Posted on 04/16/2003 10:51:29 AM PDT by Willie Green
For education and discussion only. Not for commercial use. The following analysis was adapted from testimony given by USBICEF Research Fellow Alan Tonelson before the U.S. Senate Commerce Committee hearing on international trade policy, August 1, 2001.
I. TRADE AND INVESTMENT AGREEMENTS ARE DIFFERENT
The flurry of U.S. trade agreements negotiated during the 1990s has generally been presented to Congress and the public as net creators of American jobs and growth, and boosters of wages for American workers. The key supposedly was their capacity to increase exports. The stated logic behind these agreements was compelling. The United States was the world's most open market, and its producers were denied crucial export opportunities by foreign trade barriers. Therefore, any trade agreement that reduced these barriers bilaterally or regionally or globally would bring the greatest benefits to American producers, since most of the market-opening would need to take place abroad.
American leaders further explained that more exports would increase the demand for American products, and thus for American workers. In the process, this increased trade would raise the output of the former and the value of the latter. In addition, recent administrations have contended that export jobs pay considerably better than other comparable jobs, which made increasing exports that much more important.
The rationale for investment agreements inevitably is quite different. If mainstream economic and trade theory are any guide, lowering worldwide barriers to investment makes no sense if economic policy is determined to secure disproportionate benefits for Americans. Liberalization of capital flows means that investors are free to roam the world in search of the highest returns, and to change direction as soon as business conditions change. The prime goal is maximizing global efficiency and growth, which clearly should benefit the United States in most instances, but which may well benefit other countries more. The distribution of gains depends heavily on the world economy's main features and on how investors expect those features to evolve. These characteristics of the world economy, it must be noted, inevitably include the wide variety of interventionist foreign government policies aimed at gaining technology and wealth, and promoting job creation. In short, there would be no guarantees for U.S. domestic producers ? workers and companies alike ? from the results of indiscriminate investment liberalization.
To their credit, the last two administrations have made efforts to take these complexities into account, and they produced a more sophisticated, more explicitly self-interested justification for the investment features of trade agreements that were becoming increasingly prominent and obvious. Agreements such as NAFTA, they argued, would indeed shift some U.S. production abroad. The net effect, however, would still benefit American companies and workers alike. For the work moved overseas would be relatively unsophisticated and labor-intensive ? the low end of ever more complex manufacturing processes that are more economically performed in by low-income workers in low-income countries. Not only would the total cost of U.S.-brand products be reduced, resulting in a gain for their global competitiveness. But U.S. workers would be freed up to concentrate on the more lucrative, more capital-intensive phases of manufacturing, which would make better use of their higher skill and education levels.
These arguments were especially compelling in the early 1990s, when U.S. companies and their workers were operating at distinct disadvantages vis-a-vis their European and Japanese competitors in particular. The latter typically exported from protected home markets. As any sports fan knows, winning is always easier when you only need to play offense. Because the U.S. market was so open, however, U.S. firms had to play defense as well. Facilitating the transfer of low-end U.S. manufacturing to low-income countries theoretically could help American business overcome these inequities.
Recent administrations have also taken note of changes in manufacturing techniques and markets that seem to argue for encouraging investment abroad. The emergence of truly global markets for many products means that one-size-fits-all production often will no longer do. Customization to fit local tastes is often necessary, and manufacturing close to or in local markets can help companies keep up with or ahead of local preferences, and better serve those customers. Dispersed international manufacturing can also help companies cope better with the problems created by fluctuating exchange rates. And finally, since the global distribution of worker and management skills is rarely uniform, some countries and workforces are simply better at developing or making certain products than are others. Washington quite rightly has felt that U.S. business should be free to take advantage of foreign talent and technology.
II. WHEN THEORY FALLS SHORT OF PRACTICE
Unfortunately, the shift from conventional export-oriented trade agreements to investment-oriented agreements has produced at least two major problems. First, this shift was never adequately explained to Congress or the public. In fact, throughout the 1990s, trade agreements were touted overwhelmingly for their export-creating potential. Second, the spread of U.S.-owned manufacturing abroad has not lived up to its promises in terms of promoting net exports and therefore domestic job creation and wages increases, much less economic growth.
Indeed, quite the opposite seems to have occurred. Despite its beneficial potential for the U.S. economy in theory, in practice, the U.S. manufacturing investment that has been channeled abroad by recent trade agreements has almost certainly strengthened foreign manufacturing capabilities at the expense of domestic. In the case of developing countries, this investment has fostered export bases that have served mainly the existing U.S. market, not new foreign customers. Yet even when such offshore production serves local or third country markets, it often displaces U.S. exports, as does much offshore U.S.-owned production in the developed world.
As many supporters of current trade policies observe, the 1990s have seen an enormous flow of direct investment into the United States as well ? a development that would seem to obviate concerns that America might be faced with an "investment gap." Three points need to be made in response:
In addition, the foreign manufacturing activities of U.S. corporations have hardly been restricted to labor-intensive, low-technology products. Low-income countries like Mexico and China have become major sources of high-tech products for the United States. Indeed, emerging markets run large and growing surpluses with the United States in many high-tech industries.
The results have been import levels that have swamped exports; U.S. trade deficits that are not only widening rapidly, but increasingly concentrated in high-value industries; lost market share for domestic producers; and downward wage pressure on U.S. workers even in advanced industries. Undoubtedly, some individual domestic production sites and workers have gained. But the trade deficits clearly show that, when all the complex economic effects of multinational production chains and their attendant trade flows are netted out, the domestic economy as a whole is a big loser.
At the same time, many U.S. multinational companies have clearly benefitted, often maintaining or increasing domestic or global market share, cutting costs, and widening margins. But these benefits do not necessarily accrue to the U.S. production base. That is to say, what has been good for General Motors and others is no longer automatically good for the United States. Indeed, there is precious little evidence that investment-oriented trade agreements have enhanced American competitiveness, if we accept the Packard Commission's definition of this term ? the ability to produce goods that succeed in global markets while boosting the living standards of the American workforce.
III. EVIDENCE FOR INVESTMENT ORIENTATION
Two of the clearest signs that investment considerations have dominated recent U.S. trade policy are this policy's tight focus on low-income countries, where only the most modest traditional export markets can be presumed to exist; and the gulf that has opened between U.S. outward-bound investment and U.S. export flows.
A. Targeting the Third World
Perhaps the most striking characteristic of U.S. trade policy during the 1990s has been its preoccupation with the developing world. Save for the Uruguay Round negotiations that led to the creation of the World Trade Organization, and weak, sporadic efforts to open Japanese markets in specific product areas, recent U.S. trade policy has been a third world trade policy. Its major initiatives have consisted of extending NAFTA to Mexico and Latin America, normalizing trade with China, and liberalizing trade with the Caribbean Basin region, sub-Saharan Africa, and Vietnam. Further, the Bush administration would like the next round of global trade talks to emphasize third world needs.
Even the Uruguay Round accords, moreover, are notable for their investment-related provisions and implications. In particular, by weakening U.S. trade laws, the agreement created powerful incentives for U.S. companies to serve the U.S. market from abroad. For the prospect of the United States responding effectively to predatory foreign trade practices and restricting access to its markets under any circumstances has been greatly reduced.
The presumed logic behind the third world focus is expressed in the oft-made observation that 96 percent of the world's population lives outside America's borders, and that most of this population is found in developing countries. Thus Americans, who comprise only four percent of humanity, cannot possibly remain prosperous without selling to these countries' consumers. As is just as often observed, many major third world countries are undergoing transitions from highly interventionist and even outright communist economies to more liberal systems, which allegedly promises to liberate enormous tides of productivity and generate vast amounts of wealth.
Yet this reasoning ignores the main features of third world populations and workforces ? the almost unimaginably low bases they start from, and the demographic forces likely to keep wages and therefore sustainable purchasing power near rock bottom. Developing countries may represent a large and rapidly growing share of the world's population, but they represent a much smaller share of world wealth. America's relatively puny population, for example, all by itself generates some one third of global output. The European Union and Japan account for big chunks of the rest. Yet U.S. trade policy has backed off from efforts to open Japanese markets, and has conspicuously neglected this mission regarding Europe.
Moreover, the huge projected growth of third world populations is likely to keep wages in these countries abysmally low for the foreseeable future. This population explosion has in fact created a worldwide worker glut, which shows up most dramatically in the towering rates of unemployment recorded in Asia, Africa, and Latin America. In pre-crisis Indonesia, for example, the U.S. Embassy in Jakarta pegged the real un- and underemployment rate at 40 percent. In China, economists feel comfortable openly telling Western reporters that urban jobless rates are nearing 20 percent.
Nor should these figures be surprising. When the supply of any product or economic input outstrips demand, the price will fall, all else being equal. And indeed, additional proof of a buyers' market in third world labor comes from wage figures in these countries. From China to Indonesia to Mexico, inflation-adjusted wages in most of the developing world were falling for much of the 1990s. And where they were rising, e.g., in Korea, they helped created enormous and nearly fatal competitive disadvantages, as demonstrated by the financial crisis that engulfed so many of these countries starting in 1997.
From the standpoint of promoting U.S. exports, the absurd extreme of U.S. trade policy came in the late 1990s, when the Clinton administration began pushing hard for trade liberalization agreements with sub-Saharan Africa, the Caribbean Basin countries, and Vietnam. Yet when President Clinton began touting the need for a sub-Saharan Africa deal, only four of the region's 35 potentially eligible countries had per capita incomes of greater than $800. Fifteen had per capita incomes of less than $300.
Former U.S. Trade Representative Charlene Barshefsky depicted Vietnam in 1999 as a country with "the potential to develop into a rapidly growing economy with significant demand for our products." What she did not mention was that, when she made this claim, Vietnam had only enough hard currency in its treasury to pay for nine weeks of imports from anywhere.
The picture has been just as mysterious for larger, ostensibly more promising economies like Mexico and China. During his landmark debate with Ross Perot over NAFTA in 1993, Vice President Gore gushed over the Mexican consumers allegedly voracious hunger for American made products. But at the time, Mexico's economy was only three percent as large as the U.S. economy. In addition, although Mexico's economy crashed in 1994, right after NAFTA's ratification, U.S. exports to Mexico remained relatively robust. How could this be given the sharp drop in the peso's value, and therefore in the purchasing power of the typical Mexican?
The answer is that NAFTA is primarily an investment treaty that is designed mainly to shift certain types of American production to Mexico. Most U.S. exports to Mexico have not been consumed by the Mexican economy. Rather, they have consisted mainly of industrial inputs of various kinds that are sent to these new factories, turned into finished goods, and sent right back to the United States.
China has been touted as a huge export market for American producers as well. But its booming economy of the 1990s never accounted for more than 2.1 percent of U.S. goods exports during the decade. The main reason? Wages in China along with private consumption remain low even by third world standards. And numerous studies, including one published by the Federal Reserve Bank of New York, make clear that, as with Mexico, most Chinese imports consist of inputs that are turned into exports.
B. The Widening Export-Investment gap
Mystery markets, however, are far from the only evidence for the heightened prominence of investment considerations in U.S. trade policy. Also pointing to this orientation is the widening gap between U.S. exports and U.S. outward-bound direct investment. As made clear by research published by the U.N. Conference on Trade and Development, this growing gap is a global phenomenon. The output of corporate international production networks and the sales of the foreign affiliates of multinational companies have been growing much faster than exports for the past two decades, and are now nearly twice as high.
The United States has been no exception to this rule. From 1994 to 2000, for example, U.S. goods exports increased 52.3 percent, and U.S. manufactures exports increased 56.1 percent. Yet the value of U.S. direct investment abroad for all industries (measured on an historic cost basis) more than doubled during this period. The comparable figure for manufacturing industries rose just over 71 percent.
For specific countries, the trends are even more striking, and lend considerable support to the argument that U.S. foreign investment is more strongly associated with net increases of U.S. imports than with net increases of U.S. exports ? and with larger, not smaller, U.S. trade deficits. China ? America's most difficult trade policy partner ? is the most striking example.
From 1994 to 2000, U.S. total goods exports to China rose by 74.9 percent, and manufactures exports rose by 71.7 percent. But the value of total U.S. total direct investment in China surged nearly 275 percent during this period, and the value of manufacturing investment shot up by more than 466 percent. Not surprisingly, U.S. total goods imports and manufactures from China over these years each rose by 158 percent ? more than twice as fast as U.S. export growth.
The supremacy of investment considerations in U.S.-China trade can also be gleaned from what U.S. multinationals themselves say about their economic dealings with China and their priorities vis-a-vis the People's Republic. A study of the websites of more than forty leading U.S. multinational companies I published last spring revealed that most of the major U.S. firms engaged economically with China are thinking primarily of investing and producing in China, not exporting from the United States to China.
Some of these companies have even publicly stated their intention to help China replace imports (from anywhere in the world, including the United States), with domestic production. Kodak, for example, reports that its manufacturing operations in China support Beijing's determination to "create professional enterprises which could displace imports and boost tax revenues." According to Westinghouse, "By using Westinghouse technology and domestic manufacturing sites, China will greatly reduce its need to import power-generating equipment." Similarly, companies like Compaq, Motorola, and Procter & Gamble are all on record pledging to raise the Chinese content of their products.
In fact, in September, 1999, Kodak's chief of China operations made crystal clear how the company views the roles played by exports from the United States and investments in China: "We believe that viewing emerging markets only as export opportunities is the wrong strategy....In a market such as China, where the value of business is expected to grow rapidly, local manufacturing is simply a better business model." Just three months earlier, testifying to the House Ways and Means Committee on China's WTO application, Kodak CEO George Fisher contended that "Kodak factories in China will be important customers for Kodak exports made in the United States." IV. WHY THE INVESTMENT-TRADE DISTINCTION MATTERS
The importance of properly distinguishing between export-oriented and investment-oriented trade agreements is best revealed by the U.S. government's recent failures accurately to project the economic impacts of the trade agreements it has sought. As previously discussed, NAFTA was sold primarily to Congress and the public as an export booster. Not only did Presidents Bush and Clinton and their top aides speak in these terms, but during the Bush administration, two government studies reenforced this case. The first was undertaken by the U.S. International Trade Commission. The second was conducted for the Labor Department by University of Maryland economist Clopper Almon.
These studies dutifully examined the likely impact on U.S. trade flows and balances of reducing Mexico's tariff barriers and even its non-tariff barriers. Both predicted modest gains for the United States on these grounds. Yet neither study examined the likely impact of the changed North American and global investment flows that NAFTA would surely bring ? even though Mexico supported NAFTA expressly to lure desperately needed foreign investment. As a Congressional Research Service specialist warned diplomatically in 1991, trade studies that ignore investment effects are of limited utility.
The Bush administration promised extraordinary gains from a Uruguay Round agreement as well. It studied the likely economic impact even less extensively than its scrutinized NAFTA, but the results and problems were similar. In fact, most of the administration's economic case for the Uruguay Round rested on a report prepared by Australia's Centre for International Economics, whose only mention of investment was the completely unrealistic assumption that a new trade agreement would be accompanied by an instantaneous rationalization of the world's labor and capital assets.
And despite the enormous impact on investment flows almost universally expected from China's entry into the World Trade Organization, the USITC's August, 1999 investigation of this development's "economic effects on the United States" lacked any comprehensive discussion of investment issues. And almost completely ignored was the relationship between investment flows and export flows.
V. CONCLUSION
It is possible, though doubtful, that voters and legislators want American Presidents to negotiate trade agreements that ignore one of the most important features of the world economy ? rapidly rising flows of foreign direct investment. As a result, it is possible, though doubtful, that voters and legislators want American Presidents to negotiate trade agreements bound to send more of our production abroad than they generate at home. And it is possible, though doubtful, that voters and legislators want American Presidents to negotiate trade agreements that add significantly to our trade deficits and therefore undermine our nation's financial future.
But whatever our views of the recent successes or failures of U.S. trade policy, I hope we can all agree that voters and legislators at the least should be told explicitly that such decisions are being made. There can be no excuses for hiding the truth.
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