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Measuring Globalization. Some Little Known Statistics Provide Big Clues To The Real Size Of Global Trade. By Harry L. Freeman
Apr 7, 2002

The trade community may have overlooked some startling recent statistics, all free of charge from the Bureau of Economic Analysis (BEA) web site: www.bea.doc.gov. It’s worth a few clicks of the mouse to check them out.

I pick two sets of very important statistics: first, the mushrooming sales of goods and services through U.S. majority-owned affiliates, known as MOFAs, and MOUSAS, which are sales in the Unites States by the local affiliates of foreign-owned companies. These should be notes as well as the growing number of government agencies now tracking not only MOFAS and MOUSAs, but also more specialized data, including the rapidly growing trade in services through affiliates. This data can be found under the statistical agency-agreed acronym, “FATS” for “Foreign Affiliates in Trade in Services”, courtesy of such entities as the OECD, EU, and individual countries.

Second, since the WTO Ministerial meeting in Doha, there has been a leap in the level of interest in calculating the future dollar benefits of liberalization of trade in goods and services under WTO auspices. There are some really amazing figures with certain liberalization scenarios, and real surprises in those figures, both in quantity and in sectors. Both the use of foreign affiliates as a means of marketing goods and services, which is growing rapidly, and the attempted quantification of benefits from trade liberalization, are important elements of “globalization.”

To understand the importance of MOFAs and MOUSAs, assume IBM in the Unites States sells directly to Bayer in Germany some good or services. This is a traditional cross-border export by the Unites States, and a German import. For 2000, the Unites States had its first one trillion dollar year exports of goods and services; of course, the Unites States had record imports. Further, assume an IBM subsidiary in the UK sells some product to Bayer in Germany. There is, of course, a direct IBM-UK export to Germany. Not a U.S. export, however, U.S. sale for goods and services through its majority-owned affiliate in the UK, its MOFA.

According to the most recent BEA statistics, those U.S. MOFA affiliate sales are either approaching, or are over the $2 trillion mark, and growing at twice the size of traditional U.S. cross-border exports. Whatever the benefits, the United States has exports or sales through affiliates of $ 3 trillion, not the traditional perception of trade being only direct cross-border trade exports.

Reacting to rapid growth sales through foreign affiliates, the U.S. International Trade Commission published the “Examination of U.S. Inbound and Outbound Direct Investment,” (January 2001, Publication 3383), which has a lengthy treatment of the relations between traditional exports and sales through affiliates, foreign direct investment, and the current account. The ITC calls for greater prominence of sales through affiliates so as to provide a more accurate and fuller depiction of U.S. firms global commercial activity, a depiction more accurate than the current account and traditional trade figures now indicate.

Perhaps anticipating the ITC recommendation, the BEA’s annual article on trade in services (Survey of Current Business, November 2001) says the United States has services exports and imports displayed alongside sales through foreign affiliates and sales in the Unites States by foreign-owned parents (MOUSAs).

In 2000, U.S. cross-border exports of services alone were $279 billion, while cross-border imports were $201 billion. But, sales of services through affiliates in 1999, the most recent year for statistics, were $338 billion, while imports through affiliates were $289 billion. Both exports as well as sales through affiliates were in surplus for the United States, and dales of services through affiliates exceeded traditional exports.

This is not to equate MOFA sales with cross-border exports. Sales by MOFAS may not produce any U.S. jobs, revenue from taxes, or cash flow back to the Unites States. Nevertheless, MOFA sales of $2 trillion must benefit the United Sates big time and BEA is on course to track and quantify these diverse benefits. To the extent proceeds from sales through MOFAs are traced, they are different from income received by U.S. companies as apart of the current account , in which formal income is found in dividends and interest repayments. MOFA sales may or may not produce formal dividends to the parent company.

As noted above, both national and multilateral agencies are beginning to collect and publish statistics on sales of services through affiliates-FATS-because of their growing size and importance.

The value of MOUSAs is also leaping forward as both the United States and other countries make foreign direct investments to be closer to their customers, the customary reason for setting up abroad. (The 2000 figures for goods will be available in March 2002.)

An interesting side note is that U.S. foreign direct investment has shifted from being largely in the manufacturing sector to a majority of investments in the foreign service sectors, such as telecommunications facilities and financial services.

Efforts to quantify the benefits of world trade liberalization have become a hot subject for scholars. The best I have examined is a series of papers prepared by professors Bob Stern and Alan Deardorff from the University of Michigan and professor Drusilla Brown from Tufts University. Their papers were prepared for a series of conferences, the broadest being “Multilateral, regional, and Bilateral Trade Policy Options for the United States and Japan,” (Gerald R. Ford School of Public Policy, University of Michigan, May, 2001).

Stern and others set up three scenarios. The first is an assessment of dollar benefits from the Uruguay Round as implemented, which the scholars dismiss as too insubstantial to measure. The second and most interesting is a model assuming a one-third reduction of all barriers to trade of any kind: goods, agricultural produce, and services. The third scenario eliminates all barriers to trade. There are no limits on the scenarios and the scholars realize that the scenarios may never occur, and if they do, no one can say when. But it is important to get some kind of handle on economic benefits from trade liberalization. Hence, a few major assumptions.

As noted, the authors found no major material benefit from the Uruguay Round, albeit some breakthroughs occurred, such as a scheme for liberalizing trade in services and creation of the General Agreement on Trade in Services (GATS).

The most striking result of the modeling is that the share of world welfare improvement goes in such high proportions to the United States; and to the extent the United States benefits, it is the U.S. service sector that is the main beneficiary. If there is a new trade round that has a result somewhere in the one-third reductions size, the U.S. service sector would get $150 billion out of $177 billion for all U.S. benefit. This is because tariffs and other barriers to goods trade would have been virtually eliminated, leaving the large service sector to be the beneficiary of the barrier reduction.

Even more dramatic, assuming it ever occurs, is the “global free trade” scenario, in which the United States gets a benefit of $537 billion, of which $450 billion are in the U.S. service sector.

The chart at the side shows the “world welfare” impacts for the United States, Japan, Canada, and “global.”

The dollar beneficiaries of trade barrier reduction are very big numbers, and they may be underestimated. The figures also show the growing worth of the services sector in future scenarios. The estimates indicate the weights of the service sectors as being dominant.

Also, the increasing amount of trade through MOFAs and MOUSAs are also big and growing. I commend them to your close attention, as we are taking off in heretofore unchartered waters, and the sizes of the changes are amazing. This statistical approach to globalization provides another way into that maze, dealing with numbers as the starting gate.

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