[OPE-L] U.S. Multinationals Reap Overseas Bounty

From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Mon Apr 04 2005 - 12:47:39 EDT

U.S. Multinationals
Reap Overseas Bounty

April 4, 2005; Page A2

NEW YORK -- Look across the global stage and the U.S. might look like a
vulnerable giant.

Record trade deficits leave some economists worried that the dollar could
collapse, sending interest rates sharply higher and the economy reeling.
U.S. workers, meanwhile, worry that American jobs are increasingly
susceptible to outsourcing overseas.

But for many U.S. multinationals, the global stage has rarely looked
brighter. The Bureau of Economic Analysis, the government statistics mill
that cranks out national output and income data, reported last week that
U.S. companies raked in $315 billion of profits overseas last year. That is
up 26% from a year earlier and up 78% this decade, far outpacing the growth
of profits by U.S. companies at home.

"U.S. companies are very competitive. They're booking record profit from all
corners of the world and you'd never know that looking at U.S. trade
figures," says Joseph Quinlan, an investment strategist with Bank of
America. He has been telling his clients to put their money in companies
that have international sales exposure, because, "We believe the global
earnings backdrop will remain constructive in 2005."

Multinationals are enjoying a double dose of good fortune overseas. In
slow-growing developed economies like Europe and Japan, a weaker dollar
helps, because it means cheaper products to sell into those markets, and it
means profits earned in those markets translate into more dollars back home.
Meanwhile, for the first time in recent memory, emerging markets in Asia,
Latin America and Eastern Europe are growing in sync and without financial

General Electric says it expects 60% of its revenue growth to come from
emerging markets over the next decade, compared with 20% in the previous
decade. For Brown-Forman, the spirits company, a fifth of its sales growth
of Jack Daniels, the Tennessee whiskey, is coming from developing markets
like Mexico and Poland, a trend that is expected to continue. Meanwhile, IBM
saw sales growth of 25% in emerging markets such as Russia, India and Brazil
last year.

This robust performance overseas is helping to keep overall corporate
profits strong, even though profit growth was expected to slow. Last year,
earnings overseas accounted for 40% of profit growth for all U.S. companies,
according to the government's data. It has also touched off an intensifying
debate among economists about whether the U.S. economy really is as
vulnerable on the global stage as it appears at first glance.

In a recent paper on the subject, analysts at McKinsey & Co. conclude record
U.S. trade deficits aren't as threatening as they appear, because they are
being driven in part by increasingly profitable U.S. companies, producing in
places like China, Mexico and India, and shipping their goods and services
back to the U.S. It concluded overseas profits account for $2.7 trillion in
stock-market capitalization and those profits are helping to promote
investments in new technologies and jobs abroad and back home.

"Far from reflecting the weakness of the U.S. economy, at least a third of
the current-account deficit is actually evidence of its strength," the
report says. "The U.S. acts as the world's financial intermediary, gathering
up and allocating global savings to companies that then invest them around
the world," it later concludes.

McKinsey argues the important role of U.S. multinationals means today's
record trade deficits -- a source of so much uncertainty about the economic
outlook -- could last much longer than many economists expect.

The U.S. current-account deficit hit 6.3% of gross domestic product in 2004,
a level that has triggered financial crises in other countries in the past.
Classic economic theory holds the trade gap should make foreigners less
willing to hold U.S. assets. That, in turn, should push down the value of
the dollar, making U.S. products more competitive abroad and making foreign
products more expensive at home. Theory holds this would ultimately correct
the trade imbalance.

But McKinsey argues that labor is so much cheaper in countries like China
and India that U.S. multinationals are unlikely to alter their international
strategy anytime soon, meaning the old corrective mechanisms won't work the
way they used to. "For at least the next decade, we would expect foreign
investment by U.S. multinationals to go on adding to the current account
deficit as it is currently measured," McKinsey says.

Last week, Goldman Sachs fired back at McKinsey's conclusions about the U.S.
economy's place on the global stage. Edward McKelvey, a senior economist at
Goldman, argues that it doesn't matter who is driving the deficit wider. The
end result is still that the world is awash in dollars and because of that
the currency is still prone to sharp -- and potentially destabilizing --

For now at least, McKinsey's rosy view of the world is holding up. The
current-account deficit was 25% wider in 2004 than it was in 2003 and shows
no sign of letup. And while the dollar has weakened, it hasn't touched off a
much-feared financial crisis.

But Diana Farrell, director of the McKinsey Global Institute and co-author
of the study on multinationals, says that doesn't mean there aren't pockets
of truly vulnerable Americans in this process. The $2.7 trillion in
stock-market capitalization created by multinational profits overseas
doesn't reach individuals who don't own shares in these companies. These are
often the same low-skilled workers most vulnerable to lose their jobs to
inexpensive low-skilled workers overseas. The real worry in today's economy,
Ms. Farrell says, isn't the current-account deficit. It is finding ways to
equip and enrich those workers least prepared for the globalization of

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