(Stephen Poloz, EDC Economics)
There is much talk in the U.S. about globalization and the associated loss of American jobs. But few seem to appreciate that U.S. companies have built another whole economy out in
the world.
Consider that U.S. companies in 2003 owned nearly $1.8 trillion in physical assets in foreign countries -- compare that to total U.S. GDP, at $11 trillion. Over 10 per cent of those U.S.-owned foreign
assets are in Canada ($192 billion). But the really big investments are in Europe, at $963 billion (54 per cent of the total), of which the Netherlands and the U.K. are the largest. Mexico has 3.4 per cent, at about $62
billion. Bermuda has $85 billion, but some of that reflects holdings in third countries.
Asia is also a big destination for U.S. investments, with a stock of $293 billion, or 16 per cent of the total. Of this,
the largest shares are in Japan ($73 billion) and Singapore ($58 billion). China has so far attracted $12 billion, but Hong Kong has $44 billion. U.S. investment in Hong Kong has doubled in the past four years, while
that in China has risen by about 25 per cent during the same period.
What do American companies do with all these foreign investments? First, they produce goods and services for direct sale to their host or other
foreign economies. In 2002 (the latest foreign affiliate sales statistics available), foreign-based U.S.-owned affiliates had sales of nearly $3 trillion. This represents a second U.S. economy operating outside of
America's borders, equivalent in size to nearly 30 per cent of the U.S. economy and employing 9.7 million workers.
The second thing that American companies do with those foreign investments is to produce goods
and services for export back to the U.S. Indeed, 48 per cent ($594 billion) of all imports into the U.S. during 2003 represented U.S. companies importing directly from their majority-owned foreign affiliates.
For
example, a U.S. producer of athletic shoes may import most of the components of those shoes from their foreign factories in Asia, and then finish assembly of the shoes in the U.S. and sell most of them domestically.
Similarly, a U.S. auto company builds cars in both the U.S. and Canada, and trades them both ways across the border to satisfy demand.
Such intra-firm supply arrangements are very profitable for U.S. companies,
and each individual arrangement is sustainable for that reason. Yet, the paradox is that these globalization arrangements also account for about 70 per cent of the massive U.S. trade deficit. In other words, over $400
billion of the U.S. trade deficit is inside of U.S. companies. This means that the U.S. trade deficit is largely structural, and unlikely to change much, regardless of what exchange rates do.
The fact is
globalization means that international trade statistics are not 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.
The bottom line? Globalization by American companies has created a second U.S. economy. This is changing the nature of trade and reducing the meaning of
standard trade statistics. Companies care less and less about geography -- and economists should begin to follow suit.
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