Great Graphic: Non-Consensus Thinking on Trade

(I am about to begin a two-week business trip to Beijing, Hong Kong and Tokyo.  I still intend to write but the timing will be more sporadic.)


This Great Graphic was posted by Eric Nelson, the managing editor of the Chamber of Commerce's Above the Fold publication. It shows many of the different components of the 737 single-aisle airplane and where they are sourced. 

There is a complex supply chain that stretches from Australia, through Asia (e.g., Japan, South Korea, and China) through Europe (France, Sweden, the UK, and Italy).  It extends into Canada and several US states as well.   Some of the foreign-sourced components come from Boeing's own facilities abroad, like the moveable trailing edge of the wings, which are built by its factory in Australia, or the landing gear doors from Canada.  

The intrafirm trade illustrates the complexity of the situation.  Perhaps in the 19th century, when our current framework for understanding trade emerged, a company in one country would export its goods to a foreign entity.  However, this has changed.  Intrafirm trade appears may account for around a third of US exports and 2/5 of US imports.    

The 19th-century approach was to focus on the movement of goods across national frontiers.  In the 21st century that is not sufficient to inform trade policy or understand the global linkages. Ownership of those goods moving across borders is important on various levels.  

Should that wing component made by Boeing in Australia and shipped to the US be considered an import?  Or is what is really going on is that Boeing has a virtual factory, and it simply moved the component from one side of the factory floor to the other?  Imagine a trade policy that ignored the role of intrafirm trade. A tariff, for example, on imports from Australia, for example, could hurt some US domestic producers.   

Until last year, Boeing was committed to assembling all their planes in the United States.  Then two things happened, and neither involved the fluctuation of the dollar.  First, Congress had chosen not to renew the Ex-Im Bank's charter.  Partly because Boeing's planes are more technology-intensive, they are typically more expensive than its competitors (though cheaper, reportedly, over the lifetime of the plane).  The Ex-Im Bank had facilitated, through cheap credit Boeing sales, Some critics, in fact, called the Ex-Im Bank "Boeing's Bank."  

The second thing that happened was China President Xi led a trade delegation to the US and went on a shopping spree.  It agreed to buy 300 of Boeing's 737 plane, which is one of the largest orders ever.  It is not clear from the accounts how much was quid pro quo, but Boeing agreed to construct some of the 737 planes in China under a joint venture. 

In addition to the complexity of supply chains and the role of intrafirm trade, another issue that is raised here is about direct investment.  Direct investment is about ownership.  It is building or buying production and/or distribution centers abroad.  Direct investment has different characteristics from portfolio investment.  Buying bonds and stocks in a foreign country is important, and the internationalization of savings is an important feature of the our modern world.  However, the extent of direct investment is also important. 

Like the planes that will be constructed and sold in China, many, if not most, of the Japanese brand cars on US roads today, are built in the US.  At least one Japanese carmaker exports cars from California.  The importance of the stock of foreign direct investment goes unrecognized in most narratives about trade.  One dramatic implication is that the US does not serve foreign demand by exporting, though the US is the world's third largest exporter (behind China and Germany).  

Rather US companies service foreign demand by building locally and selling locally.  The sales by the foreign affiliates of US companies sell more than 4x more goods than are exported from the US.   According to MOF data, Japanese companies made the switch in the late-1990s, so that the sale of its affiliates also outstrip exports.  

What follows from this is that the location of those affiliates are not primarily in low-wage countries. That is a myth.   Over half, the employment of US businesses abroad are in high wage economies in Canada, Europe, Japan and Australia.   The employment in South America and Africa are also concentrated in the relatively high wage regions.  Why?  US producers want to be close to their customers.   

The impact of the complex supply chains, intrafirm trade, and the significance of direct investment on labor markets is beyond the scope of this post.  However, a nuanced approach looks necessary as there appears to be both competitive and complimentary linkages.   It seems that low-skilled workers abroad do compete with low-skilled workers at domestic affiliates.  However, employment of high-skilled workers abroad compliments (as in leads to more) high skilled domestic employment.  

Disclaimer


.