What about U.S. Investment Abroad?

Economists who claim that trade surpluses in developing countries, i.e., China and elsewhere, have nothing to do with corporate profits have not looked closely at what is happening. Do they think that suddenly these countries developed manufacturing skills comparable to the developed nations, that suddenly China, for example, has become a major exporter of IT products without the presence of global corporations?

Can they explain:

• why corporate profits rise as median wages in the U.S. stagnate?
• the U.S. trade deficit as a function of high corporate profits?
• how China suddenly has become one of the leading IT exporters?

Have those who depend on FDI data ever done a survey of what our multinationals are doing in China? Do they understand that China is an export platform?

Do they understand the difference between FDI in China and FDI in the U.S.? Or are they simply comparing apples and oranges? Putting up an automobile plant in the states is expensive. Are the costs similar in China?

China enjoys a trade surplus with the U.S. What does the U.S. send to China? In 2005, the top four U.S. exports to China were: aircraft products ($41b), semiconductors and other electrical parts ($4.5b), waste and scrap ($3.7b), soybeans ($2.3).

Without question, China has become an assembly plant. The question is: Where does it go from here? And what is happening in China?

When Sam Palmisano, IBM CEO, said

By one estimate, between 2000 and 2003 alone, foreign firms built 60,000 manufacturing plants in China. Some of these factories target the local Chinese market, but others target the global market. European chemical companies, Japanese carmakers, and U.S. industrial conglomerates are all building (or have declared their intention to build) factories in China to supply export markets around the world. Similarly, banks, insurance companies, professional-service firms, and it companies are building R & D and service centers in India to support employees, customers, and production worldwide”

he was certainly supporting the view of China and India as export platforms for multinationals.

And whom are we to believe, those who cite the BEA with its antiquated and flawed measure of FDI as a measure or Yi Xiaozhun, China’s Vice Commerce Minister when he says,

Foreign-funded enterprises in China enjoyed 83 percent if China’s total foreign trade surplus and accounted for 58 percent of China’s total exports, announced Vice Commerce Minister Yi Xiaozhun at China-US Business Forum in Beijing on Feb. 14, 2006

Yi went on to say that

that foreign investors remitted some 270 billion US dollars of their profits out of China, which did not include much of their profits used for reinvestment

In the same article, the American Chamber of Commerce in China states:

American companies, in particular, stood out due to their strong competitiveness. A survey by the American Chamber of Commerce in China in 2004 shows that 86 percent of US businesses in China saw their earnings increase and 42 percent of them made more profits in China than globally.

Are those profits from Chinese markets? I don’t think so. Consider this description of a giant China mall:

The world’s largest shopping center looks almost deserted on a recent afternoon. While schoolchildren ride the sidewinder and roller coaster, there are few shoppers and fewer tenants at South China Mall in central Dongguan, a city of 6 million north of Hong Kong.

“They did this mall all wrong,” says Stephen Liu, a Hong Kong businessman visiting clients in Dongguan who came by to see the place for himself. “They never found out if there were enough people to fill it. All the Chinese in this town are factory workers, they can’t afford to shop here.”

The Chinese are not buying. Those who are not too poor to buy, save. What is happening? Simple: China is an export platform. We are the consumers. Who are the major corporations manufacturing the goods in China? Simple: Often ours!

In fact,according to Wu Xioling, deputy governor of the People’s Bank of China:

a major part of China’s trade surplus is created by multinationals as they eye low labor costs in the country and choose to produce their labor-intensive products in China.

And in the same article, but this time citing Mei Xinu, trade expert with the Ministry of Commerce:

The fact is that China’s trade surplus mainly comes from the manufacturing industry and that most exports by large multinationals have been included in China’s trade figures. A high proportion of export profits in fact stay in the pockets of multinationals.

Certainly Yi and Wu have a better understanding of what is happening in China than anyone in this blog or this country, or those who rely on the FDI BEA data.

Yi’s understanding of the nature of China’s trade is a bit more reliable. How much of China trade is FDI driven. The answer: Close to sixty per cent.

Consider again the following:

American companies, in particular, stood out due to their strong competitiveness. A survey by the American Chamber of Commerce in China in 2004 shows that 86 percent of US businesses in China saw their earnings increase and 42 percent of them made more profits in China than globally.

Acquisitions and mergers inside of China happen daily, with multinationals buying or merging or setting up partnerships with local firms. Note the following:

Mergers and acquisitions of Chinese firms: June 30,2005-June 30,2006
U.S………. 5.37 billion
U.K………..3.46 billion
Singapore…. 1.84 billion
Belgium…… 764 million
Hong Kong…. 584 million
Germany…… 399 million
France……. 321 million
Japan…….. 242 million

This merger and acquisition activity, by the way, is of concern to China.

But the counter to what is happening is always FDI. Forget about Yi and other Chinese experts; forget the mergers and acquisitions occurring in China; forget about trade and how it is really functions; forget about off-shoring, out-sourcing, and the myriad annoying facts. Forget about how an impoverished nation can suddenly become an economic powerhouse.

What about FDI?

Looking at FDI levels without any further metrics or measures of what FDI investments involve and achieve in terms of value-added production and market development is misleading, comparing apples to oranges. For this reason, BEA FDI data alone isn’t the magic answer. Go look at the corporate SEC filings that corporations make in order to determine what is really happening. Read the corporate business plans. Enter the realities of the business world. Economists are not businessmen.

Why do comparative FDI statistics fail as good metric?

FDI in developing nations brings a far higher rate of return than in developed countries. Take China, for example:

• Cheap labor. As I pointed out in an earlier piece, the average iPod worker in a Chinese SEZ makes approximately .60/hour. Yes, that is where your iPod comes from. SEZ’s are perfect manufacturing platforms for foreign firms.
• Taxes. Foreign firms in China can receive up to a ten-year tax holiday. More importantly, they are taxed at half the rate of indigenous firms. Now, you mean to tell me that those indigenous Chinese firms have suddenly stepped onto the world stage and are now competing with multinational American corporations when they are taxed at twice the rate?

FDI cannot measure how profits within a multinationals are allocated. How FDI is reported–or even measured–is antiquated and flawed. Global corporations can and do shift profits from one branch or division to another. It’s called book-keeping, transfer pricing, black matter, take your pick. FDI cannot and does not reflect these “nuances.”

In summary, FDI is not a good measurement of what is happening. It fails to explain rising corporate profits and our growing trade deficit. It fails to account for differing returns on FDI. It fails to explain the gutting of our manufacturing sector or where those companies have gone. It fails to explain the growing disparity of wealth both here and abroad. It fails to identify the the real sources of corporate profits.

Those who forward this argument chose to ignore Chinese economists and major U.S. CEO’s who are where “the action is.”

One quotation says it all:

Today, however, virtually every major company is trying to reduce costs and get closer to fast-growing markets by spreading manufacturing operations and research facilities around the world. As a result, a U.S.-centric view of capital spending, says Steven R. Appleton, CEO of Micron, is “almost meaningless.”

Or to put the FDI argument another way: Comparing FDI investments made in the U.S. and China by corporations solely on a dollar basis overlooks the differences in what corporations can achieve with the same pile of dollars. FDI investments in China go a lot further in terms of acquisition and corporate rates of return. Otherwise, why are there thousands upon thousands of U.S. corporations and companies in and flowing to China as opposed to a much smaller number of corporations trying to break down the door to get into the U.S. and build plants. Where is the comparison of new plants builds in the U.S. and China? Why aren’t U.S. economists talking about that?

Yes, automobile plants are being built in the U.S. by foreign corporations and that certainly involves a large share of FDI investment in the U.S. But note that the automobile plants fall under a separate trade “agreement” not being applied to all other production goods. Instead of duplicating the automobile import agreement, the vast majority of other manufactured goods fall under the general accords of WTO and U.S. trade agreements that have resulted in the significant transference of production offshore from the U.S. as well as the large U.S. trade deficits.

Why are corporate profits high? Look at our trade agreements and the WTO.

In short, we are watching America being gutted as corporate profits soar.