[Fwd: article] (fwd)

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                 ANDRE  GUNDER  FRANK

        1601 SW  83rd Avenue, Miami, FL. 33155-1133 USA
        Tel: 1-305-266  0311      Fax:  1-305  267 9606
  E-Mail: franka@fiu.edu   Web Page: csf.colorado.edu/agfrank/
    



---------- Forwarded message ----------
Date: Tue, 01 May 2001 18:40:24 -0400
From: Andre Gunder Frank <franka@fiu.edu>
To: franka@fiu.edu
Subject: [Fwd: article]

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 Hello Gunder,

Hope all is well.  Thought this article might interest.  Nothing too
groundbreaking, but it is a nice explication of US interests according to 2
chief financiers.  There are some interesting parallels with the 19thcc,
including the ideological assertion that all would lose if the current
liberalizing order changed.  As Bairoch convincingly showed, when Europe
threw that liberal order to the winds in the late 19th century, growth AND
trade grew, with ONLY England the loser.....

Hope to see you in Boston.  At least you'll finally get your pay from
Landes/Frank!

Take care,

Jeff
         
Foreign Affairs May / June 2001
The U.S. Trade Deficit: A Dangerous Obsession
by Joseph Quinlan and Marc Chandler

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THE WRONG SCORECARD
Every U.S. president over the past quarter-century has confronted an annual
trade deficit. But the cavernous trade gap inherited by President George W.
Bush dwarfs those faced by his predecessors. America's current-account
deficit (which measures the cross-border exchange of goods, services, and
investment income) averaged more than $1 billion a day last year, reaching a
record 4.4 percent of GDP. Many economists worry that the huge trade
deficit, which must be financed by foreign investors, could lead to a
full-blown financial crisis if and when those investors become unwilling to
fund the imbalance. Something as benign as stronger economic growth in
another country, for instance, could attract a larger share of the world's
savings, leading to higher U.S. interest rates, a weaker dollar, and a
grimmer economic outlook for the United States and the world.

Economists offer various explanations for the persistent U.S. trade deficit.
Some argue that America buys more from the world than it sells because its
companies are growing less competitive. Others blame the "unfair" trade
restrictions and labor policies of other countries. Still others point to
the underlying strength of the dollar, which makes American goods and
services more expensive for foreign buyers.

Whatever the proper explanation, a simple and important fact is absent from
the debate: the trade balance is no longer a valid scorecard for America's
global sales and competitiveness. Given a choice, U.S. firms prefer to sell
goods and services abroad through their foreign affiliates instead of
exporting them from the United States. In 1998, U.S. foreign-affiliate sales
topped a staggering $2.4 trillion, while U.S. exports -- the common but
spurious yardstick of U.S. global sales -- totaled just $933 billion, or
less than 40 percent of affiliate sales. How U.S. firms compete in world
markets, in other words, goes well beyond trade.

Still, trade erroneously remains the standard benchmark of global
competitiveness. More worrisome, it is the most important factor shaping
U.S. international economic policy. Overblown concern about the swollen
trade deficit, combined with a slowing economy and the expectation of rising
unemployment, could ignite a new round of trade protectionism in Washington,
which could spark similar responses around the globe. The greatest danger on
America's trade front, therefore, is not the size of the deficit but the
nation's obsession with it.

INSIDER TRADING
The rule "make where you sell" increasingly governs the way American
companies do business. It explains, for example, why Ford Motor Company and
General Motors have long owned affiliates in Europe and have recently
entered promising emerging markets such as Brazil and China. The principle
also underlies Dell Computer's direct-investment positions in Europe and
Latin America, as well as those of Cisco Systems and Microsoft in China. And
because of the increased globalization of services, U.S. service giants such
as American International Group, Citigroup, FedEx, and Yahoo have also set
up foreign affiliates, leading the boom in U.S. foreign direct investment
(FDI) over the last decade.

American companies simply cannot afford the luxury of staying at home.
Multiple market opportunities, incessant technological advances, blurred
industrial boundaries, and unrelenting global competition all demand that
U.S. firms compete not just through trade but also through FDI. Being an
"insider" is increasingly critical in markets around the world.

Numerous factors explain this trend. Contrary to popular perception, foreign
consumers' demands vary according to location, requiring firms such as
Procter & Gamble, Gillette, and Coca-Cola to be close to their customers.
For example, China's vastly diverse cultures, dialects, and above all else,
living standards demand that U.S. companies adapt their products to local
tastes -- that they follow Coca-Cola's mantra, "think local, act local."
Chinese consumers, whether buying soft drinks, computers, or automobiles,
are very brand-sensitive -- which means that a local presence is crucial for
success in the Chinese market.

Moreover, fierce competition for global market share compels U.S. firms to
be close to their foreign competitors. How else can Eastman Kodak
successfully compete in China against Japanese rival Fuji Photo Film?
Wal-Mart cannot let its global competitor Carrefour of France enter key
markets such as Brazil and Japan uncontested; neither can Citigroup, which
battled Germany's Commerzbank for market supremacy in Poland last year. At
stake for all these companies are new customers, new resources, new
opportunities -- and by extension, long-term success.

GLOBAL HEAVYWEIGHTS
Corporate America now has some 23,000 majority- and minority-owned
affiliates strategically positioned around the globe. Together they rank
among the world's largest economic producers, boasting a combined gross
output of $510 billion in 1998 -- greater than the GDPS of most nations,
including Mexico, Sweden, Taiwan, and South Korea. U.S. affiliates also
contribute significantly to the GDPS of their various host nations. In 1998,
they accounted for more than 16 percent of the GDP in Ireland, more than 9
percent in Singapore and Canada, and more than 6 percent in the United
Kingdom.

The strategic objective of most U.S. foreign affiliates is to produce and
deliver goods and services to the host market. In 1998, roughly two-thirds
of total affiliate sales were made to customers in the host nation --
virtually unchanged from the level in the early 1980s. Yet as U.S.
multinational corporations increasingly disperse different stages of
production among different countries, their affiliates have also become
world-class exporters of intermediate goods and components. In 1998, the
exports of U.S. affiliates totaled $623 billion. That figure not only
matched the total value of U.S. goods exports but also easily surpassed the
export levels of Germany, Japan, and China.

Critics often claim that U.S. multinationals export cheaper products from
their overseas affiliates back to the United States, thereby contributing to
the U.S. import bill and undermining American jobs and income. But in fact,
most U.S. affiliate exports do not go to the United States. In 1998, only 30
percent of them went to the United States; the bulk of the rest went to
regional markets close to the host nations. Moreover, the majority of
affiliate exports do not emanate from low-wage nations such as Brazil,
China, or India. Rather, nearly three-fourths of total affiliate exports in
1998 came from high-wage industrialized nations such as Canada, the United
Kingdom, and Germany.

U.S. affiliates also stand among the world's top employers, collectively
employing more than 8 million people in 1998 -- a workforce greater than
that of most countries. Most Americans assume that the bulk of this
workforce toils in developing nations under extreme and unfair conditions.
But in fact, corporate America's global workforce is concentrated in the
high-wage developed nations. In Europe alone, U.S. affiliates employed some
3.5 million workers in 1998 -- more than the combined U.S. workforce in
Latin America and developing Asia. In Canada, some 935,000 workers were on
U.S. payrolls in 1998 -- more than four times the number employed by U.S.
affiliates in China.

LOCATION, LOCATION, LOCATION
Not only are U.S. affiliate sales significantly larger than U.S. exports,
but they are also dispersed differently across the globe. Since the end of
World War II, America's FDI levels have soared, and Europe, notably the
United Kingdom, has emerged as the favorite destination for U.S.
multinationals. As Europe recovered from the ravages of war and moved toward
creating a common market, U.S. firms seized the new commercial opportunities
presented by its peace and economic stability. By the 1960s, Europe
accounted for almost 40 percent of total U.S. foreign direct investment. The
following decade, the tilt toward Europe became even more pronounced: the
region accounted for nearly half the value of American FDI, largely at the
expense of Latin America and Canada. In the 1970s, meanwhile, Asia remained
among the least favored destinations for U.S. multinationals.

The first half of the 1980s proved an unpropitious time for U.S.
multinationals. Courtesy of the 1979 oil shock, the global economy stumbled
into recession. After reaching a postwar peak of $13 billion in 1980, U.S.
direct investment in Europe plunged to just $3.5 billion in 1982. Investment
flows to Canada turned negative in 1981-82 due to that country's adoption of
restrictive policies such as the Natural Energy Program, which prompted U.S.
companies to sell their existing assets in the politically charged petroleum
and mining sectors. Meanwhile, Latin America's debt crisis and subsequent
economic recession sharply curtailed U.S. multinational participation in
that region.

Across the Pacific, talk of an "Asian miracle," set against debt-ridden
Latin America, protectionist Canada, and slumping Europe, inspired a
friendlier view of Asia among U.S. firms. As a consequence, cumulative U.S.
direct investment in Asia rose 71.5 percent from the previous decade, well
ahead of the pace in Europe (64 percent), Latin America (37 percent), and
Canada (-13.2 percent). More impressive still was the surge in U.S.
investment to the developing nations of Asia, which rose to $14 billion in
1980-89 from $6.1 billion in the 1970s. Still, the region attracted only 8.1
percent of total U.S. outflows in the 1980s -- less than half the amount
invested in trouble-prone Latin America.

Although the 1980s started with a gloomy investment climate for U.S.
multinationals, the decade ended on a decidedly different note. In fact, the
global investment backdrop at the end of the 1980s and into the 1990s was
nearly perfect. Multiple forces -- both cyclical and structural -- converged
to produce one of the most powerful booms in global FDI, with American firms
leading the way. Falling telecommunication and transportation costs allowed
U.S. firms to broaden the geographic dispersion of their operations. The end
of the Cold War opened new markets to U.S. firms, as did the proliferation
of regional trading blocs such as the North American Free Trade Agreement,
Mercosur (which comprises Argentina, Brazil, Paraguay, and Uruguay), and the
common market of the European Union (EU). Moreover, low interest rates and
surging equity prices around the world provided copious amounts of cash for
global mergers and acquisitions.

All of these developments converged in the 1990s to trigger the most robust
wave of U.S. foreign direct investment in history. During that decade alone,
U.S. firms invested more capital overseas -- $802 billion -- than they had
in the prior four decades combined. But the geographic preference of U.S.
firms did not change, despite all the hype about new markets in central
Europe, economic reform in India, privatization in Brazil, and
liberalization in mainland China. The developed nations -- by a wide margin
-- remained the biggest recipients of U.S. direct investment.

A number of motives drive the global strategies of U.S. multinationals, but
reducing the wage bill tends to be near the bottom of the list. More
important are wealthy markets, along with access to skilled labor and
technology. These advantages reside in the developed nations, which
accounted for two-thirds of total U.S. foreign direct investment during the
1990s. Europe remained the preferred destination, accounting for nearly 55
percent of the total. Canada represented another 8 percent, attracting $2 of
U.S. investment for every $1 invested in Mexico during 1994-99. Meanwhile,
Asia's total share of U.S. investment during the 1990s (roughly $122
billion) lagged behind other major parts of the world. And even in the
Asia-Pacific, the most favored location of U.S. multinationals was neither
China nor Japan, the two largest markets in the region, but Australia, whose
labor force and consumer markets are smaller than those of most U.S. states.

During the 1990s, Australia accounted for more than 20 percent of total U.S.
direct investment in the Asia-Pacific region, placing the nation among the
top 10 foreign destinations for U.S. companies. Australia's attractiveness
may owe to its technological capabilities and its well-educated,
English-speaking labor force. On a per capita basis, Australia is one of the
world's heaviest users of computers and the Internet and is therefore a
prime location for U.S. technology firms. Industry deregulation in the late
1980s and early 1990s was another draw for U.S. investment.

At the other end of the spectrum lies India. Although it is often viewed as
one of the most promising emerging markets in Asia, with a massive and cheap
labor force, India attracted a mere $1.1 billion of U.S. investment in the
1990s -- roughly half the level of U.S. investment in Colombia during the
same period. Meanwhile, the so-called crisis economies of South Korea,
Thailand, the Philippines, Malaysia, and Indonesia together drew only 3.2
percent of U.S. foreign direct investment. Even in Taiwan, one of the
region's hottest economies, U.S. direct investment amounted to less than
that in South Africa during the 1990s. By the same token, U.S.
multinationals invested more capital in tiny Chile than in massive China
over the same time frame.


 
TUNNEL VISION
While U.S. multinationals were enjoying their best decade ever, developing
countries around the world were suffering successive economic crises. In
1995, Mexico fell victim to a currency meltdown. In mid-1997, it was Asia's
turn. Russia rolled over the next year, followed by Brazil shortly
thereafter. Each traumatic event set off a mad scramble on Wall Street to
determine the collateral damage to the United States, using trade linkages
as the standard benchmark.

As the Asian crisis unfolded, the flurry of attention surrounding U.S.-Asian
trade linkages was understandable. Of the top 15 U.S. export markets in the
world, 7 were in Asia. Collectively the region accounted for nearly
one-third of U.S. exports in the year prior to the crisis, notably higher
than the export shares of Europe (22.4 percent) and Latin America (17.8
percent). Using trade as the key variable, then, Asia factored heavily into
the U.S. equation. But trade linkages were only half the story -- if even
that. Viewed from the lens of affiliate sales, the Asian meltdown was
significant but hardly fatal to the U.S. economy, given that developing Asia
accounted for only about 10 percent of total U.S. affiliate sales.

In contrast, Europe took credit for more than 50 percent of such sales. The
United Kingdom, for example, accounted for $224 billion in U.S. affiliate
sales in 1998, versus just $39 billion in goods exports -- a ratio of almost
6 to 1. Similarly, in nearly all developed nations, U.S. affiliate sales
surpassed exports by a wide margin. Italy, Spain, and Switzerland, for
example, do not even appear on the export radar screen, giving the false
impression that U.S. commercial links with these countries are
insignificant. But in fact, they are substantial when measured by foreign
affiliate sales. Thus, when the euro plunged against the dollar in 2000, so
did the overseas profits of U.S. multinationals such as Gillette, IBM, Ford,
Heinz, and DuPont. And since a shift in exchange rates has a more immediate
impact on affiliate sales and income than on trade, these pains were quickly
felt by corporate America.

Just as a myopic focus on U.S. exports can distort the true picture of U.S.
global competitiveness, so can a singular focus on imports. Many foreign
companies compete in the United States the same way U.S. companies compete
abroad -- through affiliate sales rather than exports. Although American
firms adopted FDI-led strategies earlier and more aggressively than did
their foreign counterparts, many Japanese and European companies have also
begun to prefer affiliate sales over exports as their main approach to
foreign markets. According to a 1998 report by the Japanese Ministry for
International Trade and Industry, Japan's affiliate sales surpassed its
exports for the first time in 1996. The same thing happened in Europe in the
late 1980s. By the mid-1990s, affiliate sales of European companies totaled
almost $3 trillion, or 1.2 times the value of EU exports.

For many foreign multinationals such as Reuters, Daimler-Benz, Royal Ahold,
and British Petroleum, the answer to globalization was to plow billions of
dollars into the United States, the growth champion and technological leader
of the world. As Krish Prabhu, chief operating officer of Alcatel, remarked
to the Financial Times in September 1999, "So much company strategy is
driven out of the United States today. No serious player can afford not to
have a presence there." Indeed, foreign multinationals pumped nearly $900
billion into the U.S. economy in the 1990s, more than the amount invested
over the preceding four decades combined.

In 1998, U.S. imports of goods and services totaled $1.1 trillion. But as
impressive as that number is, it falls short of the $1.9 trillion in sales
by foreign-owned affiliates in the United States that same year. A fixation
on imports ignores the extensive presence of foreign-owned affiliates in the
United States, which numbered more than 9,700 at last count. It also
overlooks the fact that such affiliates contributed nearly $420 billion in
output and employed more than 5.6 million Americans in 1998.

Germany, for example, may not be a significant exporter to the United
States, but German affiliates here employed nearly 800,000 Americans and
racked up sales of roughly $240 billion in 1998 -- nearly five times the
value of German exports to the United States in the same year. Similarly,
import figures suggest that China has greater stakes in the United States
than the United Kingdom does. But that is hardly the case, given the
latter's deep and long-standing direct-investment ties with the United
States. U.S. imports from the United Kingdom totaled only $36 billion in
1998, roughly half the value of that year's imports from China. But
affiliate sales of British firms operating in the United States -- $192
billion in 1998 -- greatly exceed those of Chinese firms.

GOODBYE, ADAM SMITH
Foreign direct investment has changed the face of the international economy.
Since the early 1970s, it has grown faster than either world output or
global trade and is the single most important source of capital for
developing economies.

But America's foreign economic policy still centers on trade at the expense
of FDI. A trade spat with the EU over beef and bananas, for example, risks
America's large investment stake in Europe. And the suggestion of some in
Congress to devalue the dollar to promote U.S. exports would only make it
more expensive for U.S. affiliates to do business abroad while making it
cheaper for foreign companies to buy American assets. An attempt to improve
the trade balance, therefore, would actually end up hurting the FDI balance.

Corporate America risks losing out on the best opportunities of the global
marketplace if Washington continues to make trade its top priority in the
world economy. With China's entry into the World Trade Organization, for
example, many observers will carp on the U.S.-China trade imbalance (which
recently surpassed the U.S. trade deficit with Japan), even though the real,
more substantial penetration of the Chinese market will likely come through
direct investment and affiliate sales. In 1998, U.S. affiliate sales in
China totaled $14 billion -- roughly equal to U.S. exports there. This
comparison will only grow in favor of FDI. A continued fixation on trade,
however, will divert attention from the more promising opportunities of
direct investment in China.

Similarly, America's most significant economic imbalance with Japan is not
the headline-grabbing U.S. trade deficit but the stark imbalance of FDI. In
1997, Japan's accumulation of direct investment in the United States was
worth $64 billion more than the value of U.S. assets in Japan -- a deficit
12 percent greater than the trade gap that year. Thus, in dealing with
Japan, the Bush administration should not get bogged down in the
all-too-familiar battle over automobile trade. Instead, it should
concentrate on opening the Japanese market in service sectors such as health
care, insurance, and financial services, where the potential payoffs are
greater. In other words, Detroit should not set the tone for U.S.-Japan
commercial relations; rather, Washington should work on expanding investment
opportunities in Japan for companies such as Yahoo, General Electric
Capital, and Charles Schwab. Moreover, the Bush administration should
actively promote another round of global trade negotiations, putting the
liberalization of services at the top of the agenda.

Looking south of the border, America's widening trade deficit with Mexico
appears increasingly formidable. But both policymakers and the media should
realize that in 1999, nearly two-thirds of U.S. imports from Mexico counted
as "related-party trade" -- that is, trade between multinational firms and
related affiliates. What drives U.S. trade with countries such as Mexico,
Canada, and Singapore is the exchange of goods and services within U.S.
firms such as ibm, Ford, DuPont, and Motorola. Slamming the door on Mexican
imports, then, means slamming the door on corporate America.

U.S. commercial relations with many developing nations are growing more
complex as American firms shift from trade-led initiatives to
investment-driven strategies. This development should influence how the Bush
administration takes up negotiations for the proposed Free Trade Area of the
Americas. The initial signs, however, are discouraging. Just when U.S. firms
are striving to integrate more developing nations into their global
production networks, the Bush administration is proposing broad cuts in the
Overseas Private Investment Corporation, which provides insurance and loans
to companies investing in developing nations. That proposal must be music to
the ears of policymakers in Europe, who are actively promoting their own
commercial interests in strategic markets such as China, India, Mexico, and
the Mercosur trade group.

In the end, U.S. exports and imports neither represent America's global
linkages nor indicate how or where U.S. firms compete. Yet many still view
global competition though the 200-year-old eyes of Adam Smith and David
Ricardo, who saw trade as the chief form of economic exchange. Others harbor
equally archaic mercantilist prejudices, assuming that exports are good
while imports are bad. These observers regard a trade deficit as a sign of
national weakness, a warning signal that something is amiss. But U.S. global
engagement involves far more than just trade. If policymakers continue to
interpret a large trade deficit as a loss of global competitiveness or a
result of unfair trade practices, protectionist backlash could result, which
could trigger retaliations around the globe. Under this scenario, there
would be no winners -- only losers.

The United States' obsession with its trade deficit belies the fact that
corporate America has never been better positioned to compete in the global
marketplace. It is time to say goodbye to Adam Smith's outdated framework of
global competition and to embrace instead a more complex understanding of
America's economic engagement with the world.¶

Joseph Quinlan is Senior Global Economist at Morgan Stanley Dean Witter and
author of Global Engagement: How American Companies Really Compete in the
Global Economy. Marc Chandler is Chief Currency Strategist at Mellon
Financial Corporation.
     

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