Mad About Trade: Why Main Street America Should Embrace Globalization by Daniel T. Griswold

Author:Daniel T. Griswold [Griswold, Daniel T.]
Language: eng
Format: epub
Tags: International Relations, Trade & Tariffs, Public Policy, International, Political Science, Business & Economics, Politics, General
ISBN: 9781935308201
Google: lYCQAAAAQBAJ
Goodreads: 11452911
Publisher: Cato Institute
Published: 2009-09-16T00:00:00+00:00

Reaching Billions of New Customers

The primary reason why U.S. companies acquire affiliates abroad is to sell more products to foreign customers. Certain services can only be delivered on the spot, where the company and the client must be in the same place. McDonald’s cannot ‘‘export’’ Big Macs to Russia, nor can Wal-Mart export its retail services to Mexico. The provider must have a physical presence in the foreign market. U.S. companies also establish foreign affiliates because of certain advantages in the host country—lower-cost labor, ready access to raw materials and other inputs, reduced transportation costs, and proximity to their ultimate customers. Operating affiliates abroad allows U.S. companies to maintain control over their brand name and intellectual property such as trademarks, patents, and engineering expertise. Yes, the motivations can include access to ‘‘cheap labor,’’ but labor costs are not the principal motivation for most U.S. direct investment abroad—as we will see in a moment.

Politicians focus most of their attention on comparing exports and imports, but the most common way American companies sell their goods and services in the global market today is through their overseas affiliates. In 2006, U.S. multinational companies sold $3,301 billion in goods through their majority-owned affiliates abroad and $677 billion in services. For every $1 billion in goods that U.S. multinational companies exported from the United States in 2006, those same companies sold $6.2 billion worth through their overseas operations.17 For every $1 billion in service exports, U.S.–owned affiliates abroad sold $1.6 billion.18

Contrary to popular myth, U.S. multinational companies do not generally use their foreign operations as an ‘‘export platform’’ back to the United States. Close to 90 percent of the goods and services produced by U.S.–owned affiliates abroad are sold to customers either in the host country or exported to consumers in third countries outside the United States. Even in Mexico and China, where lowwage workers are supposedly too poor to buy American products, more than half of the production of new and existing U.S. affiliates is sold in their domestic markets and another third is exported to other countries, whereas customers in the United States accounted for only 17 percent of sales.19 Think of General Motors in China or Ford in Europe: the primary focus of their overseas operations is to produce cars custom made for local markets, not to export back to the United States to displace production here.

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