GLOBALIZATION OF CAPITAL: THE RISE OF THE MULTINATIONAL

Robert E. ScottEconomist, Economic Policy Institute

April 16, 2012

Challenges of Globalization: Economic Globalization

Cambridge Forum Conference

Growth of Foreign Direct Investment has propelled

globalization process• The growth of international capital flows has played a key role in

the globalization process. For the United States:• Real U.S. GDP growth averaged 3.2% per year between 1980

and 2010• U.S. – owned assets abroad increased 8.7% per year, nearly

three times as fast.• Real Foreign Direct Investment (FDI) by U.S. Multinationals

increased 6.1% per year, or twice as fast as GDP. • Real FDI in the U.S. by foreign MNCs has increased 9.5% per

year, three times as fast as U.S. GDP.• The growth of daily trading in foreign exchange and derivatives has

exploded over the past three decades. Daily average foreign exchange market turnover reached $4 trillion in April 2010, 20% more than in 2007 (vs. annual world GDP of $63 trillion).

Changing roles of Multinationals in international trade and

development

• In the past, U.S. MNCs invested abroad to gain market access. Overall, they exported more than they imported. For example, in 1999, U..S. MNCs had exports of $442 billion, imports of $391 billion and generated a trade surplus of $51 billion. The United States had an overall trade deficit of $329 billion in 1999. Primary destinations for U.S. FDI were wealthy countries.

• Over the past decade, U.S. MNCs outsourced large amounts of manufacturing work to low-wage countries. As a result they have become net importers of goods. In 2009, U.S. MNCs had exports of $578 billion, imports of $703 billion and a trade deficit of $125 billion, 25% of the total U.S. trade deficit.

Foreign MNCs in the United States

• Foreign MNCs invest in the United States to increase access to U.S. markets and gain access to U.S. technology.

• Foreign MNCs had U.S. imports of $484 billion in 2009 and generated exports of $220 billion, for a trade deficit of $264 billion, 53% of the total U.S. trade deficit.

• U.S. exports support domestic employment, and U.S. imports displace production that could support domestic jobs, so trade deficits displace U.S. employment. I’ve estimated that the U.S. non-oil goods trade deficit displaced 5.6 million U.S. jobs. Overall, U.S. and foreign MNCs were responsible for nearly 80% of the U.S. goods trade deficit in 2009.

Foreign MNCs and insourcing

• Federal and state officials and private businesses have extolled the benefits of insourcing, such as the Hyundai “transplant” auto assembly plants in Georgia and Alabama and new GE appliance factories.

• However, these plants import large quantities of parts:• The U.S. trade deficit in auto parts has nearly tripled over the

past decade, • Since 2007, Korea’s share of the U.S. auto parts deficit

increased 4.5 percentage points. • The U.S. Department of Commerce noted that over the past 14

years, for each new employee added to foreign-owned transplant facilities, U.S. companies have laid off 6.1 employees.

• Between 1990 and 2005, insourcing displaced 4.0 million U.S. jobs.

Global trends in FDI

• The Euro countries and the United States are the top hosts to FDI in the world, with $5 trillion and $2.7 trillion, respectively in total inward FDI.

• FDI in China has grown rapidly over the past decade and played a key role in its economic development. Total FDI in China increased from $369 billion in 2004 to $1.5 trillion in 2010. Globally, China is now the third largest host to FDI, and Hong Kong ($1.1 trillion) is number 5.

• Among developing countries, after China, Brazil ($675 billion) and Mexico ($299 billion) are two of the largest hosts to FDI.

FDI and trade in China

• Growing trade surpluses have played a key role in China’s very rapid growth and development over the past decade.

• MNCs (or Foreign Invested Enterprises, as they are known in China) have been engines of growth, technology transfer and exports in China.

• In 2010, China reported a global trade surplus of $183 billion. MNCs were responsibly for more than half of China’s imports and exports, and for 68% of its trade surplus in 2010.

China’s entry into the WTO and FDI

• China entered the WTO in 2001. China’s entry into the WTO promised to increased market access and increased security for foreign investors.

• China has also offered many benefits to foreign investors, such as access to free or low cost land, facilities, and capital. China also subsidizes the costs of many basic inputs including energy, steel, glass and paper. China also prohibits free and independent trade unions and suppresses wages. Finally, China has suppressed the value of its currency by approximately 30%. This acts as a subsidy to all of China’s exports, and a tax on exports to China.

• Many of China’s trade and industrial policies conflict with its WTO obligations.

• The rapid growth of China FDI and trade has contributed to rapidly growing trade deficits and job loss in the United States.

U.S. – China trade and job loss

• The U.S. trade deficit with China increased from $84 billion in 2001 to $278 billion in 2010. U.S. imports exceeded exports by more than 4-to-1.

• The growth of the U.S. trade deficit with China between 2001 and 2010 displaced 2.8 million jobs.

• FDI in China by U.S. and foreign MNCs has played a key role in growing trade deficits and job displacement.

• China also sustained growing global trade surpluses in the 1990s, and massive capital outflows. These contributed to imbalanced growth in countries with chronic trade deficits (such as the United States) and the growth of housing bubbles (by lowering global interest rates.

• NAFTA has had similar effects on FDI in Mexico, and on U.S. trade and employment.

FDI and the North American Free Trade Agreement

• NAFTA took effect in 1994. It was the template for more than a dozen FTA’s the United States has negotiated since that date.

• NAFTA provided a secure business environment and offered many benefits to foreign investors. It required Mexico (and Canada) to eliminate trade-related industrial policies such as local content, export requirements and minimum levels of local management employment.

• The NAFTA Investment chapter provided unprecedented legal protections under the Investor-State dispute resolution mechanism, which established special tribunals where foreign investors could sue foreign governments that imposed costly regulations.

• NAFTA dispute resolution panels have awarded $hundreds of millions in awards to MNCs, which has had a chilling effect on regulation of many parts of the economy.

U.S. – Mexico FDI, trade and job loss

• FDI in Mexico tripled after NAFTA took effect, with annual inflows rising from 1% of GDP in the decade before NAFTA took effect to 3% between 1994 and 2007.

• The U.S. had a small trade surplus with Mexico in 1993, before NAFTA.

• By 2010 the U.S. had developed a trade deficit of $97 billion with Mexico.

• The growth of the U.S.-Mexico trade deficit displaced 683,000 U.S. jobs between 1993 and 2004.

• Outsourcing to Mexico and FDI by foreign multinationals has contributed to the rapid growth of exports from Mexico to the United States and to the loss of manufacturing jobs. Job displacement has been concentrated in the upper Midwest—aka the rustbelt.

Rebalancing global trade and investment

• The G-20 has agreed that, large, chronic global imbalances must be eliminated.

• China and other Asian currency manipulators need to appreciate 30 to 40 percent, relative to the dollar.

• Other unfair trade practices must be eliminated, and new approaches to trade and industrial policy must be adopted in the United States.

• The United States needs to dramatically increase investments in infrastructure, education and training, R&D, clean energy and green technologies, and in health care and the safety net.

• In the long run, after full employment is achieved, we must also rebalance spending and employment, to eliminate budget deficits and raise national savings.

Total foreign Direct Investment, 2010

(billions of dollars)

Rank1 China,P.R.: Mainland $1,476.42 China,P.R.:Hong Kong $1,089.93 Brazil $674.84 Russian Federation $493.45 Singapore $461.46 Mexico $298.57 Hungary $209.38 Poland $201.09 India $198.410 Turkey $181.611 Indonesia $154.212 South Africa $153.1

Top Twelve, Developing.

Rank1 United States $2,658.92 Luxembourg $1,865.53 China,P.R.: Mainland $1,476.44 United Kingdom $1,227.15 China,P.R.:Hong Kong $1,089.96 France $1,008.47 Germany $910.48 Belgium $901.09 Brazil $674.810 Spain $621.8

Top Ten, Globally

Source: EPI analysis of International Monetary Fund (2010) International Financial Statistics (CD ROM) April (2012)

Foreign Direct Investment in China, 2004-2010

China world trade figure

China's world trade, total and by FIE, billions of USD2009 2010 Growth

Exports 1,201.8 1,577.9 31.3%Imports 1,005.6 1,394.8 38.7%

Trade Balance 196.1 183.1 -6.6%

trade of FIEs 2009 2010 GrowthExports 672.2 862.3 28.3%Imports 545.2 738 35.4%

Trade Balance 127.0 124.3 -2.1%

FIE shares of total China trade 2009 2010 Growth

Exports 56% 55% -2.3%Imports 54% 53% -2.4%

Trade Balance 65% 68% 4.8%      

 

U.S. China trade and job displacement, 2001–10

U.S. trade with China ($billions, nominal)

* Domestic exports are goods produced in the United States, and exclude re-exports, i.e. goods produced in other countries and

shipped through the United States. Total exports as reported by the U.S. International Trade Commission include re-exports. Total

exports were estimated to be $91.9 billion in 2010 while U.S. re-exports to Mexico represent 6.67% of total exports. The employment

estimates shown here are based on domestic exports only. See text, note 5 for further details and references.

Source: EPI analysis of data from the U.S. Census Bureau (2009), U.S. International Trade Commission (2011), and Bureau of Labor

Statistics (2010a and 2010b). For a more detailed explanation of the data sources and computations, see the appendix.

Foreign direct investment in Mexico tripled after NAFTA, 1980–

2007

U.S. Mexico trade and job displacement, 1997-2010U.S. trade with Mexico ($billions, nominal)

Domestic exports are goods produced in the United States, and exclude re-exports, i.e. goods produced in other countries and shipped through the United States. Total exports as reported by the U.S. International Trade Commission include re-exports. Total exports were estimated to be $163.3 billion in 2010 while U.S. re-exports to Mexico represent 19.4% of total exports. The employment estimates shown here are based on domestic exports only. Source: EPI analysis of Census Bureau, United States International Trade Commission and the Bureau of Labor Statistics public data series

Percent change

1997 2000 2007 2010 1997-2010 2007-10 1997-2010U.S. domestic exports* $68.4 $100.4 $119.4 $131.6 $63.2 $12.2 92%U.S. imports for consumption 85.0 134.7 210.2 228.8 $143.8 18.7 169%U.S. trade balance -16.6 -34.3 -90.8 -97.2 -$80.6 -6.4 485%Average annual change in the trade balance -6.2 -2.1 14.6%

U.S. trade-related jobs supported and displaced (thousands of jobs)Percent change

1997 2000 2007 2010 1997-2010 2007-10 1997-2010U.S. domestic exports 523.7 767.1 780.7 791.9 268.2 11.2 51%U.S. imports for consumption-jobs displaced 626.3 966.7 1,347.2 1,474.8 848.5 127.6 135%U.S. trade deficit-net jobs lost 102.6 199.6 566.5 682.9 580.3 116.4 566%

Changes in: ($billions)

Changes in: (thousands of jobs)