What Do Investors Know?

by Don Boudreaux on July 1, 2007

in Trade

Here’s a letter that I sent yesterday to the Washington Post in response to this report on Congress’s refusal to renew the President’s fast-track authority to negotiate trade agreements.

Dear Editor:

It is unfortunate that Congress refuses to renew the President’s fast-track trade authority (“End Nears for Era of Presidential Trade Authority,” June 30).   And it is insulting for protectionists, such as Kevin Kearns, to justify this refusal with the argument that freer trade has encouraged “footloose multinational companies” to flee the U.S. for “penny-wage, regulation-free foreign production sites like Mexico and China.”

The facts are difficult to square with this claim.  In 2006, per-capita foreign direct investment in Mexico was $174; in the U.S. it was $612 – three and a half times as much as in Mexico.  2006 figures for China are unavailable, but in 2005 per-capita FDI in that country was just shy of $60 – less than one-tenth of 2006 per capita FDI for the U.S.

Donald J. Boudreaux
George Mason University

Note also this fact reported by UNCTAD (which I did not have room to include in my letter):

Two-thirds of FDI flows in 2006, at US$ 800 billion, were to developed countries (up from three-fifths in 2005). This represents an exceptional 48 per cent estimated increase over the US$ 542 billion flows into developed countries in 2005.

If high-wage, developed countries are less attractive places to earn profits than are low-wage, developing countries, investors worldwide have yet to learn this alleged fact.


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