Globalist Perspective

Wanted: Another Scorecard for U.S. Trade

Do traditional trade statistics tell the whole story of global U.S. trade?

Keeping score.

Takeaways


As any first-year economics student can knowingly rattle off, the United States has run a seemingly endless string of annual trade deficits in recent decades, importing more goods and services than it manages to export from its shores each year.

And 2005 is proving to be no exception. Through August, the overall U.S. trade deficit is on pace to reach a record $700 billion by the end of December 2005.

Over the long term, it's been some 30 years since the United States exported more than it imported in a given year — a looming reminder of a global consumption imbalance that threatens to inject protectionist rhetoric into U.S. trade policy.

Because of the outsized U.S. trade gap, few U.S. legislators are keen on approving trade deals or similar legislation. Rather, the majority of folks in Washington D.C. appear to be just itching to take some kind of retaliatory action against many of the largest U.S. trading partners — for example, China.

But the much-maligned U.S. trade figures are as outdated as the distribution methods they represent. Why? Multinational companies primarily deliver goods and services to foreign customers through their affiliate operations abroad — not via cross-border trade.

In this regard, the U.S. corporate sector's global reach is second-to-none, with more than 20,000 U.S.-owned affiliates embedded in various international markets around the world. It's through these affiliates that U.S. firms deliver their wares — much more so than they do through exportation.

While U.S. imports are quite large — $1.77 trillion in 2004 — sales of U.S.-owned affiliates are even larger, totaling $2.14 trillion in 2003, the last year of available data.

A more complete view of who the United States buys from — and what it sells to the rest of the world — should look not only at the U.S. trade balance. It also requires a consideration of the U.S. foreign affiliate balance, which takes into account the difference between what U.S.-owned affiliates sell abroad and what foreign-owned affiliates sell in the United States.
Yes, the U.S. trade deficit is large, with U.S. merchandise trade deficit totaling more than $530 billion in 2003. In 2004, that number soared to $651 billion.

But the offset to an outsized U.S. trade deficit is an even larger foreign affiliate surplus. The latter of the two totaled $770 billion in 2003, some 44% larger than the U.S. merchandise trade deficit that year.

That the United States enjoys such a large foreign affiliate surplus with the rest of the world reflects the extraterritorial reach of the U.S. corporate sector relative to comparable foreign multinationals.

Key regional advantages emerge when regarding trade and affiliate sales balances in tandem. The U.S. foreign affiliate surplus with Canada was nearly five times as large the U.S. trade deficit with the country in 2003.

Similarly, while bilateral trade figures between the United States and Europe are relatively unbalanced — with Europe enjoying a huge advantage over the United States — the opposite is true when U.S.-European foreign affiliate sales are taken into account.

By region, no place in the world contributes as much to the U.S. trade deficit as Asia, with the United States trade deficit with the region totaling $250 billion in 2003. However, that number is certainly downsized when taking into account the $90 billion affiliate-sales surplus U.S. firms enjoyed in Asia that same year.

In Japan, the U.S. runs both trade and affiliate-sales deficits, given Japan's large presence in U.S. automobile and consumer-electronics markets.

However, that's not the case with China, whose investment roots in the United States are relatively shallow compared to Japan's. China does enjoy a sizable trade surplus with the United States — $124 billion in 2003 — yet the United States enjoys a $47 billion foreign affiliate surplus with China, reflecting the U.S. corporate sector’s rapidly expanding direct investment position in China.

The upshot — the U.S. commercial balance with China is not as lopsided as many in Washington D.C. might argue. That said, when crafting trade and investment policies toward China, or any other nation for that matter, U.S. policymakers would be wise to review the combination of both bilateral trade and foreign affiliate balances.

In the end, the monthly U.S. trade figures seem to dominate any meaningful discourse on U.S. competitiveness abroad, sending a worrisome signal that the United States has overextended itself by consuming more foreign goods than it can sell in return. Because of this constant state of affairs, the threat of U.S. protectionism or a sharp move down in the U.S. dollar continues to loom large.

That likely won't change until policymakers stop worrying about the most outdated statistics of all — the U.S. trade numbers — and start thinking more about the sunnier side to the U.S. commercial balance picture — the hefty U.S. affiliate sales surplus.

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About Joseph Quinlan

Joseph Quinlan is the managing director and chief market strategist at U.S. Trust, Bank of America Private Wealth Management.

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