Despite a significant size disparity, the US and Luxembourg maintain a balanced economic relationship, driven by collaboration in the finance, space and technology sectors, with Luxembourg leveraging its favourable regulatory environment for US companies. Photo: Shutterstock

Despite a significant size disparity, the US and Luxembourg maintain a balanced economic relationship, driven by collaboration in the finance, space and technology sectors, with Luxembourg leveraging its favourable regulatory environment for US companies. Photo: Shutterstock

Ahead of US presidential elections on 5 November, Paperjam is looking at Luxembourg-US ties and the potential economic impact of a win by Kamala Harris or Donald Trump. The economic relationship between Luxembourg and the United States is robust and diverse, marked by significant trade, investment and collaboration across multiple sectors.

Despite the drastic difference in size, Luxembourg and the US maintain a rather balanced economic relationship, underpinned by links in the financial, space and other sectors. As of 2023, the United States boasts a gross domestic product of approximately $27.4trn, while Luxembourg’s GDP is around $85.8bn, making the US economy over 300 times larger, according to World Bank data. However, despite its smaller size and population, Luxembourg has an impressive GDP per capita of about $128,000, more than 56% higher than the US’s GDP per capita of approximately $82,000. This is largely driven by Luxembourg’s robust financial services sector.

The US is one of Luxembourg’s largest trading partners, with bilateral trade encompassing goods such as machinery, pharmaceuticals and financial services. Luxembourg, in turn, serves as a strategic hub for many American companies, particularly in finance and technology, thanks to its favourable regulatory environment and highly skilled workforce.

Investment and economic stability

In addition to trade, the investment relationship between the US and Luxembourg is highly dynamic, with numerous American companies actively investing in Luxembourg’s growing digital economy and well-established financial services sector. Luxembourg is home to a large number of investment funds, many of which are managed by US financial institutions, further cementing the financial ties between the two countries. Despite the geographic disparity, foreign direct investment flows between the US and Luxembourg are notably balanced. Over the past decade, FDI between the two nations has averaged just over €600bn annually, according to data from Statec, Luxembourg’s statistical bureau. This balanced exchange highlights the strength and mutual importance of the economic partnership.

However, trade between Luxembourg and the United States has shifted over time. Initially, it heavily favoured the US, but over the past decade, trade has become more balanced, according to data from the European Commission.

One significant difference between the US and Luxembourg lies in a key economic stability indicator: government debt to GDP. Luxembourg’s central government debt is relatively low at around 26% of GDP, while the US has a much higher ratio, exceeding 110% of GDP.

Despite this contrast, both countries continue to attract strong investor interest. Luxembourg’s low debt levels and ‘AAA’ credit rating make it highly appealing for foreign investors in government bonds. Meanwhile, although the US holds a slightly lower ‘AA+’ rating, the dominance of the US dollar as the global reserve currency and trading lifeline ensures a sustained demand for US bonds from international investors.

Furthermore, Luxembourg has consistently maintained lower inflation rates, with consumer prices rising by about 3.7% in 2023, compared to 4.1% in the United States.

This relative economic and consumer price stability, coupled with Luxembourg's prominent position as a major hub for investment funds, highlights its potential for sustained cooperation with the US. Key opportunities for expansion exist in emerging sectors such as green technology and digital finance, further strengthening the economic ties between the two nations.

In addition, the United States and Luxembourg are collaborating closely on commercial space exploration, with Luxembourg adopting a legal framework for the mining of space resources that aligns with the US approach. Luxembourg-based satellite operators SES and Intelsat are both extremely active in the US market.

Diplomatic ties

The United States established diplomatic relations with Luxembourg in 1903 and the two nations have since maintained close ties, particularly in business, trade and foreign policy. During both World War I and World War II, Luxembourg was occupied by Germany and later liberated by US forces, solidifying a strong diplomatic bond. Luxembourg now maintains an embassy in Washington, DC, while the US embassy in Luxembourg has been housed in the historic Dolibois House since 1944.

According to the US Department of State, “Luxembourg is a longstanding ally of the United States,” underscoring the shared commitment to promoting freedom and prosperity. This partnership extends across various international forums, with both countries actively participating in global organisations such as the United Nations, North Atlantic Treaty Organization (Nato), the Euro-Atlantic Partnership Council, the Organisation for Security and Cooperation in Europe, and the Organisation for Economic Cooperation and Development. Additionally, Luxembourg is an observer to the Organization of American States and served a two-year term on the UN Security Council from 2013 to 2014, further demonstrating its active role on the world stage.

Luxembourg also participates in the Visa Waiver Program, enabling its nationals to travel to the United States for business or tourism purposes without a visa for stays of 90 days or less.

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