About the author: Joseph Quinlan Head of CIO Market Strategy at Merrill’s Principal Investment Office and Bank of America Private Bank.
Nothing is more fashionable these days than writing awareness of globalization. The tragedy that followed will leave lasting scars on the United States, but what is missing from the debate about deglobalization is this: If the world of unchecked cross-border flows of goods, services, people, capital and data is truly a thing of the past, then one of America’s biggest bets at some point After the war on the verge of collapse.
No entity in the world has bet on more resources from globalization over the past four decades than American multinational corporations. America’s stock of outbound foreign direct investment rose from $215 billion in 1980 to $8.1 trillion in 2020, according to United Nations figures. The Netherlands, with $3.8 trillion in FDI stock in 2020, ranked second by a distance, underscoring the fact that no one has a larger global footprint than US companies.
Going global became a motto for many American companies as the world was conquered in the late twentieth century through declining trade barriers, investment reforms, industrial liberalization, lower communication and transportation costs, and the proliferation of regional trading blocs. These structural dynamics were complemented by such fundamental one-time events as the opening of China, economic reforms in India, the enlargement of the European Union, and the collapse of communism.
US foreign companies led the attack abroad. The global foot soldiers of U.S. corporations, these foreign affiliates, can now be found in nearly every country in the world, and numbered nearly 39,000 in 2019, according to the latest data from the Bureau of Economic Analysis.
The US corporate military is an economic force in its own right, producing nearly $1.5 trillion in output in 2019. This is equivalent to the total production of Brazil or Spain. It employs nearly 15 million workers, and the total sales of U.S. foreign companies amounted to $6.8 trillion in 2019, which is 2.5 times more than U.S. exports of goods and services. The difference highlights how US companies primarily deliver their goods and services to foreign customers – through investment and affiliate sales, rather than through out-of-arms trade (exports).
The bulk of these subsidiaries – almost 60% – are located in developed countries, in particular the European Union. When it comes to venturing abroad, companies are more concerned with reaching wealthy consumers and skilled workers, rather than chasing low-cost labor. Accordingly, approximately 90% of sales of US affiliates go to the domestic market – not to export back to US affiliates that are not stand-alone entities but are integrated with US parent entities across global supply chains. These linkages promote cross-border trade in goods and services, which in turn supports US exports and the attendant investment and employment activities in the United States.
Given all of the above, the demise of globalization – if true – could not have come at a less favorable time for US companies. Facing one of the tightest job markets in decades, the last thing American companies need is a lack of access to foreign talent. With the shortage of important raw materials, American companies cannot close out of certain resource-producing markets. As America’s share of global personal consumption declines, future earnings growth for many multinational corporations hinges on reaching consumers in both developed and developing nations. In the end, globalization has been very positive for American companies – and very beneficial for the American economy in general.
While globalization has stimulated American companies to venture abroad, it has also encouraged companies to come to America. No country – including China – has attracted more foreign investment capital than the United States since 1980. Foreign portfolio inflows have been strong over the decades, helping to finance the permanent US budget deficit. At the end of 2020, the total stock of incoming FDI in the United States was $10.8 trillion, or 26.1% of the world total.
Based on recently released figures from the BEA, inflows and outflows of US foreign direct investment rebounded strongly in 2021. The former reached $368 billion, the strongest level since 2016, while the latter surpassed a record annual level of $403 billion. This is another way of saying that if globalization dies, someone has forgotten to tell the largest multinational corporations in the world. If globalization was really dead, the S&P 500 would have fallen much more than its 18% drop from its peak set in January 2022. The good news is that the markets haven’t bought into all the hype about the decline in globalization.
However, multinationals face a more challenging environment than in the past, given the growing nationalist calls for “resettlement,” economic self-sufficiency, and the promotion of national champions, among other political pressure points. Companies are not deaf or blind to these tensions. Nor the markets.
Companies focus on building more resilience in their supply chains, but in many cases, that means relying more on foreign labor, foreign markets, and non-US resources. To paraphrase Mark Twain, the death of globalization has been greatly exaggerated. For now, this is bullish for US stocks, given that a sharp shift towards deglobalization will come at a huge cost to the US.
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