- Cafe Hayek - https://cafehayek.com -

Which Way Flow the Equity Investments in Manufacturing?

Tweet [1]

In this New York Times essay [2], Steven Rattner writes about a talk he recently gave:

Then I went rogue and uttered two blasphemous words: “Ross Perot.” He had a point, I said heretically, when he campaigned in 1992 against the landmark North American Free Trade Agreement, saying that it would result in a “giant sucking sound” of jobs headed south to Mexico.

So I spent a few minutes pawing through some data – specifically, through Bureau of Economic Analysis data on U.S. direct investment abroad [3] and on foreign direct investment in the U.S. [4]  I wanted to see how much was invested by Mexicans in U.S. manufacturing activity since NAFTA took effect in 1994 and how much was invested by Americans in Mexican manufacturing activity since NAFTA took effect.  If Perot’s prediction (and, by implication, his economics) were correct, the dollar volume of equity investments made by Americans in manufacturing facilities and activities in Mexico would have been much greater since 1993 than the dollar volume of equity investments made by Mexicans in manufacturing facilities and activities in America.  I looked, in some tables in the above links, at equity investments (other than reinvestment of earnings).

Unfortunately, for each of a large number of years the figures given – for either or both Mexican investment in U.S. manufacturing and U.S. investment in Mexican manufacturing – is “(D)”, which means that the dollar figure is being kept secret for some mysterious reason.  (The reason given in a footnote to these data is “Suppressed to avoid disclosure of data of individual companies.”  I cannot make sense of this stated reason, for how would an aggregate dollar number of investment flows such as $1,234b reveal anything sensitive – or, indeed, anything at all – about individual companies?)

For only 5 of the 21 years 1994 through 2014 is a dollar figure given for Mexican investment in U.S. manufacturing as well as for U.S. investment in Mexican manufacturing.  So, for only 5 of the 21 years since NAFTA took effect does the BEA have data that allow a comparison of the relative sizes of manufacturing-investment flows between the two countries.

This lack of data is frustrating, especially because I find it difficult to believe that national security would be threatened or some great moral principle violated if the data on those other 16 years were released to the public.  But, as they say, it is what it is.

For what it’s worth, in four of the five years (1994, 1999, 2003, 2009, & 2011) on which data are available, the dollar amounts that Mexicans invested (as equity) in U.S. manufacturing were more than the dollar amounts that Americans invested (as equity) in Mexican manufacturing.  (2003 is the one year when Americans invested more in Mexican manufacturing than Mexicans invested in American manufacturing.)  Taking these five years as a whole, the total amount of manufacturing equity investment that flowed into the U.S. from Mexico was $3.429 billion while the figure for manufacturing equity investment that flowed to Mexico from the U.S. was $2.157 billion.

I realize that 5 of 21 years is too small a portion of time from which to draw any conclusions.  But note that if all the “(D)”s were disclosed and if they showed a pattern of investment flows similar to the pattern that is revealed by the few pieces of usable annual data that are disclosed, Ross Perot’s (in)famous prediction of “a giant sucking sound” would be shown beyond any reasonable doubt to be falsified.  Again, the data that we do have, as scanty as they are, show that since NAFTA took effect Mexicans have invested more – 59 percent more, to be precise – in manufacturing activities in the U.S. than Americans have invested in manufacturing activities in Mexico.

I repeat yet again that these data on equity investment in manufacturing are indeed too scanty to use as a basis for concluding that Mr. Perot’s prediction has indeed been proven wrong.  But what data are relied upon by people – such as, presumably, Steven Rattner – who continue to insist that NAFTA has damaged U.S. manufacturing by shifting to Mexico manufacturing activity that would otherwise have occurred in the U.S.?

My question isn’t rhetorical.  Perhaps such data are out there; I’ve not searched diligently enough to conclude otherwise.  But judging from these BEA tables on cross-country equity investments in manufacturing, I don’t see them.  And I worry that a common misunderstanding of investment flows – namely, that low-wage countries typically are more attractive destinations for manufacturing investments than are high-wage countries – is taken as a valid article of faith by people who write on trade without thinking deeply enough about the matter.