Turn the Beat Around
Posted by SCapozzola on June 23rd, 2008
This morning, the Wall Street Journal’s Michael Phillips discussed an interesting aspect of world trade flows, namely that $361 billion worth of foreign investment in the U.S. in 2007 came from “emerging-market nations.” That’s nearly 40% of the $920 billion that foreign investors spent last year on U.S. stocks, bonds, and government securities.
What’s striking about this “emerging market” investment is that it runs counter to long-accepted notions of international trade flows. As Phillips pointed out, “In economic textbooks, capital is supposed to flow from slow-growing, rich countries that have a lot of it to fast-growing, poor countries that don’t. Certainly that was the case before World War I, when Europeans exploited the natural wealth of their colonies. Now the textbooks are being turned upside down.”
While some of the $920 billion in total foreign investment comes through Britain from oil-rich Persian Gulf states, many billions of dollars also flow from China, Mexico, Brazil, Russia, Singapore, Malaysia, South Korea, and other developing nations.
Essentially, the United States is now attracting investment from Third World countries. Phillips cites Bank of America strategist Joseph Quinlan, who says of the Unites States, “Not only are we addicted to other people’s money, but the money we’re addicted to is from the poor countries.”
There’s a reason for this, however. China alone accounts for 21% of foreign investment in the U.S., according to Phillips. China also accounts for more than one-third of the $700 billion U.S. trade deficit in 2007. And so, Beijing has used much of its $256 billion trade surplus to buy U.S. assets.
This is one result of current U.S. trade policy—namely that we are importing far more than we are exporting. As a result, and with no unified vision regarding the importance of domestic manufacturing, dollars are accumulating overseas. Foreign investors find themselves in the envious position of needing to spend that money.
Phillips worries that the U.S. will find itself “not only dependent on money from the developing world, but in large part dependent on money from governments in the developing world — and undemocratic ones.” What’s troubling is that “there’s no guarantee that the benevolence will last and, at some point, governments in places like Beijing may decide to exercise the leverage that their riches imply.”
As ManufactureThis is wont to say, a prudent course of action would be to seek more balanced trade. Because China is brazenly flouting world trade law, step one would be for Congress and the Administration to begin strongly enforcing existing U.S. trade law to see that illegal currency manipulation, dumping, and subsidies don’t result in a continuing, vast outflow of U.S. dollars.
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