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EMERGING ISSUE 1: The Internationalization of Uncle Sam

19 January, 2016 - 15:18

Whether by necessity or by desire, every country exchanges goods, services, and money with a number of other countries. Despite some short-term and even some long-term negative effects, internationalization benefits a country more than it harms it.

Most people tend to assign great economic benefits from internationalization to a country that exports more than it imports and invests/lends more than it borrows. By the same reasoning, countries that import more than they export and accept more investment/borrow more than they invest/lend abroad should experience severe economic costs.

The result of this conventional wisdom is the advocacy of "regulation" or "management" of the degree and nature of internationalization. The regulation mechanisms proposed by the advocates of "managed internationalization" include import tariffs, surcharges, and quotas; export subsidies; adjustment assistance to domestic firms and workers "hurt" by imports and foreign competition; and restrictions on the acquisition of capital and real assets.

The United States has until very recently been considered to be on the "winner's" side of the field. Jack L. Hervey, a senior economist at the Federal Reserve Bank of Chicago, describes the internationalization of the United States as follows:

For well over two decades after the end of World War II the international trade of the United States was primarily viewed by Americans as a one-way street synonymous with rapidly expanding markets abroad for U.S. goods and services and the rapid acquisition of foreign assets by U.S. investors. Critics called it economic imperialism. By the late 1960s a hint of changes was in the wind. Import growth began to exceed export growth. The rate of increase in foreign direct investment in the United States outpaced that of U.S. direct investment abroad. By the late 1970s the growing presence of foreign goods and services and foreign investment on U.S. shores was beginning to force a reassessment of the U.S. place in the international economy. 1

Figure 2.8, U.S. Internationalization, presents vividly the dramatic change in the openness of U.S. economic activity to the rest of the world. To illustrate more fully the importance of this growth in U.S. internationalization, Figure 2.8 presents the growth of international trade's share of the U.S. GNP. During the last fifteen years, the nominal value of the United States' international activity rose on average 14% per year, whereas the GNP grew at 9.5% per year. At the same time international trade's share of the U.S. GNP climbed from about 8.5% in 1971 to 23% in 1988.

The sum of the absolute values of the various individual components of international transactions—exports and imports of goods and services (excluding military grant programs), unilateral transfers (excluding military grants), net acquisition of U.S. assets abroad by U.S. residents, net acquisition of U.S. assets by foreigners, the allocation of SDRs (special drawing rights) by the IMF, and unrecorded transactions ("statistical discrepancy")—is used here only as a relative gauge of internationalization of the U.S. economy. From an analytical view such a compilation includes substantial double counting; most obviously, to the extent that either exports or imports exceed the other, the offsetting entry on the capital account is counting the second side of the same coin. On the other hand, capital transactions and unilateral transfers are recorded as net inflows or outflows; thus, as a measure of the volume of transactions, the reported capital transactions are an underestimate.

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Figure 2.8 Increase in U.S. International Trade Share During the 1970s 

This growth of U.S. international trade has not been in the United States' favor. As Figure 2.9 shows, the country has been importing considerably more than it has been exporting. As a result, the merchandise balance deteriorated to a deficit of almost $150 billion for 1985.

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Figure 2.9 U.S. International Trade Balances 

As the graph shows, the service portion of the United States' international trade of goods and services (what is known in balance-of-payments or international-transaction nomenclature as the current accounts) experienced a rather substantial growth over about the last fifteen years. This activity reached a peak in 1981 and then declined until 1983. It appears that it still pays for the United States to engage in trading services with the rest of the world.

A large percentage of the service trade consists of earnings derived from holdings of foreign assets by U.S. residents abroad and foreign residents in the United States. Receipts by U.S. residents from investments abroad are treated as exports of U.S. services. On the other hand, receipts by foreigners from holdings of U.S. assets, loans to U.S. banks and U.S. firms, and investments in corporate and government stocks and bonds are treated as imports of foreign services into the United States. In 1987, U.S. exports of services amounted to $163 billion, of which $104 billion (64%) were investment receipts ($58 billion portfolio and $46 billion direct foreign investment). Imports of services by the United States for 1987 totaled $141 billion, of which $83 billion (59%) were earnings from investments made by foreigners. 2

Figure 2.10 identifies the international investments that created the streams of earnings described above. The graph clearly shows that the result of the United States' internationalization has been a change in the country's position from that of a net lender until 1985 to that of a net borrower in 1985. A close look at the bars shows that from 1970 until 1984 total foreign investment by Americans was greater than total investment by foreigners in the United States.

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Figure 2.10 U.S. International Investment Position 

Although many factors are involved in the shift in the U.S. financial position around the globe, the most obvious explanation is a combination of U.S. economic recovery, acceleration in the national budget deficit accumulation, and a slowdown in European investment activity.

Figure 2.11 shows the United States' combined international transactions.

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Figure 2.11 U.S. International Transactions (excluding military grant programs) 

ISSUES FOR DISCUSSION

The data presented in this Emerging Issue clearly substantiate the assertion made at the beginning of this chapter that the United States' dependence on the exchange of goods, money, services, and information with the rest of the world is neither small nor unimportant.

Several questions have been raised by academic researchers and business and government policy makers:

  1. Is the US. trade/merchandise deficit sufficient reason to restrict the importation of goods and services into this country?
  2. Should states and/or the federal government impose restrictions on the types of businesses that a foreigner may acquire or start in this country?
  3. Should taxpayers' money be spent to assist firms and their employees that are hurt by foreign competition?
  4. Should the United States develop an industrial policy that will "target" certain industries for assistance in developing a strategy to deal with foreign competition at home and abroad?
  5. Would action by the U.S. government assist or hinder corporate/business response to the foreign challenge?
  6. Is the U.S. government making good use of foreign borrowing to finance the budget deficit?

These and other questions will be at the forefront of congressional debates in the years to come. U.S. businesses will be tremendously affected by the outcome of these debates. Not only their overseas operations but also their domestic activities will be influenced by the competition's reactions to these emerging issues. Here is how Jack L. Hervey has assessed the situation:

The United States has been a world power for the better part of this century. But it has only recently begun to experience the growing pains of becoming a full-fledged international economy. That process, having begun, means the United States does not control its economic destiny to the same degree it did 15 or 20 years ago. It means that numerous adjustments must be made to accommodate its new role in the international economy. Reversion to isolationism is not an option. Market forces can effectively facilitate the adjustments necessary to integrate the domestic and international sectors, but only within the constraints set by government fiscal/monetary policy and the distortions introduced through the myriad regulations controlling commerce. Tinkering with trade cannot cure these ills, but it can make them worse. Instead, it is the basic issues associated with the distortions imposed on productivity and competitiveness and the central issue of the influence of the fiscal/monetary policy environment and the impact of regulatory distortions on economic activity that must be addressed. If not soon, then indeed the economy of the United States faces leaner times ahead as additions to future real income are siphoned off to pay for the excesses of today. 3