Forget About the U.S. Trade Deficit?
Is the United States still competitive internationally given the U.S. trade deficit?
July 1, 2004
America's widening trade and current account deficits give the impression that when it comes to selling goods and services overseas, U.S. firms are either uncompetitive or unfairly treated in various foreign markets — or both.
Nothing could be further from the truth.
Lost amid the newspaper headlines of a record trade deficit in April 2004 ($48.3 billion) and a record current account deficit in the first quarter of 2004 ($144 billion) is this: global business and global earnings have never been better for U.S. multinationals.
A more robust global economy — in conjunction with continued U.S. dollar weakness — has sparked a boom in global profits.
Just ask Federal Express, which — helped by soaring international sales — posted stronger-than-expected quarterly results.
One of the most dangerous deficits today is not one of trade — but rather a deficit in understanding how U.S. firms compete and sell products in the world marketplace.
Simply put, American firms compete more through foreign direct investment — they establish a local presence in international markets by operating on the ground — than through arm's-length trade.
In 2001, for instance, the last year of available data, U.S. foreign affiliate sales topped nearly $3 trillion — roughly three times larger than U.S. exports of goods and services.
Because foreign affiliate sales are not included in U.S. exports, a great deal of global commerce is missing from the reported trade figures.
Accordingly, while the monthly trade deficit paints a depressing picture of U.S. global commerce, investors would do well to remember that U.S. multinationals have over 20,000 foreign affiliates strategically located around the world. And these affiliates are ringing up record earnings.
According to the latest figures from the Bureau of Economic Analysis, foreign affiliate income — a proxy for global earnings — topped $51 billion in the first quarter of 2004.
That is a 7.8% rise from the prior quarter — and a whopping 55% jump from the same quarter a year ago.
Since the fourth quarter of 2002, U.S. foreign affiliate earnings have increased each consecutive quarter. Earnings were first bolstered by the decline in the value of the U.S. dollar, which helped inflate the dollar-based earnings of U.S.-owned affiliates.
Lately, they have been lifted by the rebound in global economic activity. Remarkably, this rebound in earnings is a globe-spanning phenomenon.
In the first quarter of 2004, for instance, U.S. affiliates reported record quarterly earnings in no less than 14 countries, including: Canada, the Czech Republic, Greece, Ireland, Poland, Portugal, Russia, Spain, Switzerland, Taiwan, Thailand and South Korea.
Record affiliate earnings were also registered in China and India, two nations that were subjected to the wrath of U.S. protectionist forces this year.
In Asia, Japan provided the biggest windfall to U.S. affiliates, with affiliate earnings totaling $2.9 billion in the first quarter.
That was equivalent to roughly 26% of total foreign affiliate earnings from Asia — and not far from the record $3 billion earned in Q4 of 2003. On a year-over-year basis, U.S. earnings in Japan rose 38.2%.
Europe was also a significant source of affiliate earnings in the first quarter of 2004. Indeed, affiliate earnings rose 37% from the same period a year ago, to $24 billion. That represents a quarterly record — and accounted for nearly 47% of the global total.
Earnings from Eastern Europe nearly doubled in the first quarter, rising to $860 million, compared to $453 million in the first quarter of 2003.
In South America, affiliate earnings more than tripled from the depressed levels of 2003, soaring to $1.9 billion in Q1 2004 versus $663 million in the same period a year ago.
This shows that many observers — distracted by rising U.S. interest rates, spiraling geopolitical risks in the Middle East and disturbed by massive monthly trade deficits — have lost sight of the ongoing global profits boom taking place among U.S. multinationals.
Adapted from Joseph Quinlan’s June 24, 2004 Banc of America Capital Management report, “Forget about the U.S. trade deficit.”