Commentary

Whatever Happened to “the Giant Sucking Sound”?

By Daniel Griswold
June 6, 2000
In the thick of the recent debate in Congress over permanent normal trade relations with China, House Minority Whip David Bonior (D-Mich.), Richard Trumka of the AFL-CIO and other opponents of the trade deal warned that it would lead to a stampede of U.S. investment to China. Their protests echoed those of Ross Perot in 1993, only this time “the giant sucking sound” would be heard over the Pacific instead of over the Rio Grande.

With another crucial trade vote looming in Congress in the next few weeks, this one on whether the United States should stay in the World Trade Organization, it’s worth asking: What ever happened to the giant sucking sound that was supposed to follow passage of the North American Free Trade Agreement and establishment of the WTO?

The simple truth is that the predicted massive flight of capital to countries with lower costs and standards never materialized. More than half a decade after congressional approval of NAFTA and the WTO, domestic investment in the United States is booming. The same open economy that has benefited American consumers and workers has created a profitable climate for new business investment.

Since 1992 real nonresidential private investment in the United States has almost doubled, from $630 billion to more than $1.2 trillion (in 1996 dollars). Real investment in information-processing equipment and software has more than tripled. This surge in investment and new technology has led directly to a rise in worker productivity that in turn has fueled economic expansion and raised living standards.

In fact, during the past decade the United States has been the world’s largest recipient of foreign investment. Year after year the United States has run a net surplus in its capital account, with foreign savers investing more in the United States than American savers have sent abroad. From 1994 to 1998, the United States received an average annual net inflow of foreign direct investment (FDI) in manufacturing of $12 billion.

This inflow of foreign capital has kept interest rates down, built new factories and brought new technology and production methods to our economy. If there has been any giant sucking sound since 1993, it has been the rush of global capital to the safe and profitable haven of the United States.

American manufacturers continue to be net investors in Mexico and China, but the relative size of their investment remains small. From 1994 through 1998, the annual net outflow of manufacturing FDI to Mexico averaged $1.7 billion, an amount equal to about 1 percent of annual U.S. domestic investment in manufacturing. The net annual outflow of manufacturing FDI to China has been even smaller, averaging $661 million. In contrast to the relative trickle of outward investment to Mexico and China, new domestic investment in U.S. manufacturing in 1997 totaled $192.3 billion.

While anti-trade polemicists focus all their attention on jobs shipped overseas, they ignore the jobs shipped here. Today some 12.3 percent, or almost one in eight, of manufacturing workers in America are employed by a U.S. affiliate of a foreign-owned company. Honda, Toyota, DaimlerChrysler AG, BMW, Fuji and other foreign-owned companies have become major employers in the United States.

As is the case with trade, most of America’s foreign investment dealings are with other advanced economies. According to a study by the Deloitte & Touche consulting firm, 80 percent of FDI by U.S. manufacturing firms in 1998 was in other high-wage countries. The top destinations for U.S. manufacturing FDI in 1998 were the United Kingdom, Canada, the Netherlands, Germany and Singapore — all high-wage economies with labor, health and environmental regulations comparable to or more restrictive than those of the United States.

Outward U.S. foreign investment is not drawn primarily by low wages and lax regulations in poor countries. “Contrary to common belief, cheap labor does not drive U.S. manufacturing FDI,” the Deloitte & Touche study concluded. “Indeed, global expansion strategies are driven in large part by relative economic stability, well-developed infrastructures, lucrative market potential, and talented and skilled workers. Access to lower cost labor and raw materials is important, but not the primary driver.”

By focusing on low wages in less-developed countries, opponents of openness ignore the crucial fact that workers in poor countries are much less productive than workers in the United States. Their wages are lower, not because they are inherently lazy or incapable, but because they lack the human and physical capital and the pro-market institutions that foster higher productivity.

The United States has nothing to fear from openness to trade with and investment in less-developed countries. Global trade liberalization encouraged by the WTO promotes investment, growth and development at home as well as abroad.

Daniel T. Griswold is associate director of the Cato Institute’s Center for Trade Policy Studies. He is the author of the new Cato study, WTO Report Card: America’s Stake in Open Trade.”