The graph shows the amount of US debt held compared to US export sales by country. It shows that Japan is currently the largest holder of US debt at $1122.9 billion and China the second largest holder at $1112.5 billion. The UK is the third highest for both US debt held ($341.1 billion) and US export sales ($66.3 billion). Perhaps unsurprisingly, US debt appears to have accumulated in financial centres, with Hong Kong ($215.6 billion), Ireland ($262.1 billion), Luxembourg ($231 billion) and Singapore ($139.6 billion) holding more than larger economies like Germany ($79.2 billion). The US largest export markets; Canada and Mexico, have also been included within the data despite holding relatively little US debt. Canada is the largest export market for the US. As of 2018, sales amounted to $299.8 billion and debt held in June 2019 was $115.2 billion. Mexico is the second largest export market at $265.4 billion, holding the smallest amount of debt within the dataset at $49 billion.
What does the Graph show?
The graph displays data provided by US institutions on US debt holdings and export sales by country. The US debt data is for June 2019 and the export sales is for the financial year 2018. US export sales data has been compiled from CIA and the US Census Bureau. This includes both goods and services in billions of 2018 USD. The data for US debt held by country is from the US Department of Treasury from the dataset ‘Major Foreign Holders of Treasury Securities’. The debt holdings measured are US bonds, bills and notes and are measured in current $USD.
Why is the chart interesting?
Perhaps unsurprisingly, much of US national debt is being held in financial centres including Hong Kong, , Singapore and the UK and in tax havens such as Luxembourg and Ireland. In large part, this is due to the fiscal and regulatory environments that these countries have created. For example, Luxembourg has a corporate tax rate of over 20% for all businesses when combined with the municipal tax rate (6.75% for Luxembourg city). However, this only applies to revenue generated within Luxembourg. Hong Kong operates a similarly attractive tax policy, with business rates of just 16.5% and special business incentives being applied to certain sectors. This is not to suggest that US debt has accrued in financial centres purely because of their fiscal and regulatory environments. Strong trade exists alongside this, for example as US export figures to Hong Kong show. As of 2018 this included $11 billion in electrical machinery and $9.2 billion in precious metal and stone.
As a much larger economy than the other financial hubs listed within the data, the United Kingdom has the most significant trading relationship with the US of all the financial centres listed. Firstly, it is the UK’s largest state trading partner when imports and exports are combined. Accounting for 19% of UK exports and 11% of imports as of 2017. Moreover, the UK financial network provides significant incentive for the accumulation of financial assets and capital. Territories such as the City of London, Jersey and the Isle of Man offer favourable business climates, attracting significant amounts of capital. Therefore, whilst fiscal and regulatory environments are a major factor, a strong trading relationship is also often indicative of the holding of US financial instruments.
Despite accounting for the second lowest amount of US export sales within the dataset, Ireland collates a significant percentage of US debt. Indeed, the economic relationship between the US and Ireland goes beyond finance and is significant for multiple reasons. Irish heritage is prominent within the US population. As of the 2013 census the number of people of Irish descent was 34.5 million, or 7 times the population of Ireland itself the same year. Historically, the willingness of the US to take positions on Irish politics is reflective of the ties between the two countries. A recent manifestation of this came in the form of Nancy Pelosi, Leader of the House of Representatives, publicly citing the Irish border issue as a barrier to the ratification of any US-UK post Brexit trade deal. This is not to suggest that ties between the two are not economically motivated; Ireland has made a concerted efforts to make itself an attractive business environment. These include a corporation tax of 12.5% and universally acclaimed research and development tax credit. This has led to the creation of significant service sectors that have attracted over 700 US companies to headquarter in the Republic of Ireland, including Facebook, Google and Johnson and Johnson. The ACCI states US businesses currently employ 155,000 within the country, and indirectly support a further 100,000 jobs, some 20% of total Irish jobs. In 2016, it attracted 12.6% of all American FDI into Europe despite accounting for 1% of the European economy. These factors combine with others to produce an Irish-US relationship that appears disproportionately strong.
The trading relationship between the US and China has faced increasing scrutiny. Currently holding around 5% of total US debt, China uses this as financial lever to keep its currency (the Renminbi) weak. This is done primarily to support its export-based economy, maintaining the competitiveness of its goods and services on the global market. Whilst the US does sell to China, its trade with the country currently runs a significant deficit. As of 2018, this amounted to a $418 billion imbalance. This means that Chinese companies largely receive dollars for their products but require Renminbi to pay their various costs. Without measures to compensate, the demand for Renminbi would drive up the value of the currency. Historically, the Chinese government buys the excess dollars and exchanges them for Yuan, thus creating a shortage of dollars and supressing the value of the Renminbi, however this practice is in reduced demand as more Chinese travellers supply the international market with Yuan to ever higher extents. Other measures taken by the Chinese administration to increase independence include reform of internal labour laws and the investment of over $1 trillion in the ‘Belt and Road’ global infrastructure initiative. This imbalance has led to the Trump administration implementing a policy of tariffs, leading to a ‘trade war’ between the two countries in which US debt holdings are a potential lever.
Japan is the largest holder of US debt. This is in large part down to the historically low Japanese base rate, currently at -0.1% as well as a low inflation rate. This has made Japanese securities increasingly unattractive, with Japanese 10-year bond yields falling to -0.215% this month. US treasuries have become increasingly attractive considering the global growth in negatively yielding debt. Whilst US bond and security yields are down to 1.531%, the Bank of Japan currently aims for a 0% 10-year bond yield. This makes US debt attractive to Japanese consumers and government.
Canada and Mexico have been included to demonstrate that US export sales support the gravity model of trade. Economic integration has continued to flourish, though current tariff threats are starting to threaten trade. The Trump administration has pursued a policy of tariffs in order to re-balance the US’s trading deficits with both countries. This includes tariffs on Canadian steel (25%) and aluminium (10%), introduced in May 2019 to protect US industry in those sectors. The administration has used similar tactics against Mexico, pulling tariffs in June 2019 after an agreement was reached regarding Mexican handling of migrants. However, this trend appears set to continue with Mexico introducing tariffs to deter steel dumping in the near future.