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Thursday, August 9, 2012

U.S. Trade Deficit Largely Due to "Intra-Firm" Trade (UPDATED)

The vast majority of the U.S. $727 billion trade deficit in goods for 2011 is due to "intra-firm" or "related party" trade, that is, trade between two units of the same corporation, according to the U.S. Census Bureau. This is significant because such trade is the most open to companies manipulating the prices between subsidiaries to minimize tax liabilities, usually known as abusive transfer pricing. Moreover, as Stuart Holland argued in 1987, intra-firm trade is also less responsive to changes in exchange rates than is trade between independent businesses, since within an individual multinational corporation each subsidiary will have a specific role to play in its supply chain, which won't be quickly changed.

U.S. goods trade and related party trade (billions of dollars), world and selected countries, 2011:

Country         Exports from US      Imports to US         Balance

World            $1480.4                   $2207.8                 - $727.4
World (RP)    $  365.0                   $1056.2                 - $691.2
Canada          $  280.9                   $  315.3                 -     34.5
Canada (RP) $     98.1                   $  162.0                 - $  64.1
Ireland           $     7.6                    $    39.4                 - $  31.7
Ireland (RP)   $     1.5                    $    34.6                 - $  33.1
Mexico          $ 196.4                    $  262.9                 - $  64.5
Mexico (RP)  $   60.5                    $  155.7                 - $  95.2

Sources: Total trade, U.S. Census, Trade in Good with World, Not Seasonally Adjusted; Related party (RP) trade, U.S. Census, NAICS Related-Party, select all NAICS2, 2011, all countries, variables "imports related trade" and "exports related trade" and layout by country. Canada, Ireland, and Mexico as linked.

As we can see, related party trade (which can mean trade within either a U.S. or foreign multinational corporation) is 27.6% of goods trade, but it represents a whopping 95.0% of the trade deficit. Moreover, in countries where the U.S. has heavy foreign direct investment, such as Canada, Ireland, and Mexico, the trade deficit for intra-firm trade actually exceeds the country's overall trade deficit.

In fact, virtually all U.S. imports from Ireland take the form of intra-firm trade. This is no doubt due to Ireland's status as a tax haven and low corporate income tax rate of 12.5%.

These data suggest that much of the U.S. trade deficit is due to U.S. corporations offshoring production and exporting the products back home. As the related-party data does not distinguish between U.S. and foreign multinationals, there is no way to know exactly how big the share of U.S. multinationals is in intra-firm, but is surely much more than half. Moreover, not counted in the data are imports that come from subcontractors (Wal-Mart's many suppliers, Foxconn producing Apple products, etc.).

The bottom line is that we need to reverse the incentives in the tax code that encourage the offshoring of jobs. (Why does Apple have $64 billion in cash abroad?) However, to emphasize the point I made last time about what Americans want out of tax reform and the "reform" that has actually happened, it's worth pointing out that Robert Gilpin of Princeton University, author of the seminal U.S. Power and the Multinational Corporation (1975), made the same policy recommendation almost 40 years ago, and it hasn't happened yet. We've got our work cut out for us.

UPDATE: Following the Mitt George Romney rule ("one year might be a fluke"), I went back and collected the data for all years back to 2002 (the earliest for which the related party trade info was available). While 2009-11 were all 95%, previous years were generally between 70% and 80%. I'm not sure yet what to make of that.

Year       Goods trade deficit     Related party trade deficit  % Related party

2011                727.4                       691.2                          95.0%
2010                634.9                       607.7                          95.7%
2009               503.6                        479.2                          95.2%
2008               816.2                        647.9                          79.4%
2007               808.7                        619.1                          76.6%
2006               828.0                        582.9                          70.4%
2005               772.4                        530.0                          68.6%
2004               654.8                        478.9                          73.1%
2003               532.4                        389.3                          73.1%
2002               468.3                        352.1                          75.2%

UPDATE 2: Corrected first line of imports from 2707.8 to 2207.8 billion. Thanks to mrpuff and tle at Daily Kos for pointing out the error and correction.

Cross-posted at Angry Bear.


  1. How did our tax code start to incentivize offshoring? Why did the government do that - firm lobbying?

    1. Anonymous wrote, "How did our tax code start to incentivize offshoring? Why did the government do that - firm lobbying?"

      The tax breaks for "offshoring" were codified into law by--you guessed it--the Republican-controlled Congress and signed into "law" by the former governor of Texas, George W. Bushit.

      A wag once said, "You dance with the one that brung you." Today, the legislative and executive branch of "our government" represent the "1%" who provide the bulk of their campaign contributions.

      Thus, America has come full circle, and today "We the People" are subject to taxation without representation.

      Have a nice day.

    2. Actually, the deferral rules are much older, as they were cited in the Gilpin book from 1975 that I mentioned. I'll have to do some more research to find out just how far back they go.

  2. South Korea had a solution for this as I recall. It was quite effective

  3. This South Korean (japanese and Taiwanese) solution is fine for catch-up, but does not work once you have become developed. Governments can promote imitation (and help in stealing technology), but they cannot induce innovation - coming up with something truly new. Only free markets can do that. Thus, Japan has had ZERO growth for TWENTY years, and South Korea (which has just caught up), will soon go flatline. The is a leading economy, not a trailing one - government intervention can't fix the problem, it can only make it worse.

    1. Ram wrote, "...Governments can promote imitation (and help in stealing technology), but they cannot induce innovation - coming up with something truly new. Only free markets can do that."


      The Internet you routinely abuse was developed by DARPA (Defense Advanced Research Projects Agency, with US taxpayers' dollars, not the "free market."

      Any more revisionist history for us, "Ram"?

    2. yes, the magical delicious free market, that strange mystical mass of twisting luminous, melifluous neon rainbows and lights. Not like that dull robotic govt.

      Seriously Ram, what do you think govt is? Or the free market for that matter. Nevermind the Internet, what about the AK-47? The National Highway system? AZT? Singapore Airlines? The Famas? What about industries forced into existence by the State like, I don't know, most of the Aeronautic and Space Industries? Computation and the Electronic Digital Computer, The South Korean steel industry POSCO, or Hyundai's Shipbuilding industry. The Free Market is nothing more than an abstract concept that, much like True Communism, exists only in the minds of sheltered twenty-something college students.

    3. but getting back on topic...


  4. Ram, the South Koreans and Japanese have continued to innovate. SK is taking the lead on a few green energy products and may still become the leader in smartphone production.

    None of that proves or disproves specific policies for the US, but in the case of Japan's slowed growth, a consensus among Japanese economists was it's a case of "oversupply and insufficient domestic demand."