Trade gap: Made in the USA
Study: About a third of the trade gap is due to
imports from foreign-based units of U.S. companies.
April 11, 2005: 3:15 PM EDT
By Chris Isidore, CNN/Money senior writer
NEW YORK (CNN/Money) - U.S. companies looking for the source of much of the nation's trade gap need only look in the mirror.
A study by the McKinsey Global Institute, a think tank arm of the business consultant firm McKinsey & Co., finds that about one-third of the nation's current account deficit would disappear if we eliminate the trade with the foreign operations of U.S. companies, according to the group. The current account deficit is a broad measure of trade and capital flows between nations.
"A large and growing share of the deficit simply reflects the international reach -- and success -- of the strongest US companies," said the recently published study. "An automaker importing cars assembled in Mexico, for example, or a bank using call centers in India ...may add to the nation's trade imbalance, but they also create significant value for U.S. customers, companies and shareholders."
The trade deficit will get new attention Tuesday when the Commerce Department releases its monthly trade report. Economists surveyed by both Briefing.com and Reuters have a consensus forecast for a $59 billion trade gap for February, up from $58.3 billion in January. But one third of the 21 economists surveyed by Reuters expect the gap to top the $59.4 billion figure from November, the current record.
The McKinsey study argues that the trade gap is overstated, and that the government should change the way it measures trade, taking an ownership-based view of trade and categorizing companies by where they are owned rather than by where goods are produced.
"Today's debate over the U.S. current-account deficit misses the mark," said the study. "Focusing on (U.S. companies' foreign operations') activities is unhelpful and distracts attention from fiscal irresponsibility in Washington—which poses a far bigger threat to the future economic health of the United States."
But other trade experts argue that where the goods or services are produced does matter for the nation's economic health, and the well-being of its citizens.
"If an activity moves abroad and becomes an import, all that labor is lost," argues University of Maryland Professor Peter Morici, one of those forecasting a record trade deficit report Tuesday. "It really doesn't matter very much who owns the plant that makes the imports."
He argues the shift of work to overseas operations weakens the U.S. labor market, depressing earnings, and discouraging those with skills in short supply in the global economy from coming here to produce more wealth.
"It doesn't matter who owns the assets. You can get capital to build a plant anywhere. What matters is where the plant is," said Morici.
Jay Bryson, global economist for Wachovia Securities, agrees with the McKinsey study that the U.S. economy is better off in the long run due to investment in overseas operations by U.S. companies.
"It's good for efficiency and gains in the economy," he said.
But he disagrees that the government reports are looking at trade from the wrong perspective. He said where the goods or services are produced is still the most important way to look at trade for the purpose of estimating what it means for the nations' economic growth, as well as the value of its currency. That's why gross domestic product, which measures the value of all goods and services produced in the United States, is the broad reading of the nation's economic activity, not gross national product, which measures the activity of U.S.-owned operations. GNP is still measured but virtually ignored by economists.
"To extent that we are buying things from abroad that we used to buy here, income isn't going to be as great here," he said. "That trade gap needs to be financed and that financing needs to come from abroad."
Ashraf Laidi, the chief currency analyst for MG Financial Group, also agrees that the McKinsey study highlights something important that is often lost in the overall trade figures. But he said even looking at trade from the perspective they suggest shows that there is a widening trade gap for the United States.
"They put their finger on something," he said. "But at the end of the day you are seeing imports growing to one-and-a-half times greater than exports, and the trend is continuing."
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