Bureau of Economic Analyses

U.S. Intrafirm Trade in Goods

From the July 1997 SURVEY OF CURRENT BUSINESS

By William J. Zeile

Introcution

Trends in Intrafirm Trade

Industry Patterns of Intrafirm Trade

Intrafirm trade with MOFA's

Intrafirm trade of U.S. affiliates

Geographic Patterns of Intrafirm Trade

Intrafirm trade shares

Relation to trading-partner income levels

Introcution

Cross-border transactions between affiliated units of multinational companies account for a major share of U.S. international trade in goods. In 1994, these transactions—commonly referred to as "intrafirm trade"—accounted for more than one-third of U.S. exports of goods and for more than two-fifths of U.S. imports of goods.

As an aspect of the growing integration of the world economy, intrafirm trade has attracted considerable interest in recent years, particularly in the wake of the surge in international direct investment in the late 1980's./1/ Intrafirm trade plays a critical role in the operations of multinational companies (MNC's): It may help an MNC to reduce the costs of distributing goods abroad or of acquiring inputs from abroad or to integrate production processes on a global scale. Intrafirm trade may respond differently than trade between unrelated parties to changes in economic conditions; for example, it may—at least in the short term—be more insulated from competitive forces in particular markets or from overall changes in prices, exchange rates, or general economic conditions. Furthermore, the prices—often termed "transfer prices"—that govern intrafirm trade may have their own unique characteristics and determinants.

In a previous SURVEY OF CURRENT BUSINESS article, BEA presented aggregate estimates of U.S. intrafirm exports and imports of goods and services for 1982–93./2/ A disaggregation of the intrafirm-export and -import totals into the trade between U.S. parent companies and their foreign affiliates and the trade between foreign-owned U.S. affiliates and their foreign parent groups showed that intrafirm exports largely consisted of transactions by U.S. MNC's, whereas intrafirm imports largely consisted of transactions by foreign MNC's.

This article presents a more detailed examination of U.S. intrafirm trade in goods by U.S. MNC's and by foreign MNC's operating in the United States./3/ The intrafirm transactions are disaggregated by industry of affiliate, by country of destination or origin, and for foreign MNC's, by country of ownership.

In much of the discussion, the U.S. intrafirm trade of U.S. MNC's and of foreign MNC's is examined separately. This separation is warranted not only by the difference in the ownership of the investments (that is, whether it is U.S. or foreign) but also by a fundamental difference in the role that intrafirm trade has played in the operations of the MNC's: The intrafirm trade of U.S. MNC's has mainly been connected with manufacturing production by foreign affiliates, while the U.S. intrafirm trade of foreign MNC's has mainly been connected with marketing and distribution activities.

The following are highlights from the article:

• The intrafirm-trade shares of U.S. exports and imports of goods have changed little over the past two decades. For U.S. exports, the intrafirm-trade shares of both U.S. MNC's and foreign MNC's have fluctuated, with no sustained trend. For U.S. imports, an increase in the share of foreign MNC's was offset by a decrease in the share of U.S. MNC's.
• The intrafirm-trade share of the total trade of U.S. parent companies has increased markedly since 1982. However, because of a pronounced decline in the parents' share of total U.S. trade in goods, the share of U.S. goods trade accounted for by the intrafirm trade of U.S. MNC's has remained relatively flat.
• Since 1982, the intrafirm trade of U.S. MNC's has mainly been with their foreign manufacturing affiliates. However, the manufacturing affiliates' share of the intrafirm exports of U.S. MNC's has decreased somewhat, while their share of the intrafirm imports has increased.
• The U.S. intrafirm trade of foreign MNC's has mainly been with their U.S. wholesale trade affiliates. The share of intrafirm trade with manufacturing affiliates has increased substantially since the mid-1980's, but it still accounted for less than one-third of both the U.S. intrafirm exports and imports of foreign MNC's in 1994.
• The intrafirm-trade shares of U.S. exports and imports of goods vary widely by trading partner. Among the top six U.S. export markets in 1992, the share ranged from 70 percent for Japan to 12 percent for Taiwan. Among the top six source-countries for U.S. imports, the share ranged from 71 percent for Japan to less than 10 percent for China and Taiwan.

The remainder of this article consists of three parts. The first part discusses trends in the shares of U.S. exports and imports of goods that are accounted for by intrafirm trade and in the shares accounted for by the intrafirm trade of U.S. MNC's and of foreign MNC's. The second part discusses industry patterns in the intrafirm trade of U.S. MNC's and foreign MNC's and examines the industry patterns of intrafirm trade of foreign MNC's by country of ultimate beneficial owner (UBO)./4/ The final part discusses the variation in intrafirm trade shares among U.S. trading partners and explores the relation between these shares and the per capita income levels of the partner countries.

Trends in Intrafirm Trade

Although fluctuating moderately during the past two decades, the shares of intrafirm trade—both by U.S. MNC's and by foreign MNC's—in U.S. exports and imports of goods have changed very little. In 1977 (the earliest year for which trade data for both U.S. MNC's and foreign MNC's are available), intrafirm trade accounted for 35 percent of U.S. exports and 44 percent of U.S. imports. From 1982 to 1993, the share for exports fluctuated between 32 percent and 40 percent (chart 1); the share for imports—having dropped sharply between 1977 and 1982—increased in most years in the 1980's (chart 2). By 1994 (the latest year for which data are available), the share for exports had risen slightly, to 36 percent, while the share for imports had declined slightly, to 43 percent./5/

For both exports and imports, intrafirm trade has mainly consisted of shipments from parents to their affiliates rather than shipments to parents from their affiliates. U.S. intrafirm exports have mainly been accounted for by the intrafirm trade of U.S. MNC's—that is, shipments from U.S. parent companies to their foreign affiliates; the share in most years has ranged from two-thirds to three-fourths. Since 1982, U.S. intrafirm imports have mainly been accounted for by shipments from foreign parents and other member-firms of the foreign parent group to their U.S. affiliates./6/

The share of total U.S. goods exports that is accounted for by the intrafirm trade of U.S. MNC's has fluctuated between 22 percent and 28 percent. The share increased substantially in 1982–85, decreased gradually in the late 1980's, and then increased gradually after 1990./7/

The share of total U.S. goods imports that is accounted for by the intrafirm imports of U.S. MNC's has consistently been smaller than the corresponding share of exports. The share dropped sharply from 24 percent in 1977 to 16 percent in 1982; the drop can be largely attributed to a reduction in intrafirm imports from petroleum affiliates, partly as a result of transfers in the ownership of petroleum-producing assets in Middle Eastern countries to the host governments./8/ Since 1982, the import share has been quite stable (in the range of 15 to 18 percent).

Because the U.S.-parent-company share of total U.S. goods trade has declined since the early 1980's (chart 3), the share of U.S. goods trade accounted for by intrafirm trade of U.S. MNC's has not increased substantially, even though the share of total goods trade by U.S. parent companies accounted for by intrafirm trade has increased markedly.

From 1982 to 1994, the share of U.S.-parent-company exports that were shipped to their foreign affiliates increased from 31 percent to 42 percent, while the share of U.S.-parent-company imports that were sourced from their foreign affiliates increased from 36 percent to 50 percent (chart 4). The share of U.S. goods exports accounted for by U.S. parent companies decreased substantially in the late 1980's (when the U.S. dollar was depreciating in world currency markets), perhaps as a result of an increased export orientation on the part of smaller U.S. firms in response to new market opportunities overseas. The share of U.S. goods imports accounted for by U.S. parent companies (which include most major U.S. petroleum companies) decreased in the early 1980's, when the share of total U.S. goods imports accounted for by petroleum imports declined as a result of a decline in oil prices.

U.S. intrafirm exports of foreign MNC's have accounted for about 10 percent of total U.S. goods exports since 1977; the share has fluctuated between 7 percent and 12 percent. In most years before 1986, the share exceeded 11 percent, primarily reflecting the longstanding, dominant role played by Japanese-owned wholesale trade affiliates (particularly affiliates of Japan's largest general trading companies) in handling U.S. exports to Japan. (Japanese-owned affiliates accounted for most of the U.S. intrafirm exports of foreign MNC's throughout 1977–94.) The share dropped below 10 percent in 1986–90, despite the surge in direct investment in the United States, and it has hovered around 10 percent since then. The U.S. intrafirm imports of foreign MNC's have accounted for a much larger share of total U.S. goods imports—about 20 percent or more—since 1977. The share of imports increased substantially in 1984–90—from 21 percent to 28 percent—but has declined somewhat since. Like exports, a very large share of the U.S. intrafirm imports of foreign MNC's has been accounted for by Japanese-owned affiliates.

Table 1.—Total U.S. Trade in Goods and Intrafirm Trade in Goods, 1977-94

n.a. Not available.

1. Data are from the Bureau of the Census.

Industry Patterns of Intrafirm Trade

The U.S. intrafirm trade of U.S. MNC's and the U.S. intrafirm trade of foreign MNC's have taken fundamentally different forms and have had quite different industry compositions. The intrafirm trade of U.S. MNC's can be viewed as an aspect of the international division of manufacturing production between affiliated parts of the MNC: For both exports and imports, most of this trade has been between U.S. manufacturing parents and their foreign manufacturing affiliates. The intrafirm exports to these manufacturing affiliates have mainly consisted of materials and components for further processing or assembly./9/ (Data on the intended use of U.S. imports from these foreign affiliates are not available.) In contrast, U.S. intrafirm trade of foreign MNC's has been connected largely with distribution and marketing activities: For both exports and imports, this trade has mainly been accounted for by U.S. wholesale trade affiliates. The imports by these affiliates from their foreign parent groups have consisted almost exclusively of goods for resale by the affiliates without further manufacture./10/ (Data on the intended use of exports by these affiliates are not available.)

The rest of this section presents added detail on the pattern of U.S. intrafirm trade associated with U.S. and foreign MNC's by industry of affiliate. In this section, the discussion of the intrafirm trade of U.S. MNC's is necessarily restricted to the intrafirm trade between U.S. parent companies and their majority-owned foreign affiliates (MOFA's); however, in the aggregate, intrafirm trade with MOFA's accounts for a very high share of U.S. intrafirm trade with all foreign affiliates./11/

Intrafirm trade with MOFA's

Since 1982, MOFA's in manufacturing have consistently accounted for a dominant share of both U.S. intrafirm exports to MOFA's and U.S. intrafirm imports from MOFA's (table 2). The share of intrafirm exports to MOFA's that is accounted for by manufacturing affiliates has declined somewhat since the mid-1980's, when it exceeded 70 percent, while the share of exports to wholesale trade affiliates has increased. In contrast, the share of intrafirm imports from MOFA's that is accounted for by manufacturing affiliates has increased markedly—from less than 50 percent in 1977 to more than 80 percent in 1994—while the share of imports from petroleum affiliates has declined.

Table 2.—Intrafirm Trade in Goods Between U.S. Parent Companies and Their Majority-Owned Foreign Affiliates, by Major Industry of Affiliate, 1977 and 1982-94

MOFA Majority-owned foreign affiliate

Much of the intrafirm trade with manufacturing affiliates has consisted of trade with motor vehicle affiliates: In 1982–94, the share of total intrafirm trade with manufacturing MOFA's that was accounted for by motor vehicle affiliates ranged from 38 to 48 percent for exports and from 44 to 54 percent for imports. Much of this trade was with affiliates in Canada, reflecting the large volume of auto-related trade since the U.S.-Canada Automobile Agreement of 1965. Intrafirm trade with affiliates in machinery industries (industrial and electronic and other electric machinery manufacturing) has also been substantial, accounting for 27 to 32 percent of intrafirm exports to, and for 30 to 37 percent of intrafirm imports from, manufacturing MOFA's.

The share of intrafirm exports that was to MOFA's in wholesale trade increased substantially in 1984–94—from 25 percent to 37 percent. Much of this trade was in machinery products./12/

In 1977, petroleum affiliates accounted for 49 percent of total intrafirm imports from MOFA's; however, by 1982, their share had dropped to 35 percent, partly as a result of the transfers in the ownership of petroleum-producing assets in Middle Eastern countries to host governments. The share continued to decline in 1982–86, reflecting a fall in the U.S.-import price of crude oil.

Intrafirm trade of U.S. affiliates

Unlike the intrafirm trade of U.S. MNC's, which has been dominated by trade with manufacturing affiliates, the intrafirm trade of foreign MNC's—between U.S. affiliates and their foreign parent groups—has been mostly with wholesale trade affiliates. Through the mid-1980's, these affiliates accounted for more than three-fourths of the intrafirm exports and imports of foreign-owned U.S. affiliates; in more recent years, the share has been closer to two-thirds (table 3).

Table 3.—Intrafirm Trade in Goods Between U.S. Affiliates of Foreign Companies and Their Foreign Parent Groups by Major Industry of Affiliate, 1977-94

Until recently, the intrafirm exports by wholesale trade affiliates largely consisted of homogeneous commodities—such as food and crude materials—shipped by affiliates of Japan's general trading companies or by French-owned affiliates specializing in farm products./13/ The share of the intrafirm exports of wholesale trade affiliates that was accounted for by food and crude materials was 59 percent in 1980 and 50 percent in 1987 (table 4). By 1992, however, this share had declined to 41 percent, reflecting an increase in the importance of manufactured goods in intrafirm exports.

Table 4.—Intrafirm Trade in Goods Between U.S. Wholesale Trade Affiliates and Their Foreign Parent Groups, by Product, for Selected Years

D Suppressed to avoid the disclosure of data of individual companies.

In contrast, the intrafirm imports of wholesale trade affiliates have mainly consisted of heterogeneous manufactured products, such as machinery products or road vehicles and parts. For such products, a local presence in the form of wholesale trade affiliates may be required to provide specialized after-sales service or to obtain continuous feedback on customer requirements and tastes. Most of these affiliates were set up by foreign manufacturers to facilitate the marketing of their own products; in most years, intrafirm imports from their foreign parents have accounted for more than three-fourths of the total imports by these affiliates (table 3, column 11).

The shares of U.S.-affiliate intrafirm exports and imports accounted for by manufacturing affiliates have increased substantially. For exports, the share increased gradually from 12 percent in 1977 to 27 percent in 1994. For imports, the increase largely coincided with the surge in foreign direct investment in U.S. manufacturing industries in the mid-to-late 1980's; the share increased from 15 percent in 1985 to 27 percent in 1992./14/

Within manufacturing, the industry composition of intrafirm trade with U.S. affiliates has been somewhat more diversified than that of intrafirm trade with MOFA's; however, affiliates in chemicals and in electronic and other electric equipment have generally accounted for the largest shares of intrafirm exports and imports by U.S. manufacturing affiliates./15/

By country of UBO.—Since 1977, affiliates with UBO's in Japan have accounted for a dominant share of U.S.-affiliate intrafirm exports: The share has fluctuated in the range of 55 to 68 percent—many times larger than their share of U.S.-affiliate gross product (chart 5). Since 1982, Japanese-owned affiliates have also accounted for more than one-half of U.S.-affiliate intrafirm imports. For both exports and imports, this dominance mainly reflects trade by Japanese-owned wholesale trade affiliates, which function as intermediate agents for much of Japan's trade with the United States.

Within wholesale trade, Japanese-owned affiliates have accounted for about three-fourths of U.S.-affiliate intrafirm exports and for nearly two-thirds of U.S.-affiliate intrafirm imports (table 5). French-owned affiliates, mainly farm-product trading companies, have generally accounted for the second-largest share of the intrafirm exports; German-owned affiliates, mainly wholesale trade affiliates of motor vehicle manufacturers, have generally accounted for the second-largest share of the intrafirm imports. In manufacturing, the shares of the intrafirm trade of affiliates have been much more evenly distributed among investing countries. Japanese-owned affiliates accounted for the largest shares of both intrafirm exports and imports in 1994, but their share of exports was less than one-fourth, and their share of imports was less than one-third. German-owned affiliates accounted for the second-largest shares—about one-sixth of both exports and imports. In the 1980's, the shares of Japanese-owned affiliates were substantially smaller: In 1984, their share of exports was exceeded by the shares of German-, British-, and Canadian-owned affiliates, and their share of imports was exceeded by the shares of Canadian- and German-owned affiliates. The increased share of Japanese-owned affiliates after 1984 reflects the large increase in Japanese ownership in U.S. manufacturing industries in the late 1980's./16/

Table 5.—Intrafirm Trade in Goods Between U.S. Affiliates and Their Foreign Parent Groups, by Major Industry of Affiliate and by Country of UBO, for Selected Years