How does U.S. direct investment affect trade between the two countries?
A. U.S. direct investment in China increases the demand for U.S. capital goods, intermediate goods, services, and technology. In particular, it increases intrafirm trade between different units of the same U.S. multinational corporations. U.S. direct investment also increases trade in services between the two countries. The United States has consistently run a surplus vis-à-vis China in trade in services. Moreover, U.S. – and other foreign-invested firms in China are responsible for a large fraction of exports from China. In 2002, foreign-, including U.S.-, invested firms in China produced 52.2 percent of all Chinese exports. Likewise, foreign-invested firms in China produced a similar percentage of Chinese exports to the United States. Exports generated by foreign-invested firms have different economic welfare properties: The profits from such exports accrue in part to the foreign owners of those firms, not to the host country. A large fraction of Chinese exports are related to proces
