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Defining Trends

Economic Activity is Becoming Globlaized
Regions are Forming
Zero-Sum Rivalry in High Tech Industries May Be Emerging
Foreign Investment in the U.S. has Lead to Fears of Foreign Control and Domination of Key U.S. Industries

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Economic Activity is Becoming Globalized

A growing proportion of the world's economic transactions consists of international flows of goods, services, technologies, and capital. Since 1950, world merchandise exports have expanded at an average annual rate of approximately 6 percent, compared to 4.5 percent annual growth in world output. In the past three decades, international trade in services has grown more rapidly than merchandise exports. In 1994, international trade in goods and services will approach four trillion dollars per year.

For the United States, the share of GDP represented by exports of goods and services has more than doubled since 1965, from less than 5 percent to almost 12 percent, for a total of $460 billion in 1993. Imports have also grown in importance to the U.S. economy, rising to a postwar high of 13 percent of GDP in 1993.

Foreign direct investment (FDI) has grown even faster than trade. In the past decade, FDI flows have expanded by 27 percent per year, or seven times faster than the growth in output of the countries from which these flows originated. In terms of the global stock of FDI, the U.S. occupies first place as both an investor (accounting for 25 percent of the global FDI stock) and as a recipient (hosting 22 percent of the global FDI stock). The interaction between foreign direct investment and trade is becoming increasingly apparent. In 1990 (the most recent available data), multinational enterprises were responsible for more than 75 percent of U.S. merchandise trade, with approximately 40 percent of that trade consisting of intrafirm transactions.

Technology has also been undergoing a process of globalization. International comparisons of patenting, R&D expenditures, and density of scientific and engineering personnel show a dispersion of technical competence and technological resources. The growth of trade in technology-based products has been faster than the growth of trade of resource-based or labor-intensive products. Further, the post-war historical pattern of predominately "one-way" flows of technology out of the U.S. has been significantly altered. The National Science Board has found that transfers of technology into the United States have increased substantially in volume and importance over the past twenty years.

For the U.S., exports of advanced technology products have been rising at twice the rate of total merchandise exports. (The ten standard advanced technology product categories are biotechnology, life sciences, opto-electronics, computers and telecommunications, electronics, computer integrated manufacturing, material design, aerospace, weapons, and nuclear technology.) Over the same period, imports of advanced technology products have been rising three times as fast as total merchandise imports.

There is abundant evidence that this process of globalization of goods, services, capital, and technology has benefitted the United States. The U.S. is the world's largest exporter. One in six U.S. manufacturing jobs is devoted to exports, and export-related jobs pay wages that are approximately 19 percent above the U.S. average. From 1989 through 1993, four-fifths of the increase in U.S. domestic manufacturing production consisted of exports. Nor should one fall into the trap of thinking that only exports are good, and imports are somehow "bad." Imports provide new, better, or cheaper products and inputs to satisfy consumer and producer needs.

As for FDI, inward investment into the United States has provided 4.7 million jobs for Americans and generated $4.1 billion in new domestic R&D. Outward investment from the U.S. has, contrary to popular belief, acted as a magnet for U.S. exports and has generated more jobs at home than would have otherwise been the case.

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Regions Are Forming
Trade Blocs

Buried beneath the globalization of international economic activity is potentially disturbing evidence of emerging regional preferences and exclusivities.

The General Agreement on Tariffs and Trade (GATT) established a regime in which each member accorded others the status of Most Favored Nation (MFN), so that all trading partners were treated equally. This was intended to avoid a repeat of the disastrous division of the world into trading blocs in the 1930s. Yet GATT has always included an important exception to the MFN principle via Article 24; regional groupings could form areas of freer trade among themselves as long as explicit trade barriers against non-members were not raised. In the 1980s, the trend has in fact been toward greater regionalism. In each of the three major economic areas of the world, there has been an increase in intra-regional trade: from 23 percent to 29 percent in East Asia, from 27 percent to 29 percent in the Western Hemisphere, and from 54 percent to 60 percent in Europe.

Even after factoring out the impact of natural determinants of trade patterns (such as geographic proximity and absolute size of the nations in question), as well as the influence of common languages and cultural affinity, it appears that such patterns do indeed indicate the emergence of significant trade blocs in Europe, the Western Hemisphere, and the APEC region. The greatest intra-regional bias is in the APEC region, while the most rapid trend in this direction is in Europe. Since NAFTA has only recently come into being, a fresh spurt of bloc-oriented activity in the Western Hemisphere may be seen in the near future. (There has been no attempt to measure the emergence of a ruble-bloc in the CIS area; however, recent attempts by Russia to reintegrate the economies of parts of the former Soviet Union suggest that such a development may be underway.)

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Zero-Sum Rivalry in High Tech Industries May Be Emerging

In conventional economic analysis, the globalization phenomenon yields positive-sum results. The gains to any nation from trade in goods and services, and from transfers of capital and technology, typically outweigh the costs by a large margin. New analytic concerns have arisen, however, about whether free trade produces positive-sum outcomes in what are known as "strategic trade industries." (In this context, "strategic" refers to the oligopolistic character of the industry, not its military significance.) Examples of such industries include aerospace, advanced materials, computers and supercomputers, semiconductors and microprocessors, and biochemicals. Strategic trade theory focuses on industries where markets do not work perfectly--specifically, those with a limited number of large firms because of economies of scale, high technological barriers to entry, and production processes marked by a high level of learning-by-doing. From any country's point of view, strategic trade industries are desirable not only because they incorporate a large proportion of high-wage, high-skill jobs, but also because they are likely to generate economic, social, or defense-related benefits above and beyond their strictly commercial value.

National authorities generally want to ensure the presence of national firms in strategic industries. For example, the U.S., Europe, and Japan all want to be major players in aerospace, telecommunications, microelectronics, and advanced materials. Yet the large economies of scale in these sectors mean that global markets will only sustain a few production sites. Consequently not every country, even every major country, can expect to have an extensive presence in every key high-tech sector. This can lead to a beggar-thy-neighbor duel of national policies that aim to support one's "own" firms in strategic sectors at the expense of competitors.

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Foreign Investment in the U.S. Has Led to Fears of Foreign Control and Domination of Key U.S. Industries

The U.S. has long preached the benefits of foreign investment to host countries around the world, and has urged that foreign investors be granted treatment equal in every way to that accorded indigenous firms. This was a natural stance in the first three decades after World War II, when U.S. multinational corporations accounted for 40 to 50 percent of the total stock of global FDI. This perspective has come under intense scrutiny in recent years, however, as the U.S. has itself become a major host for foreign investors. Whereas the U.S. was the recipient of only about 11 percent of the total stock of global foreign investment in the 1970s, the percentage has more than doubled today.

Forty percent of the stock of FDI in the United States is concentrated in manufacturing. In the aggregate this amounts to only about 15 percent of total U.S. manufacturing assets. However, using conventional U.S. accounting definitions of "control" (ownership greater than 10 percent of the voting securities), foreign corporations can be shown to control one-half of the U.S. consumer electronics industry, one-third of its chemical industry, 70 percent of its tire industry, 20 percent of its automotive industry, and almost 50 percent of its film and recording industry.

Moreover, in "critical technology" industries, as defined by the Department of Defense and the National Science Adviser, much of the foreign investment has occurred via acquisition of existing American companies. According to the U.S. Department of Commerce, there have been in recent years more than four hundred foreign takeovers in microelectronics, aerospace, telecommunications, and advanced materials, totalling 46 percent of all cases and 79 percent of the total value. Thus, whatever the benefits from foreign investment, there begin to arise questions of foreign control and domination of key U.S. industries.

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