In 1967, The American Challenge by Jean-Jacques Servan-Schreiber predicted that by the 1980’s American multinationals would have virtually bought up European industry. A decade later, there was another big scare—the Arabs were going to buy up all the US farmland (some farmers now wish this had been true, since the price of farmland subsequently collapsed). A bit later, the big worry was that American companies were building too many factories in Asia, supposedly “exporting jobs” to tax havens, or to places with “cheap labor.” Today, the latest anxiety is not that we are exporting factories, but that we are importing them!
After what may soon be the longest and strongest economic expansion in US history, it takes some ingenuity to find something to complain about. The most frivolous complaint, surely, is that the US is “the world’s biggest debtor.” After all, we used to be the world’s biggest lender—to Argentina, Peru, and Poland—and look where that got us. The difference between the value of foreigners’ smart investments in the US stock and bond markets and our own foolish loans abroad is the so-called “net debt”!
The zero-sum notion that the stock of US capital is fixed, so that if foreigners have more we must have less, is equally absurd. Those who sell shares in a US company to foreigners don’t just burn the money they receive. Instead, they use the proceeds to provide equity or loans for another business. The total of funds available to expand US businesses or to build new homes thus expands by roughly the amount of the foreign investment.
Land might seem to be a special case, because it is limited in quantity. But the value of land is not limited, and it will be most efficiently used if sold to the highest bidders. The amount of real estate offered for sale at any one time is quite small relative to the total available. To arbitrarily restrict the number and class of people who would be allowed to bid for the tiny amount of land, homes, and buildings offered for sale would reduce the market value of a vastly larger stock of US land. The effect of keeping foreigners out of the bidding process would thus end up making all US landowners and homeowners poorer. If someone wants to offer $500,000 for my house, I won’t check his citizenship very carefully, nor will I worry about ending up homeless. In any case, I have a right to sell my property to the highest bidder, and it’s none of the government’s business.
To place arbitrary limits on the uses to which foreign-owned dollars could be put (such as restricting the foreign use of dollars for investment) would likewise diminish the utility of dollars. Dollars simply become less valuable when they can only be used in certain limited ways. It is no coincidence that the announcement on October 14, 1987, that Congress was merely considering restrictions on foreign investment was quickly followed by a crash in both the dollar and the stock market.
It is a myth, though, that the weak dollar made US assets a bargain for foreigners. If foreigners thought the dollar would stay weak (it didn’t), then their profits on US assets, such as dividends and rents, would also be devalued when converted back into German marks or Japanese yen. The urge to invest in this country has persisted regardless of the exchange rate, because it reflects fundamentally improved investment opportunities in the US.
If a foreigner wants to invest in the United States, he must first acquire dollars. He can do that by selling either goods or assets from his own country to people who have dollars—overwhelmingly, Americans. We don’t want the assets of most other countries as much as we want ours, so they have to offer goods instead. Suppose a Swedish exporter sells us some vodka, and ends up with a million dollars. He then has only two choices: he can either buy US goods or US assets, such as stocks and bonds, or he can trade the dollars for another currency—but then whoever bought the dollars still has to buy American goods or assets. If many foreign exporters choose to hold American assets rather than goods, the result is an American capital surplus and matching current account (trade) deficit. It doesn’t last forever, though, because the imported factories and machines eventually produce more goods, and that increased production capacity replaces imports and expands exports.
What would happen if foreign exporters refused to accept American assets in payment for their exports? Then they would have to either buy more goods from us, sell less, or give us their goods for free. Either way, the trade deficit would vanish. This is what people mean when they say the US has been “mortgaging the future.” They mean foreigners will eventually buy more US goods by selling their US stocks and bonds. But we needn’t waste much time with any argument that begins by worrying that foreigners are buying too few US goods and then ends by worrying that foreigners will later buy too many US goods.
Any homeowner who has a mortgage is also “mortgaging the future” if we only look at the debt and ignore the value of the house. Such primitive single-entry bookkeeping is the source of most anxieties about debt, whether foreign or domestic. In fact, US asset values have grown far more rapidly than debt. According to a recent study by David Bradford, net worth of households (assets minus debts) increased by $2.2 trillion from 1980 to 1987, measured in constant 1982 dollars.
People in countries with a “capital deficit” (which is the other side of their current account surplus) are choosing to invest in the US rather than in their own countries. This is not merely financial capital. It means more offices, airports, and factories being built here rather than abroad. Such capital outflows make future production weaker in the trade-surplus countries and stronger in the United States. By not reinvesting Taiwanese savings within Taiwan, for example, that country has been exporting its seed corn. Countries that do that too long, including West Germany, are having a national “going out of business” sale.
If foreigners prefer to invest their savings in the US, rather than in their own countries, that means they expect, and help create, better opportunities for profitable production inside the US.
In a world where capital is free to move from one country to another with the speed of electronic communications, the whole 16th-century mercantilist idea that current accounts should be “balanced” makes no sense. To have zero current account deficits means zero capital flows, which is literally impossible. Things that are impossible should not be held up as ideal. Adam Smith explained it well in 1776. “Nothing can be more absurd,” he wrote, “than this whole doctrine of the balance of trade, upon which, not only [trade] restraints, but almost all the other regulations of commerce are founded.”
New York City has been running trade deficits with the rest of the United States for many decades. New York City imports all its food from places like Iowa and California, imports all its cars from places like Michigan, and produces almost nothing for export to other states. About all they have left are those much-maligned “service jobs”—on Wall Street and Madison Avenue. Economists and journalists who write about the alleged inferiority of service sector jobs are, of course, part of that same service sector. Few of them really want to work on assembly lines or in sweat shops.
A group called Citizens Against Foreign Control of America wants to slap a 20 percent tariff on all imports. That is, US consumers would pay a 20 percent tax so that manufacturers located here (including foreign-based companies, such as Nestle, Bayer, and Shell) could safely hike prices by 20 percent without fear of foreign competition. If such a protectionist policy were announced, foreign companies would rush to build and buy even more plants inside the US tariff wall. To do that, they would have to import machinery and parts, because we can’t build a new Toyota or Sony from scratch. The trade deficit would increase in the short run, even aside from the certainty of retaliation. With the cost of production and cost of living 20 percent higher than elsewhere, thanks to tariffs, the US economy would soon slip into chronic decay.
Before we get so generous with bailouts for sleepy old big businesses, we at least ought to ask what it means to describe a company as “American.” Ford is a giant producer of vehicles all over the globe. Ford imports the Scorpio from Germany, the Tracer from Mexico, and the Capri from Australia. But Ford (like Chrysler, CM, and Honda America) is also starting to export thousands of US vehicles, particularly to Europe. Are we to call Ford an American company merely because its headquarters happens to be in Dearborn? Half of IBM’s employees are overseas, so is IBM only half American? On the other hand, Honda is becoming mainly a US-based auto producer, even in the area of engine production, and is exporting US cars to Japan, Taiwan, and Europe. If American investors buy 51 percent of the shares in American Honda, which they are free to do, in what sense should Honda not be considered as “American” as, say, IBM or Ford?
Mitsubishi runs “Buy American” ads, because most of its consumer electronics are built here. Mitsubishi also has a 50-50 joint venture with Chrysler, which builds the Plymouth Laser and Eagle Talon in Illinois. Ford likewise owns 25 percent of Mazda, which builds the excellent Ford-designed Probe in Michigan. Such cars are already replacing imports, and can be easily exported in large quantities as soon as production catches up with a long list of waiting US buyers. Would the US really be better off without these brand new state-of-the-art auto plants? Does anyone really believe that Ford, Chrysler, or CM could and would have built similar plants and cars on their own, without any foreign money or technology? Japan’s newest and best auto and tire factories aren’t being built in Japan—they’re here. The same is true of the many German and Swiss chemical and drug companies—such as BASF, Ciba-Gigny, Sandoz and Hoechst—that employ many of my neighbors in New Jersey. Australian gold-mining companies have unleashed a new gold rush in the US. Canadian paper companies have expanded US capacity.
It is true, of course, that any dividends and capital gains from successful foreign enterprises in the US will go to those who made these businesses possible. That usually means a mixture of US and foreign investors, as in the Ford-Mazda and Chrysler-Mitsubishi deals. But if those supplying the funds happen to live in Zurich or London, paying interest and dividends on investments in successful enterprises is no more of a “burden” on the rest of us than if they lived in Des Moines. The main point is that we have the jobs and the tax base, even if part of the dividends go abroad.
The benefits from foreign takeovers of existing plants are somewhat more subtle than in the case of brand new factories, but nonetheless real. The New York Times recently wrote that foreign takeovers of ailing US firms “are creating serious competitive threats to American companies. . . . For example, the Goodyear Tire and Rubber Company is threatened by the new, more powerful Firestone.” Japan’s Bridgestone doesn’t sell nearly as many tires as Goodyear, and no Japanese tire stacks up very well in recent tests by Car and Driver. But Bridgestone plans to pour $1.5 billion into the ailing Firestone Company in three years, to try to give Goodyear a run for its money. That’s called competition, and it’s not so bad. The alternative would have been more imports of Bridgestone tires, rather than more and better US-made Firestones.
The facts about foreign investment are readily available in Mack Ott’s study for the Federal Reserve Bank of St. Louis, or in Michael Becker’s pamphlet for Citizens for a Sound Economy, but they have little influence on what is essentially a theological dispute. Foreigners hold about 1 percent of US farmland, 6 percent of US stock, 13 percent of corporate bonds, and 15 percent of all federal, state, and local debt. Yet US direct investment in other countries still exceeds foreign investment here. And foreign ownership is now a larger share of all major countries’ stocks and bonds because of greatly increased international diversification of investments. Some 36 percent of German government bonds have been snapped up by foreigners in recent years, including Americans.
Canada has been importing capital every year since the country’s birth, and it still has a foreign debt in excess of 40 percent of CNP. Yet without all those American and European mills, mines, and factories, Canada would have a standard of living similar to that of Mexico.
In what sense does the fact that some foreign investors have a large or controlling share of a few US companies mean that they “control” anything? They cannot force Americans to buy their products, or their securities, or to work in their plants. The critics want to have it both ways—arguing that three million jobs involved in foreign-owned firms doesn’t amount to much, and yet also arguing that we will somehow all end up slaves to foreign employers.
In what sense does foreign investment hamper US policy? It supposedly means the Federal Reserve can’t debauch the dollar with impunity, since foreigners will demand higher interest rates on bonds to compensate for the exchange rate risk. But that is equally true of American investors, who would fly back into Swiss francs or gold, as they did a decade ago, if the Fed inflated.
What has actually happened in the past seven years is that both foreign and American investors decided that the investment opportunities in the United States looked a lot brighter than elsewhere after tax rates were cut and inflation reduced. The result has been an enormous revitalization of the US economy, with manufacturing productivity rising by 4 percent a year, and the overall size of the economy (real CNP) a whopping 30 percent larger than it was in 1980.
Complaints about foreign investment are an odd mix of collectivist notions about “our” property, naive identification of multinational firms with the country where they have their headquarters, and raw special-interest pleading on behalf of restricted competition. If investment is good—and it is—then more investment is even better, regardless who clips the coupons.