims for a special Mexican Government bond. The U.S. Government's imposition in February of restrictions on the transfer by U.S. banks of funds to Panama contributed to the decrease in claims. Also, internal financial institutions made repayments on earlier borrowing.

U.S. banks' dollar claims for domestic customers' account increased $0.5 billion compared to $3.4 billion.

Claims payable in foreign currencies increased $1.0 billion compared to $8.6 billion

Foreign securities -- Net U.S. purchases of foreign securities were $4.4 billion compared to $1.8 billion. A resumption of net purchases of foreign stocks after the large fourth-quarter selloff was partly offset by reduced purchaseds of foreign bonds.

Net U.S. purchases of foreign stocks were $0.7 billion following record net sales of $3.9 billion. As indicated in chart 7, net purchases of foreign stocks resumed in February and March, when stock prices in major markets rose sharply. Net purchases in Japan accounted for most of the shift, as Japanese stock prices increased to near record levels. Gross transactions in foreign stocks remained below levels prior to the October plunge in stock prices.

Net U.S. purchases of foreign bonds were $3.7 billion compared to $5.7 billion. New foreign bonds issued in the United States were $2.1 billion compared to $3.7 billion. Placements by Canada were slightly higher, while placements by other areas and international financial institutions declined. Net U.S. purchases of special Mexican Government bonds, mentioned above, were about $0.3 billion. The bonds were issued in March in exchange for deeply discounted public sector debt held by U.S. banks and were collateralized by special nonmarketable U.S. Treasury zero-coupon bonds.

Net U.S. purchases of outstanding fireign bonds were $1.7 billion compared to $2.0 billion. Continued purchases of British gilt-edge bonds and a shift to net purchases of Canadian bonds probably reflected widening interest differentials in favor of long-term assets denominated in pounds and Canadian dollars, as well as as the strength of those currencies in exchange markets. Transactions in Japanese bonds shifted to net sales.

Direct investment -- Net outflows for U.S. direct investment abroad were $4.8 billion compared to $19.7 billion. Reinvested earning fell to $3.6 billion from $15.8 billion, due to lower capital gains; distributed earnings increased. Equity capital shifted to inflows of $0.8 billion from outflows of $2.8 billion, as several companies sold foreign petroleum interests. In the United Kingdom, a pertroleum company purchased in the fourth quarter was resold in the first, and in Latin American and in other developing countries, interest in several petroleum operations were sold. Inter-company account debt outflows increased to $2.0 billion from $1.1 billion.

Foreign assets in the United States

Foreign assets in the United States increased $27.9 billion in the first quarter of 1988, compared to an increase of $56.1 billion in the fourth quarter of 1987.

Foreign official assets -- Foreign official assets in the United States increased a record $24.4 billion in the first quarter compared to $20.0 billion in the fourth. The increase reflected placement of dollars in the United States by monetary authories of key industrial countries and some increases in dollar assets of smaller industrial countries in Western Europe. Assets of OPEC members continued to decrease. Assets of other countries, particularly several Southeast Asian countries, increased.

Liabilities reported by banks -- U.S. liabilities to private foreigners and international financial institutions reported by U.S. banks, excluding U.S. Treasury securities, decreased $16.0 billion in contrast to an increase of $29.8 billion. Decrease in dollar liabilities to own foreign offices and to unaffiliated banks were widespread in January, as earlier borrowing was repaid; an exception was Japan, where liabilities to own foreign offices increased. Dollar liabilities to other private foreigners and international financial institutions increased $0.4 billion, compared to a decrease of $3.3 billion.

Liabilities payable in foreign currences increased $1.6 billion, compared to $9.2 billion; the smaller increase partly reflected the relative stability of the dollar.

An increase in U.S. banks' custody liabilities was mostly with U.S. banks' offices in the Caribbean.

U.S. Treasury securities -- Net foreign purchase of U.S. Treasury securities by private foreigners and international financial institutions were $7.0 billion compared to $0.5 billion (chart 8). In February and March, the voulme of transactions surged to record levels, reflecting the steady increase in bond prices, increased investor confidence that the dollar had stabilized, and a shift toward higher yielding longer term assets. European investors continued net purchases during the first quarter; Japanese investors, who account for about one-half of transactions, shifted from net sales in the fourth quarter to small net purchases in the first.

Other U.S. securities -- Net foreign purchase of U.S. securities other than U.S. Treasury securities were $2.3 billion. Net sales of stocks slowed substantially, and net purchases of U.S. bonds slowed slightly.

Net foreign sales of U.S. stocks slowed to $0.2 billion from a record selloff of $7.8 billion following the decline in U.S. stock markets in October. Although interest in the U.S. market picked up with some recovery of U.S. stock prices and more stable foreign exchange markets, the volume of gross transactions remained well below the previous two quarters (chart 7.)

Net foreign purchases of U.S. bonds slowed to $2.5 billion from $2.8 billion. The decrease was more than accounted for by a continued slowdown -- to $2.6 billion from $3.3 billion -- in bonds newly issued abroad by U.S. corporations. Foreign investors remained cautious about acquiring more U.S. corporate and dollar-de-nominated assets, and U.S. borrowers found alternative funding in the domestic bond and commercial paper markets.

Direct investment -- Inflows fior foreign direct investment in the United States were $10.2 billion compared to $11.7 billion Equity capital inflows were $5.7 billion compared to $11.3 billion. The largest transactions were a Japanese acquisition of a division of a U.S. entertainment company and of a U.S. hotel chain and two British acquisitions in service industries. Reinvested earnings shifted to an inflow of 3.8 billion after a net outflow of $1.9 billion. A shift to small capital gains from capital losses and a change in a financial accounting standards boosted first-quarter earnings. Intercompany account debt inflows were $0.7 billion compared to $2.4 billion

Technical Notes

As is customary each June, estimates of U.S. international transactions are revised to incorporated new information and improved methodologies. Revisions were limited to 1984-87, except for those related to a reclassification of passenger fare payments to and recipts from Canada and Mexcio for 1983-87 and revisions to merchadise trade for 1978-87.

For U.S. international transactions, tables 1 and 2 present annual estimates for 1960-87 and quarterly estimates for 1982-87. For merchandise trade, table 3 presents annual estimates for 1978-87 and quarterly estimates for 1986-87. For account and area details, tables 4-10 present annual estimates for 1985-87 and quarterly estimates for 1986-87. For selected country detail, table 10a presents annual estimates for 1985-87.

Seasonal adjustment factors -- for the current-account items that show seasonal patterns; for repayments on U.S. Government credits and other long-term assets, other than official reserve assets; and for U.S. direct investment abroad -- were recalculated by extending through 1987 the period used to derive the factors.

Passenger fares

Beginning with estimates for 1983, passenger fare payments to and receipts from Canada and Mexico are reclassified from travel to passenger fares. The average annual revision to payments due to this reclassification was $190 million for Canada and $412 million for Mexico. The average annual revision to receipts was $504 million for Canada and $125 million for Mexico.

Merchandise trade

A new end-use commodity classification system has been developed and is introduced with data presented in this issue of the SURVEY. The new system presents considerably more detail than the old and includes a few additional changes. In addition, seasonal factors have been recalculated and applied to revised unadjusted data for 1978 to the present, and the format of table 3 has been modified.

End-use commodity classification system. -- The end-use commodity classification system has undergone a number of changes since its introduction. The last major change occurred in 1978 when a new Statistical Classification of Domestic and Foreign Commodities Exported from the United States (Schedule B) for exports and a new Tariff Schedule of the United States Annotated (TSUSA) for imports were adopted. The new end-use system is being introduced in this issue of the SURVEY because it offers analytical advantages in that it provides more detail. The new end-use system was designed to incorporate the Harmonized System (HS), which comprises nearly 8,000 10-digit export codes and 14,500 10-digit import codes. The HS was developed under the auspices of the Customs Cooperation Council to establish an internationally accepted standard for the classification of internationally traded goods in order to eliminate classification as a source of nontariff trade barriers. The HS has already been adopted by the major trading partners of the United States and is awaiting approval by the U.S. Congress.

A complete outline of the new end-use system is presented at the end of those notes (table J). It uses five-digit credits to offset U.S. taxes on foreign-earned income to the extent such income is taxed abroad and distributed to the U.S. company.)

A $2.2 billion increase in equity capital outflows, to $2.5 billion, contributed to the increased growth in the position, although to a much lesser extent than reinvested earnings. Shifts to outflows in manufacturing and banking were partly offset by smaller outflows in finance and larger inflows in "other industries."

Intercompany debt outflows decreased $1.5 billion, to $6.3 billion. A $2.4 billion shift to inflows in manufacturing and a $1.8 billion decrease in outflows in petroleum were partly offset by a $2.7 billion increase in outflows to all other industries. In manufacturing, the shift to inflows partly reflected sharply increased earnings of affiliates in transportation equipment, which may have lessened their need for U.S.-source funds. In petroleum, the decline in outflows reflected an increase in U.S. parents' payables to their affiliates due to higher crude oil prices and an increased volume of U.S. petroleum imports. The partly offsetting increase in outflows to all other industries mainly resulted from larger U.S. parent receivables from affiliates in finance and wholesale trade, possibly to finance larger U.S. exports in 1987.

By account. -- The $49.2 billion increase in the position consisted of capital outflows of $44.5 billion and valuation adjustments of $4.8 billion. Capital outflows consisted of equity capital outflows of $2.5 billion, intercompany debt outflows of $6.3 billion, and reinvested earnings of $35.7 billion. (For estimates of capital outflows by account, see table 5 in "U.S. International Transactions, First Quarter 1988," on page 55 of this issue.)

The equity capital outflows were concentrated in finance and petroleum. In finance, the outflows represented capital contributions to affiliates in Bermuda, the United Kingdom, and Hong Kong. A return of capital from Netherlands Antilles finance affiliates was partly offsetting. In petroleum, most of the outflows resulted from two acquisitions. In Australia, a company with substantial petroleum reserves was acquired, perhaps in response to the easing of Australian restrictions on foreign ownership in the petroleum industry. In the United Kingdom, a minority interest in a large petroleum company was acquired. (The minority interest was subsequently sold in early 1988, and some of the proceeds were used to acquire a smaller British company with sizable petroleum reserves.)

Partly offsetting the outflows in finance and petroleum were large inflows in "other industries'; they mostly resulted from the sale of a major British food retailer and partial sales of two Australian mining operations. The British retailer was probably sold because the U.S. parent needed funds to repay debt incurred while opposing a hostile takeover attempt. One of the Australian sales reflected a public offering of a minority interest in what was previously a wholly owned affiliate. The other reflected the selloff of a minority interest in an affiliate; the proceeds were used by the U.S. parent for a stock buyback.

About one-half of the intercompany debt outflows were for U.S. prents' repayments of loans to their Netherlands Antilles finance affiliates.(2) Much of the remaining outflows were in finance as well; in one particularly large transaction, a loan was made to a holding company affiliate in Canada, which, in turn, used the funds to acquire a major Canadian real estate company with substantial U.S. holdings. Other intercompany debt outflows were to affiliates in wholesale trade, perhaps reflecting increased U.S. experts in 1987, and to affiliates in services.

(2) Previously, these affiliates had borrowed funds in European capital markets and re-lent them to their U.S. parents. The parents were prompted to borrow indirectly through these affiliates, rather than directly from Euromarkets, because the interest payments on their borrowings from affiliates were exempt from U.S. withholding taxes under a United States- Netherlands Antilles tax treaty. However, in the third quarter of 1984, the U.S. withholding tax on interest paid to foreigners was repealed, ending any advantage to borrowing through Netherlands Antilles affiliates. Consequently, most borrowing from these affiliates has ceased, and repayments of previous borrowings have increased substantially.

Reinvested earnings were boosted by depreciation of the U.S. dollar against major foreign currencies. Nearly one-half of the $35.7 billion of reinvested earnings were accounted for by capital gains from currency translation. By industry, affiliates in manufacturing had reinvested earnings of $20.4 billion, mostly in Europe. Reinvested earnings were $6.4 billion in finance and insurance and $4.1 billion in wholesale trade.

Valuation adjustments were $4.8 billion. They were particularly large in "other industries" and reflected the above-mentioned sales of the British food retailer and Australian mining operations for more than book value.

By country. -- The position increased 20 percent, to $233.3 billion, in developed countries. Among these countries, the largest increase -- $9.0 billion -- was in the United Kingdom. Most of the increase resulted from reinvested earnings that were boosted by capital gains from currency translation. In addition, equity outflows to the United Kingdom were larger than to any other country. They reflected the earlier mentioned capital contributions to affiliates in finance and the purchase of a minority interest in a petroleum company. Inflows from the sales of several large retailing operations were partly offsetting. Several other European countries -- Germany ($3.6 billion), France ($2.6 billion), and the Netherlands ($2.5 billion) -- also had large increases in position. In each of these countries, reinvested earnings accounted for most of the increase.

The position in Canada increased $6.9 billion. As in Europe, the increase was mostly attributable to reinvested earnings. However, gains from currency translation were not as significant as in the United Kingdom, in part because the U.S. dollar did not decline as much against the Canadian dollar as against the British pound. The position in Canada was also boosted by the earlier mentioned loan to a Canadian holding company, which was used to finance the purchase of a real estate company.

The position in Japan increased $2.9 billion, mainly due to reinvestment of currency translation gains. The $1.9 billion increase in Australia mostly reflected widespread growth in earnings from operations, most of which were reinvested.

In developing countries, the position increased 18 percent, to $71.2 billion. Over one-half of the increase -- $6.0 billion -- was in "other Western Hemisphere," particularly in Bermuda and the Netherlands Antilles. In Bermuda, the $3.5 billion increase partly reflected a large capital contribution and several loans to affiliates in finance. In the Netherlands Antilles, the increase reflected the continuation of U.S. parents' repayments of loans to their finance affiliates.

In "other Asia and Pacific," the position increased $2.4 billion. Most of the increase was in Hong Kong, particularly in finance and wholesale trade. It partly reflected the use of affiliates in that country as a base for expansion elsewhere in the Far East. In "other Africa," most the $0.8 billion increase was in Nigeria and consisted primarily of equity capital outflows to petroleum affiliates.

Foreign direct investment in the United States

The foreign direct investment position in the United States increased 19 percent (a record $41.5 billion) in 1987, to $261.9 billion, following an equal rate of growth in 1986 (table 4).(3) Growth in 1987 reflected both continued acquisitions of U.S. businesses by foreign direct investors and increases in foreign investors' ownership stakes in existing U.S. affiliates.

(3) The position is the book value of foreign direct investors' equity in, and net outstanding loans to, their U.S. affiliates. A U.S. affiliate is a U.S. business enterprise in which a single foreign direct investor owns at least 10 percent of the voting securities, or the equivalent. Factors that contributed to the continued growth in foreign direct investment included dollar depreciation, continued U.S. real economic growth, corporate restructuring in the United States, concerns over U.S. protectionist measures, and the availability of large dollar holdings in several developed countries with trade surpluses.(4)

(4) For a more detailed analysis of these and other factors affecting foreign direct investment in the United States, see "U.S. Business Enterprises Acquired for Established by Foreign Direct Investors in 1987," SURVEY 68 (May 1988): 50-54. The data from BEA's survey of new foreign direct investments in the United States, summarized in that article, indicate that outlays to establish or acquire U.S. affiliates decreased to $30.5 billion in 1987, from a record $39.2 billion in 1986. These figures differ from those on changes in the foreign direct investment position presented here, primarily because they cover only transactions involving the acquisition or establishment of new U.S. affiliates and because they include financing other than from the foreign parent, such as local borrowing by existing U.S. affiliates. Changes in the position, in contrast, reflect transactions of existing as well as new U.S. affiliates, but only if the transactions are with the foreign parent.

Capital inflows were $42.0 billion, an increase of 23 percent from 1986. An increase in intercompany debt inflows and a shift from negative to positive reinvested earnings accounted for most of the increase. Equity capital inflows increased only slightly from the very high level in 1986.

Intercompany debt inflows increased $2.7 billion, to $14.0 billion. The increase was more than accounted for by a British parent's loan of roughly $5 billion to its U.S. petroleum affiliate. The funds financed part of a tender offer for the publicly held stock of the affiliate, which raised the parent's ownership stake to 100 percent.

Reinvested earnings shifted $4.8 billion to a positive $2.5 billion. The shift reflected both a reduction in capital losses and an improvement in earnings before capital gains and losses. Capital losses fell from $2.1 billion to $0.2 billion. The losses in 1986 were more than accounted for by a large writedown of the assets of a U.S. machinery affiliate and the writedown of oil reserves of U.S. petroleum affiliates following the collapse of oil prices that year. In 1987, capital losses in petroleum shifted to capital gains, and capital losses in manufacturing declined substantially. Partly offsetting was a shift from gains to losses in insurance, which reflected declines in the value of affiliates' stock and bond portfolios, particularly after the October stock market collapse.

Earnings before capital gains and losses increased $2.6 billion, to $7.0 billion. The increases were more than accounted for by affiliates in manufacturing and petroleum. They reflected improvement performance in these industries, acquisitions of new U.S. affiliates, and increases in the ownership -- and, thus, in foreign parents' shares of the earnings -- of existing affiliates. Partly offsetting were a shift to losses in banking and an increase in losses in real estate.

Equity capital inflows increased $0.4 billion, to $25.5 billion. The high level of inflows in both 1986 and 1987 reflected strong acquisition activity, as well as increases in ownership of existing affiliates, by foreign direct investors. Large increases in equity inflows in manufacturing and "other industries' were partly offset by a decline in wholesale trade and a shift to outflows in insurance.

By account. -- The $41.5 billion increase in the position in 1987 consisted of capital inflows of $42.0 billion and negative valuation adjustments of $0.5 billion. Capital inflows consisted of equity capital inflows of $25.5 billion, intercompany debt inflows of $14.0 billion, and reinvested earnings of $2.5 billion.

Equity capital inflows largely reflected acquisitions of U.S. businesses by foreign direct investors. Three large acquisitions, each involving inflows of over $1.0 billion, were financed through equity capital. One involved the purchase of a large U.S. employment agency by a smaller British employment agency. Another involved the purchase of a Wisconsin-based brewery by a large Australian brewery. Finally, a British company acquired the international hotel division of a large U.S. company that was divesting most of its nonairline businesses.

In addition, a portion of the inflows financed increases in foreign investors' ownership of existing affiliates. The single largest equity capital inflow, about $1.5 billion, financed the increase in a Netherlands parent's equity stake in a manufacturing joint venture.

Substantial portions of intercompany debt inflows financed acquisitions by U.S. affiliates and increases in foreign parents' ownership in existing U.S. affiliates. The large intercompany debt inflow in petroleum mentioned earlier was among the largest ever for either a new investment or an increase in an existing investment. Other large intercompany debt inflows occurred in manufacturing, wholesale trade, "other industries", and real estate and were dispersed among many affiliates. In manufacturing, large intercompany debt inflows (from the United Kingdom and the Netherlands) to a single U.S. chemical affiliate refinanced the affiliate's 1986 acquisition of a U.S. manufacturer of chemical, cosmetic, and health products.

Reinvested earnings were more than accounted for by affiliates in manufacturing, wholesale trade, and petroleum; affiliates in banking and real estate had negative reinvested earnings. In manufacturing, U.S. chemical affiliates accounted for a substantial portion of reinvested earnings. European chemical companies -- attracted by strong demand; high profitability, particularly in specialty chemicals; and U.S. corporate restructuring -- have expanded their U.S. operations over the past few years. The high earnings that have accompanied the expansion have tended to be reinvested rather than distributed to foreign parents. In wholesale trade, reinvested earnings were more than accounted for by Canadian-owned affiliates. In petroleum, reinvested earnings reflected the recovery of oil prices in the first half of 1987 and an increase in foreign ownership in a large U.S. affiliate, which boosted the foreign parent's share of the affiliate's net income.

By country. -- By far the largest share of the increase in the position, 46 percent, was accounted for by the United Kingdom. Japan and the Netherlands accounted for 16 and 15 percent, respectively.

The position of British parents increased $19.0 billion, to $74.9 billion. The largest increases were in manufacturing (particularly chemicals, machinery, and food), petroleum, and "other industries." Two major factors contributed to the surge in investment from the United Kingdom: The sharp appreciation of the pound against the dollar in 1987 and the deregulation of U.K. financial markets. The latter provided an opportunity for British parents to finance several large acquisitions in the United States by issuing their shares in the London stock market.

The position of Japanese parents increased $6.5 billion to $33.4 billion. The largest increases, which were in manufacturing and real estate, were almost entirely related to acquisitions.

The position of Netherlands parents increased $6.3 billion, to $47.0 billion. The largest increases were in manufacturing (particularly chemicals), petroleum, and banking and reflected both acquisition activity by Netherlands parents and transactions involving Netherlands finance affiliates of direct investors in other countries. In banking, the Netherlands affiliate of a Hong Kong bank purchased the remaining shares of its U.S. affiliate.

Smaller inflows from France, Switzerland, and Germany -- ranging from $2.3 to $2.5 billion -- accounted for large percentage increases in the positions of these countries. The position of French parents increased 32 percent, to $10.2 billion. The increase was largely accounted for by equity inflows in manufacturing. Several French chemical companies made capital contributions to their U.S. affliates. In machinery, a French company acquired the consumer electronics business of a large U.S. company in exchange for the French company's medical equipment business and cash.

The 19 percent increase, to $14.3 billion, in the position of Swiss parents was parimarily in manufacturing. There was a shift to positive reinvested earnings as well as an equity inflow to finance the acquisition of a U.S. confectionery producer by a Swiss company that manufactures similar products. The position of German parents increased 14 percent, to $19.6 billion. The increase was accounted for by equity capital and intercompany debt inflows related to acquisitions in manufacturing. The equity inflows financed the acquisition of a U.S. manufacturer of tires and rubber products and the intercompany debt inflows financed a portion of a U.S. affiliate's purchase of a U.S. chemical company.
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Author:Krueger, Russell C.
Publication:Survey of Current Business
Date:Jun 1, 1988
Words:6754
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