Consider this international trade conundrum: Say that a US-based multinational provides technology and managerial know-how to a firm in Europe. The firm uses these inputs to produce goods, which are then exported back to the US economy. As a result, the European economy has a trade surplus in goods vis-a-vis the US economy. However, a US firm gets all the profits. Is this good or bad for the US economy?
I won’t try to weigh and balance all the tradeoffs here, but something not too far from this example is happening in real life. Lorenz Emter, Michael Fidora, Fausto Pastoris, Martin Schmitz and Tobias Schuler present the patterns in “US trade policies and the activity of US multinational enterprises in the euro area” (ECB Economic Bulletin, Issue 4/2025).
The authors present this figure showing the “current account balance” between the US and the EU, the broad-based measure of trade flows that includes not just exports and imports of goods (which is called the “merchandise trade balance”), but also trade in services and flows of payments as a result of foreign direct investment.
The bars reaching up show trade in goods. As you can see, the euro area runs a trade surplus in goods with the US economy. The blue bar shows the share of the goods surplus due to US multinationals producing in the European Union. The bars reaching down show the areas where the US has a trade surplus with the euro area. The red bar shows the US surplus in trade of services, and the green bar shows the US surplus that is payments resulting from foreign direct investment. (For context: Seven countries in the European Union are not part of the euro area: Bulgaria, the Czech Republic, Denmark, Hungary, Poland, Romania, and Sweden. Euro-area GDP is roughly 90% of EU GDP.) Overall, the ECB authors write:
ECB estimates suggest that almost 30% of the euro area goods surplus with the United States in 2024 involved trade by euro area affiliates of US MNEs, while these companies accounted for around 90% of the euro area deficit in services trade.
Overall, the current account balance suggests that trade between the US and the euro area is near-balance, as shown by the black line. If the imposes substantial tariffs against imports from the EU, then it presumably will reduce imports of goods from the euro-area countries–including the imports of goods from US multinationals. In addition, less production by US multinationals in the euro area means that sales of US-based services to those multinationals is likely to drop substantially as well, and payments to US-based firms as a result of their past investments in euro-area operations will fall.
Again, I will not try here to weigh and balance all these tradeoffs. But I do want to emphasize several points: 1) Using only the merchandise trade balance can be a deeply misleading way to look at trade between two regions because it leaves out the other parts of the current account balance. 2) The tradeoffs from imposing tariffs on the European Union (and elsewhere, for that matter) have some complexity to them. 3) The US-based firms that use their technological and managerial expertise to produce in other countries around the world, both to sell in foreign markets as well as in the US market, are some of America’s most productive and successful firms–indeed, they are the US firms most-envied by high-income countries around the world.
(Hat tip to Edward Conard’s Macro Roundup, which is always full of intriguing graphs and figures from a wide array of sources.)
