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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 260  September 9, 2019
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
*Do not neglect establishment trade: the China-US example*
* <#m_-7922130635980672526__edn1>
Karl P. Sauvant** <#m_-7922130635980672526__edn2>

Firms have two major ways to service foreign markets: they can produce at
home and export their goods and services (“cross-border exports”), or they
can establish themselves in foreign markets, produce there and then sell
their goods and services in those markets or elsewhere (what could be
called “establishment trade”[1] <#m_-7922130635980672526__edn3>). World
establishment trade is estimated to amount to US$31 trillion, considerably
exceeding world cross-border exports, at US$23 trillion, in 2017.[2]

Accordingly, assessing the performance of a country’s firms requires
looking at cross-border trade and establishment trade together, to obtain a
more holistic picture of the international competitiveness of firms, as
reflected in firms’ market share and, ultimately, profitability.

Establishment trade (i.e., the sales of foreign affiliates) is the result
of FDI, typically undertaken on the basis of superior technology, marketing
and managerial talent, as well as other competitive ownership advantages
held by parent firms: they establish affiliates abroad primarily to better
access these markets and avail themselves of local resources. Doing so
helps firms to strengthen their international competitiveness. This
objective is shared by every country in which firms are headquartered,
because strengthening their firms’ competitiveness is a precondition for
creating more employment, increasing wages and continuing to export.

The choice between cross-border exports and establishment trade—both
typically controlled by parent firms—depends on what is more profitable for
firms when seeking to service foreign markets and strengthen their
international competitiveness.  Moreover, the two types of trade are
intertwined: cross-border exports can lead to FDI (e.g., when exports
become uncompetitive and hence production is delocalized), and FDI can lead
to cross-border exports (e.g., when foreign affiliates import components or
headquarters services from the home country to produce their goods and
services). A caveat needs to be made, however, for services: since most
services still need to be produced when and where they are consumed,
service firms typically have to undertake FDI to sell in foreign markets,
thus generating establishment trade.

This reality applies to all countries, including the China-US trade

Using 2016 data published by the Bureau of Economic Analysis of the US
Department of Commerce,[3] <#m_-7922130635980672526__edn5> US cross-border
arm’s length exports of goods and services to China amounted to US$156
billion; to this, one would have to add US$266 billion in arm’s length
sales generated by majority-owned US affiliates in China (excluding sales
of such affiliates in China to other US affiliates in China and to other
countries), for a total of US$422 billion in trade. During the same year,
US cross-border arm’s length imports of goods and services from China
amounted to US$461 billion;[4] <#m_-7922130635980672526__edn6> to this, one
would have to add US$26 billion in establishment trade generated by
majority-owned Chinese affiliates in the US (excluding sales of goods of
such affiliates in the US to other countries), for a total of US$487

Thus, looking at the trade relationship between the US and China on the
sole basis of cross-border trade leads to a 2016 US deficit of US$308
billion. But taking a holistic view of this relationship by looking at
cross-border and establishment trade together, that deficit is only US$65
billion, or 7% of the total trade volume—not that big a figure. This
underlines the importance of establishment trade for the international
competitiveness of US firms—this is where their strength lies.

What are policy implications if the US administration wishes to help the
country’s firms strengthen their international competitiveness? Since all
other developed countries, and more and more emerging markets, also have
substantial outward FDI they should ask themselves the same question.
Countries need to play to the strength of their firms and, therefore, focus
on the facilitation of (sustainable) FDI to boost establishment trade and
the global value chains connected with it, beginning with recognizing this
issue and formulating appropriate policies.

As it happens, structured discussions aimed at a framework on investment
facilitation are conducted in the WTO. They seek to facilitate FDI and,
with that, establishment trade. The US, along with other developed
countries, should participate actively in these discussions (as China and
other developing countries already do), with a view toward achieving,
soonest, a multilateral framework on the facilitation of sustainable

* <#m_-7922130635980672526__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-7922130635980672526__ednref2> Karl P. Sauvant ([log in to unmask])
is Resident Senior Fellow, Columbia Center on Sustainable Investment, a
joint center of Columbia Law School and the Earth Institute at Columbia
University. The author wishes to thank Raymond Mataloni for his comments on
an earlier draft, to Yardenne Kagan for her research assistance and Maria
Borga, Camila Maia Carneiro Costa and Premila Nazareth Satyanand for their
helpful peer reviews.
[1] <#m_-7922130635980672526__ednref3> The concept of "establishment trade"
was developed in reference to the General Agreement on Trade in Services to
denote the sales associated with commercial presence (Mode 3), basically
FDI. See also J. Steven Landefeld, Obie G. Whichard and Jeffrey H. Lowe for
a discussion of “Alternative frameworks for U.S. international
transactions,” *Survey of Current Business*, December 1993, pp. 50-61.
“Establishment trade” is used here to refer to sales of all foreign
affiliates, regardless of sector.
[2] <#m_-7922130635980672526__ednref4> UNCTAD, *World Investment Report
2018 *(Geneva: UNCTAD, 2018), p. 20.
[3] <#m_-7922130635980672526__ednref5> See, US Bureau of Economic Analysis,
[4] <#m_-7922130635980672526__ednref6> This amount includes imports from
non-US foreign affiliates in China.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Karl P. Sauvant, ‘Do not neglect establishment
trade: the China-US example,’ Columbia FDI Perspectives, No. 260, September
9, 2019. Reprinted with permission from the Columbia Center on Sustainable
Investment (** <>**).” A
copy should kindly be sent to the Columbia Center on Sustainable Investment
at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Alexa Busser, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 259, Howard Mann and Martin Dietrich Brauch, ‘Investment
   facilitation for sustainable development: Getting it right for developing
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   - No. 258, Carlo de Stefano, ‘How to limit treaty shopping,’ August 12,
   - No. 257, Yong Liang, ‘Challenges for the EU-China BIT negotiations,’
   July 29, 2019

*All previous FDI Perspectives are available at
<>**. *

*Other relevant CCSI news and announcements*

   - *On September 25, 2019*, CCSI, will host its 14th Annual Columbia
   International Investment Conference: “Aligning Corporations with the
   Sustainable Development Goals.”
   conference aims to clearly define SDG-aligned corporate activity in order
   to bring coherence and rigor to SDG measurement, reporting, and tools,
   helping to avoid the divergence and incoherence that has undermined the
   usefulness of ESG criteria and tools to date. *For more information, and
   to register, please see our website here
   - *On September 25, 2019*, CCSI, the UN Sustainable Development
   Solutions Network (SDSN), and Le Club des Juristes, with support from
   Iberdrola and under the guidance of Prof. Jeffrey Sachs, Special Advisor to
   the UN Secretary-General on the SDGs, and Laurent Fabius, President of the
   Constitutional Council of the French Republic, will host a conference to
   discuss the Global Pact for the Environment
   . *For more information, and to register, please see our website here
   - *On September 27, 2019*, CCSI, the Sabin Center for Climate Change
   Law, Landesa, and Wake Forest Law School will be hosting a day-long
   conference on the intersection between land use, the climate crisis and
   clean energy transition, and human rights. *For more information, and to
   register, please see our website here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
*Copyright © 2019 Columbia Center on Sustainable Investment (CCSI), All
rights reserved.*
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
| w: | t: @CCSI_Columbia

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