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From today's Globe&Mail. What the article
suggests is that the US trade deficit is largely is largely a matter of internal
trade -- US branch plants abroad trading with headquarter companies in the
US. So, because it's internal, we may not have to worry about large U$
foreign holdings crashing down. But it does raise other questions: how
much of the business world does the US in fact own, and how much of that world
lies beyond its boundaries, and where, therefore, are the boundaries that it
would feel compelled to protect if threatened?
Ed
U.S. trade deficit is an all in the family affair
OTTAWA -- Assignment: Define "nation." Start with definitions of the heart -- a geographical tract, perhaps, made unique by true patriot love. Amend for globalization. For Canada, Calixa Lavallée, composer of O Canada, might himself be regarded as the first amendment. He did fight for the North in the U.S. Civil War, after all, leaving military service as a lieutenant. And when he did eventually return to the land of his birth, it was in his coffin. This detracts from Lavallée not a whit, either as a musician or as a Canadian. It does anticipate the World Bank's libertarian definition of globalization: "The freedom of either individuals or firms to initiate voluntary transactions with residents of another country." The United States is the world's most globalized country. Sweden ranks second, Canada third (as measured in its 2006 report by the Swiss think tank KOF). In this assessment, the U.S. is 30 per cent more "globalized" -- politically, economically, socially -- than fifteenth-place Japan. Oddly, though, America's trade deficits have risen along with its globalization. The U.S. has reported a trade deficit every year since the 1970s, with its 2005 deficit setting yet another record at $728-billion (U.S.). What's happening here, anyway? Doesn't foreign investment pay off? Will these trade deficits by themselves not compel a significant American depreciation? Doesn't the U.S. need a cheaper dollar to stimulate exports and reduce imports? Over at Export Development Canada (EDC), chief economist Stephen Poloz offers a distinctive take on the U.S. trade deficits, perhaps partly from his distinctive perspective. The EDC assesses economic and political risk in countries around the world, an essential service for a federal agency that helps to arrange almost $60-billion (Canadian) a year in bridge financing for Canadian exporters. With a team of 20 economists and political analysts, Mr. Poloz makes regular calls on the direction of the Canadian dollar and the U.S. dollar, on which factors the success of many export deals ultimately depend. (In 2004, he correctly called the end of the 18-per-cent decline in the U.S. dollar.) The U.S. trade deficits, he says, are not at all the problem they appear to be. In the EDC's most recent economic analysis report, Mr. Poloz summarizes his case. A large percentage of U.S. international trade takes place within multinational companies that are dealing abroad with themselves. In 2003, these companies imported $530-billion (U.S.) worth of goods and services from their own operations in foreign countries. In the same year, they exported $314-billion worth of goods and services to their operations abroad. The net result was an "intrafirm" trade deficit of $216-billion -- or 45 per cent of the entire U.S. trade deficit ($480-billion). And this percentage includes only U.S. companies and majority-owned subsidiaries. Include transactions between U.S. companies and minority-owned subsidiaries and the percentage of the trade deficit wrought through intrafirm trade rises to 70 per cent. "This high level of intrafirm trade," Mr. Poloz says, "means that close to one-half of the U.S. trade deficit is internal to these companies. Such transactions are self-sustaining and largely self-financed. The need for Americans to borrow from foreigners to finance these trade deficits does not apply. As such, the U.S. trade deficit may be largely a private affair." In an earlier report, Mr. Poloz observed that U.S. companies now own $1.8-trillion in physical assets in foreign countries, compared with domestic American GDP of $11-trillion. More than 10 per cent of these foreign-based assets are in Canada ($192-billion) but more than 50 per cent are in Europe ($963-billion). Asia has 16 per cent ($293-billion). American companies own $73-billion in assets in Japan, $58-billion in Singapore, and $12-billion in China -- not counting another $44-billion in Hong Kong. Almost one-half of all American imports come from all-in-the-family foreign affiliates, and almost one-third of all American exports go to them. The share of U.S. imports coming from intrafirm transactions: Mexico and Germany, 67 per cent; Japan, 77 per cent; Singapore, 74 per cent. From South Korea, 56 per cent, a doubling in the past 10 years. From China, 21 per cent, another doubling. From Eastern Europe, 32 per cent, and a tripling. In 2002, foreign-based affiliates of U.S. corporations had sales of almost $3-trillion. Mr. Poloz says: "This number represents a second U.S. economy operating outside of America's borders, an economy equivalent to 30 per cent of the U.S. economy." This other American economy now directly employs 10 million people in other countries. "These intrafirm arrangements are set up to earn profits," Mr. Poloz observes, "and they are very profitable." Hence, the trade deficits are substantially "the product of the profitable globalization of U.S. companies." As such, they are not a threat to either the U.S. dollar or to the global economy. Mr. Poloz says international trade statistics aren't what they used to be. "We rarely think about the trade balance between Hawaii and the U.S. mainland. And the more trade that happens within global companies, the less meaningful such statistics become. Companies care less and less about geography. Economists should begin to follow suit." In other words, define "nation" in a world in which patriot love remains but geographical boundaries don't. |
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