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FEDERAL RESERVE BANK OF ST. LOUIS




1990 ANNUAL REPORT

ANNUAL REPORT 1990

~|

President's
Message
T \
V

^ ^^ ^^ ^^
-

Bank. In Kentucky, Toyota provides
jobs for more than 3,400 people.
JLhe economic well-being of the
And, in Memphis, a Finnish company
Eighth Federal Reserve District is
— Leaf, Inc.— employs 550 in the
affected to an ever-increasing degree
manufacture of candy, bubble-gum
by the production, consumption and
and baseball cards.
investment decisions of people Uving
Some people view the
outside U.S. borders. Some people
increasing flows of international trade
refer to this internationalization of
and investment with suspicion. Others
goods, services and investments as
will tell you that growing world trade
"going global."
is the single most important reason
As each day passes, it
for the prosperity we enjoy today.
becomes more and more difficult to
Who's right? The essay that foUows
tell where the goods and services we
will attempt to sort out these issues
use routinely are produced. When we
and provide some insight into the
eat, wear clothes or watch television,
extent as well as the desirabiUty of
we're very hkely doing business with
''going global."
a foreign firm. A recent estimate
Before we begin, however,
showed that more than 70 percent of
I would hke to extend my warmest
the total manufacturing cost of an
thanks to several retiring directors.
IBM personal computer—a highwhose hard work and commitment
profile American product—was for
have helped guide us through the past
components manufactured overseas.
several years: H. L. Hembree and
H. Edwin Tmsheim (left),
chairman of the board,
At the same time, our
Roger W. Schipke, St. Louis; David
and Thomas C. Melzer,
domestic firms—including many in the
Armbruster and Wayne Hartsfield,
president and
Eighth District—are exporting their
Little Rock; and Raymond M. Burse
chief executive officer
goods and services for purchase by
and Irving W. Bailey, II, Louisville. In
...^ "iMi^^
foreign consumers. McDonnell Douaddition, I would like to welcome two
' glas' aircraft, for example, are sold
important additions to our official
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throughout the world, and both Fedstaff: Karl W. Ashman, who was named
eral Express and UPS provide ship^ ^^9^^V
^ f l i l i ^ ' ^ i ^ ^ president and branch manager of 1
ping services around the globe. Thus,
W^:^^m
^ ^ ^ f t ^'^^ Little Rock Branch, and Mary H.
the jobs and incomes of many District
J iG^^r
j i ^ l ^ ^ ^ B l^i'i^' ^ h o joined us as vice presiresidents rely on purchases by f o r - ^ ^ ^ J ^ ^ ^ ^ ^ ' ^ ^ ^ ^ ^ ^ ^ ^M^^^^M
^^^^^ general counsel and secretary. 1
consumers.
^^^^^^^m ^^^^^^^^ W^^^^^^.
District jobs are also
^^^^^^^^H^^^^^^^H^^^I
affected by the investment de- ^ ^ ^ ^ ^ ^ ^ ^ ^ H ^ ^ ^ ^ ^ ^ ^ ^ H ^ i ^ P l
foreign firms.
^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ K I B ^ ^ ^ ^ ^ ^ ^ ^ B Thomas C. Melzer
1
Laclede
Company, for ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ V ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ B ^^^^^^^^^
example, is Canadian-owned, ^ ^ ^ ^ ^ ^ ^ H H P ^ i H ^ ^ ^ ^ ^ B ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ ^ B Executive Officer

1

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while Purina Mills and
Peabody Coal are Britishowned. All three firms are
headquartered in the St.
Louis area, Peabody just
across the street from our



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FEDERAL RESERVE BANK OF ST. LOUIS

As American As a
Baby Ruth
mix milkshakes in, the Baby Ruth candy
bar we grab in the check-out line—even
the Mack truck that passes us on the
interstate. Few of us stop to consider
the country of origin of these products
or the contribution we're making to
"globalization'when we purchase them.

M.

Lost of US are aware of the
growing links between the U.S. economy and the rest of the world. Nonetheless, we have numerous bhnd spots
when it comes to the extent of these
linkages and, more importantly, how
these linkages affect our well-being.
Even presidential candidates
suffer from these blind spots. During
the last campaign, Michael Dukakis,
speaking at the Moog Automotive
parts plant in St. Louis, extolled the
virtues of American manufacturing
know-how in an industry dominated
by foreign competition. Unfortunately
for Dukakis, Moog had been owned
since 1978 by an ItaUan conglomerate. George Bush, meanwhile,
cloaked himself in the symboUsm of
the American flag, a product more
likely to be made in Hong Kong or
Taiwan than Anytown, U.S.A. Clearly, it
is becoming difficult to define what's
"American ' in a world marked by
disappearing economic borders.
The fact is, globalization is
more widespread and more complicated than the trade deficits with
Japan and the foreign purchases of
American real estate we hear so much
about. The Reebok athletic shoes so
many Americans sport, for example,
are produced by a British company in
South Korea, then exported to the
United States. Many of the Japanese
cars driven by Americans are made in
the United States by American workers, and many of those same automobiles are exported to other countries,
some of them back to Japan.
Products and services we
encounter daily are produced by foreign firms: the One-A-Day vitamin we
take in the morning, the Bic pen we
write with, the episode of ''Monty
Python" we watch on a Sony television, the Hamilton Beach blender we



Which of the following
companies or products are
foreign-owned?
A. Alka-Seltzer
B. Saks Fifth Avenue
C. Kool cigarettes
D. Milk Duds
E. Shell Oil
F. Butterfinger candy bar

All of the above.
The first three are British-owned,
while the latter three are owned
by Finnish, Dutch and
Swiss companies, respectively.

B,

businesses throughout the world
have a greater variety of goods and
services to choose from because of
increased global Unkages. The cost of
doing business overseas has declined
dramatically over the last 40 years
with the tremendous advances in
transportation and communications.
In 1950, a 10-minute phone call from
the United States to Great Britain cost
almost $210; that phone caU today
costs less than $10. Companies
throughout the world now use Citicorp's financial products and AT&T's
communications services. Trade in
services, foreign direct investment
and foreign portfolio investment have
increased rapidly over the last
decade, especially in the United
States. The economic liberalization of
Eastern Europe and its integration
with Western Europe is already providing opportunities for U.S. firms to
expand their customer bases and
investors to diversify^ their portfolios.
Who gains and who loses
from this increased globalization?
With few exceptions, analysts agree
that the benefits of opening borders
to foreign trade and investment flows
far outweigh the costs. Merchandise
and service exports are important
components of the U.S. gross national
product (GNP). The U.S. Commerce
Department estimates that merchandise
and business service exports together
made up almost 10 percent of GNP in
1989; merchandise exports contributed
more than a third of the nation's growth
in real GNP. In addition, many U.S.

ANNUAL REPORT 1990

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•I

FEDERAL RESERVE BANK OF ST. LOUIS

;;v^i^\-




ANNUAL REPORT 1990

Many state leaders are now
convinced of the benefits of foreign
investment and exports. According to
the National Governors' Association,
governors from 41 states and territories made trips to 34 countries in
1989. These visits, which generally
included a delegation of state government and business officials, were
designed to increase exports and
attract investment.
Economics can explain
much of the increased globahzation
of world markets. In the rest of this
report, we will explain why globahzation happens, then concentrate on the
emerging patterns of trade and foreign investment in the nation and the
Eighth Federal Reserve District.

businesses rely on imported materials
in making products for both the
domestic and international markets.
Competition with foreign
firms for a piece of the domestic market forces U.S. firms to eUminate inefficiency and waste, thus driving down
industry costs. Domestic businesses
also benefit from the exchanges of
technology and management expertise made possible by foreign direct
investment. U.S. workers tend to gain
when U.S. companies expand operations to export or when foreign firms
decide to set up shop in this country.
Consumers benefit the most, as they
enjoy more variety, lower prices and
higher incomes than they would in
a world with no international trade
and investment.

why Do Countries
Trade?
c,
\T r

I ountries—or, more precisely,
the consumers, firms and governments in these countries—benefit by
engaging in international trade. They
benefit primarily by being able to
purchase some goods abroad at
lower prices than if they were produced domestically.
There is no simple explanation for international trade. Rather,
there are numerous explanations that
have varying degrees of appUcabiUty.
First, countries may have different
amounts of productive resources.
Productive resources, or inputs,
include natural resources such as
land and minerals; capital, such as
machinery and buildings; skilled and
unskilled labor; and management.
The production of each good
requires a different amount of these
inputs. Producing wheat, for example, requires a lot of land, some people and some machinery, among
other things. Manufacturing textiles,




What country
imports the most U.S.
agricultural goods?
A. Soviet Union
B. Mexico
C. South Korea
D.Japan

Japan. In fiscal year 1990,
U.S. agricultural exports to Japan
totaled $8.1 billion.
Exports to the Soviet Union,
our second-largest agricultural
export market, totaled
nearly $4 billion.

on the other hand, requires a lot
more labor than other inputs. Second, firms may be able to reduce
their cost per unit of output by producing large amounts of a certain
good. These are powerful incentives
to trade. Let's take a look at them
more closely.
A simple example, which
assumes similar demand patterns
across countries, can illustrate how
resource differences encourage
trade. Assume that the world consists
of two countries, the United States
and Mexico, and that each country
has two resources from which to
draw: its people (or labor) and its
capital. Assume that each country can
produce only two goods, airplanes
and cloth. In this hypothetical world,
the United States has relatively more
capital per worker than Mexico
and is, thus, "capital-abundant."
Mexico, on the other hand, has a
higher ratio of workers to capital
than the United States and is, therefore, "labor-abundant."

FEDERAL RESERVE BANK OF ST. LOUIS

In addition to their relative
abundance, one must examine the
way in which these resources are
used to produce the good. Airplane
production, in contrast to cloth production, requires a relatively larger
percentage of capital than labor.
Thus, airplanes are capital-intensive
goods. Conversely, cloth is a laborintensive good.
A country will tend to export
goods that use its abundant resource
intensively and import goods that use
its scarce resource intensively. Why?
Because a resource that is relatively
abundant in a country will likely also
be cheaper in that country than it is
elsewhere. Thus, goods produced
using this relatively cheap input can
be sold for a cheaper price. Because
the United States is capital-abundant,
it should export airplanes and import
cloth. Indeed, this is what we see
happening in the real world.

R

"oth countries gain because they
are importing a good at a lower price
than they could produce it for domestically. At the same time, the resources
that are not needed for the production of the imported good are available to produce other goods, some of
which can be exported.
Though countries overall
tend to benefit from trade, some
groups can be harmed by trade. As a
result, trade pohcy is almost always
controversial. Return to our U.S.Mexico example for a moment. When
the United States and Mexico trade,
the relatively lower price of Mexican
textiles wiU cause U.S. consumers to
substitute Mexican for U.S. textiles.
U.S. textile producers will face falling
prices, and some will go out of business. Obviously, some U.S. textile
\^
producers and workers are hurt
V;
when the U.S. imports Mexican cloth; ^\
U.S. consumers, on the other hand,
benefit by being able to purchase relatively cheap cloth. Meanwhile, the
benefits to Mexican producers will
exceed the losses of their consumers.
In general, however, research has
shown that the benefits gained by
consumers worldwide will outweigh
the losses of producers.
What our discussion so far
means is that we can predict trade



I L III

2«i
TRUE OR FALSE
About half of tfie jobs
dependent on manufactured
exports are performed by
non-manufacturing workers.

True. The banker who arranges
for export financing, the
warehouser who stores products
before distribution, and the
shipper who transports products
overseas are examples of other
workers whose jobs depend
on manufactured exports.

patterns based on our knowledge of a
country's resources. Since the services of a country's productive inputs
are embodied in its exports, international trade may be viewed as the
exchange of the services of the country's abundant input for the services
of its scarce inputs. In our example,
the United States exports the services
of its relatively abundant input, capital, and imports the services of its relatively scarce input, labor. In addition
to capital, the United States has a relatively abundant supply of agricultural land and skilled labor (scientists, etc.). This suggests that the U.S.
would export goods that use these
inputs intensively, and indeed it does.

A

another reason that countries
trade is because of economies of
scale. Economies of scale—the decline
in per unit production costs as output
increases—can exist for several reasons. One reason involves the learning
curve. The more fighter jets McDonnell Douglas builds, the better its
workers get at putting the parts together.
The more they specialize in making
jets, the more productive they become
and the cheaper it is to build jets.
Thus, by restricting production to a
limited range of goods, a country can
produce each of these goods on a larger
scale and at lower per-unit costs than
if it tried to produce everything itself.
Once again, an example can
be used to illustrate. Assume the
United States and Japan each needs
10 airplanes and 10 large ships. Further assume that a plant must build at
least 15 boats or planes before its per
unit production costs decline substantially. Each country could build its own
airplanes and ships, at a relatively
high cost of production per unit, or it
could speciaUze and trade. If the U.S.
were to specialize in building airplanes, it could build the 20 needed
for both countries and achieve
economies of scale. Likewise, Japan
could SpeciaUze in building ships and
build all 20 boats. The U.S. would
export 10 planes to Japan and Japan
would export 10 ships to the United
States. By each country specializing
and thereby achieving economies of
scale, each country is able to purchase planes and boats at a lower cost.

ANNUAL REPORT 1990

Why Is There Foreign
Investmerrt?
R

•oth U.S. investment abroad and
foreign investment in the United
States are motivated by a desire to
increase profits, reduce risk or
finance trade deficits (or, more accurately, current account deficits).
Greater profit is the fundamental reason. The investor chooses one asset
over another because it has a higher
risk-adjusted rate of return, a behavior that causes resources to be used
in their most productive alternatives.
When the chosen asset is foreign,
then foreign investment is said to
occur. All other things the same,
when the return on an investment in a
foreign country is higher than the
potential return on domestic investments, firms will invest in the foreign
country and the stockholders they
represent gain from the transaction.
In our trade example, the
two countries exported the "services"
of their abundant production. The
United States exported its capital services and Mexico exported its labor
services. Sometimes it is possible to
simply export the input, rather than
turn the input into a tradeable good.
Foreign investment can be
viewed as a substitute for the international trade of goods and services.
Rather than exporting its cars to the
United States, a Japanese car manufacturer could build a plant in the
United States and build the cars here.
Thus, foreign investment has substituted for trade. Not all foreign investment, however, takes the form of a
firm purchasing or building a plant in
a foreign country (called foreign
direct investment). Foreign investment also occurs when a firm or
household purchases foreign government bonds or foreign stocks, or
makes a deposit in a foreign bank
(called foreign portfoho investment).



I'&i
What percentage of U.S.
commercial real estate is owned
by foreigners?

According to the
National Association of Realtors,
only 1.7 percent of nonfarm,
nonresidential property
is owned by foreign individuals
or corporations.

The rate of return on investments can be higher in one country
than in others for several reasons.
One is input costs: labor and energy,
for example, vary across countries.
Similarly, a reduction in tax rates in a
country would increase the rate of
return on projects in that country.
Investors may also find it more
profitable to produce goods or services in a foreign country because of
lower transportation costs. Or, to
avoid stiff import restrictions in a
country, they might build a factory in
that protected country. Finally, the
rate of return on a project is affected
by a country's pohtical and mihtary
stability. Investors are less Ukely to
invest in countries where political
regimes change often or war is a
threat than in stable countries.
The last example suggests
that risk influences foreign investment decisions. Indeed, the purchase
of foreign assets is often motivated by
a desire to avert risk. The judicious
spreading of one's portfoho of assets
over a wider range of assets, some of
which may be foreign, can accompUsh this objective.
Finally, foreign investment
allows countries to run trade deficits
or surpluses with other countries. In
recent years, for example, the United
States has run trade deficits in excess
of $100 biUion. These deficits reflect
the fact that U.S. purchases of goods
and services exceeded U.S. production. To finance its trade deficits, the
United States has to borrow from
abroad. This borrowing occurs primarily via the sale of U.S. financial
assets to foreigners. Thus, U.S. trade
deficits are associated with net foreign investment into the United States,
while U.S. trade surpluses are associated with net foreign investment into
foreign countries.

FEDERAL RESERVE BANK OF ST. LOUIS

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ANNUAL REPORT 1990

Trade and Investment
Trends in the US. and
Eighth District
L

iternational business activity has
become increasingly important to the
Eighth Federal Reserve District, as it
has to the nation. International markets provide a substantial portion of
the demand for manufactured goods
and agricultural commodities produced in the District, and a number
of industrial sectors important to the
District economy have significant foreign capital invested in them.
Who are the District's trading partners? Although such information may seem fundamental, the available evidence is scarce and, in some
cases, not very useful. No consistent
data on imports are kept, while data
on exports suffer from other problems. A relatively new series indicates
the state from which merchandise
exports began their export journey.
While this could be the state where
the export was produced, it could
also reflect the location of the wholesaler or the port from which the good
was shipped. States like Louisiana, for
example, are credited with disproportionately high exports because of
their international port facilities.
A large portion, more than
one fifth, of exports that were shipped
from the District in 1989 were destined for Canada. While the CanadaU.S. Free Trade Agreement of 1989
has eliminated many trade barriers,
making trade between the two nations
even easier, the recent slowdown of
the Canadian economy will likely slow
the growth of exports to our northern
neighbor. The likelihood of continued
Japanese economic growth, however,
will ensure District exporters of an



Where Do Eighth District Exports Go?
1989
I France (5.4%)
I Spain (4.3%)
I Netherlands (4.2%)
I Belgium (4.0%)
I NICs* (7.5%)
I Other (22.6%)

Canada (23.0%)
I Japan (9.9%)
I Mexico (7.2%)
I United Kingdom (6.3%)
I West Germany (5.6%)
Canada is the leading export destination for both the District and the
United States.
* Newly Industrialized Countries: Singapore,
Hong Kong, Taiwan, Korea.

expanding market. Almost 10 percent
of District exports were shipped to
Japan in 1989.
Many District exporters have
strong trade relationships with European customers: exports to Europe
accounted for almost one-third of
total District exports in 1989- Thus, it
is likely that the anticipated acceleration of the European Community's
economy after the 1992 integration
will aid many District exporters, particularly if no further trade restrictions are enacted.
The internationalization of
our economy is reflected in capital
flows, as well as trade flows. Although
recent purchases of Rockefeller
Center, MCA, and Columbia Pictures
by Japanese investors have been
well-pubhcized, Japan is only the
third-largest foreign direct investor in
the United States, as indicated by
employment at foreign affiliates (see
chart on next page). In the Eighth
District, Japan ranks fourth behind
Canada, the United Kingdom and the
Netherlands. (A foreign affiliate refers
to any firm that is at least 10 percent
owned by a foreign party.)
The perception that Japan is
the leading foreign investor may
have developed because many of its
investments are highly visible, like the
$6.6 billion purchase of MCA by Matsushita, or large, like the Toyota and
Nissan factories in Kentucky and
Tennessee. Moreover, most Japanese
investment has taken place only since
the mid-1980s, at the same time
the United States was experiencing
large trade deficits with Japan. In
contrast, firms affihated with Canadian and European owners have

FEDERAL RESERVE BANK OF ST. LOUIS

Operated quietly for decades in
this country.
Overall growth in foreign
direct investment has been rapid
since the late 1970s, as reflected in
the number of U.S. workers employed
at foreign affihates (see chart on
opposite page). Of course, many of
the jobs in foreign affihates are not
new jobs. In recent years, foreign
acquisitions of U.S. firms accounted
for about 80 percent of all foreign

direct investment. Thus, in many cases,
the nationality of the owners has
changed, but not the jobs themselves.
Grov^h in foreign direct
investment has been rapid in the District as well. This can largely be
attributed to the District's expanding
manufacturing facihties. As we will
see, manufacturing is not only the
primary focus of foreign investment
in this country, it also dominates
our exports.

Manufacturing
Exports

Who Are the Biggest Foreign
Employers in the United States?

Exports of manufactured
products have played an important
and growing role in the U.S. economy.
In 1986, manufactured exports
totaled almost $160 billion, more
than three times as much as in 1963,
after adjusting for inflation.
Not all regions have enjoyed
the rapid growth of manufactured
exports found at the national level,
however. Export activity has shifted
away from the so-called Rust Belt in
recent decades, mirroring the general
shift of manufacturing activity. The
Pacific states, including Alaska and
Hawaii, have experienced the largest
increases in export activity. Manufactured exports in the Eighth District, as
represented by the states of Arkansas,
Kentucky, Missouri and Tennessee, have
grown slightly faster than the national
average. The District in 1986 accounted
for 6.4 percent of U.S. exports, its best
performance since 1963.
Real manufactured exports
expanded rapidly between 1976 and
1980 in both the nation and the District. From 1980 through 1986, however, these exports declined slowly in
the nation and grew only weakly in
the District. This slowdown may partially reflect the rising exchange value
of the doUar, which tends to increase
the price of U.S. exports in foreign
markets. Sluggish economic growth
abroad and rising levels of trade barriers also hindered export growth. No

France (6.7%)
Netherlands (8.2%)
Australia (2.6%)
Switzerland (5.5%)
Other (16.5%)




1988

Canada (19.4%)
Japan (10.9%)
United Kingdonn (20.0%)
West Germany (10.2%)
More Americans work for British- and
Canadian-affiliated firms in this
country than they do for Japaneseaffiliated firms.

consistent state or regional export
data are available after 1986; at the
national level, manufactured exports
have grown rapidly, increasing at
double-digit rates in 1987, 1988 and
1989. Assuming the District share of
U.S exports has been stable or has
continued to rise, District manufactured exports have Ukely also
expanded.
Despite this growth—to more
than $10 billion in 1986—exports
accounted for a shghtly smaller share
of the District's economic activity
(6 percent) than they did at the
national level (7 percent). Missouri,
with 7 3 percent, was the only District
state in which exports as a percentage
of shipments exceeded the national
average.
Transportation equipment
was the leading export industry in
both the District and the nation in
1986. This sector, however, was far
more important to the District, as
exports of transportation equipment
accounted for more than a third of all
District exports that year. The hon's
share of these exports came from
Missouri, whose exports of motor
vehicle and aircraft-related products
have grown rapidly since 1976, contributing heavily to the state's and the
District's faster-than-national export
growth. Missouri exported almost 13
percent of its transportation equipment shipments in 1986. Exports of
transportation equipment from Kentucky and Tennessee, including
trucks and motor vehicle parts, were

ANNUAL REPORT 1990

also substantial.
Chemicals and aUied products made up the second-largest
District export industry in 1986,
accounting for 17 percent of the total.
While chemical exports from all four
states were considerable, more than
half of the total came from Tennessee.
More than 40 Tennessee firms export
chemicals and aUied products, and
they export a wide variety of products,
including pharmaceutical, industrial,
organic and agricultural chemicals.
Reflecting the District's sizable agricultural sector, exports from
the food and kindred products industry are relatively larger than at the
national level. Poultry products from
Arkansas and Uquor from Kentucky
are among the primary processed
food products being exported.
On the other hand, exports
from the nonelectrical machinery
sector, which includes many major
capital goods, accounted for a substantiaUy smaller proportion of District exports than in the nation. Nonelectrical machinery production plays
a smaller role in the region's manufacturing sector and is less exportoriented than at the U.S. level. None
of the products that dominate U.S.
nonelectrical machinery exports,
such as computers and construction
equipment, are produced extensively
in the region.
Overall, exports not only
provide a substantial number of jobs,
but a substantial number of *'good
jobs," with relatively high incomes for
workers. Reflecting its abundance of
skilled labor, the United States tends
to export goods that require skiUed
labor. Thus, wages, which often are
related to skill, tend to be higher in
U.S. industries that are exportoriented. Such an association is also
present in District states. Some of the
highest wage rates are earned in the
District's transportation equipment
and chemicals industries, the two
most export-oriented industries.




How Fast Is Employment at Foreign
Affiliates Growing?
1977-88

Will
United States

Kentucky

Eighth District

Missouri

Arkansas

Tennessee

U.S. employment at foreign-affiliated
firms expanded at more than a 10
percent annual rate between 1977
and 1988. The Eighth District's
growth was even stronger, thanks
to Tennessee.

Which manufacturing
industry is the largest exporter?

Transportation equipment
(automobile, airplanes, etc.)
accounted for more than
one-fifth of manufactured exports
in the U.S. in 1986 and more
than one-third in the District.

Foreign
Investment
The manufacturing sector
has long been a favored target of foreign investors. Ownership of domestic manufacturing firms, in addition
to providing greater access to affiuent
U.S. markets, allows foreign owners
to circumvent tariffs or quotas
imposed on manufactured products,
including motor vehicles, textiles and
apparel and raw steel. To some
extent, the concentration of foreign
investment in manufacturing may also
reflect the technical expertise of some
of the larger investors, especially
Japan and Germany.
In the Eighth District, almost
60 percent of employees at firms
classified as foreign affiUates in 1988
worked in manufacturing plants.
Nationally, manufacturing accounted
for a smaller segment, employing 48
percent of workers in foreign affiUates. Although manufacturing remains
the largest single sector among foreign affiUates, its growth is not what it
used to be: in 1977, manufacturing's
share of employment in foreign
affiUates was roughly 10 percentage
points higher, both regionaUy
and nationaUy.
Nevertheless, the grow1:h of
foreign-affiUated manufacturing has
stiU been impressive. The real book
value of foreign affiUates' property,
plant and equipment in the District
more than doubled between 1977
and 1988, rising to $11.3 bilUon.
NationaUy, the rise has been even
greater, more than tripUng during the
same period.
Employment at foreign affiUates rose commensurately: District
manufacturing employment in such
firms rose from about 51,000 in
1977 to 130,000 in 1988, an 8.9
percent annual growth rate (see
chart on next page). This grov^h
occurred at the same time total manufacturing employment in the District
had staUed.
Of the four District states on
which this report focuses, Arkansas
has seen the least grovv1;h in employment at foreign-affiUated manufactur-

FEDERAL RESERVE BANK OF ST. LOUIS
How Many Jobs Have Foreign Manufacturers Contributed to the District Economy?
Thousands of Employees

^

Arkansas

^

Kentucky

^ ^ Missouri
^ ^ Tennessee
Employment at foreign-affiliated manufacturers in each state rose substantially from 1977 to 1988.
Tennessee's gain of 39,100 such jobs accounted for half of the District's total increase.

ers. Though the reasons for Arkansas'
slower growth are unclear, its industrial structure may have contributed.
Traditionally, Arkansas' manufacturing sector has been concentrated in
food processing and metals production, two sectors in which foreign
direct investment has risen more
slowly Motor vehicle production,
which has been the recipient of a
good portion of new foreign investment, is relatively unimportant in
Arkansas. Unlike the other three
District states, Arkansas has no
major vehicle assembly plants.
Nonetheless, manufacturing employment in foreign affiUates was fairly
high in Arkansas throughout the
1980s, accounting for 16,000 jobs in
1988. These jobs represented 7.1
percent of total state manufacturing
employment, 3 points more than in
1977. The state's largest foreign-affiliated sector is machinery; this sector
includes Fort Smith's Rheem Air Conditioning factory, which employs
almost 2,000 workers.
Kentucky's dependence on
foreign-affiliated manufacturing has
increased dramatically since the late
1970s. Employment in foreign affiliates accounted for just 2.5 percent of
the state's manufacturing workers in
1977; by 1988, this figure rose to



Since the late 1970s,
which foreign nation has had
the most rapid employment
growth at its affiliates in
the United States?

Japan. Its investnnent in
motor vehicle-related
manufacturing has been
particularly strong.

8.9 percent, reflecting the addition of
17,500 workers. The state's largest
foreign-affihated employers — Armco
Steel Company in Ashland and Toyota's vehicle assembly plant in Scott
County — both employ roughly 3,500
workers and are affihated with
Japanese owners. In November 1990,
Toyota announced plans to invest
$800 miUion to expand its Scott
County operations. The expansion
will double capacity to more than
400,000 vehicles a year and provide
1,500 new jobs. In addition, the new
operations will increase demand for
the products of Toyota's suppUers.
Scores of factories producing primary
and fabricated metal products, motor
vehicle parts and other automotiverelated inputs have located in the
region since the Toyota plant—and the
Nissan plant in Tennessee—opened in
the mid-1980s. Many motor vehicle
suppliers are owned, totally or in
part, by foreign firms, with the
Japanese most heavily represented.
Missouri's manufacturing
sector employs more than 400,000
workers, but only a small proportion
work at foreign affiliates. In 1988, 6.6
percent of manufacturing workers in
Missouri were employed in foreign
affiliates. The United Kingdom is
the home of the state's two largest
foreign-affiliated manufacturing
firms: Purina Mills, Inc., located in
St. Louis, was acquired by British
Petroleum in 1986, while Fasco
Company, which produces small
motors, has its largest Missouri operations in Springfield. Each firm
employs roughly 3,000 workers.
Since 1977, Missouri has trailed the
nation in manufacturing job growth
in foreign affiliates.
The amount of foreign direct
investment in Tennessee is enormous. In 1989, foreigners invested
almost $1.4 biUion in new and
expanded plants in Tennessee, more
than 40 percent of the total investment in the state that year. The number of Tennessee workers at foreignaffiliated manufacturing firms is more
than double that of any other District
state. In the 1977-88 period, manufacturing employment at foreignaffiliated firms rose by almost 40,000,
or at a 9 9 annual rate. New plants
producing motor vehicles or related

ANNUAL REPORT 1990

will be able to build 450,000 vehicles
a year in Tennessee, twice as many as
today. The second-largest foreign
affihate, Bridgestone, makes tires
in Nashville.

goods account for a major source of
this growth. Nissan's motor vehicle
plant in Smyrna, which employs
approximately 4,000 workers, is currently expanding. By 1992, Nissan

Agriculture
Exports
As with manufacturers, agricultural producers rely on exports for
a substantial portion of their income.
Determining how much of an agricultural commodity an individual state
exports, however, is difficult. Soybeans grown in one state may wind
up in an elevator in another state
before being exported. Since soybeans grown in Arkansas are indistinguishable from soybeans grown in
Missouri, it is difficult to figure how
much was grown in each state when a
boatload of beans leaves port. This
story is the same for other agricultural commodities. The U.S. Department of Agriculture, however, provides a rough estimate of agricultural
exports by state based on the assumption that, for each commodity, a state
contributes the same export share as
its share of production.
During fiscal year 1989, District states (Arkansas, Kentucky, Missouri and Tennessee) exported more
than $3.6 billion worth of agricultural
products, accounting for more than 9
percent of the nation's agricultural
exports. District states accounted for
almost half of the nation's rice exports
and just under one-third of tobacco
exports. District states were also
responsible for about one-tenth of the
nation's exports of soybeans, cotton,
poultry, and animal and meat products. In dollar value, soybeans and
wheat top the Ust of agricultural products exported in the Eighth District.
Between 1981 and 1989,
both U.S. and District agricultural
exports fluctuated widely. Before
then, agricultural exports had been
growing rapidly, with several factors
helping to fuel this growth: the



What Are the Area's Top
Agricultural Exports?
Fiscal Year 1989
Millions of dollars

increased dependence of centrally
planned economies on imports; the
growth in import demand from middle-income countries, especially in
Latin America; increases in the
demand for high-quaUty food brought
on by the new wealth of OPEC countries; and a decUning value of the U.S.
dollar. When some of these trends
reversed themselves, U.S. and District
agricultural exports decUned sharply
from their 1981 levels, before bottoming out in the mid-1980s. Their
subsequent recovery, in part, was the
result of a once-again growing world
economy, a falling trade value of the
dollar, a more market-oriented U.S.
federal farm program and the use of
agricultural export subsidies.

Foreign
Ownership

Soybeans

Feed Grain

•

m

Wheat

Tobacco

Rice
In dollar value, soybeans far exceed
other agricultural products exported
fronn the Eighth District.

Foreign investment in agriculture, though growing, is not as
important as is foreign investment in
manufacturing. By the end of 1989,
foreign interests reported owning
12.9 miUion acres of U.S. agricultural
land, up 56 percent from 1979Despite this large percentage
increase, foreign interests own just 1
percent of U.S. agricultural land,
compared with four-tenths of one
percent in 1979. Nearly half of the
foreign-owned land is forest land,
while other principal uses include
pasture and cropland. Corporations
own about 81 percent of this land.
Interests from seven countries jointly
account for most of the foreignowned acreage in the United States
(see map on next page). The
Japanese own slightly more than 2

FEDERAL RESERVE BANK OF ST. LOUIS

percent of all foreign-held acreage. If
you subtract the holdings by U.S. corporations with foreign interests from
the 12.9 million acres, only about 3
miUion acres of U.S. farmland are
essentially 100 percent foreign-owned.
Foreigners own a smaller
proportion of agricultural land in the
Eighth District than they do in the
nation. In 1989, the percent of District agricultural land owned by foreigners stood at four-tenths of one

The Largest Holders of
Foreign-Owned Acreage in
the United States

percent, up just sUghtly from 1979Of the foreign-owned agricultural
land in the United States, District
states contained 9 percent in 1979;
today that number is down to 4 percent. Foreigners own more land in
Arkansas—more than 182,000 acres
in 1989—than they do in any other
District state. Even so, this accounts
for less than 1 percent of Arkansas'
agricultural land.

Services
w.

^hile trade in services has been
around as long as trade in goods, it
has only been in the past two decades
that its level and pervasiveness have
been significant. The services sector
generally includes wholesale and
retail trade, finance and insurance,
banking, real estate, other consumer
and business services, transportation,
communications and pubUc utiUties.
According to the Department of Commerce, the U.S. registered a surplus
in business services trade in 1989,
exporting $104.6 biUion while
importing $76.9 biUion in such services. Service exports are only onefourth the size of merchandise
exports, but their rate of grov^h has




been much stronger in recent years.
For example, travel receipts, a significant portion of service exports, rose
64 percent from 1984 to 1988, while
merchandise exports grew 45 percent.
The significance of trade in
services can also be gauged by its
major role in the latest round of GATT
trade talks. Proposals to govern multilateral trade in banking, insurance,
telecommunications, aviation and
other services topped the agenda at
these talks. Rules governing international trade in services are especially
important to the United States
because of the growing size of its service sector in both output and
employment shares.
Trade and investment in services, while of growing importance to

ANNUAL REPORT 1990

the United States, do not play a big
role in the Eighth District. International banking services and tourism,
two of the largest sources of service
exports, are generally confined either
to the coastal states or, in the Midwest, to Chicago. In the fourth quarter of 1989, for example, foreign
assets made up just 0.1 percent
of the total assets of banks in the
Eighth District; 10.9 percent of the
New York district's and 4.4 percent of
the San Francisco district's bank
assets are foreign. Nevertheless,
nearly every category of service
exports is represented, reflecting the
increasing diversity of the District's
economy. Federal Express, and United
Parcel Service (UPS) are major
examples of District-based international services firms. Southwestern
Bell's recent acquisition of a stake in
the Mexican telephone system is an
example of both trade in services and
foreign investment.

F

. oreign direct investment in serJLor
vices is also weU-represented in the
District, albeit on a much smaller
scale than in other parts of the country. Engineering, insurance, computer/^
consulting, and freight firms
from many foreign countries
have estabUshed joint ventures or subsidiaries in
District states. Although
state laws prohibit
foreign banks from
buying local banks
or setting up fullservice, deposittaking banks in many
places, a number of
foreign banks have estabhshed loan offices in the District.
Foreign banks have helped finance
several large corporate and civic projects, including the expansion of the
Cervantes Convention Center in St.
Louis. While a state-by-state tally is
not available for the number of U.S.
workers employed by foreign affiliates in the service sectors, it is fair to
assume that, while growing, the
District's share of the national total
is small.




How are
Services
Traded?
Conceptually, it is easier to
understand trade in goods than it is
trade in services. A service is an activity that usually requires both the producer and the consumer to be in the
same place at the same time, as they
are with a haircut or a restaurant
meal. But this is not always the case.
Most business servicesaccounting, management consulting,
legal services, economic forecasting,
statistical analysis, engineering,
design and so on—are in the form of
information; thus, it is not necessary
for producers and consumers to be
in the same place. Modern communications, data processing and transportation advances have reduced the
costs of acquiring services from distant locations and have promoted the
centralization of business services.
These technical advances have promoted specialization. Both Japanese
and U.S. car makers, for example,
commission Italian industrial artists
to design their new sports models.
French clothing designers determine
to a large extent the styles currently
popular in New York, Tokyo and London, as well as in Paris. And Lloyds of
London provides custom insurance
services that no other firms in the
world provide.
Consumer services are
another matter. Taking classes at a
foreign university is an example of
trade in services, as is attending a
concert in New York conducted by an
Austrian composer These consumer
services require international travel,
as do most consumer services —
tourism, education and entertainment.
Is it really "trade" if either
the consumer or producer travels to
another country to perform or
receive the service? Yes. Services purchased abroad result in an expenditure of foreign exchange, just like the
import of goods, and income derived
from services deUvered abroad
results in foreign exchange earnings,
just like the export of goods.

FEDERAL RESERVE BANK OF ST. LOUIS

Should We Buy
Americaa^
Some people may feel that
it's wrong or unpatriotic to purchase
foreign goods, because doing so may
cause American workers to lose their
jobs. But there's another way to think
about trade, a way most economists
prefer. Whenever we purchase lowercost imported goods, we are freeing
up domestic resources for more productive uses. This means new jobs
and, for the nation as a whole, higher
real incomes. Thus, in terms of economics, trade and foreign investment
are not bad. If, however, a consumer
gains satisfaction from buying an
American-made product, and the
value of this satisfaction outweighs
the cost savings of buying an import,
then the consumer is rational in buying the domestic good. It is up to
individual consumers to decide.
Making the choice between
domestic and foreign goods, however,
is only going to get harder. As the
economies of the world become
more linked, and production continues to shift to areas of least cost, a




wider variety of goods of foreign origin will be on the shelves. In addition,
foreign inputs for those goods that we
tend to view as American-made will
Ukely rise. A number of recent developments point to increased globaUzation in the 1990s: the phasing-in of
free-trade agreements between the
United States and its largest trading
partner, Canada; a potential North
American free-trade agreement
among the United States, Canada and
Mexico; the integration of the European Community scheduled for yearend 1992; the expansion of Eastern
Europe to trade and investment with
the West; and the multilateral trade
agreements being negotiated in the
current round of GATT talks. These
developments, although not without
costs, are best viewed as opportunities for expanded purchases and
sales. Trade and foreign investment,
when conducted in a free and
undistorted economic environment,
provide "win-win ' opportunities for
all countries.

Statement of Condition




(thousands of dollars)
December 31,
1990

December 31,
1989

ASSETS
Gold certificate account
Special Drawing Rights certificate account
Coin
Loans to depository institutions

$ 346,000
307,000
35,550
27,837

$ 370,000
291,000
29,979

Securities:
Federal agency obligations
U.S. government securities
Total securities

183,879
6,816,617
$7,000,496

200,880
6,981,979
$7,182,859

279,991
27,856
1,027,092
182,779
$9,234,601

386,646
22,878
1,030,018
0

$9,365,905

$7,507,195

$7,419,660

1,409,917

1,200,594

4,050
906
$1,414,873

4,200
31,352
$1,236,146

105,039
80,374
0
$9,107,481

359,979
86,948
.
140,008
$9,242,741

$

61,582
61,582
$ 123,164
$9,365,905

Cash items in process of collection
Bank premises (net)
Other assets
Interdistrict settlement account
TOTAL ASSETS
LIABILITIES
Federal Reserve notes
Deposits:
Depository institutions
Due to other Federal Reserve
Foreign
Odier
Total deposits
Deferred availability cash items
Other liabihties
Interdistrict settlement account
TOTAL LL\B1L1TIES
CAPITAL ACCOUMS
Capital paid in
Surplus
TOTAL CAPITAL ACCOUNTS
TOTAL LIABILITIES AND CAPITAL ACCOUNTS

63,560
63,560
$ 127,120
$9,234,601

52,525

FEDERAL RESERVE BANK OF ST. LOUIS

Income and Expenses




(thousands of dollars)

December 31,
1990
CURRENT INCOME
Interest on loans to depository institutions
Interest on government securities
Earnings on foreign currency
Revenue from priced services
All other income
Total current income

December 31,
1989

$

5,553
586,282
70,467
30,802
438
$693,542

$

$ 64,916
(8,149)
$ 56,767
5,491
62,258
$631,284

$ 63,698
(7,052)
$ 56,646
6,109
62,755
$611,484

$

1,823
57,764
6
$ 59,593

$

$

0
10
$
10
$ 59,583
(4,675)

$

$ (2,834)
(5,924)
$677,433

$ (2,480)
(5,957)
$636,724

DISTRIBUTION OF NET INCOME
Dividends paid
$ (3,772)
Payments to the U.S. Treasury (interest on Federal Reserve notes)... (671,683)
Transferred to surplus
1,978
Surplus, January 1
61,582
Surplus, December 31
$ 63,560

$ (3,612)
(629,990)
3,122
58,460
$ 61,582

CURRENT EXPENSES
Current operating expenses
Less expenses reimbursed
Current net operating expenses
Cost of earnings credits
Current net expenses
CURRENT NET INCOME
PROFIT AND LOSS
Additions to current net income
Profit on sales of government securities (net)
Profit on foreign exchange transactions (net)
All other additions
Total additions
Deductions from current net income
Loss on foreign exchange transactions (net)
All other deductions
Total deductions
Net additions or deductions
Cost of unreimbursed Treasury service
Assessment by Board of Governors
Expenditures
Federal Reserve currency costs
NET INCOME AVAILABLE FOR DISTRIBUTION

NOTE: Detail figures may not balance to total due to rounding.

7,013
606,577
29,049
31,105
495
$674,239

429
35,613
5_
$ 36,047
0
l_
$
1
$ 36,046
(2,369)

1

ANNUAL REPORT 1990

Operating!Statisti(:s




Operations

Number of Pieces Handled
1990
1989
Services to Depository Institutions
Cash Services:
Currency Received and
Counted
690,265,000 606,572,000
Coin Received and Counted
333,988,000 819,010,000
Check Services:
U.S. Government Checks
32,568,000 33,105,000
Postal Money Orders
161,877,000 147,335,000
590,568,000 602,927,000
Mother
ACH Services:
Commercial
64,819,000 52,600,000
24,490,000 21,180,000
U. S. Government
Collection Services:
U.S. Government Coupons
Paid
45,500
39,250
Mother
187,657
141,995
Wire Transfer of Funds:
Loans to Depository Institutions:..
Services to U.S. Treasury
Transfer of Government
Securities:
Food Stamps Redeemed:

3,093,950
1,132

Dollar Amount (thousands)
1990
1989

7,965,000
21,877

6,766,000
65,775

28,500,000
16,485,000
389,112,000

29,233,000
14,284,000
385,086,000

317,008,300
19,385,100

288,272,600
16,202,500

20,500
324,400

20,400
417,700

2,899,969 3,708,876,000 3,597,000,000
2,218
3,989,000
1,636,000

140,798^
132,829
186,717,000 163,937,000

210,535,000
895,900

207,695,000
841,400

I.

Senior Management
Thomas C. Melzer
President and Chief
Executive Officer
James R. Bowen
First Vice President and
Chief Operating Officer
Anatol B. Balbach
Senior Vice President
Research and Public
Information
Henry H. Bourgaux
Senior Vice President
Operations
Joan P. Cronin
Senior Vice President
Banking Supervision and
Regulation
Ben C. Wade
Senior Vice President
Administration




Vice Presidents
Dennis W. Blase
Consumer Examinations,
Applications, & Banking
Analysis
Charles R. Halbrook
Bank & Bank Holding
Company Supervision
Mary H. Karr
Legal
Richard E. Kay
Valuables Processing

Other Officers
Bernard E. Bems
John W. Block
Timothy A. Bosch
Martin J. Coleman
Clems C. Coughlin
Susan B. McCollum
Michael J. Mueller
Gregory S. Pusczek
Harold H. Rieker
Harold E. Slingerland

James R. Kennedy
Information Systems

Audit
Michael D. Renfro
General Auditor

Jean M. Lovati
Payments

Jeffrey M. Dale
Assistant General Auditor

Martha L. Perine
Human Resources and
Financial Services
Kristi D. Short
Electronic Services and
Customer Support

Little Rock Branch
Karl W. Ashman
Vice President and
Manager

William J. Sneed
Support Services
Randall C. Sumner
Credit and Community
Affairs
Assistant Vice
Presidents
Michael T. Belongia
Keith M. Carlson
Judie A. Courtney
Hillary B. Debenport
R. Alton Gilbert
Walter W.Jacobs
Jerome J. McGunnigle
John P. Merker
Jerome R. Rodgers
Frances E. Sibley
Courtenay C. Stone
John A. Tatom
Robert J. Taylor
Daniel L. Thornton

Thomas R. Callaway
Assistant Vice President
David T. Rennie
Assistant Vice President
Louisville Branch
W.Howard Wells
Vice President and
Manager
Thomas A. Boone
Operations Officer
Thomas 0. Short
Operations Officer
Memphis Branch
Raymond H. Laurence
Vice President and
Manager
John P. Baumgartner
Assistant Vice President
Anthony C. Cremerius, Jr.
Assistant Vice President

Research
This report was
researched and written by
Federal Reserve Bank of
St. Louis economists
Michelle A. Clark, Cletus C.
Coughlin, Jeffrey D.
Karrenbrock and Thomas
B. Mandelbaum.
Production
The report was printed
using a combination of
national and international
products:
Front and back covers:
Kromekote C2S paper
(United States)
Flysheet: T-2000 paper
(formerly West Germany,
recently bought by a U.S.
firm)
Pages 1-16: Kromekote
Enamel paper (United
States)
Financial pages: Three
Crowns paper (Sweden)
Whole report: Toyo inks
Oapan)

Federal Reserve Bank of St. Louis
Post Office Box 442
St. Louis, Missouri 63166
314-444-8444
Little Rock Branch
Post Office Box 1261
Little Rock, Arkansas 72203
501-372-5451
Louisville Branch
Post Office Box 32710
Louisville, Kentucky 40232
502-568-9200
Memphis Branch
Post Office Box 407
Memphis, Tennessee 38101
901-523-7171





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102