“America First” policy should be reinterpreted as “America’s MNEs First” Policy

United States (US) President Donald Trump aims to keep American companies inside the US to secure American employment. International trade analysis suggests, though, this is a wrongheaded policy. The present situation is one where Japan, Korea, and members of the Association of Southeast Asian Nations (ASEAN) export intermediary goods to China, these countries’ subsidiaries or factories in China use a large proportion of these goods to assemble final goods for export to the US, European Union (EU), Japan, and elsewhere, and the US imports substantial amounts of assembled goods from China while exporting much less to China than those East Asian nations.

Put differently, whereas the horizontal division of labor between East Asian nations and China is making steady progress, US multinational enterprises (MNEs) are failing to achieve a horizontal division of labor with China. Statistically, if we look at the “trade specialization index” (which is derived by dividing net exports by gross trade) for the US and China, we find that the index in most of the industries is close to minus one, meaning the US only imports from China. In contrast, the index figure for Japan and China in most industries is close to zero, meaning a perfect horizontal division of labor has been achieved. To increase exports to China, US MNEs need to set up more factories and subsidiaries in China as this would promote a greater horizontal division of labor between the two countries. As the case of East Asian countries shows, this would be a more positive way for the US to profit from Chinese industrial dynamism while securing employment. In addition, from a geopolitical vantage point, an enhanced American presence in Asia through a more positive “America’s MNEs First” policy would prevent from China dominating the region and thus further protect US national interests.