Alan Tonelson and Sam Rose discuss the real intent of offshoring, dealing less with opening up foreign markets to the U.S. and more with fattening a company’s profits while supplying ‘the high-price U.S. market.’
Lots of Americans these days are upset that members of Congress keep voting on legislation – like the nearly 1,100-page stimulus bill, the 2,000-page health care bill and the 1,000-some-odd-page climate change bill – without even reading these measures. But here’s something much more disturbing: Few legislators have bothered to read any of the federal government’s 25-page annual reports on the global operations of U.S. multinational companies, either. If they had, they never would have swallowed the multinationals’ claims that the last decade-and-a-half’s worth of trade deals they’ve pushed through Washington have strengthened the U.S. economy rather than weakened it.
It’s all about opening booming new foreign markets to U.S. businesses, farmers, and their workers. That’s the argument that these globe-spanning firms have used for nearly two decades to convince presidents and congresses to approve a string of controversial new trade agreements and policies starting with the North American Free Trade Agreement in the early 1990s, and continuing through current struggles over responding to predatory Chinese trade practices like currency manipulation.
As a result, these companies and their lobbyists have insisted critics are wrong to charge that the trade deals are really all about offshoring – helping the multinationals fatten their profits by enabling them to supply the high-price U.S. market from factories and workers moved to super-low cost developing countries like China, India, and Mexico.
But as made clear by annual surveys by the Department of Commerce’s Bureau of Economic Analysis, the multinationals’ claims are all wet. Principally, despite their export mantra, U.S. multinationals are now running big and steadily growing trade deficits with the world overall, and with their favorite offshoring sites in particular. And because the standard way of measuring the gross domestic product treats such deficits as detractors from growth, these firms’ operations as such obviously have undercut the U.S. economy’s size over the years, not enhanced it.
BEA’s latest survey of the multinationals’ global operations came out in the August issue of its monthly Survey of Current Business, and presented preliminary figures for 2007. The report shows that the multinationals do export robustly. Their total overseas sales of goods rose from $163.38 billion in 1982 to $558.62 billion in 2007 – a more than 242 percent increase. So there these firms have been, servicing those exciting foreign markets, either in the form of their own overseas affiliates, or independent customers. Or so they have said.
Trouble is, they’ve been even more impressive importers – with their goods purchases from abroad surging from $120.77 billion to $728.41 billion during this period – an increase of more than 503 percent, or more than twice as fast as the export increase. That represents both a big increase in their foreign sourcing for their domestic production, and a big increase in finished imports from overseas suppliers – including the foreign affiliates they’ve set up for this purpose. As a result, the multinationals’ trade performance deteriorated from a $42.62 billion global merchandise surplus in 1982 to a $169.79 billion deficit in 2007. Worse, once the deficit emerged in 2001, it widened rapidly.
By comparison, total U.S. goods exports from 1982 to 2007 jumped by 439 percent, while imports shot up by 695 percent, with the merchandise trade deficit during this period exploding by 22-fold. So the multinationals’ trading activity didn’t undermine U.S. growth during this period as much as trade conducted elsewhere in the economy. But it sure didn’t help.
The performance of these firms is all the more disappointing because they’re supposed to be among the U.S. economy’s most competitive actors and among the strongest in the world. About the best thing that can be said for them is that they contributed only slightly more than 25 percent of the total deterioration of U.S. trade accounts over the last quarter century. But they contributed nonetheless. And although their imports rose more slowly than overall imports (at just under three-quarters the rate), their exports rose more slowly still (at just over half the rate).
The multinationals’ performance has been better when their trade was conducted within their own corporate networks – i.e., between parent companies’ facilities in the United States, and their overseas affiliates. But it’s not nearly good enough to absolve them of the charge of investing overseas mainly to serve the U.S. market with factories and workers that used to be located in America – not to service foreign markets more efficiently than through traditional exports from the home country.
From 1982 to 2007, exports from the U.S. parents to these overseas affiliates rose by 360.64 percent – faster than the total imports by the parents (including shipments to independent customers), but slower than the total rise in goods exports. Yet shipments from the overseas affiliates to the domestic parents rose faster than exports (553.98 percent), albeit more slowly than the total increase in goods imports.
The only convincing explanation of the swing from surplus to deficit in the multinationals’ trade flows: Many of their exports, whether to their own affiliates or to independent customers, consisted of capital equipment and other goods needed to build factories and related infrastructure systems. Yet these new manufacturing complexes existed mainly in countries pursuing export-led growth strategies – principally low-income developing countries.
Once the factories and the associated roads and ports and airports and bridges were completed, they focused on their prime mission – exporting. And the overall trade flows of these countries reveal a heavy reliance on the U.S. market and its high income population. Does anyone seriously think that the multinationals responsible for this offshoring don’t know the final destination of most of the output?
More evidence of the multinationals’ broken export promises and of the primacy of their outsourcing intentions: the data on the imports of their foreign affiliates from independent U.S. exporters. The companies have long portrayed their decision to locate factories and other facilities in developing countries as a bonanza for other American companies and workers. The reason: Their overseas affiliates would become magnets for exports from these independent suppliers. And more exports would lead to more demand for the independents’ products, more economic growth, and ultimately the need to hire more workers at higher wages.
But the BEA figures demonstrate that, for fully a quarter-century, nothing of the kind has happened. In 1982, non-multinational exports from the United States to the multinationals’ overseas affiliates stood at $10.16 billion. By 2007, this figure had indeed jumped to $43.19 billion – a 325 percent rise. But the absolute numbers have remained so tiny that these exports have shrunk dramatically as a share of total exports – from 4.69 percent to 0.38 percent. Some magnet.
The multinationals and their hired guns in the lobbying and academic worlds have used the BEA data for one seemingly decisive rebuttal of the offshoring charge. The data purport to show that these companies’ foreign affiliates sell the lion’s share of their production to local customers, rather than exporting it back to the United States. Even in export-obsessed China, for example, BEA data show that 90 percent of U.S. multinational affiliates’ sales serve Chinese markets.
But there’s a fatal flaw in this argument – and one that the BEA studies should acknowledge. The sales figures measure only the first transaction involving a product coming out of an affiliate factory. And since manufacturing worldwide has now been so vertically disintegrated, with so many phases of the production process of so many goods now being farmed out globally to so many subcontractors, the first transaction involving anything other than a finished good is highly unlikely to be the last, or even close. Certainly there’s no reason to assume that the first – local – customer represents the final demand for that product. In fact, when dealing with export-focused countries like China and other third world offshoring sites, it’s at least as reasonable to assume that the final customer is overseas.
Think of the following example. When Intel sells a semiconductor assembled in one of its Chinese factories to a consumer electronics factory in China (for insertion in a laptop or some other device), the BEA studies count this transaction as a sale to a local customer. But is that device likely to be sold ultimately to a Chinese consumer? Maybe. But it’s as least as likely to be finally consumed in the United States or another foreign market.
BEA analysts know this and freely admit – though not in their reports – that they can’t track the second and third and final trips made by the vast volume of parts and components and other intermediate goods made in export-oriented countries like China. But these realities make all the difference in judging the role played by the multinationals accurately.
Again, the multinationals are fully aware of the end-use markets for their products – how could they make money consistently otherwise? But they know that disclosing this information would create a PR disaster. So in a harmful globalization version of “Don’t ask, don’t tell,” they don’t provide this critical information to the U.S. government. And Washington doesn’t seek it. Only the public interest suffers.
A few years ago, comedian and now U.S. Senator Al Franken wrote a book on the supposedly debased state of American conservatism called “Lies and the Lying Liars Who Tell Them.” That’s too harsh a verdict to hand down to U.S. multinational companies when they talk about trade. But as the BEA studies show, it’s uncomfortably close to the mark.
Alan Tonelson is a Research Fellow at the U.S. Business and Industry Council Educational Foundation in Washington, D.C. A contributor to the Council’s AmericanEconomicAlert.org Web site, he is also the author of The Race to the Bottom (Westview Press, 2000). Sam Rose is a Research Assistant at the Foundation. The views expressed here are their own.