Full text of Chicago Fed Letter : International Ties, No. 74

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ESSAYS ON ISSUES

THE FEDERAL RESERVE BANK
OF CHICAGO

O C T O B E R 1993
N U M B E R 74

Chicago Fed Letter
International ties
Today, a good or service produced in a
remote part of the world can compete
with a local good or service more easily
than twenty years ago. To some extent,
this change is due to advances in tech­
nology (such as telecommunications)
and to widespread economic develop­
ment. But it is also due to trade liberal­
ization, much of which can be attribut­
ed to the General Agreement on Trade
and Tariffs (GATT), the world’s joint
mechanism for regulating internation­
al trade and trade negotiations. Since
GATT’s inception after World War II,
more than 110 countries have joined.
In addition, regional trading blocs
have united countries in several re­
gions of the world. These blocs reduce
or eliminate tariffs among members,
which in turn makes members’ goods
less costly and more competitive in the
world market. The European Econom­
ic Community, the Central American
Common Market, and the U.S.- Cana­
da Free Trade Agreement are just a few
examples of regional trading blocs in
existence today. The proposed North
American Free Trade Agreement be­
tween the U.S., Canada, and Mexico
is another.
Foreign trade and competition affects
not only countries and world regions,
but also local regions such as the Fed­
eral Reserve Seventh District (which
includes most of Illinois, Indiana,
Michigan, and Wisconsin, and all of
Iowa). For example, prior to the
1960s, the Big Three automakers (Gen­
eral Motors, Chrysler, and Ford),
which are headquartered in the Dis­
trict, had a substantial stronghold on
vehicles produced and sold within the
United States. But thanks to aggressive
marketing, differentiated products,
and other factors, foreign auto produc­
ers managed to enter the U.S. market
on a major scale. Between 1965 and

1992, they grew from 7% to 25% of
total U.S. retail auto sales.
Many factors affect a nation’s or re­
gion’s ability to compete in a global
marketplace such as this, where goods
and services readily cross borders. This
Chicago Fed Letter examines three of
these factors: export performance,
foreign direct investment in the U.S.,
and migration.1
Exports
Exports play a vital role in a nation’s
economy. In the short term, they re­
flect production activity. In the long
term, they create foreign exchange,
which in turn enables purchases of
foreign goods, services, and capital.
Additionally, exports create and main­
tain jobs. In 1990, an estimated 7.2
million jobs in the U.S. were exportrelated—more than 7% of the civilian
work force. Within the manufacturing
sector, the figure was 17%. Exportrelated jobs earn nearly 17% more
than non-export-related jobs.2
In 1992, U.S. merchandise exports
totaled $448 billion.3 Of this amount,
$403 billion were manufacturing ex­
ports. More than half of all manufac­
turing exports came from three
industries—transportation equipment,
nonelectrical machinery, and electrical
machinery. Between 1987 and 1992,
U.S. manufacturing exports increased
nearly $187 billion. As a percentage of
GDP, they increased from 7 or 8% in
the mid-1980s to over 11% in 1992.
Three-fourths of total 1992 manufac­
turing exports went to Europe, south­
east Asia, and Canada. Yet over the
period 1987-92, manufacturing exports
to Mexico experienced the largest
percentage increase, up 183% from
$13 billion to nearly $38 billion.

Agricultural exports are also important
to the U.S. economy, representing
approximately 10 to 12% of total U.S.
exports over the last 5 years.4 Between
1987 and 1991, the value of U.S. agri­
cultural exports increased 37% to
about $40 billion.5
The Seventh District produced $57
billion worth of exports in 1992, about
13% of the U.S. total. District manu­
facturing exports totaled $55 billion,
or 14% of U.S. manufacturing exports.
Of District manufacturing exports,
32% were in electrical and nonelectri­
cal machinery, while 31% were in
transportation equipment. In 1992,
Seventh District manufacturing exports
to Canada ranked first in terms of
value ($25 billion), accounting for
nearly half the District’s exports in that
category. Between 1987 and 1992,
District exports to the Middle East
experienced the largest percentage
increase, up 108% to over $2 billion.
The U.S. has not just increased trade
with its larger partners. It is also send­
ing a steadily growing stream of ex­
ports to smaller economies, including
developing and newly industrialized
countries (see figure l).6 As those
countries’ economies continue to
grow, so will their demand for the
types of goods and services that the
U.S. produces.
Foreign direct investment

Foreign direct investment (FDI), both
in the U.S. and abroad, also has a ma­
jor impact on the U.S. and the Seventh
District.7 Foreign companies invest in
the U.S. for a variety of reasons—more
favorable U.S. market growth, lower
production costs, or the availability of
skilled labor, technology, and physical
infrastructure. Companies may also
invest abroad to circumvent high im­
port tariffs or import quotas, or

region has contributed in part to the
region’s current economic revival.

1. 1992 manufacturing exports by destination
U.S.
Destination

Europe

Seventh District
% change
since 1987

Billions
of dollars

% change
since 1987

$109

78

$11

81
99

Billions
of dollars

102

101

8

Canada

84

67

25

30

Mexico

38

183

4

103

South America

22

89

2

67

M iddle East

18

71

2

108

Southeast Asia

Central America

11

66

0

40

Pacific Islands

10

66

1

56

6

4

0

-2

$403

87

$55

54

Africa
Total m anufacturing
exports3

aU.S. total includes Puerto Rico and the U.S. Virgin Islands.
Source: Massachusetts Institute for Social and Economic Research, University of Massachusetts
at Amherst.
Note: Totals may not match because of rounding.

because home-country governments
are politically unstable. In addition to
jobs, foreign affiliates bring new tech­
nologies and contacts that may benefit
U.S. industries. For example, many of
the changes taking place today in the
U.S. auto industry—lean manufactur­
ing, just-in-time inventories, and so
on—are a result of efforts by U.S. man­
ufacturers to compete with Japanese
transplant operations.
FDI is a two-way street; that is, foreign
companies invest in the U.S. and U.S.
companies invest abroad. Of course
foreign investment in the U.S. helps
keep jobs and physical plants in this
country—an attractive benefit, particu­
larly in the eyes of the general public.
Nevertheless, U.S. direct investment
abroad also benefits the U.S., since
overseas earnings may ultimately be
repatriated. If a company maintains a
U.S. headquarters, it also keeps profes­
sional jobs and higher wages here.
Finally, U.S. direct investment abroad
allows U.S. firms to sell products with
less costly components—a benefit to
consumers.
The total number of foreign affiliates
in the U.S. increased from 2,999 in
1977 to 6,857 in 1990, up 129%. Over
the same period, total employment
at these affiliates increased by 4 mil­
lion, or 289%. As figure 2 indicates,

the United Kingdom had the largest
number of employees in U.S. foreign
affiliates in 1990, followed by Canada
andJapan.
In the Seventh District, increases in the
number of foreign affiliates between
1977 and 1990 ranged from 223
(168%) in Iowa to 790 (105%) in Illi­
nois. Employment at foreign affiliates
in the District increased by 440,000, or
238%, over the same period (see figure
3). This relatively strong increase in
FDI in what had been a lagging U.S.

Migration

Persons entering the U.S. are either
residents of foreign countries (aliens)
or U.S. citizens. Aliens may enter ei­
ther for brief visits as commuters or
crewpersons of vessels or aircraft, or as
immigrants—persons with permanent
resident documents, refugee travel
documents, or immigrant visas.
Like foreign direct investment, migra­
tion brings new technologies and skills
to the U.S. To a lesser extent, it also
brings capital investment and entrepre­
neurship. In addition, because many
services such as business consulting
are transportable through people, the
ability to travel freely is vital for services
growth.
In 1991, 455 million people entered
the U.S.—294 million aliens and 161
million U.S. citizens. In the same
year, almost 2 million immigrants
(many of whom had entered the coun­
try in earlier years) were granted per­
manent resident status. By occupation­
al group, over 900,000 of these immi­
grants were in farming, forestry, and
fishing. Another 100,000 were opera­
tors, fabricators, or laborers, while
58,000 were in professional specialities
and technical occupations. About 42

2.1990 employment in foreign affiliates by country o f ownership
thousands of employees
0

300

6 00

900

1,2 0 0

3. 1990 employment in foreign affiliates (in thousands)
All
industries

Total
mfg.

M achinery

O ther
mfg.

Trade

Services

llinois

243

125

30

35

60

28

Indiana

125

89

27

22

18

10

37

22

4

8

10

1

143

78

19

26

32

8

Iowa
Michigan
W isconsin
U.S.

79

49

14

14

13

7

4,674

2,185

506

660

1,190

548

Source: U.S. Department of Commerce, Bureau of Economic Analysis.

million people entered the Seventh
District in 1991—a 57% increase over
1987. Immigrants admitted to the
District in 1991 numbered 103,000.
State programs also promote trade

While much discussion to date has
focused on federal programs that pro­
mote trade, state and regional policy­
makers have not overlooked the im­
portance of competing in a global
marketplace. Budgetary stress has led
many state governments to cut back on
development services, yet state export
promotion programs continue to ex­
pand. These usually comprise a mix of
services including market or strategy
development and trade shows or leads.
Some states also offer export financing.
The two most frequently used and
effective tools of state governments to
promote trade and investment are
foreign offices and foreign trade zones.
In 1986, there were 44 state foreign
offices in Europe and the Far East. By
1991, there were 64, with the bulk of
the new ones in Japan, China, Korea,
Taiwan, and Hong Kong.
A foreign trade zone (FTZ) is an area
in the U.S. into which goods can be
imported duty-free until they are re­
exported or formally imported into the
country. A warehouse, industrial park,
or manufacturing or assembly plant
can be designated an FTZ. A company
using an FTZ pays duty on imported
goods only when those goods actually
leave the FTZ and enter the domestic
market. Thus the company never pays
import duties on damaged goods or
goods that it re-exports. Also, goods

that are substantially transformed
within an FTZ are subject to a different
(often reduced) import tariff than the
original good would have been. In
1990 the nation had 383 FTZs. The
Seventh District had 72.
Public or quasi-public organizations,
such as port authorities or state eco­
nomic development agencies, usually
establish FTZs in order to bring jobs
and other business opportunities to an
area. FTZs increase the global attrac­
tiveness of an area by reducing costs
to U.S. firms that use foreign inputs,
and also by acting as storage or distri­
bution facilities for foreign firms that
do business in the U.S. Regional poli­
cymakers can also create FTZs to
strengthen regional ties and promote
a common interest in increased trade
and investment.

o f th e Federal Reserve Bank o f C hicago,
Regional Economies in Global Markets. This
booklet, ad d ressed to g o v ern m en t officials,
analysts, a n d business p eople, exam ines a
variety o f tools th a t th e n atio n an d its
regions can use to p ro m o te in tern atio n al
ties. In ad d itio n to th e tools discussed in
this article, th e b o o k let discusses others,
such as foreign banking.
For a free single copy o f this b ooklet
c o n tac t th e Public In fo rm atio n C enter,
F ederal Reserve Bank o f C hicago, P.O.
Box 834, C hicago, IL 60690, (312) 3225111.
“T e ste r A. Davis, “U.S. jo b s su p p o rted by
m erch an d ise ex p o rts,” U.S. D e p artm en t o f
C om m erce, E conom ics a n d Statistics
A dm inistration, A pril 1992.
TJ.S. exports in clu d e those from P u erto
Rico a n d th e U.S. Virgin Islands.
A g ric u ltu ra l goods are d efin ed as n o n ­
m arin e food p ro d u cts a n d o th e r p roducts
o f ag ricu ltu re th a t have n o t passed
th ro u g h a co m plex m an u factu rin g p ro ­
cess. T hey in clu d e fibers, raw hides an d
skins, fats a n d oils, a n d b e e r an d wine.
5U.S. D e p a rtm e n t o f A griculture, Foreign
Agricultural Trade o f the United States, 1991.
bF or an overview o f these trends, see Bruce
K asman, “R ecen t U.S. e x p o rt p erfo rm an ce
in th e d eveloping w o rld ,” Quarterly Review,
F ederal Reserve Bank o f New York, W inter
1992-93.
"Foreign d irect in vestm ent refers to ow ner­
ship o r c o n tro l o f physical facilities located
o n foreign soil. O w nership is d efin ed as a
10% interest.

Conclusion

In order to compete successfully with
other countries, the U.S. must make
use of all available opportunities. Ex­
ports and foreign investment help
create and maintain U.S. jobs—a ma­
jor goal of policymakers. In addition,
they help the U.S. take advantage of
new technologies and skills. Migra­
tion, both in the U.S. and abroad, also
serves this goal. Together, these facts
make clear that federal and state poli­
cies to foster and maintain interna­
tional ties can enhance the competi­
tive position of U.S. and District firms.
—Linda M. Aguilar
'T h ese factors a n d o th ers are describ ed in
m o re detail in a fo rth co m in g p u blication

Karl A. S cheld, S en io r Vice P re sid e n t a n d
D irecto r o f R esearch; David R. A llardice, Vice
P re sid e n t a n d A ssistant D irecto r o f R esearch;
J a n ic e Weiss, E ditor.
Chicago Fed Letter is p u b lish e d m o n th ly by th e
R esearch D e p a rtm e n t o f th e F ed eral Reserve
B ank o f C hicago. T h e views ex p ressed are th e
a u th o r s ’ a n d are n o t necessarily th o se o f th e
F ed eral Reserve B ank o f C hicago o r th e F ed eral
Reserve System. A rticles m ay b e r e p rin te d if
th e so u rce is c re d ite d a n d th e R esearch
D e p a rtm e n t is p ro v id ed with co p ies o f th e
rep rin ts.
Chicago Fed Letter is available w ith o u t ch arg e
fro m th e Public In fo rm a tio n C e n te r, F ed eral
R eserve B ank o f C hicago, P.O . Box 834,
C hicago, Illinois, 60690, (312) 322-5111.

ISSN 0895-0164

Purchasing managers’ surveys show a slowdown in Midwest industrial growth in
recent months from a relatively high growth rate earlier in the year. This pattern has
been echoed in the Midwest Manufacturing Index. Activity normally slows consider­
ably during late summer, but a loss of momentum was still apparent on a seasonally
adjusted basis. Auto assemblies have lagged schedules made earlier in the year, and
output gains have slowed for some other items important to the regional economy,
including appliances, heavy-duty trucks, and primary and fabricated metals.
Auto sales softened in August and early September, but the weakness was due in part
to low inventories and a pullback from fleet sales. Car production plans for the
fourth quarter are expected to boost assemblies in the Seventh District by roughly
15% from the third quarter on a seasonally adjusted basis.

SOURCES: T h e M idwest M a n u fac tu rin g In d e x
(M M I) is a co m p o site in d e x o f 15 in d u stries,
based o n m o n th ly h o u rs w orked a n d kilow att
ho u rs. IP re p re se n ts th e FRBB in d u strial p ro ­
d u c tio n in d e x fo r th e U.S. m a n u fa c tu rin g sec­
tor. A utos a n d lig h t trucks are m e a su re d in a n ­
n u alized physical units, u sin g seasonal ad ju st­
m en ts d ev elo p ed by th e F ed eral Reserve B oard.
T h e PMA in d e x fo r th e U.S. is th e p ro d u c tio n
c o m p o n e n ts fro m th e NPM A survey a n d fo r th e
M idwest is a w eig h ted average o f th e p ro d u c ­
tion c o m p o n e n ts from th e C hicago, D etro it,
a n d M ilw aukee PMA survey, w ith assistance
fro m B ishop A ssociates a n d C om erica.

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