Thursday, July 24, 2008

It's NOT international trade. Don't be fooled.

Many people around the world understand that our modern era of globalisation is one in which international trade is between countries. We also tend to believe that such trade involves the indisputable benefit of greater freedom to engage in the act of purchasing and of selling goods and services between peoples of different nations. For example, Tom Palmer from the Cato Institute questions the understanding of people who are unhappy with this vast expanse of trade by asking “Should American wheat farmers be allowed to buy cell phones from people in Finland? Should Ghanian weavers be allowed to sell the shirts and pants they make to German autoworkers?”.[1]

The reality of international commerce paints a vastly different picture, however. Giant multinational corporations dominate the area of international exchange and a very large share of world ‘trade’ is actually between branches of these same corporations. In North America trade associated with U.S. parent multinationals or their foreign affiliates accounted for 54 percent of U.S. exports of goods and 36 percent of imports.[2] Forty percent of trade between the US and Canada in 1998 was intra-corporate.[3]. “Forty percent of the US-Europe trade is between parent firms and their affiliates, and in respect of Japan and Europe, it is 55 per cent; with regard to US-Japan trade, it is 80 %.”[4]

This intra-corporate form of trade appears to be increasing at a rapid rate. In 2005 “U.S. imports between U.S. MNCs and others increased 13.5 percent, and imports between U.S. parents and foreign affiliates increased 8.6 percent.”[5]

John Ralston Saul highlights this new phenomenon in his book ‘The Collapse of Globalism’. He asks why such an “astonishing and continuous expansion in trade [does] not produce broad economic growth, spread wealth and reduce unemployment”[6] There is good reason for alarm. The form of economic growth experienced today is associated with rising productivity rather than increased employment. Real wages have dropped for workers and sources of taxation revenue for one government after another have declined to a point where regressive taxations regimes have now been imposed on domestic populations and public services have been cut back significantly.

Saul also asks whether the trade between subsidiaries of the same transnational corporations should be counted as trade at all. Then he goes on and adds a few other important queries. Does intra-corporate trade actually have the effect of trade? Why are profits rarely made at each stage of movement? Saul then asserts that these large firms actually intend to create losses in order to avoid taxation; this form of international commerce – unrelated to market competition - makes it possible.

Giant corporations produce goods in countries where governments provide cheap labour and lax (or non-existent) environmental regulations. That’s how they make goods where their constituent parts are put together at the lowest possible cost and then sold as a final product at the highest possible price somewhere else. If we add ‘transfer pricing’ to that strategy[7] and throw in escalating concentration of industry through mergers and acquisitions; well, what have we? I think we have a recipe for global economic meltdown!

1 'Globalization is Grrrreat!' by Tom G Palmer, Senior Fellow, Cato Institute. Cato's Letter - a quarterly message on liberty
Fall 2002, Volume 1 - Number 2

2 United States Bureau of Economic Analysis (USBEA) . As quoted from the ‘Monthly Trade Bulletin’ Volume 3 Number 10

3 United States Bureau of Economic Analysis (USBEA) . As quoted from the Trade Bulletin’ Volume 3 Number 10‘Monthly

4 General Concept of Transfer Pricing
By: Khurram Khan. [t-price.pdf]

5 United States Bureau of Economic Analysis (USBEA) . As quoted from the Trade Bulletin’ Volume 3 Number 10‘Monthly

6 ‘The Collapse of Globalism – and the reinvention of the word’ by John Ralston Saul. Viking Press, published 2005. Page 142.

7 where multinational corporations arbitrarily set unrealistic prices in transactions between parent and affiliates in order to reduce taxes and tariffs, avoid exchange controls and optimize profits.


Michael said...

Insightful article and one that makes you shiver if you begin to extrapolate the likely consequences of the inevitability of rising intra-corporate trade throughout the globe. I'm sure a better brain than mine could create a financial model that could be utilised by all countries enabling them to anticipate and then try and cope (not entirely clear how though) with the destructive aspects of globalisation.
However, if this slant on global economics does not make you particularly concerned then just add in the purely 'local' trade, that these behemoths garner, to these figures and you have some particularly sick looking economies in many parts of the world although, it would be interesting to see just how the calculations differed (+political and social) country by country.
Thanks also for alerting me to Saul's new book.

juan said...

Sure enough Brenda, the become dominant mode of corporate organization transforms trade into transfer. This has been an internalizing and one which, besides contradicting notions of strictly national economies, brings out contradiction between global firms and a system of national states. The former have, for some time now, been able to pit the later against one another in order to obtain the largest possible direct and indirect subsidies.
Back in '90, I tended to think of this as governments becoming labor contractors, but really as simple mediations between transnats and national societies. When one considers ideological reaction to modern globalization, it might help explain what has seemed to me a phase of increased nationalisms and subnationalisms.

Brenda Rosser said...

Michael: " that makes you shiver if you begin to extrapolate the likely consequences of the inevitability of rising intra-corporate trade throughout the globe."

Michael, I believe that nations are not in a position to wait until the global catastrophe happens. In terms of the global environment and economy this situation is already dire.

Juan: "When one considers ideological reaction to modern globalization..."

Well, OTOH this observation should put to rest once and for all the neoliberal ideology of a global 'free market'. It is neither 'free' nor even a 'market'.

Thanks for the feedback btw. I had been meaning to respond earlier but thunderstorms prevented computer use.

Brenda Rosser said...

John Ralston Saul's writng on this subject caught my complete attention immediately because of the economic disaster in my state of Tasmania, Australia.

Gunns Ltd (a multinational corporations that is jointly owned by other transnationals) wants to build a gigantic pulp mill here. Over $2 billion dollar's worth of investment that would be a massive economic loser for the state. All the economic assessments done by independent economists also show it would be a loss maker for the corporation itself. So why go ahead??? It only makes sense if you look at it as part of a global trading scam within this transnational itself.

The people here don't want this mill. There are huge protests going on at frequent intervals.

What a wonderful case study.

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