Economy Volume 1: Headline Trends. Annual Survey of Jobs, Trade and Investment between the United States and Europe

Transcription

1 Volume 1: Headline Trends Daniel S. Hamilton and Joseph P. Quinlan Center for Transatlantic Relations Johns Hopkins University Paul H. Nitze School of Advanced International Studies The Transatlantic Economy 2012 Annual Survey of Jobs, Trade and Investment between the United States and Europe

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3 Volume 1: Headline Trends The Transatlantic Economy 2012 Annual Survey of Jobs, Trade and Investment between the United States and Europe Daniel S. Hamilton and Joseph P. Quinlan Center for Transatlantic Relations Johns Hopkins University Paul H. Nitze School of Advanced International Studies

4 Hamilton, Daniel S., and Quinlan, Joseph P., The Transatlantic Economy 2012: Annual Survey of Jobs, Trade and Investment between the United States and Europe Washington, DC: Center for Transatlantic Relations, Center for Transatlantic Relations, 2012 Center for Transatlantic Relations American Consortium on EU Studies EU Center of Excellence Washington, DC The Paul H. Nitze School of Advanced International Studies The Johns Hopkins University 1717 Massachusetts Ave., NW, Suite 525 Washington, DC Tel: (202) Fax (202) ISBN ISBN

5 Table of Contents Preface and Acknowledgements iv Executive Summary v Chapter 1 Transatlantic Turbulence: Fasten Your Seatbelts Chapter 2 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Notes on Terms, Data and Sources About the Authors

6 Preface and Acknowledgements This annual survey offers the most up-to-date picture of the deep and intricate economic relationship binding European countries to America s 50 states. This year we have divided the survey into two volumes. Volume One offers Headline Trends for the transatlantic economy, and updates with the latest facts and figures our basic framework for understanding the deeply integrated transatlantic economy via eight ties that bind. Volume Two provides the most up-to-date information on European-sourced jobs, trade and investment with the 50 U.S. states, and U.S.-sourced jobs, trade and investment with the 27 member states of the European Union, as well as Norway and Switzerland. This annual survey complements other recent publications of ours in which we use both geographic and sectoral lenses to examine the deep integration of the transatlantic economy, and the role of the U.S. and Europe in the global economy, with particular focus on how globalization affects American and European consumers, workers, companies, and governments. In Daniel Hamilton s recent book Europe s Economic Crisis (Washington, DC: Center for Transatlantic Relations, 2011), co-edited with Nobel Prize Laureate Robert Solow, leading experts provide context and grounding for understanding Europe s current economic tribulations, and how they might best be addressed. His book Europe 2020: Competitive or Complacent? (Washington, DC: Center for Transatlantic Relations, 2011) assesses the EU s global competitive position and maps its connections to 12 other world regions in terms of goods, services, money, energy, people and ideas. Joseph Quinlan s recent book, The Last Economic Superpower: The Retreat of Globalization, the End of American Dominance, and What We Can Do About It (New York: McGraw Hill, 2010), analyzes the global aftershocks of the Made in America financial crisis, the attendant rise of developing countries and the impact on the standard bearers of the global economy: the United States and Europe. We would like to thank Lisa Mendelow, James Medaglio, Andrew Vasylyuk and Alexis Cedeno for their assistance in producing this study. We are grateful for generous support of our annual survey from the American Chamber of Commerce to the European Union and its member company sponsors Caterpillar, Fleishman Hillard and SAS; and the European- American Business Council and its member company sponsors AT&T, Boehringer Ingelheim, CA Technologies, Cisco, DHL, Nokia, SAP, TE Connectivity, Unilever and Xerox. The views expressed here are our own, and do not necessarily represent those of any sponsor or institution. Other views and data sources have been cited, and are appreciated. Daniel S. Hamilton Joseph P. Quinlan iv the transatlantic economy 2012 volume 1

7 Executive summary Despite continuing transatlantic economic turbulence, the U.S. and Europe remain each other s most important markets. No other commercial artery in the world is as integrated. The transatlantic economy generates close to $5 trillion in total commercial sales a year and employs up to 15 million workers in mutually onshored jobs on both sides of the Atlantic. Ties are particularly thick in foreign direct investment, portfolio investment, banking claims, trade and affiliate sales in goods and services, mutual R&D investment, patent cooperation, technology flows, and sales of knowledge-intensive services. The transatlantic economy is the largest and wealthiest market in the world, accounting for over 50% of world GDP in terms of value and 41% in terms of purchasing power. Even following the financial crisis, U.S. and EU financial markets continue to account for well over two-thirds of global banking assets; three-quarters of global financial services; 77% of equity-linked derivatives; more than two-thirds of all private and public debt securities; almost 80% of all interestrate derivatives; almost 75% of all new international debt securities; and 70% of all foreign exchange derivatives transactions. 91.3% of global foreign exchange holdings are either in dollars (61.7%), euros (25.7%) or sterling (3.9%). As globalization proceeds and emerging markets rise, however, transatlantic markets are shifting from a position of preeminence to one of predominance still considerable, but less overwhelming than in the past. In the last decade the transatlantic share in global stock market capitalization declined from 78% to just over 50%. Its share in stock trading fell from 86% to just over 70%. Asia s share of investment banking revenues rose from 13% to more than 20%. BRIC stock markets grew more than 40% per year while EU and U.S. markets contracted. The BRIC share of listed companies worldwide jumped from just over 2% in 2000 to 25% today. China had the largest IPO market in 2010 and Expect More Transatlantic Turbulence The 2012 economic outlook for the transatlantic economy is bifurcated, with the eurozone expected to contract slightly and the U.S. set to grow by up to 2.2%. The eurozone crisis and Europe s economic slowdown have not only knocked the wind out of the transatlantic economy but also dealt a sizable blow to the global economy. The European financial crisis has been transmitted to the U.S. via three channels through the capital markets; through trade; and through U.S. corporate earnings. U.S. banks are not overly exposed to Greece and Portugal, but they are heavily exposed to banks in the UK, Italy, France and Germany, which are highly leveraged to some of Europe s most indebted countries. Financial contagion in Europe has added volatility to U.S. capital markets and triggered financial deleveraging by European banks in the U.S. European FDI to the U.S after nearly doubling in 2010 plunged 28% in the first nine months of 2011.»» In the first nine months of 2011, UK FDI to the U.S. was -$9.3 billion. On a year-over-year basis, FDI inflows from France to the U.S. declined 86% in the January-September period, while investment inflows from Germany and Ireland dropped 20% and 86%, respectively. the transatlantic economy 2012 volume 1 v

8 Executive summary Government debt is well beyond 100% of GDP in Greece (160.9%), Italy (120.1%), Ireland (106.7%) and Portugal (101.7%). EU public debt as a percent of GDP is around 85%. Budget deficits as a percent of GDP average 6.2% for the eurozone. This masks wide variation, for example, from 4.3% of GDP in Germany to 10.3% in the UK. The U.S. federal budget deficit for fiscal year 2012 is expected to total $1.1 trillion, the fourth straight year of a $1 trillion-plus deficit, and equating to 7% of GDP. While many areas of the U.S. and Europe face stubborn unemployment, impaired financial systems and mounting fiscal debts, some regions are showing improvements. Transatlantic Investment: Still Driving the Transatlantic Economy Trade alone is a misleading benchmark of international commerce; mutual investment dwarfs trade and is the real backbone of the transatlantic economy. The U.S. and Europe are each other s primary source and destination for foreign direct investment. Together the U.S. and Europe accounted for only 25.4% of global exports and 32% of global imports in But together they accounted for 57.8% of the inward stock of foreign direct investment (FDI), and a whopping 72.8% of outward FDI stock. Moreover, each partner has built up the great majority of that stock in the other economy. Foreign investment and affiliate sales power transatlantic trade. 60.3% of U.S. imports from the EU consisted of related-party trade in The percentage was even higher in the case of Ireland (83%) and Germany (67%). Related-party trade accounted for 30% of U.S. exports to the EU but nearly half of total U.S. exports to the Netherlands in The U.S. in Europe Over many decades no place in the world has attracted more U.S. foreign direct investment (FDI) than Europe. From Europe attracted 56% of the global total, and since the start of 2010, Europe has snagged 55.2% of total U.S. investment. U.S. FDI to Europe in 2011 topped $200 billion for only the second time on record. Investment flows reached $215 billion, a 23% jump from the prior year. Strong U.S. flows to Europe in the first half of 2011, however, were offset by softer, weaker levels in the second half, continuing into In the first nine months of 2011 U.S. FDI flows rose sharply to Germany (214%), Poland (114%), Spain (81%), Austria (69%), the Netherlands (35%), and Ireland (18%). U.S. investment to Italy plunged 52%, however, and fell 50% to Belgium, 26% to the UK, and 2% to France. U.S. investment in Portugal plunged 729%, while flows to Russia dropped 127%. Over the past 3 years U.S. companies have disinvested $350 million from Greece $149 million in 2009, $26 million in 2010 and roughly $175 million in U.S. companies also disinvested in Hungary and Turkey in the first nine months of 2011, with net outflows of $322 million reported for Hungary and $1.3 billion for Turkey. U.S. capital flows to the EU15 totaled $53 billion. Excluding the UK, purchases of U.S. securities were -$60 billion in other words, there was net selling.»» Within Europe, America s top overseas market has shifted from the UK to the Netherlands. In the decade to late 2011, the Netherlands accounted for roughly 25% and the UK 21% of total U.S. investment to Europe. The UK has traditionally served as an export platform for U.S. affiliates to greater Europe, but the euro, the Single Market, and EU enlargement have all galvanized more U.S. firms to use the Netherlands as a key vi the transatlantic economy 2012 volume 1

9 executive summary export platform and pan-regional distribution hub. Roughly 60% of total U.S. foreign affiliate sales in the Netherlands are exports, with the bulk going to other EU members. The export-propensity of U.S. foreign affiliates in Ireland is even greater roughly three-fourths of foreign affiliate sales are destined for foreign markets, with the rest for the local market. U.S. companies based in Ireland exported more than 100 billion of products and services to the rest of the world, including back to the U.S., far more than U.S. affiliate exports from China. U.S. firms have sunk over $170 billion into the Irish economy since 2000, an eight-fold increase from the comparable levels of the 1990s. Despite Ireland s current woes, U.S. firms continue to find the country favorable. U.S. FDI accounted for 74% of Ireland s inward investment in 2011; accounts for 9% of all U.S. investment in the EU; and for 5% of all U.S. FDI worldwide. Ireland remains the No. 1 location worldwide for U.S. FDI in the information sector and third worldwide in the chemicals sector, which includes pharmaceuticals. The output of U.S. foreign affiliates in eastern Europe rose nearly ten-fold between 1999 and 2009, surging from $5 billion to $46 billion. U.S. affiliate output in eastern Europe was nearly 50% larger in 2009 than U.S. affiliate output in China. Capital expenditures by U.S. affiliates in eastern Europe more than tripled between 1999 and 2009, from $3 billion $9.3 billion. Of total U.S. capital expenditures in Europe of $64.6 billion in 2009, eastern Europe accounted for 14.4% of the total, up from a 5.4% share a decade earlier. Poland has attracted nearly $5 billion in U.S. foreign direct investment since 2000 a five-fold increase from cumulative levels in 1990, and a figure greater than total U.S. investment in Austria and Portugal over the same period. U.S. investment in the BRICs has totaled $108 billion since 2000, up from a total of $48 billion in the 1990s. However, the total is less than U.S. investment in Ireland and just 7.2% of total U.S. investment in Europe. Through the first nine months of 2011 U.S. investment in the BRICs was just 6.1% of U.S. investment in Europe. U.S. firms invested $38 billion into China between 2000 and Q3 2011, putting China 12th as a destination of U.S. FDI, behind Belgium, France, Germany, Switzerland, Ireland, the UK and the Netherlands. U.S. investment in Ireland over the 2000-Q was more than four and a half times larger than U.S. investment in China. U.S. investment in the Netherlands was more than ten times larger and in the UK more than eight times larger. Since 2000, U.S. firms have invested more in the Netherlands ($380 billion) alone and in the UK ($315 billion) alone than in South and Central America, the Middle East, and Africa combined ($270 billion). U.S. cumulative investment in Brazil since 2000 ($37 billion) is roughly 75% of total investment in Belgium. U.S. FDI in Russia since 2000 has been less than in such smaller European markets as Norway ($16.1 billion) and Denmark ($11.4 billion). Since 2000 Corporate America has invested less in India ($24.2 billion) than Italy ($29 billion). U.S. investment in India totaled $2.7 billion in the first nine months of 2011, compared to $4 billion invested in tiny Belgium over the same period. On a historic cost basis, the U.S. investment position in Europe was over 13 times larger than in the BRICs and nearly 4 times larger than in all of Asia at the end of U.S. investment stakes in France and Belgium in 2010 were on par with the combined U.S. investment position in China and India ($87.5 billion). America s investment stakes in Ireland ($190.5 billion) were much greater than total U.S. capital sunk in South America ($136.4 billion). U.S. investment in Spain ($58.1 billion) is greater than all of U.S. investment in Africa ($53.5 billion). the transatlantic economy 2012 volume 1 vii

10 Executive summary Corporate America s foreign assets totaled a staggering $20 trillion in % of these assets $11.3 trillion were located in Europe. Largest share: the UK (22%, $4.4 trillion). U.S. assets in the Netherlands ($1.6 trillion) were the second largest in the world in More than half of U.S. affiliate sales in the Netherlands are for export within the EU. America s asset base in Germany ($741 billion in 2010, up from $675 billion in 2008) was nearly double its asset base in all of South America. America s collective asset base in Poland, Hungary, and the Czech Republic (roughly $130 billion, up from $85 billion in 2008) was much larger than the size of corporate America s assets in India (est. $85 billion). U.S. assets in Ireland totaled $836 billion in 2010, more than total U.S. assets in either Germany or France. Ireland accounted for 7.5% of total U.S. assets in Europe in Total output of U.S. foreign affiliates in Europe ($592 billion in 2009) and of European affiliates in the U.S. ($389 billion) was larger than the output of such nations as the Netherlands, Turkey or Indonesia and this in a bad year. U.S. affiliate output in Europe rebounded after recession year 2009 to total $625 billion in 2010 and continued to expand in 2011, albeit modestly. Growth in 2012 will depend on overall EU growth, with more downside than upside risks at this juncture. Aggregate output of U.S. affiliates reached nearly $1.2 trillion in 2010; Europe accounted for 52% of the total. The UK accounted for 25% of total U.S. affiliate output in Europe, followed by Germany (15%) and France (9%). These 3 countries accounted for roughly half of total U.S. affiliate output in Europe in 2009 and By sector, services output (54%) has gained ground on manufacturing (46%). U.S. affiliates accounted for over 25% of Ireland s total output in 2010; 7% of the UK s output; 6.9% of Switzerland s output; 6.7% of Norway s output; and 5.8% of Belgium s total output. U.S. foreign affiliate output in Belgium in 2010 (roughly $27.5 billion) was more than double U.S. foreign affiliate output in India (est. $13 billion). U.S. affiliate output in Poland totaled an estimated $10.3 billion in 2010, exceeding U.S. output in more developed markets like Austria, Portugal, and Denmark. There was a five-fold increase in U.S. affiliate output in Poland between 2000 and U.S. affiliate output in Hungary ($5.7 billion) was larger than output in Greece ($2.4 billion); U.S. output in Turkey ($8 billion) was roughly 40% larger than output in Austria. Europe accounted for 51% of U.S. affiliate sales worldwide in Sales rebounded to an estimated $2.7 trillion, close to the record high of $2.9 trillion reached in 2008, before the onset of the transatlantic recession and a 13% plunge in sales in Sales of U.S. affiliates in Europe in recession year 2009 were roughly double comparable sales in the entire Asia/Pacific. Affiliate sales in the UK ($602 billion) exceeded sales in all of Latin America. While U.S. affiliate sales in China have soared over the past decade, they do so from a low base, and still remain well below comparable sales in Europe. For instance, U.S. affiliate sales of $148 billion in China in 2009 were above those in Italy ($113 billion) but well below those in Germany ($322 billion) or France ($201 billion). U.S. foreign affiliate sales in Ireland ranked fourth in Europe at nearly $250 billion in 2009 a good share of these sales, however, take the form of U.S. affiliate exports to the EU and other third markets. Europe remains the most profitable region of the world for U.S. companies. U.S. foreign affiliate income earned in Europe rose to an estimated $213 billion in 2011 a record high. Affiliate earnings weakened at the end of 2011, however, amid eurozone uncertainties.»» Affiliate income soared 126% in France; climbed 16% in the UK, 12% in Belgium, 10% in Germany and Spain, and 6% in the Netherlands. viii the transatlantic economy 2012 volume 1

11 executive summary U.S. affiliate income from Europe in 2011 and 2010 was nearly double the total earnings from South America and Asia. U.S. affiliates in 2010 earned 4 times more in the Netherlands alone ($54 billion) and double in the UK alone ($26 billion) than they did in China and India combined ($13.5 billion). In the first nine months of 2011, however, U.S. affiliate income in Brazil ($9 billion) or China ($8.6 billion) was well in excess of affiliate income in Germany ($5.3 billion) and France ($3.8 billion). Europe in the U.S. European investment in the U.S. on a historic cost basis totaled $1.7 trillion in 2010, or 72% of total foreign direct investment in the U.S. Historic cost basis represents the stock of foreign investment in the U.S. Using this measure, companies from the UK, followed by Japan, the Netherlands, Germany, and Canada were the largest foreign investors in the U.S. The story is the same in terms of foreign investment inflows, with European investors accounting for 72.8% of cumulative U.S. capital inflows between the beginning of 2000 and the third quarter of Many European financial firms have scaled back their presence in the United States over the past year due to Europe s sovereign debt crisis, which has forced banks to raise capital at home by selling assets overseas. European automobile manufacturers, on the other hand, have shifted into high gear when it comes to investing in the U.S. European FDI flows to the U.S. totaled an estimated $120 billion in 2011, a marked decline from $173 billion in 2010, yet above the depressed levels of 2009 ($92 billion). The 2011 downturn was led by Norway (-299%), the UK (-135%), France and Ireland (-86%), Sweden (-59%) and Germany (-20%). Capital flows from the EU15 to the U.S. fell 69% to $105 billion from Jan.-Nov As of November 2011, China held 24% ($1.1 trillion) of foreign holdings of U.S. Treasuries while Japan and Europe each held 22% (roughly $1 trillion) and OPEC 5%. In 2010 total assets of European affiliates in the U.S. were an estimated $8.4 trillion. UK firms held $2.2 trillion, followed by German firms ($1.5 trillion), Swiss and French firms (roughly $1.3 trillion each), Dutch firms (nearly $1 trillion). The U.S. remains the most important market in the world in terms of earnings for many European multinationals. Profits of European foreign affiliates in the U.S. plunged 30% in recession year 2009 but soared by 41% in 2010 to a near record $105 billion. And in the first nine months of 2011, the income of European affiliates continued to rise, climbing some 19% from the same period the year before. All in all, we expect European affiliate income in the U.S. to have reached a record high of $120 billion in British and Dutch affiliate income in the U.S. in the first nine months of 2011 rose 33% and 34%. German affiliate income rose 18%. European affiliate output in the U.S. rebounded in 2010 and continued to expand in 2011 after falling by almost 4% in 2009 to $388.6 billion, and by another -6.2% in The output of British firms in the U.S. in 2010 reached nearly $106 billion roughly a quarter of the European total. German affiliate output totaled $80 billion, or one-fifth of the total. French affiliate output accounted for 14% of the total. Beyond European affiliates, only Corporate Japan has any real economic presence in the U.S. Japanese affiliate output totaled $70 billion in 2010, well below UK and German affiliate output.»» Overall, foreign affiliates contributed nearly $633 billion to U.S. aggregate production in 2010, with European affiliates accounting for roughly two-thirds of the total. the transatlantic economy 2012 volume 1 ix

12 Executive summary Affiliate sales, not trade, are the primary means by which European firms deliver goods and services to consumers in the U.S. In 2010 European affiliates sales in the U.S. ($1.9 trillion) were more than triple U.S. imports from Europe ($522 billion). Affiliate sales rose roughly 7% in 2010 following a near 20% plunge the year before. Sales by British affiliates in the U.S. totaled an estimated $474 billion in 2010, followed by German affiliate sales ($354 billion). Transatlantic Trade U.S.-EU merchandise trade totaled an estimated $632 billion in 2011, up 63% from $387 billion in U.S. merchandise exports to the EU totaled an estimated $270 billion in 2011, up roughly 11% from the prior year and off only slightly from the peak of $277 billion in 2008; however, U.S. export growth to Europe weakened in the later months of 2011, a trend directly tied to Europe s sovereign debt crisis and the attendant slowdown in economic growth in Europe. The U.S merchandise trade deficit with the EU surged to roughly $90 billion, a 23% rise. The trade deficit with Germany exploded by around 43% to roughly $45 billion. Most U.S. states recorded healthy gains in trade with Europe in California, Texas, and to a lesser degree, New York, are the top U.S. state traders with Europe. California s exports to Europe rose 10% in 2010, but total exports of $27.7 billion were basically unchanged from a decade earlier. Texas, in contrast, has more than doubled exports to Europe over the past decade. Energy-related and information technology exports led the Texas surge. Germany was the top European export market for 20 U.S. states in The UK ranked second, and was the top European export market for 10 states. In the first nine months of 2011, China s imports from the EU15 totaled $114 billion, a rise of 27% from the prior year, while imports from the U.S. tallied $74 billion, a rise of 18%. The U.S. trade deficit with China was in excess of $291 billion in 2010, up from $90 billion in 2000; the EU trade deficit with China topped $208 billion, up from $36 billion in 2000; Japan s imbalance was just $4 billion in 2010, down from $25 billion in Services: The Sleeping Giant of the Transatlantic Economy The U.S. and Europe are the two leading services economies in the world. The U.S. is the largest single country trader in services, while the EU is the largest trader in services among all world regions. The EU ranks number one in each major category of global services trade, accounting for 41.1% of world travel receipts; 40% of world exports of transportation services; and half of world exports of other commercial services. Overall, Europe accounted for 41.1% of total world receipts in By country, the U.S. was number one in the world in terms of world travel receipts in 2010, with a 14.1% share; number one in world transportation receipts, with a 9.1% share; and the world s top exporter of other commercial services, with a global export share of 16%. Europe and the U.S. continue to lead the world when it comes to many different global services. For instance, of global exports of communication services in 2010, Europe s share global share was 58.6%, North America s 16.5%. Of insurance exports, Europe ranked 57.5% to North America s 24.8%; financial services Europe 55.8%, North America 23.1; computer and information service exports Europe 52.5%, North America 8.7%: royalties and fees Europe 41.2%, North America, 40.7%: and other business services Europe 49.5%, North America, 13.2%.»» 5 of the top 10 export markets for U.S. services are in Europe; the U.S. enjoyed a $43.7 billion private services trade surplus with the EU in 2010, compared with its $80 billion goods trade deficit with the EU. Top U.S. x the transatlantic economy 2012 volume 1

13 executive summary business services exports to the EU included management, consulting, and public relations services ($15.5 billion in 2010), research, development, and testing services ($8.8 billion); and computer and information services ($6 billion). U.S. private services exports to Europe nearly doubled between 2000 and 2010, rising from around $106 billion to $200.6 billion in U.S. private services exports to Europe plunged by 11.5% in 2009 but rose 1% in U.S. private services imports from Europe also rebounded by 2.9% in 2010 after having declined by 11% in Europe accounted for roughly 41% of total U.S. services imports in Transatlantic services trade figures are impressive, but the more important services linkages are actually in mutual flows of foreign direct investment. After reaching $634 billion in 2008, sales of services of U.S. foreign affiliates in Europe fell to $581 billion in Yet affiliate sales of services were nearly triple U.S. services exports to Europe in the same year. The UK accounted for around 34% of all U.S. affiliate sales in Europe; UK services sales ($197 billion in 2009) were down 13.7% from the prior year but were nevertheless greater almost double than total affiliate sales of services in South and Central America, Africa, and the Middle East ($108 billion). On a global basis, Europe accounted for nearly 54% of total U.S. services sales. Sales of services by U.S. affiliates of European firms totaled $422 billion in European affiliate sales of services were more than two and a half times larger than U.S. services imports a fact that underscores the ever-widening presence of European services leaders in the U.S. economy. Transatlantic Jobs Despite stories about U.S. and European companies decamping for cheap labor markets in Mexico or Asia, most foreigners working for U.S. companies outside the U.S. are Europeans, and most foreigners working for European companies outside the EU are American. The number of workers employed by U.S. affiliates in Germany, France and the United Kingdom is more than double those employed in China. European companies in the U.S. employ millions of American workers and are the largest source of onshored jobs in America. Similarly, U.S. companies in Europe employ millions of European workers and are the largest source of onshored jobs in Europe. Roughly 38% of the 11.3 million people employed by U.S. majority-owned affiliates in 2010 lived in Europe with roughly half working in the UK, Germany and France U.S. affiliates employed more manufacturing workers in Europe (1.8 million) in 2009 than they did in 1990 (1.6 million). Yet the geographic distribution has shifted within Europe towards lower-cost locations like Ireland and Poland. Between 1990 and 2009 U.S. affiliate manufacturing employment fell in the UK by roughly 36% and in Germany by 8.6%. Meanwhile, manufacturing employment in Ireland soared over 40%, while rising from zero to 10.3% in Poland, the Czech Republic and Hungary. U.S. affiliate employment in eastern Europe more than doubled in the last decade from 221,600 workers in 1999 to 509,000 in Eastern Europe s share of total U.S. affiliate employment in Europe rose from 6.2% to 12.2%. Even with the decline of manufacturing employment in Germany, the manufacturing workforce of U.S. affiliates in Germany alone totaled 371,000 workers in 2009 above the number of manufactured workers employed in Brazil by U.S. affiliates (295,000) yet below the figures of China (516,000).»» European majority-owned foreign affiliates directly employed roughly 3.5 million U.S. workers in 2010 some 700,000 less workers than U.S. affiliates employed in Europe. The top five European employers in the U.S. in 2010 were firms from the UK (900,000, down from 978,000 in 2008), Germany (585,000, down from the transatlantic economy 2012 volume 1 xi

14 Executive summary 617,000 in 2008), France (525,000, down from 554,000 in 2008), Switzerland (433,000, up from 389,000 in 2008) and the Netherlands (344,000, down from 349,000 in 2008). European firms employed two-thirds of all U.S. workers on the payrolls of majority-owned foreign affiliates in The Transatlantic Innovation Economy The U.S. and EU account for 63% of the top R&D companies; 58% of all global R&D; and 18 of the top 20 knowledge regions in the world. In 2009 U.S. affiliates sunk $22.7 billion on research and development in Europe, or roughly 63% of total R&D expenditures by U.S. foreign affiliates of $36 billion. R&D expenditures by U.S. affiliates were greatest in Germany, the UK, Switzerland, France, Sweden, Belgium and Ireland. These seven countries accounted for nearly 84% of U.S. global spending on R&D in Europe in In the U.S, R&D expenditures by majority-owned foreign affiliates totaled nearly $43.4 billion in 2009 around 15% of total R&D spending in the U.S. R&D spending by European affiliates totaled $31.3 billion, up from $30 billion the prior year, and accounting for 72% of all R&D performed by majority-owned foreign affiliates in the United States.»» Swiss-owned R&D in the U.S. totaled $9.1 billion in 2009, up sharply from the year before ($6.9 billion), accounting for 21% of total affiliate R&D in the United States. British and German affiliatesaccounted for a 15% and 13% share, respectively. xii the transatlantic economy 2012 volume 1

15 Chapter 1 Transatlantic Turbulence: Fasten Your Seat Belts The transatlantic economy is poised precariously on the edge of what could become an extended economic slowdown, courtesy of Europe s sovereign debt crisis and the region s seeming inability to resolve it. Economic projections vary, but in all likelihood Europe is expected to experience an aggregate decline in output in 2012, while the United States achieves only modest growth. As a result, the economic outlook for the transatlantic economy is bifurcated. The World Bank and IMF expect the eurozone to contract by between -0.3% and -0.5% in In contrast, the World Bank expects 2.2% growth in United States. The IMF is a tad more cautious, forecasting 1.8% growth. Against this backdrop, the transatlantic economy is poised to underperform in 2012, with more downside than upside risks to U.S. and European firms competing in the largest economies in the world. Transatlantic turbulence continues as both sides of the Atlantic struggle to clamber back from the period of financial turmoil and recession. By the time the dust had settled from the Made in America global crisis, economic output in the United States had declined 3.5% in 2009, and output in the eurozone had plunged 4.3%. Real economic growth rebounded in 2010 and gained momentum entering Yet as the year unfolded the situation again became troubled. Although years in the making, Europe s sovereign crisis boiled over in the later months of Panic swept the financial markets in August and September following credit rating downgrades and negative outlooks in the United States and Europe, causing interbank lending to seize, banks to scale back loans, and sovereign spreads to spike. The insidious combination of higher interest rates and fiscal austerity punished Europe s periphery and dramatically slowed real economic growth across the continent as 2011 came to a close. EU leaders did little to help matters, as summit after summit produced little in the way of concerted action plans needed to pacify the financial markets and engender confidence among consumers and businesses. In the end, the region s sovereign debt crisis and ensuing economic slowdown have not only knocked the wind out of the transatlantic economy but also dealt a sizable blow to the global economy. Both lost significant momentum over the past year. Despite some confidence-inducing measures namely the European Central Bank s Long-Term Refinancing Operation, which has greatly eased liquidity conditions in Europe there are numerous known unknowns overhanging Europe at this juncture. For instance, could a default actually leave Greece in better shape or is the nation destined to leave the eurozone? Will Portugal ultimately default on its debt as well? Will the eurozone be successful in creating a fiscal compact? Will surplus-germany relent and become a critical source of demand and credit for its weaker southern neighbors? Will the UK stay in the European Union, and if so, will it become marginalized? Will EU leaders ultimately draft a progrowth economic agenda, allowing various nations to grow out of their problems? Can the competitiveness of Spain, Italy and others be restored in time to stave off financial Armageddon? These questions remain unanswered and hang ominously over Europe and the transatlantic economy s Lesson: Europe Matters If we have learned anything in the past year, it is this: Europe still matters to the United States, to the emerging markets and to the global economy at large. This simple truth was all but forgotten during the credit-fueled, shop til you drop era of global growth spearheaded by the United States until Things changed in September When the U.S. economy and financial sector imploded, devaluing the transatlantic economy 2012 volume 1 1

16 Transatlantic Turbulence: Fasten Your Seat Belts Table 1: U.S. vs. Euro Area - Real GDP, annual percent change 5.0 U.S. Euro Area U.S. $Billions * 2011: Estimate; 2012: Forecast. Source: IMF the economic credibility of the United States, the common narrative turned to the emerging markets. Led by China, the developing nations were anointed as the new drivers of global growth of the post-crisis era, the new financial superpowers who would place their stamp on global trade, multilateral institutions, and other activities long the domain of the West i.e., the United States and Europe. According to this post-crisis narrative, the U.S. mattered less to the world economy because debtladen America was a spent and aging engine of growth, while rising China, India, Brazil and other developing nations were ready to assume the mantle of global growth. And Europe didn t matter at all. Reality has proven otherwise. Europe is a key engine of the global economy, and when it malfunctions, so does the rest of the world. The Global Economy as a Boeing 747 To frame Europe s role in the global economy, it is useful to think of the world economy as a Boeing 747. The latter has four engines and so, quite simply, does the world economy. Engine #1: North America The United States and Canada make up Engine One, accounting for just over one fifth of world GDP based on purchasing power rates from the IMF. Although Engine One is home to just 5% of the world s population, this engine nevertheless accounts for 30% of global consumption and for 15% of world imports. Until the financial crisis of 2008, this engine was known for driving global demand, adding significant thrust to other parts of the global economy. When the crisis struck, however, the main lubricant of demand leverage or debt dried up, sapping Engine One of its power. A morbid housing market, stubbornly high unemployment, battered state finances, and a divided and bitter political climate in Washington all of these factors continue to weigh on Engine One. And if that is not enough, Engine One faces a problem with Engine Two. Engine #2: Europe Engine Two consists of the 27 member states of the European Union. After emitting smoke over most of 2011, Engine Two is now on the verge of losing full power. Fiscal austerity, higher interest rates, soaring unemployment, diminished business confidence, a lack of global competitiveness in many places all of 2 the transatlantic economy 2012 volume 1

17 Transatlantic Turbulence: Fasten Your Seat Belts Table 2: The Four Engines of the World Economy (% of World Total, 2010) Engine One: North America Engine Two: Europe Engine Three: Asia Engine Four: Commodity Producers GDP (Purchasing Power Parity) Population Private Consumption Expenditure* Exports Imports International Reserves** Sources: IMF, EIU, UN *Personal or household consumption expenditure **Excluding gold these factors have sapped Engine Two of its economic vitality, triggering the global turmoil and tumult of the past six months. This engine accounts for 22% of world GDP, over one-quarter of global consumption, the bulk of international trade and finance metrics that underscore the fact that Europe plays a key role in keeping the global economy aloft. Europe s widening sovereign debt problem and Europe s inability to get ahead of the crisis has placed a tremendous strain on other engines of growth and could ultimately ignite a full blown global banking crisis. Engine #3: Asia Engine Three is the largest in the world in terms of output and population, and is the one engine of the global economy that seems to be functioning properly. That said, the longer Engines One and Two struggle, the greater the risk to Engine Three, which stretches from India to Japan. Asia cannot fly solo there is no such thing in this world. To this point, Asia s export growth slowed sharply in the second half of 2011 as demand in Engine Two weakened, reducing real economic growth rates across the region, including China. Europe still matters just ask thousands of Asian exporters whose orders and revenues have declined on account of Europe s sovereign debt crisis. Engine #4: Commodity Producers The common denominator of Engine Four lies with commodities or raw materials and encompasses such regions as Latin America, the Middle East, Russia, central Asia, central Europe and Africa. Although this is a diverse group, the common link holding Engine Four together is its role as the world s supplier of primary commodities. This engine of the world economy has been on cruise control for most of the past decade thanks to soaring global demand for food and energy and by extension, soaring prices for their goods. However, reflecting the recent weakness in world commodity prices, when things malfunction in Engine Two, which creates problems in Engines One and Three, the problems are quickly transmitted to Engine Four via falling commodity prices. Once again, Europe matters just ask the world s commodity exporters, whose export receipts have declined sharply over the past year due to falling demand and prices for their wares. All of the above, as well as the accompanying exhibit, serve as a simple template by which to view the world economy. Too much attention is typically paid to the United States and Asia as key growth engines of the global economy, with only nominal consideration given to Europe. Yet Europe s global economic weight and stature is just as important. The world was painfully reminded of this fact in How Europe s economic crisis has been transmitted and channeled to the U.S. is discussed below. Catching a Cold or Catching the Flu? How the Eurozone is Transmitting Contagion Europe s sovereign debt crisis has entered its third year, and like past financial crises, the longer it takes Europe to come to grips with its financial challenges, the greater the collateral damage to Europe, the United States and the global economy. It was in May 2010 that the European Union had to come to the financial rescue of Greece, followed by Ireland in November of the same year and Portugal in April As the financial crisis has spread and affected other parts of the Europe, the collateral damage to the U.S. has increased as well. The European financial crisis has been transmitted to the United States via three channels through the transatlantic economy 2012 volume 1 3

18 Transatlantic Turbulence: Fasten Your Seat Belts the capital markets, through trade, and through U.S. corporate earnings. Each channel is discussed briefly below. Channel One: The Credit and Capital Markets The most direct way Europe s financial crisis has jumped the pond has been through the global capital markets. Since European banks are large holders of sovereign debt, when the sovereign dominoes in Europe toppled last year, bank lending and credit creation came to a virtual standstill. Rising risk aversion among banks led to widening credit spreads for sovereigns, with Italy, for instance, forced to pay punishing yields in excess of 7% in As the year progressed, governments across the continent found it increasingly difficult to refinance debt. Ireland, Greece and Portugal could not even borrow in the private capital markets, and became dependent on financing from public sector institutions like the European Central Bank, the IMF and European Union. Since the financial crisis began in 2008, European banks have written off over $680 billion in bad loans. That is a large figure, although by some estimates, European banks have written off only half of their bad loans. U.S. banks are thought to have written off a larger percentage after suffering losses in excess of $1.2 trillion. Of notable concern is Europe s weaker southern periphery, or countries like Greece, Italy, Portugal and Spain, where large government deficits have undermined investor confidence in each government s debt and ability to repay it. Table 3 underscores just how financially interdependent Europe has become. Notice how exposed German and French banks are to Greece and Portugal, with Germany s bank exposure to Greece totaling $33.5 billion and its exposure to Portugal amounting to $36 billion. The comparable figures for France are $51 billion and $26 billion, respectively. But it gets worse: German and French exposure to Italy and Spain is simply staggering, underlining the risk of Europe s entire banking sector should Italy and Spain be forced to reschedule/default like Greece. Prospects of this happening are slim, although back in early 2010, when the financial crisis in Europe first appeared, no one ever though Greece would ultimately default. As for the United States, given the interdependence of the transatlantic capital markets, Wall Street has not been spared Europe s financial crisis. U.S. banks are not overly exposed to Greece and Portugal, with outstanding U.S. loans/claims in Greece totaling $8.3 billion and Portugal $5.5 billion last year, according to the Bank of International Settlements. U.S. financial institutions, however, are heavily exposed to banks in the United Kingdom, Italy, France and Germany, who in turn are highly leveraged to some of Europe s most indebted countries. Transatlantic financial links, in other words, are thick and very much entangled across borders, meaning that a financial problem in one corner of the eurozone is a problem for the entire continent and for the United States. At a minimum, financial contagion in Europe has added more volatility to the U.S. capital markets and worse still, triggered financial deleveraging among European banks in the United States. Over the past year European banks have shed U.S. assets by selling or scaling back their North American businesses, Table 3: Countries' banks: cross-border exposure (as of end June 2011) Exposure to Belgian banks French banks German banks Greek banks Irish banks Italian banks Portuguese banks Spanish banks UK banks U.S. banks Belgium $230.2 bn $37.5 bn $329 m $4.0 bn $4.0 bn $446 m $4.9 bn $18.4 bn $33.1 bn France $38.2 bn $223.3 bn $1.8 bn $14.4 bn $48.7 bn $7.5 bn $32.1 bn $291.6 bn $183.2 bn Germany $17.2 bn $262.9 bn $1.8 bn $63.0 bn $267.5 bn $2.9 bn $59.5 bn $183.8 bn $147.7 bn Greece $1.6 bn $51.3 bn $33.5 bn $768 m $3.9 bn $10.1 bn $1.2 bn $12.6 bn $8.3 bn Ireland $45.8 bn $40.1 bn $110.5 bn $507 m $15.6 bn $22.7 bn $10.1 bn $157.4 bn $65.8 bn Italy $23.9 bn $412.9 bn $161.8 bn $454 m $12.1 bn $2.9 bn $38.2 bn $73.0 bn $45.5 bn Portugal $1.4 bn $25.9 bn $35.9 bn $29 m $2.1 bn $3.9 bn $90.0 bn $25.6 bn $5.5 bn Spain $23.8 bn $152.2 bn $177.5 bn $349 m $12.7 bn $29.6 bn $25.2 bn $105.7 bn $63.7 bn UK $35.5 bn $293.6 bn $511.2 bn $16.6 bn $161.2 bn $51.1 bn $6.1 bn $430.2 bn $602.6 bn Sources: Bank for International Settlements; Financial Times. Data for foreign claims by nationality of reporting banks, immediate borrower basis. 4 the transatlantic economy 2012 volume 1

19 Transatlantic Turbulence: Fasten Your Seat Belts paring their American workforces and reducing the level of capital inflow to the United States. Crossborder capital flows have reversed, and as part of this dynamic, foreign direct investment from Europe to the United States after nearly doubling in 2010 from the depressed levels of 2009 plunged 28% in the first nine months of 2011 from the same period a year ago. Some, but not all, of this decline reflects disinvestment on the part of European banks in the United States, with many European financial institutions forced to hive off some or parts of their U.S. operations in order to raise capital at home. In the first nine months of last year, foreign direct investment (FDI) from one of America s largest overseas investors, the United Kingdom, was actually -$9.3 billion, a clear sign of British firms selling U.S. assets to shore up their finances at home. On a yearover-year basis, FDI inflows from France to the U.S. declined 86% in the January-September period, while investment inflows from Germany and Ireland dropped 20% and 86%, respectively. Channel Two: Cross-Border Trade Just as global finance has dried up over the past year, so has global trade. Global trade volumes decelerated dramatically in 2011, and will continue to weaken if Europe s crisis like the financial crisis spawned in the U.S. in 2008 ultimately drags the global economy into recession. Notably at risk is the United States, which relies on Europe to consume roughly one-fifth of total U.S. exports. Last year U.S. exports to the European Union totaled an estimated $270 billion, off only slightly from the precrisis peak of $277 billion in 2008; however, U.S. exports to Europe weakened in the later months of 2011, a trend directly tied to Europe s sovereign debt crisis. U.S. exports to the European Union expanded 13.1% in the first eleven months of 2011 from the same period a year earlier; that is a robust figure but masks the fact that by November 2011, U.S. exports to the EU were expanding by just 4.8% on a year-over-year basis. In November, U.S. exports to France, Germany and Ireland actually declined, by 8.8%, 7% and 8.5%, respectively, from a year earlier. Exports to the Netherlands rose by just 1.5% in November after rising surging over most of the year. All of the above speaks to a region losing its economic vitality and the attendant effect on U.S. trade. As part Table 4: Corporate America s Bias Towards Europe (U.S. foreign direct investment (FDI) outflows to Europe as a percent of total) 70% 65% 66% 60% 59% 58% 55% 55% 53% 56% 50% 47% 45% 40% 35% 30% Q3 Source: Bureau of Economic Analysis Data through 3Q2011 the transatlantic economy 2012 volume 1 5

20 Transatlantic Turbulence: Fasten Your Seat Belts Table 5: Selected Data for U.S. Foreign Affiliates* in Europe, 2009 Value % of Total Global Rank** Number of Affiliates 13, % 1 Thousands of Employees 4, % 1 manufacturing Employment (Thousands) 1, % 1 Total Assets (Bil. US$) 10, % 1 Net Property Plant & Equipment (Bil. US$) % 1 Total Sales (Bil. US$) 2, % 1 Sales of Goods 1, % 1 Sales of Services % 1 Net Income (Bil. US$) % 1 Capital Expenditures (Bil. US$) % 1 R&D Expenditures (Bil. US$) % 1 Gross Product ("Value Added", Bil. US$) % 1 Compensation of Employees (Bil. US$) % 1 The following data is for 2010 US Foreign Direct Investment Outflows (Bil. US$) % 1 Affiliate Income (Bil. US$) % 1 Direct Investment Position on a Historical-Cost Basis (Bil. US$) 2, % 1 *Majority-owned bank and nonbank foreign affiliates ** Ranked against Canada, Latin America ex. Other Western Hemisphere, Africa, Middle East and Asia & Pacific. Source: Bureau of Economic Analysis. of this process, America s merchandise trade deficit with EU surged from $73 billion in the January- November period of 2010 to roughly $90 billion last year, a 23% rise. America s trade deficit with Europe s largest economy, Germany, exploded by around 43% last year, rising to roughly $45 billion. The upshot? U.S. exports had been on an upward trajectory over most of 2011, acting as a key pillar of growth for the U.S. economy. Late in 2011, however, Europe s sovereign debt crisis helped throttle a key component of U.S. growth. Weaker demand from Europe if prolonged could very well torpedo any chance of the White House reaching its goal of doubling U.S. exports in five years. The goal is unobtainable without a healthy Europe. Channel Three: U.S. Corporate Earnings Finally, it is not just in finance and trade where the ill effects of the European crisis have hurt the United States. The impact has also become painfully evident in the earnings or the bottom line of many U.S. corporations. Numerous U.S. companies, across different swathes of U.S. industry, have all recently taken a hit on their earnings from deteriorating profits and sales in Europe whether Tiffany s (highend retail), General Electric (industrial products) and Baxter International (health care) or Alcoa (materials) and National Instruments (technology). Indeed, in the fourth quarter of 2011, the earnings of the S&P 500 were among the weakest in years thanks to Europe s economic/financial crisis and attendant effect on the rest of the world. More troubling is the fact that many U.S. firms singled out Europe as the key risk to their earnings outlook for 2012, underscoring the deep commercial ties that bind corporate America and Europe together. Indeed, no other region of the world is as important to the global success of U.S. multinationals as Europe, due to the simple fact that over the past few decades no place in the world has attracted more U.S. foreign direct investment (FDI) than Europe. Over the 1980s, for instance, Europe accounted for 55% of total cumulative outflows from the United States. Europe s aggregate share of U.S. investment dipped to 53.5% in the 1990s, but rebounded in the first decade of this century, edging up to 56% of the global total. And not much has changed in the new decade underway since the start of 2010, Europe has snagged 55.2% of 6 the transatlantic economy 2012 volume 1

21 Transatlantic Turbulence: Fasten Your Seat Belts total U.S. investment. This is a rather robust share considering the emergence of the developing nations, notably China and Brazil, and all the hype about U.S. firms decamping from high-cost locales U.S. and Europe for cheaper destinations in China and Brazil. The evidence suggests that nothing of the sort is happening. As Table 5 outlines, by numerous metrics the number of foreign affiliates, affiliate employment, R&D expenditures, affiliate income, compensation, total assets Europe ranks at the top of the list, underscoring the exposure of U.S. firms to the region. In good times, these transmission belts of economic integration amplify opportunities for growth, profits and jobs. But by the same token, when things go wrong, as they have in parts of Europe over the past two years, the ill effects are quickly transmitted to the bottom line of many U.S. multinationals. A key risk in 2012 is that the U.S. earnings slowdown becomes more pronounced courtesy of Europe s recession, a scenario that could very well lead to less hiring and investing among U.S. firms and weakerthan-expected U.S. growth. Another medium-term risk lies with the indebted nature of Europe, with many countries deep in debt, suggesting a long debt workout period that could inhibit real growth for years. Debt and Jobs Reflecting the poor shape of public finance, government debt is well beyond 100% of GDP in Greece (160.9%), Italy (120.1%), Ireland (106.7%) and Portugal (101.7%). The EU s public debt as a percent of GDP is presently around 85%, and will only stabilize at these levels if Europe s most indebted nations can stomach severe budget cuts and maintain austerity measures on populations that are increasingly angry over how governments have managed state finances over the past decade. At the moment, budget deficits as a percent of GDP are quite high across Europe, averaging -6.2% for the eurozone as a whole. This average, however, masks wide variation: while the budget deficit is -4.3% of GDP in Germany, one of the Europe s most fiscally conservative states, deficits in the rest of Europe are relatively larger: the United Kingdom (-10.3%), Greece (-10.6%), Spain (-9.3%), and France (-7.1%). Not to be outdone, the U.S. federal budget deficit for fiscal year 2012 is expected to total $1.1 trillion, the fourth straight year of a $1 trillion plus deficit. In fiscal year 2011, the federal budget deficit was $1.3 trillion, or 8.7% of GDP. The deficit projected for 2012 equates to 7% of GDP, down from the prior year but still relatively high from past years. Given all of these figures, it is little wonder that the specter of sovereign debt defaults looms large over the transatlantic economy. Greece may still be on the path to default, despite the $172 billion bailout offered by international lenders in February Will anyone else follow? Portugal is certainly a candidate, while the United States confronts another credit downgrade if Washington fails to produce a viable deficit reduction plan in the next year. At the minimum, the heavily indebted nations of Europe will muddle through, condemned to years of slow or very little growth, the penalty for living well beyond their means for years. Unemployment remains another key concern for the transatlantic economy. The unemployment rate in the United States peaked at around 10% but still hovers at an uncomfortable rate north of 8%. The jobs machine is slowly cranking up in the United States, although the outlook in Europe is more challenging. Indeed, unemployment in the EU reached a record 10.4% in December This figure, however, masks varying degrees of joblessness across the continent. Germany, for instance, posted a jobless rate of 5.5% at the end of the year, well below the eurozone average. The unemployment rate was even lower in Switzerland (3.1%) and the Netherlands (5.8%), but nearly 20% in Greece at the end of year. The rate was even higher in Spain 22.9%. Hungary (10.6%), Poland (12.1%), Ireland (14.5%), Portugal (13.6%) had jobless rates in excess of 10% at the end of the year. In France, some 9.8% of the workforce was without a job in November. What Does this Portend for the Transatlantic Economy? For starters, the corollary to a transatlantic jobs shortage is weaker-than-expected demand, or a transatlantic economy expanding at a subpar pace. In particular, the lethal combination of weak employment growth and fiscal austerity suggests a prolonged period of fragile growth in Europe and potentially the United States. At the micro level, this may translate into earnings shortfalls for many small, medium and large cap companies. Second, stubbornly high unemployment and an inability to create jobs go hand-in-hand with protectionism, or government policies that put national interests first and the global commons second, if not dead last. While the G-20 has done a decent job in avoiding the deadly embrace of protectionism since 7 the transatlantic economy 2012 volume 1 the transatlantic economy 2012 volume 1 7

22 Transatlantic Turbulence: Fasten Your Seat Belts Trading with China: Who Has the Advantage? With so much of the media focused on China s exports and what this might mean for the West, it is easy to forget that China is also the second largest importer in the world, trailing only the United States. Yes, China exports a great deal of goods but it also consumes 9% of world imports, a share greater than any country in Europe. European firms are prime beneficiaries from this little-known fact. They are way out in front of their U.S. counterparts when it comes to providing goods to the Middle Kingdom, although they lag their Japanese counterparts. In 2010, Chinese imports from the EU15 totaled $125 billion, compared to $150 billion from Japan. The laggard: the United States. China s imports from the U.S. tallied just $92 billion in 2010, well below imports from Europe. China has always imported more goods from the EU than from the United States, although the gap has narrowed slightly over the past decade. Chinese imports of EU15 goods were 46% larger than U.S. imports in 2000, though 36% larger in In the first nine months of 2011, China s imports from the EU15 totaled $114 billion, a rise of 27% from the prior year, while imports from the U.S. tallied $74 billion, a jump of 18%. Imports from Japan rose by 13% in the first nine months of High-end French and Italian luxury items, German automobiles and capital goods, Swiss pharmaceuticals all of these products and more have become more attractive to China and help underwrite trade gains with one of the largest and wealthiest markets in the world. The downside: all three parties the United States, the EU15 and Japan still run massive trade deficits with China. As the accompanying chart highlights, the EU15 s trade deficit with China topped $208 billion in 2010, a sizable jump from the shortfall in 2000 ($36 billion). The U.S. deficit with China was in excess of $291 billion in 2010, up from $90 billion at the start of the decade. Japan s imbalance with China is not as great just $4 billion in 2010, down from $25 billion in the transatlantic economy 2012 volume 1

23 Transatlantic Turbulence: Fasten Your Seat Belts Table 6: U.S., Europe and Japan Exports to China - (Billions of $) United States Japan EU Sources: IMF Data through 2010 Table 7: U.S., Europe and Japan Trade Balance with China - (Billions of $) United States Japan EU 15 Sources: IMF Data through 2010 the transatlantic economy 2012 volume 1 9

24 Transatlantic Turbulence: Fasten Your Seat Belts A Transatlantic Jobs Crisis? In a world of insufficient demand, excess labor, bulging new labor entrants in the emerging markets and productivity-enhancing techniques that substitute capital for labor, the transatlantic economy confronts a significant jobs challenge over the next few years. The numbers are stark: according to the International Labor Organization (ILO), 80 million jobs need to be created globally over the next two years (2012 and 2013) just to return to 2007 employment rates. Yet based on subpar growth projects, employment in the developed nations is not expected to recover to pre-crisis levels until The developed nations need to generate nearly 27.2 million jobs in the next two years to return to normal, although the ILO estimates that only 2.5 million new jobs will be created, leaving a staggering job shortage of nearly 25 million. It is only slightly better in the developing nations: roughly 53 million new jobs are needed to reach pre-crisis levels, and owing to faster levels of real GDP growth, the developing nations are expected to generate some 38 million new jobs over the next two years. That s an impressive figure but nevertheless insufficient given the developing nations rising workingage population, which will help to generate a 15 million job shortage in the near term. In the aggregate, with the global economy struggling to find its moorings, the ILO expects the world to generate only half the jobs needed over the next twenty four months. According to the ILO, we are staring at a global employment shortage on the order of 40 million jobs. A global shortage of 40 million jobs? That s tinder for political and social instability in many parts of the world, the United States and Europe included. The longer workers remain idle and the larger the pool of disenchanted laborers, the greater the odds of rising political and social instability on both sides of the pond, and increased calls for various types of protectionism. 10 the transatlantic economy 2012 volume 1

25 Transatlantic Turbulence: Fasten Your Seat Belts the financial crisis of 2008, creeping protectionism is nevertheless becoming a clear and present danger to the global economy. Finally, the global jobs shortage will continue to stoke political instability and social unrest not only in such volatile places like the Middle East but also across Europe and the United States. Millions of dissatisfied and idle workers are a combustible politicaleconomic variable for policy makers on both sides of the Atlantic. Rebound or Relapse? Good but not great is probably the best way to describe the key macroeconomic trends of the transatlantic economy leading into Stepping back for a moment, the bottom fell out of the economy in 2009, with the U.S. financial crisis-cum-global recession precipitating deep declines in transatlantic trade, finance, investment, employment, profits and a bevy of other metrics was a year of healing, and the year-over-year comparisons of many variables were quite robust. U.S. foreign affiliate income, for instance, surged to a record $199 billion in By the same token, European affiliates in the U.S. experienced a 41% surge in income, with income rising to a near-record of $104.7 billion. As earnings of affiliates on both sides of the pond improved in 2010, so did foreign direct investment flows. U.S. outflows to Europe rose nearly 8% in 2010, while European inflows to the United States soared 88% off the depressed levels of All this was expected in 2010 and as we outlined in last year s Survey, all the key metrics pointed towards further improvement in And in many cases, this is what transpired. As an example, U.S. foreign investment outflows to Europe surged 30% in the first nine months of 2011 from the same period a year ago. Over this period, U.S. FDI flows rose sharply to Germany (214%), the Netherlands (35%), Norway (23%), Poland (114%), and Ireland (18%). In contrast, U.S. inflows to France declined 2%, while flows to the United Kingdom, Italy and Sweden declined 26%, 52%, and 134%, respectively. Meanwhile, disinvestment was evident among U.S. firms in problem countries like Hungary and Greece. U.S. firms disinvested $172 million from Greece and Table 8: Profits 1 Reaching Peak Again U.S. Affiliate Profits in Europe European Affiliate Profits in the U.S U.S. $Billions Income of affiliates Source: Bureau of Economic Analysis Data through 3Q data is annualized for full year estimate. the transatlantic economy 2012 volume 1 11

26 Transatlantic Turbulence: Fasten Your Seat Belts Table 9: The Power Brokers of the Global Economy Compared Eurmerica Asia Chindia Chinmerica GDP, PPP 40.8% 31.3% 19.1% 33.1% GDP, Nominal 50.4% 26.0% 11.9% 32.4% Market cap. (as of 1/2/2012) $25.0 trillion $14.4 trillion $4.1 trillion $18.1 trillion Personal consumption exp. 54.4% 24.1% 8.1% 33.1% M+A Sales 59.9% 23.2% 3.4% 25.4% M+A Purchases 32.3% 38.2% 16.4% 34.1% Inward FDI stock 57.8% 23.3% 4.1% 21.1% Outward FDI stock 72.8% 17.3% 1.9% 25.2% Inflows ( ) 56.3% 22.8% 7.6% 21.7% Outflows ( ) 72.6% 16.8% 2.7% 20.4% Exports* (Goods) 25.4% 32.1% 16.2% 25.7% Imports* (Goods) 32.0% 29.5% 10.8% 25.4% Military Spending $1,004.4 $285.7 $149.1 $801.4 (U.S. $ billions at constant 2009 prices) 64.4% 18.3% 9.6% 51.4% Top 100 Global Brands 87 brands valued at $1.1 tr. 10 brands valued at $118.4 bil. None 49 brands (all American) at $793.9 bil. * Total does not include Intra-EU27 + Norway, Switzerland, & Iceland trade Sources: IMF, Bloomberg, UN, SIPRI, Interbrand All data for 2010 otherwise noted some $322 million from Hungary in the first nine months of U.S. affiliate income earned in Europe also increased in 2011, rising 8% in the first nine months of the year from the same level a year earlier. Gains were notably robust in France, where affiliate income soared 126% from a year ago. Affiliate earnings in Germany were up 10% in the same period, and climbed 6% in the Netherlands, 10% in Spain, 16% in the United Kingdom, and 12% in Belgium. In terms of affiliate income/earnings, European affiliates in the U.S. posted stronger year-over-year gains than their counterparts in Europe. That is not surprising given the fact the U.S. economy grew at a faster pace than most of Europe over the balance of In contrast to the 8% rise in income in Europe among U.S. affiliates, the income/earnings of European affiliates in the U.S. soared 19% in the first nine months of last year. We estimate the earnings of European affiliates in the U.S. totaled $120 billion in 2011, an all-time high. A relatively strong U.S. economy helped boost the earnings of European affiliates last year; however, the same dynamic did not do much to boost European FDI inflows to the United States. To the contrary, European inflows declined 28% in the first nine months of 2011 from the same period a year earlier, a decline that is more of a reflection of troubled times in Europe than of unfavorable dynamics in the United States. Trends in transatlantic capital flows reflect many of the variables just mentioned. Indeed, while Europe remains a key provider of capital to the United States, U.S. capital inflows from the European Union (including the global money center, the United Kingdom) dropped sharply in In the first eleven months of the year, EU15 purchases of U.S. securities totaled $105 billion, down 69% from the prior year. In contrast, U.S. capital outflows to the EU15 totaled $53 billion in the same period, net outflows of $11 billion in Excluding the United Kingdom, a global money center where money from Russia, Africa and the Middle East is funneled, the figures were not as good: EU purchases of U.S. securities were -$60 billion there was net selling, in other words. U.S. purchases, meanwhile, totaled nearly $30 billion. In terms of foreign holdings of U.S. Treasuries, China and Japan still rank number one and two, respectively; as of November 2011, China held $ the transatlantic economy 2012 volume 1

27 Transatlantic Turbulence: Fasten Your Seat Belts trillion in Treasuries, while Japan held $1 trillion. The U.K. ranked third, with holdings of $429 billion at the end of November Europe s total holdings of U.S. Treasuries, including the U.K., were in excess of $1 trillion roughly 22% of the total. That compares to China s share of 24%, Japan s 22% and OPEC s 5%. In short, it s not just the Asian creditors of China and Japan that are important sources of capital to the United States. So is Europe. Finally, the services economies of the United States and Europe have never been as intertwined as they are today, notably in such activities as financial services, telecommunications, utilities, insurance, advertising, computer services, and other related activities. A healthy services sector is critical to both economies. While latest services data are less current than other indicators, it is important to note that five out of the top ten export markets for U.S. services are in Europe and that the U.S. enjoyed a $43.7 billion trade surplus in private services with the EU in 2010, compared with its $80 billion trade deficit in goods with the EU. Moreover, foreign affiliate sales of services, or the delivery of transatlantic services by U.S. and European foreign affiliates, have exploded on both sides of the Atlantic over the past decade and become the overwhelming mode of delivery, topping more than $1 trillion. The U.S. and EU are each other s most important commercial partners and major growth markets when it comes to services trade and investment. Moreover, deep transatlantic connections in services industries, provided by mutual investment flows, are the foundation for the global competitiveness of U.S. and European services companies. In sum, despite the turbulence of past years and an uncertain economic outlook for 2012, the United States and Europe remain each other s most important foreign commercial markets, a fact still not fully appreciated by opinion leaders on either side of the transatlantic, much less elsewhere around the world. Put simply, no other commercial artery in the world is as integrated and fused together as the transatlantic economy. We estimate that the transatlantic economy continues to generate close to $5 trillion in total commercial sales a year and employs up to 15 million workers in mutually onshored jobs on both sides of the Atlantic. These workers enjoy high wages and high labor and environmental standards. In addition, we continue to espouse the view that the transatlantic economy remains at the forefront of globalization meaning that the commercial ties between the U.S. and Europe are deeper and thicker than between any other two continents. Recent economic troubles have only underscored the deep integration of the transatlantic economy and the importance of healthy transatlantic economic ties for millions of U.S. and European workers, consumers and companies. This is evident from this survey. the transatlantic economy 2012 volume 1 13

28 Chapter 2 Chapter 2 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind To appreciate the distinctive nature of the transatlantic economy, it is important to understand one central fact: foreign investment binds the transatlantic economy together far more than trade. Whereas U.S. and European commercial ties with economies in Asia and elsewhere are each driven largely by trade, commercial ties between the U.S. and Europe are driven largely by investment. This distinction is critical. The cross-border movement of traded goods and services is a shallow form of integration, and often associated with the early phases or stages of bilateral commerce. In contrast, a relationship that rests on the foundation of foreign investment is one in which both parties are extensively embedded and entrenched in each other s economies. Such a relationship is more job-creating, income-producing, and wealth-generating for both parties than one based solely on trade. This deep integration epitomizes the transatlantic economy, which is wound and bound together in so many ways. Understanding that investment comes first and trade second in the transatlantic economy, and that investment is a critical dynamic to drive and boost trade, is central to appreciating the distinctive role the U.S.-EU commercial relationship continues to play in the global economy, and how to craft policy initiatives to create jobs and fuel growth. This investment-trade symbiosis is reflected in the fact that the global primacy of foreign affiliate sales over trade continues to expand dramatically. To this point, global foreign affiliate sales (sales of affiliates from around the world) totaled $5.1 trillion versus global exports of $4.4 trillion in 1990, according to figures from the United Nations. In 2010, however, global foreign affiliate sales tallied a staggering $33 trillion, a figure three-fourths larger than global exports ($18.7 trillion). The widening gap in part reflects rising cross-border investment and commerce between the United States and Europe. Against this backdrop, most American foreign affiliates in Europe are indistinguishable from local German, French or Dutch firms, while European affiliates operating in the United States are barely distinguishable to U.S. consumers who enjoy European goods and services on a daily basis without much thought. When they can, U.S. firms and their global counterparts in Europe, Japan and now even China prefer to deliver goods and services via foreign direct investment (foreign affiliates) rather than trade (exports). We do not mean to downplay the importance of transatlantic trade, which remains considerable. Indeed, transatlantic trade (defined here as U.S. exports plus imports of goods from the European Union) totaled an estimated $632 billion in 2011, up from $387 billion at the start of the new century. Transatlantic trade is sizable and important to both economies. In addition, investment and trade in many ways can be synergistic complements, rather than substitutes. But this only underscores the need to add investment to the trade picture if one wants to get a true sense of the size and dynamism of the transatlantic economy, particularly compared to any other bilateral economic relationship either partner has in the world. Companies invest abroad for various reasons. They may want to make a strategic investment, for instance to introduce a new product or service. Build where you sell is a mantra of many successful multinationals, which requires an in-country/region presence in many different parts of the world. They may seek resources, such as acquiring access to specialized knowledge or 14 the transatlantic economy 2012 volume 1

29 particular technologies. They may want to win share in new markets, or they may want to achieve greater efficiencies by gaining access to cheap factors of production. While much media and political attention focuses on the resource- or efficiency-seeking motivations behind such investments, particularly the need for cheap foreign labor, the reality is that the increasingly critical need for companies to position themselves within pan-continental markets, and to generate new sources of knowledge that they can turn into new sources of profit, drives a good deal of mutual investment across the Atlantic. Moreover, these companies and affiliates invest in local communities. European affiliates in the United States employ millions of American workers and are the largest source of onshored jobs in America. Similarly, U.S. corporate affiliates in Europe employ millions of European workers and are the largest source of onshored jobs in Britain, Ireland and across the continent. The Transatlantic Economy in the World No commercial artery in the world is as large as the one binding the United States and Europe together. The transatlantic economy still accounts for over 50% of world GDP in terms of value and 41% in terms of purchasing power, is the largest and wealthiest market in the world, and is at the forefront of driving global foreign direct investment and global mergers and acquisitions activity. Even following the financial crisis, U.S. and EU financial markets continue to account for well over two-thirds of global banking assets; account for more than three-fourths of global investment banking revenue; three-quarters of global financial services; 77% of equity-linked derivatives, more than two-thirds of all private and public debt securities; almost 80% of all interest-rate derivatives; almost 75% of all new international debt securities; 70% of all foreign exchange derivatives transactions, 63% of the top R&D companies and 58% of all global R&D, and 18 of the top 20 knowledge regions in the world. 91.3% of global foreign exchange holdings are either in dollars (61.7%), euros (25.7%) or sterling (3.9%). 1 All told, by our estimate nearly $5 trillion in commerce takes place between U.S. and European companies and their affiliates each year. Hence, when one half of the transatlantic partnership suffers or goes into recession, as the United States did in 2009, the other half suffers as well. While the U.S. economy contracted 3.5% that year, the downturn was even steeper in Europe. Output in the EU contracted 4.2% in 2009, with steeper declines reported in Germany (5.1%), and Ireland (7%). Then, the transatlantic economic recession was deep and painful, with the collateral damage evident on both sides of the pond. Now the other half of the transatlantic economy is teetering on the edge of recession, with Europe this time playing the role of spoiler. As discussed in Chapter 1, the economic downturn in Europe has yet to derail the U.S. economy, but Europe s problems are quite evident via declining capital flows from Europe to the U.S., plummeting U.S. exports to Europe, and weaker-than-expected U.S. corporate earnings for many companies with extensive links to Europe. Should the eurozone crisis intensify this year and growth/demand across the continent weaken further, the risks of a U.S. recession will only rise. The U.S. economy will not escape a recession should Europe s economic crisis prove to be deeper and more prolonged than expected. A weakened transatlantic partner is the last thing the U.S. needs right now given the soft nature of the U.S. economy. The U.S. economy is growing but has yet to free itself fully from the economic turbulence of recent years. The U.S. housing market remains mired in one of the worse downturns in history. The federal budget deficit is expected to top $1 trillion again this fiscal year and could ultimately lead to another credit downgrade of the United States. State finances remain a challenge, with public sector austerity and layoffs a key drag on growth. A U.S. unemployment rate of around 8.5% as of this writing speaks to the sluggish nature of domestic job growth. U.S. firms have been hiring but tentatively. The U.S. continues to be overly reliant on spending and borrowing, rather than saving, investing and competing in the global marketplace. U.S. economic challenges, in turn, have consequences for Europe, given that the U.S. is one of the top country export destinations for EU goods and services, the EU s leading source and destination of both FDI and private portfolio investment, and a key innovation partner for European economies seeking to maintain their competitive position in knowledge- based activities. In other words, the transatlantic economy has some heavy lifting to do over the next twelve months and beyond, problems even more acute owing to Europe s the transatlantic economy 2012 volume 1 15

30 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Table 1: The Transatlantic Economy vs. The World - Share of World Total 80% 70% 72.8% 60% 57.8% 59.9% 50% 40% 40.8% 30% 25.4% 32.0% 32.3% 20% 10% 0% World GDP 1 World Exports 2 World Imports 2 World FDI Inward Stock World FDI Outward Stock World M&A Sales World M&A Purchases Sources: UN, IMF, figures for Based on PPP estimates, 2 Excluding intra-eu, Norway, Switzerland and Iceland trade. sovereign debt crisis. Success or failure in one part of the relationship will affect the other since no two regions of the global economy are as economically fused as the two parties straddling the Atlantic. That said, it has long been our contention that one of the most dangerous deficits affecting the transatlantic partnership is not one of trade, values, or military capabilities but rather a deficit in understanding among opinion leaders of the vital stakes Americans and Europeans have developed in the success of each other s respective economies. With so much attention devoted to the rise of the Chinese economy and shifting trade flows in both the United States and Europe, many on both sides of the Atlantic have forgotten about the importance of investment and the unappreciated, invisible and little understood activities of foreign affiliates, which represent the real backbone of the transatlantic economy. This is illustrated in the accompanying chart, which illustrates the weight of the transatlantic economy in the overall global economy. Taken together U.S. and European exports to the world accounted for only 25.4% of global exports in 2010; combined U.S. and European imports accounted for 32% of global imports. But the U.S. and Europe together accounted for 57.8% of the inward stock of foreign direct investment (FDI), and a whopping 72.8% of outward stock of FDI. Moreover, each partner has built up the great majority of that stock in the other economy. In short, mutual investment in the North Atlantic space is very large, dwarfs trade, and has become essential to U.S. and European jobs and prosperity. All in all, the transatlantic economy remains the dominant force in the global economy. Rising powers are resetting the global economy, but they haven t done so yet. Such a transformation is neither complete nor pre-ordained. And a different world economy is not necessarily a worse one for Americans and Europeans if they use the coming decade to leverage global growth, human talent and innovation while tackling related challenges of deficits and debt, building on their own considerable strengths, and exploiting the full potential of the transatlantic economy. That is a big if considering Europe s inability to contain and address its ongoing sovereign debt crisis and Washington s ineptness in dealing with the nation s most pressing issues in a bipartisan fashion. 16 the transatlantic economy 2012 volume 1

31 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Moreover, time is not standing still. Over the past decade, for instance, Asia s share of investment banking revenues has risen from 13% to more than 20%. The transatlantic share in global stock market capitalization has declined substantially from 78% to roughly 50% today, and its share in stock trading has fallen from 86% to approximately 70%. BRIC stock markets grew more than 40% per year in the past decade, while EU and U.S. markets contracted. The BRIC share of listed companies worldwide has jumped from just over 2% in 2000 to around 25% today. China had the world s largest IPO market in 2010 and The number of Chinese IPOs more than tripled in 2010 from the previous year to 349, and the IPO funds raised more than doubled to 488 billion yuan. In 2011, China had 282 new IPO listings worth 286 billion yuan, a decline from the previous year that underscores the uncertain global economic climate. 2 In addition, European and American financial and economic credibility has been damaged considerably by back to back financial crises, first in the United States and now Europe. It is little wonder many developing economies in Asia and Latin American have lost faith in free-market capitalism and now look disparaging upon U.S. and European economic management. As Chinese Deputy Premier Wang Qishan reportedly noted, the teachers now have some problems. As a result, the window is closing on the ability of the U.S. and Europe alone to set the rules and reap the benefits of an open global economy. Whereas much of the past decade was about the deep integration of the transatlantic economy, during the coming decade U.S. and European companies are likely to focus much more on positioning themselves for a global economy with multiple engines and sources of growth and innovation. The Ties that Bind Quantifying the Transatlantic Economy Foreign affiliates on both sides of the Atlantic have constructed a formidable commercial infrastructure over the past half century. Remarkably, notwithstanding all the stress and strain on the transatlantic partnership over the past decade, this infrastructure remains solid and dynamic. Even in the face of the transatlantic recession of 2008/09, and the economic relapse of 2011, the transatlantic foundation remains firm. Many measures of economic performance declined sharply in 2009 due to the transatlantic recession, rebounded in 2010 and softened again in 2011, reflecting the cyclical dynamics of the transatlantic economy. Structurally, the foundation of the transatlantic economy remains robust, but 2012 at least in the first half of the year will be challenging for companies on both sides of the Atlantic. The Transatlantic Economy annual survey uses eight key indices to offer a clearer picture of the deep integration forces shaping the transatlantic economy. This chapter updates those indices with the latest available data. Each variable, in general, has ebbed and flowed with the cyclical swings of transatlantic economic activity, but has nevertheless grown in size and importance over the past decade. If there is a common theme to the data below, it is this: most metrics declined in 2009 due to the transatlantic recession, then rebounded in 2010, but remained below 2008 peak levels. Further progress healing was evident in 2011 and still possible over the balance of 2012 if Europe can avoid a steep and prolonged recession. 1. Gross Product of Foreign Affiliates In their own right, U.S. affiliates in Europe and European affiliates in the United States are among the largest economic forces in the world. For instance, the total output of U.S. foreign affiliates in Europe ($592 billion in 2009) and of European affiliates in the U.S. ($389 billion) is greater than the total gross domestic output of most countries. Combined, transatlantic foreign affiliate output in 2009 of $981 billion was larger than the output of such nations as the Netherlands, Turkey or Indonesia and this in a bad year. Thanks to the U.S. financial crisis-cum-global recession, U.S. affiliate output in Europe shrank 10.3% in 2009, with output falling to $592 billion in 2009 from $660 billion the year before. We estimate that affiliate output rebounded to $625 billion in 2010 and continued to expand in 2011, albeit modestly. Growth in affiliate output in 2012 will depend on the overall level of growth in the EU this year, with more downside than upside risks at this juncture. In the U.S., European affiliate output fell by almost 4% in 2009 to $388.6 billion, following a decline of 6.2% in We estimate that output rebounded in 2010, however, along with the rebound in U.S. economic growth, and continued to expand in On a global basis, aggregate output of U.S. affiliates reached an estimated $1.2 trillion in 2010, with Europe the transatlantic economy 2012 volume 1 17

32 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Table 2: America s Major Commercial Arteries $4.6 Trillion U.S. $Trillions $2.0 Trillion $1.4 Trillion $1.0 Trillion $1.0 Trillion $980 Billion $861 Billion $765 Billion Transatlantic Total Foreign Affiliate Sales Asia/Pacific Total Foreign Affiliate Sales Asia/Pacific Total Trade Transatlantic Total Trade NAFTA Total Trade NAFTA Total Foreign Affiliate Sales Latin America Total Trade Latin America Total Foreign Affiliate Sales Foreign Affiliate Sales: Estimates for Total Trade: Data for goods & services, 2010 Source: Bureau of Economic Analysis accounting for roughly 52% of the total. The latter figure was basically unchanged from the prior year. The United Kingdom, where U.S. investment ties are among the deepest, accounted for around 25% of total affiliate output in Europe, followed by Germany (15%) and France (9%). These three countries accounted for roughly half of total U.S. affiliate output in Europe in 2009 and By sector, services output (54%) has gained ground on manufacturing (46%). The presence of U.S. affiliates in some European countries is particularly noteworthy. The gross output of American affiliates in Ireland, for instance, represented just over one-quarter of the country s gross domestic product in 2010 by our estimates, a staggering contribution on both an absolute and relative basis. This dynamic reflects, in part, the large U.S. investment base, notably among U.S. life science and technology companies, in Ireland, still one of the favorite destinations of U.S. firms despite the severe jolts to its economy over the past two years. During Ireland s crisis, in fact, the importance of U.S. affiliates to the Irish economy has grown. Elsewhere, by our estimates, U.S. affiliates accounted for a full 7% of the United Kingdom s aggregate output in 2010, 6.9% of Switzerland s aggregate output, 6.7% of Norway s aggregate output, and 5.8% of Belgium s total output. Regarding the latter, it is interesting to note that U.S. foreign affiliate output in Belgium in 2010 (roughly $27.5 billion) was more than double U.S. foreign affiliate output in India (est. $13 billion). U.S. firms are gradually taking advantage of the EU s expanded Single Market and are incorporating central and eastern European member states, as well as such key non-eu countries as Turkey and Russia, into their European and global production networks. U.S. affiliate output in Poland, for instance, totaled an estimated $10.3 billion in 2010, exceeding U.S. output in more developed markets like Austria, Portugal, and Denmark. There was a five-fold increase in affiliate output in Poland between 2000 and Meanwhile, U.S. affiliate output in Hungary in 2010 ($5.7 billion) was larger than output in Greece (estimated at $2.4 billion); U.S. output in Russia ($7.5 billion in 2010) easily surpassed output in Portugal ($4.7 billion); and total output in Turkey ($8 billion) was roughly 40% larger than output in Austria. In the United States, European affiliates are major economic producers in their own right, with British 18 the transatlantic economy 2012 volume 1

33 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind firms of notable importance. Their U.S. output reached nearly $106 billion in 2010, or roughly a quarter of the European total. For the same year, output from German affiliates operating in the U.S. totaled $80 billion by our estimates, or one-fifth of the total, while output from French affiliates ($55 billion) accounted for 14% of the total. Beyond European affiliates, only Corporate Japan has any real economic presence in the United States. Japanese affiliate output totaled an estimated $70 billion in 2010, a decline of $17 billion from 2008 and below output from British and German affiliates, but slightly above output from French affiliates. Overall, foreign affiliates contributed nearly $633 billion to U.S. aggregate production in 2010, with European affiliates accounting for roughly two-thirds of the total. 2. Assets of Foreign Affiliates America s global commercial presence, in the form of foreign assets of corporate America, totaled roughly $20 trillion in 2010, a staggering sum and metric of the global reach and ambition of corporate America. U.S. foreign assets (bank and non-bank) were valued at roughly $11.3 trillion in Europe in 2010, or around 58% of the global total. Within the region, the bulk of U.S. assets were in the United Kingdom. U.S. assets in the UK totaled an estimated $4.4 trillion in 2010, or 22% of the global total. U.S. assets in the Netherlands ($1.6 trillion) were the second largest in Europe and the world in America s sizable asset base in the Netherlands reflects the host country s strategic role as an export platform/ distribution hub for U.S. firms doing business in the rest of the European Union. To this point, more than half of affiliate sales in the Netherlands are for export, namely within the EU. Meanwhile, America s asset base in Germany ($741 billion in 2010, up from $675 billion in 2008) was nearly double its asset base in all of South America in the same year. America s collective asset base in Poland, Hungary, and the Czech Republic (roughly $130 billion, up from $85 billion in 2008) was much larger than the size of corporate America s assets in India (est. $85 billion). As for Corporate America s in-country presence in Ireland, U.S. assets totaled an estimated $836 billion in 2010, more than total U.S. assets in either Germany or France. Ireland, by our estimates, accounted for around 7.5% of total U.S. assets in Europe in Table 3: Sales of U.S. Affiliates in Europe vs. U.S. Exports to Europe 3,200 3,000 U.S. $Billions 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, U.S. Foreign Affiliate Sales in Europe Total U.S. Exports to Europe * *Estimate for sales Source: Bureau of Economic Analysis Majority-owned non-bank affiliates data: Majority-owned bank and non-bank affiliates: the transatlantic economy 2012 volume 1 19

34 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Table 4: Sales of European Affiliates in the U.S. vs. U.S. Imports from Europe 2,400 2,200 2,000 European Foreign Affiliate Sales in the U.S. Total U.S. Imports from Europe 1,800 1,600 U.S. $Billions 1,400 1,200 1, * *Estimate for sales Source: Bureau of Economic Analysis Majority-owned non-bank affiliates: Majority-owned bank and non-bank affiliates: As for foreign-owned assets in the United States, Europe s stakes are sizable even after declining by nearly 7% in 2009 from the prior year. Total assets of European affiliates in the United States were valued at $8.1 trillion in 2009, and most likely were $8.4 trillion in The United Kingdom ranked first as the largest holder of U.S. assets in 2010 ($2.2 trillion), followed by German firms ($1.5 trillion), and Swiss and French firms, with assets of roughly $1.3 trillion in U.S. assets of Dutch firms totaled nearly $1 trillion in the same year. 3. Affiliate Employment Much media and political commentary features the stubborn myth that when it comes to hiring workers overseas, the bulk of corporate America s overseas work forces toils in developing nations. Reality is different. Most foreign workers on the payrolls of U.S. foreign affiliates are employed in industrialized countries, notably in Europe. U.S. majority-owned affiliates (banks and non-banks) employed roughly 11.3 million workers in 2010, with the bulk of these workers 38% toiling away in Europe. That share is down from 41% in 2008, although the decline could reflect the cyclical decline in output and employment across recession-rankled Europe in The bulk of U.S. affiliate employees is based in the United Kingdom, Germany and France, a trend little changed from previous years. What has changed, however, is the following: the European workforce of U.S. majority-owned foreign affiliates is shifting towards more services activities as opposed to manufacturing. Manufacturing employment accounted for just 43.6% of total employment in 2009, the last year of available data. The top industry in terms of manufacturing employment was transportation, with U.S. affiliates employing nearly 400,000 European workers, followed by chemicals (295,000 workers). Wholesale employment was among the largest sources of servicesrelated employment, which includes employment in such areas as logistics, trade, insurance and other services-related activities. Although services employment among U.S. affiliates has grown at a faster pace than manufacturing employment over the past decade, it is interesting to 20 the transatlantic economy 2012 volume 1

35 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind note that U.S. affiliates employed more manufacturing workers in Europe in 2009 (1.8 million) than in 1990 (1.6 million). However, while the aggregate number has increased, the geographic distribution of U.S. manufacturing employment in Europe has shifted over the past few decades. In general, the shift has been towards lower-cost locations like Ireland, Poland and Hungary, at the expense of the United Kingdom, France and Germany. To this point, the latter three nations accounted for 67% of total U.S. affiliate manufacturing employment in Europe in In 2009, the share had been reduced to slightly less than half, 48.3%. The United Kingdom took the biggest hit, with the UK s share of U.S. affiliate manufacturing employment accounting for just 16.3% of the total in 2009 versus a share of 29% in Between 1990 and 2009, U.S. affiliate manufacturing employment in the United Kingdom fell by roughly 36%, and fell in Germany by 8.6%. Meanwhile, manufacturing employment in Ireland soared by over 40% over the same period. From virtually zero in 1990, the combined share of affiliate manufacturing employment in Poland, the Czech Republic and Hungary totaled 10.3%, indicative of the eastern movement of U.S. European operations. Interestingly, even with the decline of manufacturing employment in Germany, the manufacturing workforce of U.S. affiliates in Germany alone totaled 371,000 workers in 2009 above the number of manufactured workers employed in Brazil by U.S. affiliates (295,000) yet below the figures of China (516,000). When it comes to affiliate employment, trends in the United States are similar to those in Europe. In other words, despite stories on the continent about local European companies decamping for cheap labor markets in central Europe or Asia, most foreigners working for European companies outside the EU are Americans. European majority-owned foreign affiliates directly employed roughly 3.5 million U.S. workers in 2010 some 700,000 less workers than U.S. affiliates employed in Europe. The top five European employers in the U.S. in 2010 were firms from the United Kingdom (900,000, down from 978,000 in 2008), Germany (585,000, down from 617,000 in 2008), France (525,000, down from 554,000 in 2008), Switzerland (433,000, up from 389,000 in 2008) and the Netherlands (344,000, down from 349,000 in 2008). European firms employed roughly two-thirds of all U.S. workers on the payrolls of majority-owned foreign affiliates in Table 5: The U.S. - European Employment Balance Thousands of employees, Country European Affiliates of U.S. Companies U.S. Affiliates of European Companies Employment Balance Austria Belgium Denmark Finland France Germany Ireland Italy Luxembourg Netherlands Norway Spain Switzerland United Kingdom 1, Europe 4, , Note: Employment balance + favors the United States Source: Bureau of Economic Analysis 1. Estimates Majority-owned bank and non-bank affiliates In the aggregate, the transatlantic workforce directly employed by U.S. and European foreign affiliates in 2010 was roughly 7.7 million strong. That said, as we have stressed in our last survey, these figures understate the employment effects of mutual investment flows, since these numbers are limited to direct employment, and do not account for indirect employment effects of nonequity arrangements such as strategic alliances, joint ventures and other deals. Moreover, affiliate employment figures do not include jobs supported by transatlantic trade flows. Traderelated employment is substantial in many U.S. states and many European regions. In total, and adding in indirect employment, we estimate that the transatlantic work force numbers some million workers. Europe is by far the most important source of onshored jobs in America, and the U.S. is by far the most important source of onshored jobs in Europe. 4. research and Development (R&D) of Foreign Affiliates While most multinationals still tend to cluster their R&D expenditures and activities in their home the transatlantic economy 2012 volume 1 21

36 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind table 6: The Innovation Top 20 R & D Spending Rank 2010 Company 2010, $US Millions Change from 2009 Headquarters Location Industry 1 Roche Holding 9, % Europe Healthcare 2 Pfizer 9, % North America Healthcare 3 Novartis 9, % Europe Healthcare 4 Microsoft 8, % North America Software and Internet 5 Merck 8, % North America Healthcare 6 Toyota 8, % Japan Auto 7 Samsung 7, % South Korea 8 Nokia 7, % Europe Computing and Electronics Computing and Electronics 9 General Motors 6, % North America Auto 10 Johnson & Johnson 6, % North America Healthcare 11 Intel 6, % North America 12 Panasonic 6, % Japan Computing and Electronics Computing and Electronics 13 GlaxoSmithKline 6, % Europe Healthcare 14 Volkswagen 6, % Europe Auto 15 IBM 6, % North America Computing and Electronics 16 Sanofi - Aventis 5, % Europe Healthcare 17 Honda 5, % Japan Auto 18 AstraZeneca 5, % Europe Healthcare 19 Cisco Systems 5, % North America Computing and Electronics 20 Siemens 5, % Europe Industrials Source: Booz & Company Top 20 Total 141, % country, foreign affiliate R&D has become more prominent over the past decade as firms seek to share development costs, spread risks and tap into the intellectual talent of other nations. Alliances, cross-licensing of intellectual property, mergers and acquisitions and other forms of cooperation have become more prevalent characteristics of the transatlantic economy in the past decade. The internet, in particular, has powered greater transatlantic R&D. The complexity of scientific and technological innovation is leading innovators to partner to share costs, find complementary expertise, gain access to different technologies and knowledge quickly, and collaborate as part of open innovation networks. Cross-border collaboration with foreign partners can range from a simple oneway transmission of information to highly interactive and formal arrangements. Collaboration with foreign 22 the transatlantic economy 2012 volume 1

37 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind customers and/or suppliers helps firms develop new products, processes or other innovations. 3 Bilateral U.S.-EU flows in research, development and innovation are the most intense between any two international partners. In 2009, the last year of available data, U.S. affiliates sunk $22.7 billion on research and development in Europe, or roughly 63% of total R&D expenditures of total global R&D by U.S. foreign affiliates of $36 billion. R&D expenditures by U.S. affiliates were greatest in Germany, the United Kingdom, Switzerland, France, Sweden, Belgium and Ireland. These seven countries accounted for nearly 84% of U.S. global spending on R&D in Europe in In the United States, meanwhile, expenditures on R&D performed by majority-owned foreign affiliates totaled nearly $43.4 billion in 2009, up nearly 7% from the prior year. As in previous years, a significant share of this R&D spending emanated from world-class leaders from Europe, given their interests in America s highly skilled labor force and first-class university infrastructure. Most of this investment took place among European firms in such research-intensive sectors as energy, chemicals, telecommunications, and automobiles. In 2009, R&D spending by European affiliates totaled $31.3 billion, up from $30 billion the prior year, and accounting for 72% of all R&D performed by majority-owned foreign affiliates in the United States. By country, Swiss-owned R&D in the U.S. totaled $9.1 billion in 2009, up sharply from the year before ($6.9 billion). Swiss firms accounted for 21% of total affiliate R&D in the United States. British affiliates accounted for a 15% share in 2009, trailing both Switzerland and Japan. Germany s share of R&D spending was nearly 15%, mainly concentrated in transportation equipment, pharmaceuticals and machinery. Given recessionary conditions in the U.S., German investment fell 3.5% in 2009, while French R&D investment plunged nearly 14%. As the accompanying table underscores, some of the world s most innovative companies are domiciled in the United States and Europe. 5. Intra-Firm Trade of Foreign Affiliates While cross-border trade is a secondary means of delivery goods and services across the Atlantic, the modes of delivery affiliate sales and trade should not be viewed independently. They are more complements than substitutes, since foreign table 7: Related Party Trade, 2010 US Imports: "Related Party Trade," as % of Total US Exports: "Related Party Trade," as % of Total European Union Germany France Ireland Netherlands United Kingdom Source: U.S. Census Bureau investment and affiliate sales increasingly drive cross-border trade flows. Indeed, a substantial share of transatlantic trade is considered intra-firm trade or related-party trade, which is cross-border trade that stays within the ambit of the company. Intra-firm or related-party trade occurs when Volkswagen or Mercedes of Germany send parts to Volkswagen of Tennessee or Mercedes of Alabama; when Lafarge or Michelin send intermediate components to their plants in the Greater Cincinnati area, or when 3M ships components for its office products or communications sectors from St. Paul to affiliates in Germany or the UK. The tight linkages between European parent companies and their U.S. affiliates are reflected in the fact roughly 60.3% of U.S. imports from the European Union consisted of related-party trade in The percentage was even higher in the case of Ireland (83%) and Germany (67%). Meanwhile, roughly 30% of U.S. exports to the EU in 2010 represented related-party trade, but the percentage is higher for some countries. For instance, nearly half of total U.S. exports to the Netherlands in 2010 (48%) was classified as related-party trade. 6. Foreign Affiliate Sales U.S. foreign affiliate sales on a global basis (goods and services) rebounded in 2010, increasing to $5.3 trillion by our estimates, after having declined in 2009 as a result of the global recession. In comparison, total U.S. exports amounted to $1.8 trillion in 2010 a sizable difference that underscores the primacy of U.S. foreign affiliate sales over U.S. exports. One of the best kept secrets in Washington is how U.S. firms actually deliver goods and services to foreign customers. As usual, Europe accounted for the bulk of U.S. affiliate sales in 2010, or 51% of the total. Sales rebounded to the transatlantic economy 2012 volume 1 23

38 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Table 8: U.S. Earnings from Europe Hitting New Highs (U.S. foreign affiliate income from Europe) U.S. $Billions * Source: Bureau of Economic Analysis * Data through 3Q2011. Data annualized for full year estimate an estimated $2.4 trillion in 2010 close to the record high of $2.9 trillion reached in 2008, before the onset of the transatlantic recession and a 13% plunge in sales in Reflecting just how important Europe is to Corporate America, sales of U.S. affiliates in Europe in 2009, the last year of available data, were roughly double comparable sales in the entire Asia/Pacific region. Affiliate sales in the United Kingdom ($602 billion) exceeded aggregate sales in Latin America. While U.S. affiliate sales in China have soared over the past decade, they do so from a low base, and still remain well below comparable sales in Europe. For instance, U.S. affiliate sales of $148 billion in China in 2009 were above those in Italy ($113 billion) but well below those in Germany ($322 billion) or France ($201 billion). U.S. foreign affiliate sales in Ireland ranked fourth in Europe at nearly $250 billion in 2009 a good share of these sales, however, take the form of U.S. affiliate exports to the EU and other third markets. Affiliate sales are also the primary means by which European firms deliver goods and services to consumers in the United States. In 2010, for instance, we estimate that majority-owned European affiliates sales in the U.S. ($1.9 trillion) were more than triple U.S. imports from Europe (roughly $552 billion). Affiliate sales rose roughly 7% in 2010 following a near 20% plunge the year before. By country, sales of British firms led the way, totaling an estimated $474 billion in 2010, followed by Germany ($354 billion). For virtually all countries in Europe, foreign affiliate sales were easily in excess of their U.S. imports in Foreign Affiliate Profits We estimate that U.S. affiliate income earned in Europe totaled $213 billion in 2011, a record high and well above the previous peak of $199 billion in Europe continues to be the most profitable foreign market in the world for U.S. affiliates. That said, however, one key caveat is in order: as mentioned above, affiliate earnings weakened over the second half of 2011 as the European debt crisis triggering widening credit spreads, a contraction in lending, a drop in consumer and business confidence pushed many parts of Europe into recession. Europe limped into The upshot: U.S. affiliate income is not likely to be as robust in 2012 as it was in U.S. affiliates in Europe enjoyed a record year in 2010, with affiliate income rising to an all time high of $ the transatlantic economy 2012 volume 1

39 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind billion, a near 12% increase from the prior year. The trend continued into 2011; affiliate income totaled $160 billion in the first nine months of the year, a rise of 8% from the same period a year earlier. Yet affiliate income softened in the third quarter of 2011 as economic growth slowed across Europe. Affiliate income totaled $52 billion in the third quarter, down just over 9% from the prior period. The weakness was widespread; affiliate income in Germany quarter to quarter declined 21% in the third quarter, while affiliates in Ireland, the Netherlands, and Switzerland posted annual losses in income of 5.3%, 1.3%, and 4.8%, respectively. Losses were even bigger in slow-growth United Kingdom, where affiliate income declined 27% in the third quarter from the prior quarter. Other trends are also at work. While Europe year in and year out typically accounts for over 50% of global U.S. affiliate earnings, Europe s global share declined in 2010 (to 48.5%) and to 45.8% in first three quarters of We believe the decline is cyclical rather than structural, however, and expect Europe s share to edge above the 50% mark once the region emerges from recession. On a comparative basis, U.S. affiliate income from Europe is staggering, nearly double the total earnings of South America and Asia in 2010 and again in the first nine months of It is interesting to note that combined U.S. affiliate income from China and India in 2010 ($13.5 billion) was a fraction earned in the Netherlands ($54 billion) and well below other European nations like Switzerland ($21 billion) and the United Kingdom ($26 billion). However, there is little doubt that the likes of India, Brazil and China are becoming more important earnings engines for U.S. firms. To this point, in the first nine months of 2011, U.S. affiliate income in China alone ($8.6 billion) was well in excess of affiliate income in Germany ($5.3 billion) and France ($3.8 billion). U.S. affiliates in Brazil earned over $9 billion in the January-September period, a figure well above many European countries. All of that said, we see rising U.S. affiliate earnings from the emerging markets as a complement, not a substitute, to earnings from Europe. The latter very much remains a key source of prosperity for corporate America. Similarly, the United States remains the most important market in the world in terms of earnings for many European multinationals. After profits of European foreign affiliates in the United States plunged 30% in recession year 2009, they soared by 41% in 2010 to a near record $105 billion. And in the first nine months of 2011, the income of European affiliates continued to rise, climbing some 19% from the same period the year before. All in all, we expect European affiliate income in the United States to have reached a record high of $120 billion in Strong gains were reported by various countries, with British and Dutch affiliate income in the first nine months of 2011 rising 33% and 34%, respectively, from the levels of Income among German affiliates rose 8%. 8. Transatlantic Services Linkages As we have remarked in the past, services are the sleeping giant of the transatlantic economy, or the one key area where there exists significant opportunities to strengthen and deepen transatlantic commercial ties. 4 The United States and Europe are the two leading services economies in the world. According to the World Trade Organization, the U.S. is the largest single country trader in services, while the EU is the largest trader in services among all world regions. Among the three largest components of global services trade travel, transportation and other commercial services Europe ranks number one in each category, accounting for 41.1% of world travel receipts, roughly 40% of world exports of transportation services, and half of world exports of other commercial services, whose activities run the gamut, from communications services, insurance, finance and many other activities. Overall, Europe accounted for 41.1% o total world receipts in By country, the U.S. ranked number one in the world in terms of world travel receipts in 2010, with a 14.1% share. Turkey ranked 6th and Switzerland 10th. Meanwhile, the U.S. accounted for 9.1% of world transportation services (receipts) in 2010, ranked Number 1 once again. Norway ranked 8th and Russia 10th in the world, the only two European countries in the global top ten. Finally, in terms of world exports of other commercial services, the U.S. was tops again in the world and by a wide margin; the U.S. global share was 16% in 2010, well above second-place India with a share of 4.9%. Only Switzerland, reflecting its status as a global financial hub, ranked in the top ten among European nations, coming in 6th in the transatlantic economy 2012 volume 1 25

40 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Table 9: U.S. - Europe Services Linkages U.S. Affiliates Services Supplied in Europe U.S. Services Exports to Europe U.S. $Billions Source: Bureau of Economic Analysis Majority-owned bank and non-bank affiliates. Services Supplied in Europe estimate for That said, Europe and the United States continue to lead the world when it comes to many different global services. For instance, of global exports of communication services in 2010, Europe s share global share was 58.6%, North America s 16.5%. Of insurance exports, Europe ranked 57.5% to North America s 24.8%; financial services Europe 55.8%, North America 23.1; computer and information service exports Europe 52.5%, North America 8.7%: royalties and fees Europe 41.2%, North America, 40.7%: and other business services Europe 49.5%, North America, 13.2%. All of the above underscores the underlying strength of U.S. and European services exports, with both transatlantic economies world class leaders in a host of services-related activities. That said, while transatlantic services trade figures are impressive, the more important services linkages are actually in mutual flows of foreign direct investment. The services economies of the United States and Europe have become even more intertwined over the past year, with cross-border trade in services and sales through affiliates posting strong gains. By sectors, transatlantic linkages continue to deepen in financial services, insurance, education, telecommunications, utilities, advertising, and computer services. Other sectors such as aviation and e-health are slowly being liberalized and deregulated. On a regional basis, Europe accounted for 37.8% of total U.S. services exports and for 41.5% of total U.S. services imports in Five out of the top ten export markets for U.S. services in 2010 were in Europe. The United Kingdom ranked #2, followed by Ireland (4th), Germany (5th), Switzerland (8th) and France (10th). Similarly, four out of the five countries just mentioned were among the top ten services providers to the U.S., the outlier being Ireland. The United Kingdom ranked #1, followed by Germany (5th), Switzerland (6th), and France (7th). The U.S. enjoyed a $43.7 billion trade surplus in private services with the EU in 2010, compared with its $80 billion trade deficit in goods with the EU. Thanks to a variety of factors stronger growth, the weaker dollar, EU enlargement, industry reform and deregulation U.S. private services exports to Europe nearly doubled between 2000 and 2010, rising from around $106 billion to $200.6 billion in U.S. services exports to Europe plunged by 11.5% in the transatlantic economy 2012 volume 1

41 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Table 10: Europe - U.S. Services Linkages European Affiliates Services Supplied in the U.S. U.S. Services Imports from Europe U.S. $Billions Source: Bureau of Economic Analysis Majority-owned bank and non-bank affiliates. Services Supplied in the U.S. estimate for but rose 1% in 2010, helped by rising exports (or receipts) of a number of services-related items like travel, passenger fares, and royalties and license fees. Gains were also reported among exports of other private services, or in such value-added activities as computer processing, engineering, advertising and related activities. In this category, U.S. exports to the EU totaled nearly $79 billion in 2010, yielding a $15.5 billion trade surplus. U.S. private services imports from Europe, meanwhile, also rebounded in 2010, up 2.9%, after declined by roughly 11% in Services imports peaked at $166.2 billion in 2008, more than double the levels of The same top countries that ranked in the top ten U.S. services export markets also ranked among the top ten services providers to the U.S. On a regional basis, Europe accounted for just roughly 41% total U.S. services imports in Meanwhile, while the U.S. recorded a near $80 billion deficit in goods exports with the EU in 2010, a sizable amount of the deficit in goods was offset by America s $44 billion surplus in private services. That was down slightly from a surplus of $47 billion in The U.S. enjoyed a sizable surplus in many activities, including financial services, telecommunications and in particular in other private services, notably in activities associated with business, professional and technical services. The latter surplus was roughly $11 billion in By activity, the U.S. registered a surplus in computer and information services, management consulting, legal services, construction engineering, and operational leasing with Europe in Top U.S. business services exports to Europe included management, consulting, and public relations services ($15.5 billion in 2010), research, development, and testing services ($8.8 billion); and computer and information services ($6 billion). Beyond trade, there are the foreign affiliate sales of services, or the delivery of transatlantic services by U.S. and European foreign affiliates. Sales of affiliates have exploded on both sides of the Atlantic over the past decade; indeed, affiliate sales of services have not only supplemented trade in services but also become the overwhelming mode of delivery in a rather short period of time. To the latter point, global affiliate sales of U.S. services rose more than 10-fold between 1990 and 2010, topping $1 trillion for the first time in In the same year, U.S. services exports were roughly half the level of affiliate sales of services. the transatlantic economy 2012 volume 1 27

42 The Post-Crisis Transatlantic Economy: The Eight Ties that Still Bind Not unexpectedly, and reflecting the transatlantic recession, sales of services of U.S. foreign affiliates in Europe declined in 2009, the last year of available data. Sales fell to $581 billion, a decline of 8.3% from the prior year. Notwithstanding this decline, affiliate sales of services were nearly triple U.S. services exports to Europe in the same year. The United Kingdom accounted for around 34% of all U.S. affiliate sales in Europe; UK services sales ($197 billion in 2009) were down 13.7% from the prior year but were nevertheless greater almost double than total affiliate sales of services in South and Central America, Africa, and the Middle East ($108 billion). On a global basis, Europe accounted for nearly 54% of total U.S. services sales. U.S. affiliate sales of services in Europe continue to exceed sales of services by U.S. affiliates of European firms. The latter totaled $422 billion in 2009, the former some $581 billion. However, on a country-bycountry basis, French and German affiliates sold more services in the U.S. in 2009 than American affiliates sold in France and Germany. Of particular note, European affiliate sales of services were more than two and a half times larger than U.S. services imports a fact that underscores the ever-widening presence of European services leaders in the U.S. economy. In fact, the U.S. and EU each owe a good part of their competitive position in services globally to table 11: America's FDI Roots in Europe (Billions of $) Industry US FDI to Europe % of Industry Total European Total 2,186 56% Manufacturing % table 12: Europe's FDI Roots in the US (Billions of $) Industry US FDI from Europe % of Industry Total Total from Europe 1,697 72% Manufacturing % Note: Historic-cost basis, 2010 Source: Bureau of Economic Analysis deep transatlantic connections in services industries provided by mutual investment flows. A good share of U.S. services exports to the world are generated by European companies based in the United States, just as a good share of EU services exports to the world are generated by U.S. companies based in Europe. In the end, these eight indices convey a more complete and complex picture of global engagement than simple tallies of exports and imports. Foreign direct investment and foreign affiliate sales, not trade, represent the backbone of the transatlantic economy. The eight variables just highlighted underscore the depth and breadth of the transatlantic commercial relationship. Endnotes 1. IMF; Bank for International Settlements; Steffen Kern, Global financial centres after the crisis, DB Research, August 2, 2010; Transatlantic Business Dialogue (TABD), EU- U.S. financial markets need for cooperation in difficult times, Brussels and Washington, February 2010; World Knowledge Competitive Index, available at 2. Figure includes Hong Kong SAR. See Steffen Kern, China s financial markets a future global force? Deutsche Bank Research, Frankfurt am Main, 2009, p. 22; Kern (2010), op. cit.; International Financial Markets in the UK, International Financial Services London, May 2010, p. 5; World Federation of Exchanges. For a detailed analysis of the role of U.S. and EU financial markets in the world economy, see Steffen Kern, EU- U.S. financial market integration work in progress, Deutsche Bank Research, Frankfurt, 2008; also TABD, op. cit. 3. OECD, Science and Technology Indicators 2009,op. cit. 4. For a closer examination of the transatlantic services economy, see Daniel S. Hamilton and Joseph P. Quinlan, eds., Sleeping Giant: Awakening the Transatlantic Services Economy (Washington, DC: Center for Transatlantic Relations, 2007). 5. Bureau of Economic Analysis, U.S. International Services, Cross-Border Services Exports and Imports by Type and Country, 2010; Eurostat. 28 the transatlantic economy 2012 volume 1

43 Notes on Terms, Data and Sources Employment, Investment, and Trade Linkages for the 50 U.S. States and Europe Data for investment as well as investment related jobs are from the U.S. Commerce Department s Bureau of Economic Analysis. Investment data measure gross property, plant, and equipment of affiliates. Europe includes Belgium, France, Germany, Italy, Netherlands, Sweden, Switzerland, and the United Kingdom. Trade data are from the International Trade Administration s Office of Trade and Industry Information at the U.S. Commerce Department. Europe includes Albania, Andorra, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bosnia- Herzegovina, Bulgaria, Croatia, Czech Republic, Cyprus, Denmark, Estonia, Faeroe Islands, Finland, France, Germany, Georgia, Gibraltar, Greece, Iceland, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Macedonia, Malta, Moldova, Monaco, Montenegro, Netherlands, Norway, Poland, Portugal, Romania, Russia, San Marino, Serbia, Slovakia, Slovenia, Spain, Svalbard, Sweden, Switzerland, Tajikistan, Turkey, Ukraine, United Kingdom, Vatican City. The top ten exports to Europe bar chart employs a logarithmic scale to facilitate cross state comparisons. Investment and Trade for the EU 27, Norway and Switzerland and the U.S. Investment data are from the Bureau of Economic Analysis. Trade data are from the IMF Trade Statistics. Data for the top ten U.S. imports bar charts are from the Office of Trade and Industry Information of the International Trade Administration. They employ logarithmic scales to facilitate cross-country comparisons. Terms Throughout this report, the term EU refers to all 27 member states of the European Union. The term EU15 refers to the older EU member states: the United Kingdom, Ireland, Belgium, Luxembourg, the Netherlands, Austria, Spain, Italy, Greece, France, Germany, Portugal, Sweden, Finland, and Denmark. The term EU12 refers to the newer EU member states: Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Malta, Cyprus, Romania and Bulgaria. About the Authors Daniel S. Hamilton and Joseph P. Quinlan have been producing The Transatlantic Economy annual survey since They have authored and edited a series of award-winning books and articles on the modern transatlantic economy, including Germany and Globalization (2009); France and Globalization (2009); Globalization and Europe: Prospering in a New Whirled Order (2008); Sleeping Giant: Awakening the Transatlantic Services Economy (2007); Protecting Our Prosperity: Ensuring Both National Security and the Benefits of Foreign Investment in the United States (2006); Deep Integration: How Transatlantic Markets are Leading Globalization (2005); and Partners in Prosperity: The Changing Geography of the Transatlantic Economy (2004). Together they were recipients of the 2007 Transatlantic Leadership Award by the European-American Business Council and the 2006 Transatlantic Business Award by the American Chamber of Commerce to the European Union. Daniel S. Hamilton is the Austrian Marshall Plan Foundation Professor and Director of the Center for Transatlantic Relations at the Paul H. Nitze School of Advanced International Studies, Johns Hopkins University. He also serves as Executive Director of the American Consortium on EU Studies (ACES), designated by the European Commission as the EU Center of Excellence Washington, DC. He is an advisor to the U.S. Business Roundtable, the Transatlantic Business Dialogue, and Microsoft. Recent books include Europe s Economic Crisis (2011), co-edited with Nobel Prize Laureate Robert Solow; and Europe 2020: Competitive or Complacent? (2011). He has served in a variety of senior positions in the U.S. State Department, including as Deputy Assistant Secretary of State. Joseph P. Quinlan is Senior Fellow at the Center for Transatlantic Relations, with extensive experience in the U.S. corporate sector. He is a leading expert on the transatlantic economy and well-known global economist/ strategist on Wall Street. He specializes in global capital flows, international trade and multinational strategies. He lectures at New York University, and his publications have appeared in such venues as Foreign Affairs, the Financial Times and the Wall Street Journal. His recent book is The Last Economic Superpower: The Retreat of Globalization, the End of American Dominance, and What We Can Do About It (New York: McGraw Hill, 2010).

44 The Transatlantic Economy 2012 Annual Survey of Jobs, Trade and Investment between the United States and Europe Volume 1: Headline Trends Daniel S. Hamilton and Joseph P. Quinlan The Transatlantic Economy 2012 annual survey offers the most up-to-date set of facts and figures describing the deep economic integration binding Europe and the United States. It documents European-sourced jobs, trade and investment in each of the 50 U.S. states, and U.S.-sourced jobs, trade and investment in each member state of the European Union and other European countries. It reviews key headline trends and helps readers understand the distinctive nature of transatlantic economic relations. Key sectors of the transatlantic economy are integrating as never before. Europeans and Americans have become so intertwined that they are literally in each other s business. These linkages underpin a multi-trillion dollar economy that generates millions of jobs on both sides of the Atlantic. The Transatlantic Economy 2012 offers a clear picture of the deep integration forces shaping the U.S.-European economic relationship today; shows how these interdependencies have shifted in recent years; and explains how decision-makers can address the accompanying opportunities and challenges. In the context of today s debates about jobs, competitiveness, financial crisis, changing economic fortunes and rising powers, The Transatlantic Economy 2012 provides key insights about the United States and Europe in the global economy, with often counterintuitive connections with important implications for policymakers, business leaders, and local officials. Center for Transatlantic Relations American Consortium on EU Studies EU Center of Excellence Washington, DC The Paul H. Nitze School of Advanced International Studies The Johns Hopkins University 1717 Massachusetts Ave., NW, Suite 525 Washington, DC Tel: (202) Fax (202) transatlantic@jhu.edu