An Ownership-Based Framework of the U.S. Current Account, 2017

By Kassu W. Hossiso  |  Volume 99, Number 2  |  February 13, 2019

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This report updates the supplemental ownership-based framework of the current account of the U.S. international transactions accounts (ITAs) prepared by the Bureau of Economic Analysis (BEA).¹ The supplemental presentation is similar to the standard current-account presentation in some fundamental ways. It includes the major aggregates of international trade in goods and services, primary and secondary income, and some key balances, which are also included in the ITAs.

In addition, the basic principle of residency is used to define international transactions. That is, transactions are defined as international when they occur between a U.S. resident and a nonresident. Therefore, the residency of an affiliate of a multinational enterprise (MNE) reflects the country where the affiliate's operations are located, not the country of its owner. For example, total sales by foreign affiliates of U.S. MNEs to local customers abroad are not treated as U.S. receipts. Instead, only the U.S. parent's share of earnings on those sales is treated as a U.S. receipt because, on a residency basis, the remainder of the earnings represents transactions between foreign residents. The framework presented here is “ownership-based” in that it adds detail from BEA's activities of MNEs data to provide additional insight into the owners of direct investments and their affiliates' activities behind the statistics.²

The ownership-based framework highlights the important role that MNEs play in international transactions. For example, in 2016, intra-MNE trade accounted for 33 percent of U.S. exports and for 37 percent of U.S. imports of goods and services. The supplemental framework recognizes that direct investment income results from the MNE's active role in decisions about the production of goods and services by its affiliates. Under the ownership-based framework, direct investment income is renamed “net receipts or payments of direct investment income resulting from sales by affiliates” to distinguish this income from the other, more passive types of investment income included in the current account, such as dividends and interest on foreign stocks and bonds. This framework also shows that direct investment income receipts and payments are the result of substantial sales of goods and services and purchases of labor and other inputs. It also disaggregates trade in goods and services to show trade with affiliated foreigners separately from trade with unaffiliated foreigners.

This report includes new summary statistics on the major current-account aggregates for 2017, revised and more detailed statistics for 2016, and revised statistics for earlier years.³ The updated statistics through 2016 in this report reflect the 2018 annual update of the ITAs, which incorporated newly available and revised source data and other improvements.⁴ In addition, the updated statistics reflect preliminary results from both the 2016 Annual Survey of U.S. Direct Investment Abroad (“outward” direct investment) and the 2016 Annual Survey of Foreign Direct Investment in the United States (“inward” direct investment) as well as the revised results from both the 2015 Annual Survey of U.S. Direct Investment Abroad and the 2015 Annual Survey of Foreign Direct Investment in the United States.⁵

A technical note that presents information on the conceptual basis of the ownership-based framework is available on BEA's website.⁶

The following are highlights of the updated statistics in table A:⁷

• In 2017, U.S. receipts were $2.8 trillion, reflecting exports of goods and services of $2.4 trillion and net income receipts of U.S. parents from sales by their foreign affiliates of $0.5 trillion. U.S. payments were $3.1 trillion, reflecting imports of goods and services of $2.9 trillion and net income payments to foreign parents from sales by their U.S. affiliates of $0.2 trillion.
• In 2017, the deficit on goods, services, and net income receipts from sales by affiliates—U.S. parents' income receipts from foreign affiliates less U.S. affiliates' income payments to foreign parents—was $253.8 billion, less than the more narrowly defined deficit on trade in goods and services, which was $552.3 billion. The broader based deficit was smaller because receipts of income by U.S. parents resulting from sales by their foreign affiliates were larger than payments of income to foreign parents from sales by their U.S. affiliates.
• In 2017, the deficit on goods, services, and net income receipts increased $24.4 billion, reflecting a $50.3 billion increase in the deficit on trade in goods and services and a $25.9 billion increase in the surplus on net income receipts from sales by affiliates.
• In 2016 (the latest year for which detailed statistics are available), net receipts of direct investment income of $0.4 trillion resulted from sales by foreign affiliates of $6.6 trillion less deductions of $6.2 trillion for labor, other inputs, and profits accruing to foreign persons. Net payments of $0.2 trillion in 2016 resulted from sales by U.S. affiliates of $4.3 trillion less deductions of $4.2 trillion for labor, other inputs, and profits accruing to U.S. persons.
• Long-run patterns in the statistics suggest transactions that are facilitated by the operations of MNEs—direct investment income and intrafirm trade in goods and services—have accounted for a growing share of all U.S. international transactions. These transactions accounted for 36.5 percent of U.S. receipts (line 3) in 2016, up from 30.4 percent in 1982, and they accounted for 32.5 percent of U.S. payments (line 37) in 2016, up from 27.4 percent in 1982 (chart 1).⁸ While the shares in 2016 were higher than they were in 1982, they have risen and fallen within this period.

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• The majority of international transactions by MNEs since 1982 has been trade in goods and services within MNEs. The growth in international transactions by MNEs over this period, however, was primarily due to growth in income received by U.S. parents from their foreign affiliates and growth in income paid by U.S. affiliates to their foreign parents. The share of total U.S. parent receipts attributable to income earned by their foreign affiliates increased from 8.0 percent of total receipts in 1982 to 14.0 percent in 2016, while the share of total U.S. affiliate payments attributable to income paid to their foreign parents increased from 0.6 percent in 1982 to 4.7 percent in 2016.
• Value added by foreign affiliates of U.S. parents (line 73) as a share of their sales (line 21) decreased from 30.6 percent in 1982 to 22.5 percent in 2016. The decrease was particularly large for manufacturing affiliates. This decrease is consistent with globally engaged foreign manufacturing affiliates increasingly fragmenting production by sourcing inputs from outside the host country.
• Value added by U.S. affiliates of foreign parents (line 78) as a share of their sales (line 55) increased from 20.0 percent in 1982 to 22.5 percent in 2016 (chart 2). The increase was particularly large for affiliates with ultimate beneficial owners in France, Switzerland, and Japan and reflected a pronounced shift in the primary industries of those affiliates, from wholesale trade to manufacturing. These changes in industrial classification partly reflect a maturing effect of direct investments from those countries. As noted by Zeile (1998), “Foreign direct investment in manufacturing typically begins with affiliates undertaking final assembly operations that rely heavily on components and parts sourced from the foreign parent or other established suppliers abroad. Over time, these affiliates are expected to increase their domestic content, both through vertical expansion of their production operations and through increased procurement from domestic suppliers.”⁹

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