Intracompany trade
One of the least understood effects of large multinational companies is that of intracompany trade. This phenomenon defies some of the rules of supply and demand that have governed the worldwide distribution of cash and labor. When, for example, Apple Computer ships iPods from its plant in China or Xerox imports copiers assembled mostly in China, it's not clear what the real value of transshipped goods are. That's unlike the classical model of trade where an American company, for example, buys French wine or German cars at a certain price then carried them across the ocean. The value of the import as opposed to the final cast of the product in these cases is fuzzy.
And it's not just technology companies that are doing this, though they are certainly leaders. Cargill, for example, buys soybeans in Brazil and processes them there in at least six plants. If the product is shipped to a Cargill subsidiary in the US, Europe, or Asia, the exact value of the imported soy products is not very precise. Similar problems exist in accounting for auto parts, clothing, beverages, and a range of other products.
A recent Wall Street Journal article ("Why Dollar Can't Close Gap", 5/31/05) deals with the question of why the sinking dollar has not helped the US trade balance, as economists generally thought it would.
Economic theory says that as the dollar declines, the trade balance should shift in the U.S.'s favor, usually with a delay of about 18 months after the currency starts moving downward. But it has been more than three years since the dollar started its slide, although it has recovered some ground recently, and there is little evidence of a significant impact on trade.
The answer, according the article, may be that the figures are hopelessly skewed by the moving of good between foreign and US division of large multinationals. In fact, the article states that 42% of all US trade in goods, $950 billion, came last year from such intracompany trading.
In my opinion, the article raises an interesting issue, but is not very clear on the precise effect that this intracompany trade is having, though it does cite some other reasons (the fixed cost of investments and the difficulty of raising prices without killing demand). But here's one of the causes: it's much to the advantage of multinationals to overstate the somewhat arbitrary value of products they produce in Third World countries. That means that the value added in the US, that subject to US taxes, is lower, thus lowering the tax bill. Typically, the tax policies in Malaysia, China, and Brazil will be far less onerous, and a large company providing lots of jobs is likely to get a tax break. Large companies have all kinds of leeway on describing the tax venue where they make their biggest profit, since the numbers are even more portable than the goods.
I'm just thinking through this internal trade subject (your thought are welcome) and will come back to it later. Its dominance and growth is frightening, and it certainly is behind the worldwide pressure to reduce trade barriers. It is also a major threat of the idea of national economic sovereignty.
