From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Mon Apr 04 2005 - 12:47:39 EDT
U.S. Multinationals Reap Overseas Bounty By JON E. HILSENRATH Staff Reporter of THE WALL STREET JOURNAL 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 turmoil. 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 -- depreciation. 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 profits.
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