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American Shipper

Globalization’s positive touch

Report says multinationals, worldwide supply chains benefit U.S. economy.

By Eric Kulisch

   American companies that make, buy and sell, goods and services around the world tend to invest more, create additional jobs and experience increasingly rapid growth at home as opposed to firms that are purely domestic, according to a new report commissioned by the Business Roundtable and the U.S. Council for International Business.
  
The report, American Companies and Global Supply Networks: Driving U.S. Economic Growth and Jobs by Connecting with the World, attempts to debunk negative perceptions of globalization by explaining the reality of how companies invest, produce and hire in a global economy.
  
Economists and industry leaders have known for a long time that globally-engaged companies tend to be more successful and pay higher wages. The sponsors say the report is necessary to remind politicians and the public about the importance of implementing policies that encourage free trade and make it easier for companies to invest and operate overseas.


“After a presidential campaign in which the intersection of trade and jobs has been such a bone of contention, we in the business community realized we need to do a much better job of explaining things.”
— Peter Robinson, president, USCIB

  
“After a presidential campaign in which the intersection of trade and jobs has been such a bone of contention, we in the business community realized we need to do a much better job of explaining things,” USCIB President Peter Robinson said Dec. 4 at an event at Bloomberg Government headquarters in Washington to introduce the report.
  
“We need to be able to explain the essential role played by American business with worldwide production and supply networks. And we need to explain the benefit of this to workers, consumers, and small business here at home. . . . Global engagement is no longer a nice-to-have. It’s a must have,” he said.
  
“America risks turning inward in a way that would leave its workers even more stagnant and isolated from a world economy that will grow in opportunity whether or not America plays a role. . . .The United States cannot rest on past strengths. U.S. policymakers must craft policies aimed at sustaining an environment that both attracts the world’s best companies and helps these companies compete globally,” Matthew Slaughter, the report’s author and director of the Center for Global Business and Government at the Tuck School of Business at Dartmouth College, wrote.
  
During the discussion, Robinson and Business Roundtable President John Engler called on the U.S. government to reform the corporate tax rate, which at 35 percent is 10 to 15 percent higher than any other industrialized nation.
  
Engler, a former Republican governor of Michigan, said 2013 policy priorities for his association of chief executives are expansion of trade and investment opportunities, lowering the federal debt, education and immigration reform, and streamlining regulations.
  
“Companies that are not globally competitive over the long run won’t employ any workers, either here or abroad,” Robinson warned.
  
Dynamic companies operate beyond the border because 95 percent of the world’s customers lie outside the United States and many countries are growing much faster than the United States, according to the report. A McKinsey & Co. study forecasts that by 2025, annual household consumption in emerging markets will reach $30 trillion and present “the biggest growth opportunity in the history of capitalism.”
  
“Fifteen years out, another 1 billion people are expected to enter the middle class. Incomes will rise and they’ll accumulate wealth, and increase demand. So that’s where the opportunity lies,” Adam Feinberg, vice president of U.S. international sales at McKinsey, said in an interview.
  
U.S. exports of goods and services since 2004 have grown faster than the overall U.S. economy, except during the worst part of the global recession, and in absolute value have more than doubled to $2.09 trillion in 2011. Exporters within the same industry tend to have more employees, sales, and productivity than their non-exporting counterparts
  
Businesses also want to take advantage of diverse supply sources, innovative ideas and lower labor costs, wherever they are located, in order to maintain a competitive edge.
  
Slaughter’s report cites the latest government statistics and academic studies to counter the perception that companies that outsource production have pulled up U.S. roots.
  
Contrary to popular belief, the report says, global companies continue to maintain a significant presence in America, where they invest heavily in research and development and capital expenditures, employ tens of millions of workers, and produce huge amounts of goods and services. Their involvement in foreign markets boosts those business activities at home. U.S. multinationals buy more than $8 trillion in inputs from suppliers in the United States, including components and services for export. The typical domestic-based global corporation buys more than $3 billion in supplies from more than 6,000 American small businesses, indirectly creating more jobs.
  
In fact, 26 percent of all U.S. multinationals fit the government’s definition of a small or midsized enterprise of fewer than 500 employees. They are believed to be the fast-growing companies that have established an office or plant in a single foreign country.
  
Worldwide operations of U.S. multinational companies are highly concentrated in America in their U.S. parents, not abroad in their foreign affiliates, according to the report. And most of the complex parts of the supply chain – R&D, design, automated production, logistics, management and marketing – that require skilled labor are maintained at home.
  
Parent operations of U.S.-headquartered multinational firms produced 23 percent of all private sector output in 2010 and exported 44.8 percent, or $573.3 billion, of the U.S. total. Wages for U.S. parent companies average $70,682, about a third more than the average private-sector worker. U.S. subsidiaries of foreign-headquartered companies also contribute to U.S. productivity, although to a lesser degree.
  
A Business Roundtable and USCIB survey of 121 members found the majority of their revenues came from U.S. customers, but that revenue growth since the recession has been stronger in other parts of the world. But 70 percent of respondents said they expected U.S. sales to lead revenue growth for the next several years.
  
Meanwhile, more than 90 percent of what foreign affiliates of U.S.-based multinationals produced abroad in 2009 was sold abroad, rather than being imported back to America. Companies often set up offices and facilities in other countries to better serve local markets rather than as low-cost substitutes for U.S. production aimed at American consumers. More than 91 percent of what affiliates produce abroad is sold overseas instead of being imported back to the United States, according to the report.
  
Having foreign facilities enables companies to avoid customs tariffs, quotas, and long-distance transportation costs, provide quicker turnaround from production to sales, and improve after-sales maintenance and support in local markets.
  
“This is not to say that global expansion has never substituted foreign workers for American workers. This substitution has surely happened and surely will continue to happen. But situations in which foreign and domestic labor substitute for each other often evolve into relationships of complementarity,” Slaughter wrote.
  
“Within global production networks, once different tasks and stages have located in different parts of the world, coordinating these stages to make final products means they tend to expand (or contract) together. And even if an American company relocates abroad some labor-intensive assembly tasks, the resulting cost-savings may boost that company’s order book so much that its net U.S. employment still rises as the reduced assembly jobs are more than offset by jobs in design, testing, logistics and customer support — new jobs in that company and, in other companies as well.”
  
Slaughter argues the decline in U.S. manufacturing employment during the past quarter century has more to do with automation than offshoring production. Since 1987, according to separate U.S. government data, the United States has lost 5.5 million manufacturing jobs, but manufacturing output has increased 84 percent.
  
The Dartmouth professor, who also is a research associate at the National Bureau of Economic Research, points to data showing employment at U.S. manufacturers fell 2.16 million between 1999 and 2009, but their foreign affiliates only grew by 181,600 workers over the same period. His analysis, however, doesn’t make mention of another common practice — outsourcing to third-party manufacturers.
  
Along with rising exports from being connected to the world come higher levels of imports. The Commerce Department estimates that the foreign content of U.S. exports has tripled in the last 40 years to 22 percent, according to Slaughter’s report. In 2011, almost two-thirds of America’s $2.2 trillion-plus in goods imports were components used for “Made in America” products.
  
Robinson said the U.S. government needs to do more to facilitate trade so that intermediate goods from overseas can efficiently cross the border without adding to the cost of the final product.
  
Companies constantly adjust their global supply networks to meet changing conditions and need policy support that gives that flexibility, according to the report.
  
Engler said the United States needs a national strategy for competitiveness because other nations are providing support to give their companies a leg up in the global marketplace. Reforming the corporate tax structure would enable U.S. companies to repatriate profits, most of which would be spent in the United States, Engler said.
  
Lowering corporate tax rates is the only way the United States will be able to get economic growth consistently above 3 percent — the level necessary to create enough revenue to tackle the federal debt and bring down unemployment, FedEx founder, Chairman and Chief Executive Officer Fred Smith said in a Dec. 6 speech to the Economic Club of Washington.
  
Business investment in equipment and technology to support innovation is the primary driver of job creation, but without lower tax rates companies have less incentive to invest, the nation can’t increase the Gross Domestic Product rate and joblessness will remain high, he said, according to a transcript of his remarks.
  
Smith blamed the 1986 Tax Act for the current economic doldrums because it equalized tax rates for individuals and corporations.
  
“You can’t play in the international arena with a noncompetitive tax system,” Smith said.
  
He called on Washington to implement a 25 percent corporate tax rate and a territorial tax system that wouldn’t tax profits brought back into the United States.
  
Chile is the only other country in the world, Smith said, that taxes the differential between taxes paid in a foreign country and the home rate, but Chile’s corporate tax rate is only 17 percent (soon rising to 20 percent).
  
“So absent a reduction in corporate tax rates and absent moving to a territorial tax system, we will not return to a level in investment that is necessary to increase U.S. GDP, reemploy our citizens, increase the standard of living, and produce trillions of dollars of revenue to help pay for” entitlement programs, he said, pointing to at least $1.7 trillion in profits currently sitting offshore.
  
President Obama, as part of his “Fiscal Cliff” negotiations, proposed lowering corporate tax rates to 28 percent and tax rates for manufacturers to 25 percent.
  
But the White House is firmly opposed to a system that doesn’t tax multinationals for profits earned overseas, even though the idea has been endorsed by Obama’s own Export Council, according to the Associated Press. Obama said during the campaign that allowing profits to only be taxed in the country where they are earned would reward companies for moving operations offshore and eliminating jobs. He instead has called for a new minimum tax rate on foreign profits and a foreign tax credit for taxes paid overseas.
  
Smith also recommended policies to decrease reliance on imported oil and boost trade agreements. The United States needs to move aggressively to produce as much oil and gas from domestic shale formations and consume much less oil by converting to alternative energy sources so that the nation can eliminate the need to import half of its petroleum, which is responsible for two-thirds of the nation’s $560 billion trade deficit. Although consuming domestically produced oil won’t change the price of fuel because it is sold in a global market, it will improve GDP by keeping that money circulating through the U.S. economy, he said.
  
“We’ve been involved with the largest transfer of wealth over the past 10 years in the history of the world, paying for imported petroleum,” he said.
  
Smith feels the impact of oil prices every day because his package and freight delivery company operates 666 aircraft and more than 90,000 vehicles around the world.
  
The third leg of his economic plan involves tougher actions against China for using national policy to set rules in favor of local firms and limit the freedom of international firms within its borders. “So over the next several years . . . the United States must insist on fair trade and that we cannot permit mercantilist trade with the United States because it’s too expensive to our citizens. And where our companies have an advantage, particularly in the service sector, we’ve got to be able to compete and have access to our competitors’ markets, just as they’ve had access to our markets over these past 30 years,” he said.
  

Anti-Trade Businesses. There is a contingent of U.S. manufacturers, however, that still feels threatened by globalization. They want a national strategy too — one that supports home-based manufacturers who feel China and other countries are skirting international trade rules to undercut their prices and win over customers.
  
The Alliance for American Manufacturing (AAM) argues that the government should go beyond its goal of doubling exports in five years by 2015 to significantly reduce the nation’s trade deficit, primarily by imposing sanctions on China for unfair trade practices and aiding domestic manufacturers.
  
The lobbying group points to the re-shoring phenomenon in which some domestic and foreign manufacturers are opening new plants in the United States, the aging manufacturing workforce and the new development of oil-and-gas shale fields around the country that will lower energy costs as reasons why manufacturing can grow in the United States and provide relief for high unemployment.
  
AAM President Scott Paul argued on CNN’s “Your Money” program on Nov. 25 that manufacturers deserve special treatment because “manufacturing is in the tradable sector. We have global competition. Hospitals don’t. Retailers don’t. Other sectors of the economy don’t necessarily have that. And every other country out there has incentives to attract manufacturing. . . .
  
“If we’re not in that game, we’re going to be sitting on the sidelines, we’re going to lose jobs,” he said, pointing to the October increase in the trade deficit for goods.
  
Manufacturing is also unique, he added, because it has a high multiplier effect in terms of logistics and cash that spills into the broader economy and creates jobs.
  
Even though companies recognize they face higher transportation costs due to volatile fuel prices, rising wage rates in Asia, and the risk of having extended supply chains subject to disruption, from production abroad and that there is a benefit to having production, research and development, and design teams in close proximity, domestic manufacturers still need targeted subsidies if they are to relocate plants back home, Paul said on the show.
  
AAM’s prescription for an industrial policy includes dedicating more federal education funding to technical training, condition federal loans for energy projects on the use of domestic suppliers for construction, and apply “Buy America” provisions to all federal procurement contracts to give domestic firms the first crack at government business.
  
Asked whether Apple has proven its ability to innovate while contracting with manufacturers in China, Paul responded: “Apple is the out liar. They have a very risky manufacturing strategy that’s depending on 250,000 workers in China that are working in deplorable conditions. There’s a smarter way to do it. And, yes, it would be highly automated but they could be employing thousands of engineers in California, making those products.
  
“It wouldn’t raise the cost of an iPhone more than a couple of bucks. But the returns for our economy would be fabulous.”
  
Apple CEO Timothy Cook recently said the company would open a manufacturing plant in the United States for one of its Mac computer lines, which could still be operated by its Taiwanese partner Foxconn.

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