Who’s ‘Outcompeting’ Who?

by Don Boudreaux on January 19, 2011

in Myths and Fallacies, Trade

Here’s a letter to the Programming Director of WTOP news radio in DC:

During today’s 11am hour your anchors interviewed a “trade expert” with the AFL-CIO who asserted that “China, with its low wages, will outcompete the U.S. for investments and customers unless Congress intervenes.”

Forget that this “trade expert” seems to be unfamiliar with the principle of comparative advantage.  Let’s look at some relevant empirical evidence – namely, the amount of foreign direct investment (FDI)* that China has received over the past decade compared to the amount that the U.S. has received.  If the “expert’s” claim is correct, China should be receiving more FDI than is America as investors swarm into that Asian nation to take advantage of its low wages.

But in fact, over the ten-year span 2000 through 2009, the total amount of FDI received by China was $685.8 billion, while the total amount of FDI received by the U.S. was $1,799.1 billion.  That is, America’s inward FDI was 162 percent higher than was China’s.  On a per-capita basis, the figure is even greater: America’s per-person inward FDI during these years was ten times (!) greater than was China’s.**

So much for the case that low-wage countries suck investments away from high-wage countries.

Sincerely,
Donald J. Boudreaux

* As defined by Richard Caves, Jeffrey Frankel, and Ronald Jones on page 285 of the 9th edition of their widely used textbook World Trade and Payments (Addison Wesley, 2002), “Foreign direct investment occurs when the residents of one country acquire control over a business enterprise in another country.  The acquisition may involve buying enough stock in an existing enterprise to become a controlling shareholder…., taking over the enterprise outright, or building a new factory or enterprise from scratch….”

** FDI figures were calculated using this very helpful database from UNCTAD.

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