Transatlantic economy

Thursday, 3rd July 2008 – 00:00CET

Transatlantic economy

Anton Tabone

It is estimated that transatlantic economy between the US and Europe generates $4 trillion in total commercial sales a year and employs up to 14 million workers on both sides of the Atlantic.

These workers enjoy high wages as well as high labour and environmental standards. Over the last five years the transatlantic economy has enjoyed one of its strongest periods of growth and prosperity in decades.

This comes out in an American Chamber of Commerce to the European Union report. The chamber commissions the Centre for Transatlantic Relations Johns Hopkins University and Paul H. Nitze School of Advanced International Studies to conduct surveys on jobs, trade and investment.

 remains the top destination of US foreign direct investments (FDI), with the region accounting to nearly 59 per cent of total US investment outflows in 2006. For instance, US assets in the UK are the largest in the world, totalling $2.3 trillion in 2005, nearly one-quarter of the global total, and an amount greater than total combined US assets in Asia, South America, Africa and the Middle East.

During the same year US assets in The Netherlands were the second largest with $868 billion invested. The US asset base in Poland, Hungary and the Czech Republic was $50 billion or twice the size of corporate America’s assets in India. US FDI in Ireland in 2006 hit a new record of $13.3 billion, nearly double the amount of US investment in all of South America.

Europe’s investment stakes in the US totalled a record $1.3 trillion in 2006, a 12.6 per cent rise from 2005 and more than triple the level of a decade ago. The US remains the

primary destination of EU investment in terms of FDI flows. No other region of the world has invested as much in the US than Europe, with the latter accounting for roughly 75 per cent of total inward investment in 2006.

Switzerland ranked first as the largest holder of US assets in 2005 ($1.3 trillion), followed closely behind by the UK firms ($1.1 trillion). Of particular interest is the spread between European investment in the US on the one hand versus EU investment in China and India on the other.

In a nutshell there is no comparison – in 2005, EU investment in the US totalled €29 billion versus investment in China of €6 billion and investment in India of just €2 billion. Europe invests considerably more in California than it does in China. Texas, California and New York maintained their rank as the top three destinations of European foreign investment.

Transatlantic trade flows

While America’s trade deficit with Europe peaked in 2005 at $132.65 billion, it narrowed by 5.2 per cent in 2006 to nearly $126 billion. US exports of goods and services to Europe rose 16.2 per cent in the first half of last year from the same period the previous year, well ahead of US imports from Europe, up 5.7 per cent in the same period. Against this backdrop, the US trade deficit with Europe narrowed by nearly 27 per cent in the first half of last year, and was running at an annual rate of $100 billion.

Transatlantic portfolio flows

Last year, US capital outflows to the EU soared to $62 billion – a figure roughly five times than US inflows from Europe over the same period in 2006. In this regard, it is interesting to note that despite the high-flying stock markets of India, China and Brazil in 2007, US investors have shown a stronger preference for European equities. For instance, net US purchases of Spanish securities last year ($11.9 billion) were nearly 40 per cent larger than net US purchases of Brazilian securities. US investors sunk more than four times the amount of capital in French securities last year ($17 billion) than they invested in India ($3.8 billion).

Transatlantic jobs

Of the nine million people employed outside the US by majority-owned US companies in 2005, roughly 44 per cent were located in Europe. The bulk of these workers were based in the UK, Germany and France.

Despite stories about European companies moving to cheap labour markets in central Europe or Asia, most foreigners working for European companies outside the EU are American. European majority-owned foreign affiliates directly employed roughly 3.5 million US workers in 2005. The top five European employers in the US were firms from the UK (908,000), Germany (655,000), France (473,000), The Netherlands (442,000) and Switzerland (389,000).

Transatlantic growth: A rebalancing between Europe and America

Last year, the transatlantic economy underwent a rebalancing of sorts. Significantly, the

one-time transatlantic economic laggard, Europe, has pulled ahead of the perennial transatlantic growth leader – the US. The US economy has been battered and bruised by a housing recession and attendant sub-prime credit squeeze that has constrained economic activity. On average, the US economy expanded by roughly 2 per cent in the first half of last year, following 2.9 per cent annual growth in 2006. Prior to 2006, US economic growth easily outpaced that of Europe.

The global earnings of US corporations have taken an added importance this year on account of weaker-than-expected growth in the US.

Simply put, strong global earnings staved off a US profit recession last year.

Without the overseas boost o earnings last year – with Europe at the forefront – US earnings would have been far weaker than reported, adding even more uncertainty and volatility to the US financial markets.

Given the depth and breadth of US-European trade and investment linkages, both economies are so tightly linked that when things go awry in one market, the effects are felt in the other. More often than not, a problem in either the US or in European economies becomes a transatlantic problem.

The UK, France, Ireland and Spain were the markets of choice for US investors last year, with many investors actively adding more global securities to their portfolios as a hedge against a US market downturn and a weaker US dollar.

The transatlantic services economy continues to deepen

The services economies of the US and Europe have become even more intertwined over the past year, with cross-border trade in services and sales through affiliates posting strong gains in the past year. By sectors, transatlantic linkages continue to deepen in financial services, insurance, education, telecommunication, utilities, advertising and computer services.

Other services – such as aviation, are gradually being liberalised and deregulated, albeit slowly. Services represent the sleeping giant of the transatlantic economy, or the one key area where significant opportunities exist to strengthen and deepen the transatlantic economy.

No commercial artery in the world is as large as the one binding together the US and Europe. No two regions of the global economy are as economically fused as the two parties straddling the Atlantic, making the transatlantic economy the largest and wealthiest in the world.

It is foreign investment – the deepest form of global integration – that binds the transatlantic economy, not trade. Trade, which involved the cross-border movement of goods and services, is a shallow form of integration and often associated with early phases or stages of bilateral commerce.

In contrast, a relationship resting on the foundation of foreign investment is one where both parties are extensively embedded and entrenched in each other’s economies. The transatlantic economy epitomises the latter. American affiliates in Europe are

increasingly indistinguishable from local firms. The same is true for European affiliates in the US. Europeans and Americans literally own each other.

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