Who says the US has a trade deficit with the rest of the world?
Classical economic doctrine holds that nations compete by producing and exporting what they make best, while importing from other countries those goods in whose making they lack comparative advantage in. The tally of exports and imports results in either a trade surplus, thought to be good, or a deficit, considered bad.
Today that 200-year-old theory is flawed, misleading and overly simplistic. And when policymakers insist on reducing the way countries economically interact to a single figure—the trade balance—it is dangerous, especially when it unleashes the spectre of protectionism.
“US international trade in goods and services renders an incomplete picture of US global engagement,” says Joseph Quinlan, chief market strategist at Bank of America Capital Management in New York. That’s because the main avenue by which US corporations deliver goods and services to overseas clients is via the American companies’ affiliates abroad, not exports.
In 2004, the latest year for which affiliate data is available, US corporations exported $1.4 trillion (Rs56.56 trillion) of products and services, while US imports totalled $1.7 trillion. That yielded a deficit of $300 billion. US exports exclude shipments by foreign-owned affiliates in America, while US imports don’t include shipments to foreign companies’ US-based units. In the same year, though, US-owned affiliates abroad had foreign sales of $3.8 trillion. Meanwhile, the US-based units of foreign multinationals sold $2.3 trillion of goods and services in the US. Thus, US foreign-affiliate sales were almost triple US exports, while the sales of foreign-owned subsidiaries and other units located in the US were 35% higher than US imports from abroad.
What’s more, combining US and foreign-owned affiliate sales with the export-import data reveals the “US actually sold more goods and services abroad in 2004 than it bought from the rest of the world,” Quinlan says. In other words, contrary to popular belief, “the US enjoys a global commercial surplus with the world, totaling $1.2 trillion,” he says.
A similar exercise would shrink a $90.4 billion US trade deficit with China in 2004 to $32.1 billion.
“Unfortunately, though economic theory and global realities now dictate that affiliate sales are preferable to direct exports, affiliate sales do not impact the export-sales figures,” Richard J. Polo Jr said in a 2004 paper written at the National War College in Washington. “In short, American companies producing products and then exporting products to the world do not get credit for exporting if this place of production is a foreign country.”
Like Quinlan, Polo says policymakers seeking to correct the US trade deficit “should consider foreign-affiliate sales.”
About half of the US trade gap can be attributed to intra- company trade, says Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co. and co-author with Quinlan of a 2001 Foreign Affairs article on the deficit. He offers the hypothetical example of a US auto company, say General Motors Corp., developing a braking system in Canada and exporting it to GM in the US.
That’s different, he says, from a US firm buying goods from, say, Bombardier Inc., a Montreal-based maker of transportation equipment. The movement of goods within one organization doesn’t require the same kind of financing as a transaction between non-affiliated companies, Chandler says.
Regardless, protectionist winds are blowing strong. The US last year had a record $763.6 billion trade deficit. The shortfall with China was $232.5 billion, or 30%. This past May, the trade gap with China was $20 billion, or a third of the monthly $60 billion total.
Numerous bills have been crafted seeking to reduce China’s surplus with the US. Most recently, four senators in June introduced legislation that would permit US companies to petition for steeper anti-dumping duties to counter the benefit of undervalued currencies in China or other countries.
Many US legislators blame China’s policy of maintaining an undervalued yuan for the steep bilateral deficit. Additionally, China has been accused of failing to protect intellectual property rights, to fully implement World Trade Organization rules and to cease unfair labour practices that cost US manufacturing jobs. Here also, US politicians may be barking up the wrong tree. The deterioration of the US’s manufacturing employment isn’t unique to America, but rather a global phenomenon that reflects technological change.
“The popular explanation for the decline in US manufacturing payrolls is that American workers are being categorically replaced by workers in China and other parts of Asia,” Joseph Carson, New York-based director of global economic research at AllianceBernstein LP, said in a 2003 study. “In truth, factory jobs have been slashed not only in America and Europe, but in Asia as well.”
About 22 million manufacturing jobs were lost globally between 1995 and 2002, an 11% decline, Carson estimated. Still, during those years, global industrial production rose more than 30%. The US experience was no worse than average, losing almost 2 million jobs, or 11%. By contrast, China’s manufacturing employment fell 15% to 83 million, the most among the world’s 20 biggest economies.
Bottom line: politicians promoting protectionist trade legislation had better understand that passing laws protecting relatively low-skilled jobs may risk retaliation abroad, which would harm some of the US’s most competitive companies.
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