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  1. #1
    Senior Member Senior Member Ser Clegane's Avatar
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    Default Re: This Scares Me: The U.S. Balance of Trade

    Quote Originally Posted by drone
    On the flip side of that, do foriegn cars made here in the States count as imports? Say, BMWs built in South Carolina?
    No - the cars are made domestically (OTOH the investment by BMW to build the plant would fall under "foreign direct investment" that is reflected in the "Capital/Financial Account Balance" on DA's chart)

  2. #2
    stalin
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    Default Re: This Scares Me: The U.S. Balance of Trade

    The funny part of the debt is when you check who USA's biggest creditor is...
    Spoiler Alert, click show to read: 


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    Default Re: This Scares Me: The U.S. Balance of Trade

    To answer some of the questions here:

    What is, in your opinion (or that of Greenspan or of someone else with some authority), the reason for this and what are the possible consequences if this situation continues?
    This is exactly the point of my research.

    The data tells us that since 1997, the United States has experienced a precipitous decline in international trade, taking in far more than it exports. Furthermore, international investment into the United States has grown at an equally rapid pace. In its analysis of the current account decline since 1991, the Congressional Budget Office (2004) wrote: “The fall in the current-account balance since 1991 reflects the fact that U.S. residents collectively spent increasingly more than their income (Par. 2)”. Since this is a national summary, the extra financing must come from outside of the U.S., and this financing is demonstrated by the inflows from the Financial Account. The Congressional Budget Office also wrote: "Between 1991 and 2003, cumulative net borrowing from abroad raised the nation's net obligations to the rest of the world by $2.1 trillion, to a record $2.4 trillion, or 22 percent of gross domestic product (Par.4)".
    A number of factors have contributed to the decline of the Current Account and the corresponding rise in the Capital and Financial Account. The Congressional Budget Office explained that rising demand for dollar-based assets stimulated a decrease in interest rates and resultant U.S. investment in foreign currency.

    CBO Commentary (2004)

    In sum, we are accruing a huge amount of foreign debt while failing to match that debt with income from exports.

    where, in relation to all of this, would products manufactured by a US company at a foreign plant to be shipped back to the US fit into all of this? Do shoes made by Nike in India to be sold in the US count as exporting or importing? And what about when a guy in India processes my insurance claim from Geico? Seriously, I'm curious how this figures in.
    On the balance of payments, foriegn owned subsidiaries count as imports to the home nation. In other wors, a BMW plant in the U.S. headquartered in Germany counts all U.S. sales from that plant as income to Germany. Even though the plant is in the U.S., it is still an export to America. This is because the profits from subsidiary are sent back to Germany. The consolidated baalnce sheet of the German company counts its foreign operations as an export out of Germany. A U.S. plany abroad would count as a U.S. Export. So if Nike builds a plant in INdia and sells to residents in that country, it is technically an export. This is because the profits are sent back to the U.S. and accounted for uin U.S. Dollars after currency exchange is conducted. There is a spectrum of"exporting", rangin from simple exporting such as buying online and shipping abroad to wholly owned foreign subsidiaries. Either way, the profit goes back to the home country, irrespective of the value chain that delivered the product to the customer. The guy in India is neither an export nor an import. It is actually a domestic service, despite its nature as a "re-import".

    I'm pretty sure that counts as import into the US (why shouldn't it? - where the headquarters of a company are located should be pretty irrelevant for this kind of statistic)
    The headquarters of a company determines its national ownership, and therefore, the currency it does its accounting in. A U.S. firm doing business in Australia must exchange all Aus$ to US$ before it can document gains or losses from the Australian operation. Those US$ profits are then distributed to shareholders via dividends. Sure, foreign investors can purchase sahres of a U.S. firm. That is represented in the Capital/Financial Account as foreign financing. The foreign ownership of U.S. firms. The money that is given to them is considered a financial "export" for accounting purposes.

    On the flip side of that, do foriegn cars made here in the States count as imports? Say, BMWs built in South Carolina?
    Yes. Because the ownership of the company is foreign and the profits are sent back to germany. A U.S. citizen who hold shares in BMW would count as U.S. investment abroad and the money sent back to him would count as an export from the U.S. in terms of financing; we are exporting our financing in that case.

    No - the cars are made domestically (OTOH the investment by BMW to build the plant would fall under "foreign direct investment" that is reflected in the "Capital/Financial Account Balance" on DA's chart)
    Foreign direct investment actually means just that. If the German company is owned entirely by German nationals, than the profits are retained by germany. Thus the goods are exported from Germany and the financing is exported from Germany. The sale counts as an outflow and the financing counts as an inflow. This creates the inverse realtionship of the current account and the Capital/Financial Account.

    By the way, the unfiltered data on this can be found here: http://www.bea.gov/bea/di/table1.xls
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    Senior Member Senior Member Ser Clegane's Avatar
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    Default Re: This Scares Me: The U.S. Balance of Trade

    Just to clarify:
    The revenues for a BMW car that has been manufactured in the US do not count as an import (other than the revenues for a BMW shipped in from Germany
    Last edited by Ser Clegane; 05-25-2006 at 21:56.

  5. #5

    Default Re: This Scares Me: The U.S. Balance of Trade

    Quote Originally Posted by Ser Clegane
    Just to clarify:
    The revenues for a BMW car that has been manufactured in the US do not count as an import (other than the revenues for a BMW shipped in from Germany
    Look at it this way:

    (1) A German company operates solely in Germany. They have neither exports nor imports for accounting purposes in Germany, and this activity is not counted as an international transaction on the German BoP.

    (2) A German company manufactures the product entirely in Germany, with German based resources. The German company than sells the product to an American buyer using an export/import third party company. This international transaction appears as an export on the German BoP and an Import on the U.S. BoP.

    (3) A German company manufactures the product entirely in Germany, with U.S. based resources. The German company than sells the product to an American buyer using an export/import third party company. The purchase of the U.S. based resources count as an import on the German BoP and an export on the U.S. BoP. The sale of the final product appears as an export on the German BoP and an Import on the U.S. BoP.

    (4) A German company manufactures the product entirely in the U.S., with German based resources. The German company than sells the product to an American buyer using a German sales subsidiary based in the U.S. The purchase of the German based resources do not count as an international transaction on the BoP because they are being purchased by their own national-based company. The sale of the final product appears as an export on the German BoP and an Import on the U.S. BoP. The ONLY difference from example #2 was that the firm happened to build its product in overseas. The profits from the sale still return to Germany.

    (5) A German company manufactures the product entirely in the U.S., with U.S. based resources. The German company than sells the product to an American buyer using a German Sales subsidiary based in the U.S. The purchase of the U.S. based resources count as an import on the German BoP and an export on the U.S. BoP, even though the product is produced in the U.S.; this is because the buyer is foreign-based. The sale of the final product appears as an export on the German BoP and an Import on the U.S. BoP.

    I hope this helps to clarify it.
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  6. #6
    The very model of a modern Moderator Xiahou's Avatar
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    Default Re: This Scares Me: The U.S. Balance of Trade

    DA, why should I be concerned about this when it's coupled with consistent, strong economic growth and ever increasing worker productivity. The United States generates fantastic amounts of wealth, I dont necessarily see it as a cause for alarm that we're importing goods from other countries. I posted an article to this affect from Investor's Business Daily not too long ago.

    As a side, some seem to be confusing government budget deficits with trade deficits- they are not the same.
    Last edited by Xiahou; 05-26-2006 at 07:17.
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    Senior Member Senior Member Ser Clegane's Avatar
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    Default Re: This Scares Me: The U.S. Balance of Trade

    Quote Originally Posted by Divinus Arma
    (5) A German company manufactures the product entirely in the U.S., with U.S. based resources. The German company than sells the product to an American buyer using a German Sales subsidiary based in the U.S. The purchase of the U.S. based resources count as an import on the German BoP and an export on the U.S. BoP, even though the product is produced in the U.S.; this is because the buyer is foreign-based. The sale of the final product appears as an export on the German BoP and an Import on the U.S. BoP.

    I hope this helps to clarify it.
    I still believe that you are incorrect here.

    To quote some BEA-definitions:

    Quote Originally Posted by BEA Glossary
    Imports of goods and services. Goods and services purchased by U.S. residents from foreign residents.
    [...]
    Foreign residents. Individuals, governments, business enterprises, trusts, associations, and nonprofit organizations that fulfill two criteria: (1) They have their center of economic interest outside the United States, and (2) they reside, or expect to reside, outside the United States for one year or more. Included in this definition are U.S. individuals living abroad for one year or more who are not employed by the U.S. government, foreigners residing in the United States for less than one year, and foreign affiliates of U.S. companies. In addition, foreign nationals employed in the United States by their home governments, foreign students enrolled at U.S. educational institutions, and international institutions located in the United States are also considered foreign residents.
    BMW of North America, LLC is an enterprise that clearly has its economic interest primarily inside the US.
    It is a US affiliate of a German company, however, as goods that are shipped into the US from foreign affiliates of US companies are considered to be imports, it should be clear that domestic sales of US affiliates of foreign companies are not.
    Of course any services the US affiliate (of e.g. BMW) receives from their (in this case German) corporate headquarter would be imports, just as any profit transfers to the parent company would be exports.

  8. #8

    Default Re: This Scares Me: The U.S. Balance of Trade

    An affiliate is different from a wholly owned subsidiary. An affiliate is either a company merely realted to another company in some way (the broad definition), or a company in which another company has a minority interest. A foriegn affiliate of a U.S. company is one in which the U.S. company has a minority interest. In these cases, profits from the affiliate are reported in the country where based. For example, China's government prohibits foreign firms from owning a majority interest in any Chinese operation. McDonald's in China is actually a U.S. affiliated Chinese owned company. The U.S. firm grants license to the chinese company to use its name, products, etc. I'm not 100% sure of the exact arrangement, but I do not that the firm is majority owned by Chinese nationals.

    As for BMW, it depends on whether or not the affiliate conducts its consolidated balance sheet in the U.S. or Germany, and that is based on which nation has the majority interest in the affiliate company. If it sends its profits back to Germany, than it is wholly owned. If it reports its profits stateside, than it is an American-owned affiliate with licensing rights granted by BMW. In this case, it pays fees and royalties for the right to manufacture and sell within the U.S. under the BMW name, but does not send its profits to Germany for tax and accounting purposes.

    BMW Manufacturing Co, LLC, in the U.S., is "a subsidiary of BMW AG in Munich", according to its website.

    According to the 2005 Annual Report, the BMW group reports its income in Euro on its balance sheets. That means it sends its cahs back to Germany, and sales in America are considered exports from Germany.

    Here's an odd one: A U.S. tourist making a purchase abroad counts as an import into the U.S.


    But all of this is a minor point. The issue at hand is that the United States may be facing a serious currency crisis. One of two things are going to happen very soon:

    (1) As it stands now, the USD is the international currency reserve due to its stability, and more importantly, the ability of U.S. firms to provide the highest return on assets in the world. If the U.S. can continue the trend of high RoI, then the world will essentially remain on "The Dollar Standard", and then that will mean that high current account deficits do not matter. This is a theory proposed by Alan Greenspan, and it explains why he believed that the greater threat to the U.S. economy was deflation, not inflation, and thus his policy of low interest rates.

    (2) The U.S. is unable to sustain its entreprenuerial and technological advantage. In this instance, ROI will be greatly impacted, and the Euro will replace the dollar as the world reserve. The Dollar would devalue fairly quickly, causing a severe economic recession in the States, which in turn would result in catastophic recession in Asia, since theirs is an export economy entirely. Furthermore, the reduction in the Dollar value would cause international U.S. securities to lose big time against the Yen, Yuan, and Euro, triggering further flight from the greenback.

    Most analysts believe that option #1 is most likely, since the U.S. economic and political sysetm isn't in danger of changing too much. However, if Democrats take control of the house, we will see an immeidate increase in the federal minimum wage as well as a mountain of new regulation due to "global warming". These regulations, coupled with higher input costs could be just enough to limit RoI in the states to turn investors towards Euro based securities. That would result in scenario #2.

    Analysists do agree that both scenarios are possible. It depends on what happens to congress this year. Massive regualtion and socialization works in the Euro zone where GDP growth is 0% and based on a domestic economy and exports rather than RoI. The same type of economic sysetm would greatly damage the U.S. economy, which would have global shockwaves.


    Edit:
    Bottom line: If Democrats gain the House, BUY GOLD and as soon as possible. It will skyrocket as a hedge against currency instability and dollar devaluation.
    Last edited by Divinus Arma; 05-26-2006 at 14:48.
    "Great spirits have always encountered violent opposition from mediocre minds." -Einstein

    Quote Originally Posted by Pannonian View Post
    The Backroom is the Crackroom.

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