EU-US economic linkages: The role of multinationals and intra-firm trade

EU-US economic relations go beyond that of traditional trade ties. Multinational companies and their affiliates abroad do not only represent vital elements of each other's domestic economy but are also major determinants of the movement of goods and capital across borders. In the light of the on-going Transatlantic Trade and Investment Partnership (TTIP) negotiations it becomes increasingly important to consider the impact of a given trade policy change on traditionally over-looked economic variables such as foreign affiliate output, value added and intra-firm trade. The goal of this paper is two-fold. First, we provide a comparative overview of multinational companies on the two sides of the Atlantic exploring data on production, value added, employment and intra-firm trade. Second, we consider the determinants of arm's length versus related party EU-US trade. Our findings suggest that EU-US arm's length trade is found to be relatively more supply driven (GDP of the exporter matters more) while conversely related party trade is relatively more demand driven (GDP of the importer matters more). Surprisingly, our results also show that related party trade is more sensitive to changes in tariffs than arm's length trade.