For years, the United States partly offset its trade deficit with a surplus in capital income, as its foreign assets earned more in dividends and interest than it paid out. This is essentially no longer the case. While this reflects in part the recent rise in interest payments on US debt, particularly government debt, a weakening of income from investments by US multinationals also played a role in the early 2000s.
The components of the current account
The current account measures the various ways in which a country earns and spends money abroad. The figure below shows that the US has always had a current account deficit (blue line). Although this deficit narrowed after 2008, it has been on the rise again since 2020.
While the major component is the balance of international trade in goods and services (red line), other components also play a role. Trade is only one way of earning and spending with the rest of the world. Another is to receive dividends and interest on foreign investments, and to pay them to foreign investors who have placed their funds in the USA. The balance of this capital income has always been positive for the USA, especially since 2008 (yellow line).
This may seem surprising for a country that is a debtor to the rest of the world. The situation can be explained first by the fact that Americans are debtors in terms of bonds with relatively low interest rates, but creditors (until recently) in terms of stocks and multinationals' assets, which earn a higher return. What's more, the returns earned by US multinationals outside their borders are higher than those earned by their counterparts in the US.
This ability to offset part of the trade deficit with capital income was particularly strong between 2008 and 2020, but has since all but disappeared. Consequently, while the current account deficit was lower than the trade deficit between 2008 and 2020 (blue line above the red line), the opposite has since prevailed, with a capital income balance at zero, and net transfers to the rest of the world (purple line).
An evolution in two steps
Let's dig a little deeper by analyzing the change in the capital income balance between 2018-2019 and 2021-2022, and then between this period and 2023-2024. The figure below breaks down the changes in the total balance between the different investment categories. The first reduction of 0.72% of GDP between 2018-19 and 2021-22 is essentially explained by a reduction in the surplus on direct investment by multinationals (green bar). Between 2021-22 and the last six quarters, we see that a growing deficit in terms of bond and bank interest (red and blue bars) explains the additional decline in the balance of 0.28% of GDP.
We can refine the analysis by taking a closer look at these categories. The left-hand side of the chart below breaks down the direct investment balance between what US multinationals earn abroad (blue bars) and what foreign companies earn in the USA (green bars, constructed so that if foreign companies earn more the bar is negative, widening the deficit). We see that the deterioration in the direct investment income balance is primarily a reflection of lower revenues for US companies. While a rise in what foreign companies earn on their investments in the US played a role between 2018-19 and 2021-22 (negative green bar), this has not been the case since.
The right-hand side of the chart presents the same analysis for interest on bonds, with the amounts received by foreign investors further broken down into those linked to Treasury bonds held by non-Americans (red bars) and other bonds (green bars). The deterioration in the interest balance since 2021-22 (0.20% of GDP) is mainly explained by a rise in interest payments on public debt (red bar), but not only, as payments on other bonds have also increased.