CHAPTER FOUR
From World Trade to World Investment
INTERNATIONAL TRADE HAS BEEN steadily slowing down for most of the past decade. But international investment is booming as never before. It has now become the dominant factor in the world economy. Most of it is investment in securities, of course. But the growing portion—by now, a third or more—is permanent investment in manufacturing and financial services.
Traditionally investment has followed trade. But trade is increasingly becoming dependent on investment.
U.S. exports in the years of the overvalued dollar would have been even lower had the European subsidiaries of American companies and American joint ventures in Japan not continued to buy machinery, chemicals, and parts from the U.S. Similarly, the foreign subsidiaries of America’s financial institutions, such as the major banks, accounted for something like one-half of U.S. service income during those dismal years. And now, in turn, the Japanese are investing heavily in manufacturing subsidiaries in the Americas and in Western Europe so as to defend their export business. Even the South Koreans are investing in manufacturing subsidiaries in North America—especially in plants on the Mexican side of the U.S.-Mexico border—to create dependable customers for their exports to North America.
Multinational Competition
By now, about one-fifth of the total capital invested in U.S. manufacturing firms is in facilities outside the U.S. In addition, a similar proportion of the output of U.S. manufacturing industries is being produced offshore. Three-quarters of this output is for sale abroad and one-quarter is for export back to the U.S. to be sold in, or incorporated into goods for, the American market. Major American commercial banks and major brokerage firms have a similar proportion of their assets invested abroad and derive an even larger proportion of their total business through their foreign branches.
No other major country yet outdoes America as a “multinational”—although West Germany is probably coming closer every day. But within a few years, every single major trading country will proportionately produce as much outside its boundaries as does the U.S., if not more. In 1983, Japanese manufacturers produced only 2 percent of their output outside of Japan. By 1986, this had grown to 5 percent of a much larger output. By 1992 or so, only five years hence, Japanese offshore output is likely to match America’s one-fifth, with most of the growth concentrated in North America and in Spain (for sale in the European market).
At least one-third of the world trade in manufactured goods may now be intracompany trade—e.g., from the Mexican border plant of Sony to Sony’s final assembly plant across the border in San Diego, or from a Ford Motor Co. engine plant in the U.S. to a Ford plant in Europe or in Brazil.
Protectionism, or the fear thereof, is a minor factor in world investment. The multinational expansion of the Americans into Europe began 30 or more years ago, long before there was any fear of protectionism. It was most vigorous in the two countries where there was the least danger of protectionism: Britain and West Germany. Similarly, the multinational investment of the Japanese in manufacturing plants in the U.S. began long before there was any threat of protectionism. Far more important are marketing pressures.
It is simply not possible to maintain substantial market standing in an important area unless one has a physical presence as a producer. Otherwise, one will soon lose the “feel” of the market. The most recent example of this truism is the experience of Volkswagen in America.
Just over 20 years ago, in 1969-70, Volkswagen had 10 percent of the American automobile market. Then the German labor unions vetoed the company’s plan to establish a manufacturing plant in the U.S.; they were not going to allow “the exportation of German jobs.” When the American car market changed a few years later, after the first oil crisis, Volkswagen had lost its “feel” for the market—and the 10 percent of the market that Volkswagen had is now held by the Japanese.
Wage differentials also are not a major cause of world investment. To be sure, the maquiladoras, the plants along the Mexican border, which supply labor-intensive parts and products to the American market, or the electronic-assembly plants in Taiwan and Singapore owe their existence to wage differentials. But blue-collar labor rates are less and less important as factors in manufacturing production. There are few industries in which they account these days for more than 8 percent or so. And even in these industries—textiles, cars, electronic assembly, steel—labor costs as a factor in production are decreasing so fast that “out-sourcing” abroad to obtain wage-cost advantages can be considered a phenomenon unlikely to survive this century.
The major force behind world investment is, however, human resources. Exporting goods primarily creates employment for blue-collar workers. Investing abroad in a multinational affiliate primarily generates employment for educated people in the home country—for engineers and chemists, for accountants, managers, and quality-control staffs, and so on. And as one developed country after another shifts its supply of new workers from semiskilled or unskilled machine operators to people with long years of education, investment abroad is the way in which it can both optimize its human resources and create the jobs a developed country needs.
We can thus expect that, barring world depression or world war, world investment will continue to grow—and probably faster than world trade. And yet we have almost no figures on it. We also, which may be more serious, have no theory for an international economy that is fueled by world investment rather than by world trade. As a result, we do not understand the world economy and cannot predict its behavior or anticipate its trends.
We also have no law for this new world economy. No country permits totally unrestricted foreign investment. But no country has thought through the rules. Recently, for instance, the U.S.—the country that by and large has the fewest restrictions on investment by foreigners—frowned on the transfer of ownership of a major semiconductor producer, Fairchild, from one foreigner, a French company, to another foreigner, a Japanese company (even though Fairchild, one of America’s largest semiconductor manufacturers, may not be able to survive under its present ownership or by itself). Other countries are equally arbitrary and equally inconsistent.
One of the great achievements of the period after World War II was the codification of the rules for international trade in GATT, the General Agreement on Tariffs and Trade. Even though it is honored as much in the breach as in the observance, it still serves as the norm. And to its great credit, the U.S. is now seeking the extension of GATT to cover international trade in services and in data. But no one, so far, is talking about an international agreement to set the norms for world investment. All we have so far are some feeble attempts to specify compensation to be paid when expropriating a foreign investment. But what should the conditions be for permitting it in the first place?
War-Recovery Plans
Equally urgent is the development of international law for the position of world investment in case of war. By now, we should all have learned that the protection of foreign investment in case of war is in the self-interest of every single Free World country. Even after the most destructive and most bitter war, the survivors will have to live together on this small, crowded planet. And then their chances for recovery depend on the speediest possible restoration of the bonds of economic interdependence. The nineteenth century knew that even the most ferocious war eventually ends. This has been forgotten in this century. As a result, there are no legal rules at all for foreign investment in case of war.
Increasingly, world investment rather than world trade will be driving the international economy. Exchange rates, taxes, and legal rules will become more important than wage rates and tariffs. This is one of the major changes in the world economy and one to which neither government nor economists nor businessmen have given adequate attention.
[1987]