"It is very distressing that many American politicians now associate globalization with a loss of jobs."
There is now remarkable hostility in Washington to the international activities of American corporations.
John Kerry has been attacking American firms for employing people in other countries and diversifying their businesses on a global basis. He refers to some CEOs as “Benedict Arnolds”. He also has suggested that the U.S. should end the deferred tax treatment of foreign corporate income and offer an amnesty to firms which repatriate offshore profits. The U.S. offers this tax deferral because it is unique among the major industrial nations in taxing all global income. Without tax deferral, American firms would suffer a major competitive disadvantage compared to firms in other countries.
There is growing support in Congress for enacting a tax bill which would apply a 5.25% tax on firms which repatriate their profits to the U.S. This legislation would be part of a larger bill to replace existing tax laws which conflict with a WTO ruling.
Members of Congress want to encourage U.S firms to bring money home in order to promote employment in this country. It is laudable for Congress to use tax policy to promote investment in this country. But the domestic bias of the legislation suggests they have little comprehension of the important role which multinational firms play in promoting exports from this country.
The total value of global sales by multinational firms are $17.7 trillion compared to total global export trade of $7.9 trillion, American corporations are by far the world’s largest multinational enterprises. They have sales of $2.3 trillion or three times more than the country exports. They have assets of $1.5 trillion and employ 8.4 million people. The multinational firms play a major role generating U.S. exports. About 33% of U.S. exports and 40% of imports are intra-corporate sales of firms shipping goods between their domestic and foreign divisions. The contrast between American firms’ international sales and exports are very striking. In Britain, American firms have sales of $420 billion while exports are only $40 billion. In Canada, U.S. sales are $367 billion while exports are $163 billion. In Germany, U.S. sales are $241 billion while exports are $30 billion. In Brazil, U.S. sales are $73 billion while exports are $16 billion. If American firms did not have large multinational operations with distribution networks, American exports would be much smaller. Despite the large size of these foreign sales, though, American firms still have 77% of their output in the U.S. compared to 75.3% in 1977.
The tax deferral on foreign income is important to U.S. business because the U.S. is unique among the G-7 nations in taxing global income. American firms already pay a very diverse mix of tax rates on their foreign income. The levels range from 41% in Italy and 30% in Germany to 11% in China, 15% in Mexico, and 10% in Singapore. If they did not have a tax deferral, there would be a strong incentive to redomicile their operations to Bermuda, where the current effective tax rate is 11%.
The corporate sector’s foreign profits also play a dominant role driving foreign direct investment. In 2003, reinvested profits accounted for 80% of U.S. foreign direct investment. The ratio of reinvested earnings to FDI is 39% in Europe, 38% in the Asia Pacific region and 31% in Latin America. If American firms repatriated their profits, the level of FDI would slump sharply. The U.S. corporate sector is not unique in having a close relationship between exports and multinational sales. Japanese corporations have global sales of $1.2 trillion. Japanese firms now send about 38% of their country’s exports to Japanese firms in offshore locations compared to only 12% in 1986. Intra-corporate trade plays a major role driving exports in most industrial countries. In France and Switzerland intra-corporate trade produces 41% of exports. In Britain and Canada, intra-corporate trade generates one third of exports. The highest ratio in the world is Singapore which generates 46% of exports through intra-corporate trade. Intra-corporate trade plays a small role only in backward regions which have attracted little foreign direct investment. In Africa, for example, intra-corporate trade generates only 7% of exports. If American firms did not have the international business activities to generate intra-corporate trade, they would be much less effective at competing with European and Asian companies.
The U.S. has been the world’s largest recipient of foreign direct investment. It has over $1.4 trillion of foreign investment compared to $500 billion for China, $639 billion for Britain, and $452 billion for Germany. Foreign firms employ 6.4 million Americans today compared to 4.9 million in 1991 and 2.4 million in 1981. Foreign firms employed these people to generate sales of $2.35 trillion in the U.S. during 2001.
What John Kerry fails to recognize is that foreign direct investment has become one of the most powerful forces for both global economic integration and promoting American values. The level of global FDI has shot up from modest levels during the 1970s to $200 billion per annum during the early 1990s and a peak of $1.45 trillion during 2000, when there were large foreign takeover bids for American firms. In recent years, about 70% of FDI has flowed to the industrial countries and about 30% to the developing countries. The U.S. has had great trade tensions with Japan in the past largely because of differences over corporate investment. In the decades after World War Two, Japan severely restricted FDI in order to protect local companies. Korea followed a similar policy. On the eve of the great east Asian financial crisis in 1997, Japan had only $17 billion of FDI while Korea had $12 billion. China, by contrast, has completely opened itself up to foreign companies. During the past decade, they have invested over $500 billion and become the dominant players in sectors as diverse as cellular telephones, automobiles, and soap. China has a large trade surplus with the U.S. because foreign companies now produce over 55% of China’s exports. Wal-Mart, for example, buys $40 billion of goods from China each year. But it buys only $14 billion from Chinese companies. The other $26 billion comes from American, Japanese, and Korean firms with manufacturing plants in China. As a result of these corporate linkages, China is experiencing such a dramatic surge of imports for capital goods and components for reassembly that it is now running a global trade deficit.
It is very distressing that many American politicians now associate globalization with a loss of jobs. During the years since 1960, the American economy has produced 60 million new jobs while the import share of GDP has grown from 4% to about 14%. Multinational firms pay on average 19% higher wages to blue collar workers than purely domestic firms. The U.S. has recently suffered an export slump because of a global economic slowdown but during 2004 and 2005 exports are likely to be a leading growth sector. John Kerry should be giving speeches about how he will open markets for American business and use foreign direct investment to promote democracy in backward regions of the third world with closed economies. His policy of opposing multinational investment will only reduce America’s export potential and enhance the competitive position of companies in Japan and Europe.