TABLE OF CONTENTS

<table><tbody><tr><td>INTRODUCTION<br>Edward A. Kangas</td><td>2</td></tr><tr><td>FOREIGN INVESTMENT IN THE UNITED STATES<br>A Touche Ross Survey</td><td>12</td></tr><tr><td>FOREIGN INVESTMENT IN THE UNITED STATES: A SIGN OF U.S. STRENGTH OR WEAKNESS?<br>A ROUNDTABLE DISCUSSION</td><td>17</td></tr><tr><td>FOREIGN INVESTMENT IN THE UNITED STATES: A CONGRESSIONAL POINT OF VIEW</td><td>27</td></tr><tr><td>UNDERSTANDING FOREIGN OWNERSHIP IN THE UNITED STATES<br>Representative John Bryant</td><td>34</td></tr><tr><td>FOREIGN INVESTMENT IN THE UNITED STATES<br>Senator Nancy L. Kassebaum</td><td>38</td></tr><tr><td>THE IMPACT OF FOREIGN INVESTMENT: IS LEGISLATION NEEDED?<br>Representative Richard A. Gephardt</td><td>41</td></tr><tr><td>FOREIGN DIRECT INVESTMENT: ASSET OR LIABILITY?<br>William E. Brock</td><td>46</td></tr><tr><td>WE SHOULD LOVE THE TRADE DEFICIT<br>John Rutledge and Deborah Allen</td><td>50</td></tr><tr><td>THE LAND-RUSH MENTALITY OF FOREIGN INVESTMENT<br>Pat Choate and Linda Spencer</td><td>56</td></tr><tr><td>THE CASE FOR FOREIGN DIRECT INVESTMENT<br>Howard H. Baker, Jr.</td><td>60</td></tr><tr><td>BUYING INTO AMERICA<br>Susan J. Tolchin</td><td>64</td></tr><tr><td>DO WE NEED TO CURB THE INVESTMENTS FOREIGNERS ARE MAKING IN THE UNITED STATES?<br>Alfred E. Kahn</td><td>70</td></tr><tr><td>IS AMERICA IN DECLINE?<br>Henry Kissinger</td><td>73</td></tr></tbody></table>

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# INTRODUCTION

Edward A. Kangas
Chief Executive, Touche Ross

The Touche Ross report on The Impact of Foreign Investment in the United States focuses on a subject that appears to strike deeply at our national sense of self-esteem. Nearly every day, we hear about "the buying-up of America," the "foreign invasion," or the "rising tide of foreign investment." Many Americans are surprised to learn that foreign investors own large portions of our commercial real estate, key segments of our industrial base, some of our most fertile farmland, and are beginning to influence our political process. And at some level, most of us feel dismayed about the transformation of the United States from the world's leading creditor to its leading debtor—all in a period of less than ten years. What has brought about this new economic order? What are its long-term ramifications? What, indeed, are the realities?

Late in 1988, as a public service to the business community and society, Touche Ross invited business leaders, government officials—both current and former—legislators, academics, and journalists to share their thinking about these and other questions surrounding foreign investment in the United States. We also asked Richard R. West, Dean of New York University's Leonard N. Stern School of Business, to assemble a panel of distinguished business leaders and educators to discuss this topic. To provide a benchmark, we surveyed more than 500 corporate executives in the fall of 1988, asking for their opinions about the effects of foreign investment on both U.S. business and America's social and cultural foundations. In January of this year, we also polled members of Congress on these same issues. And we invited Dr. Henry Kissinger to address the question implicit in all discussions of foreign investment in the United States: "Is America in Decline?"

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["(L)", "In articles, a roundtable discussion, and the Touche Ross survey, our contributors approach the topic from many different perspectives—as policymakers, lawmakers, business people, or scholarly observers. A number of common themes emerge, and, regardless of their political philosophy, our contributors agree more often than not. Ultimately, a sense of cautious optimism prevails.", "One point needs stressing, even before we look in more depth at some of the concerns raised in this report. For our contributors, foreign investment itself is not necessarily bad. Indeed, respondents to the Touche Ross survey are \"bullish\" in their belief that foreign investment actually helps the U.S. economy. Fifty-five percent believe it helps, 31 percent see little cause for alarm, while only 14 percent say that foreign investment poses a threat. At the same time, however, an undercurrent of concern is evident. More than one-fifth of executives completing the survey believe that accelerating foreign investment threatens America's social and cultural foundations.", "Let me turn now to a summary of the report's more significant points.", "Foreign investment in the United States has become a political issue. Our contributors recognize that foreign investment worries Americans—so much so that it has become a political issue. As Professor Alfred E. Kahn observes, \"The increasing tendency for the huge inflows of foreign capital to involve direct acquisitions of American businesses ... has generated an especial concern, vaguely expressed, that we may be 'losing control over our own destiny....'" William E. Brock, former Secretary of Labor, notes that politicians are \"becoming more and more vocal about the dangers of 'selling out America.'\" One result he sees is an attempt by \"alarmists\" to put \"advocates of an open world trading and investment system on the defensive\" by elevating foreign investment \"to the front political burner in 1989.\"", "5"]

In reality, we know little about the extent of foreign investment in America. Even though Americans are increasingly concerned about foreign investment, we are "ill-equipped," in Representative John Bryant's words, to understand the "far-reaching implications" it may hold for the nation's security. Why? "The reason is simple," he continues; "policymakers at all levels of government lack the hard and reliable information needed to assess the impact of foreign investment on the health and well-being of the U.S. economy, technological base, and national defense." Other contributors also cite this lack of hard information about who is buying what—and in what amounts. For this reason, some of the contributors to this report support the Bryant amendment, which would require foreigners to register their investments once they have been made.

America has become a debtor nation. Running almost as a refrain through the articles is the rueful recognition that the nation has lost status by becoming a major debtor nation. In writing about this transformation, Representative Richard A. Gephardt notes that because of our debt, the United States can no longer project its "vision of a progressive capitalism throughout the world," helping develop the Third World or financing new "Marshall plans." Instead, he says, America is "sucking up about $140 billion of foreign capital each year, selling our land, industries, and government bonds to foreign interests." Indeed, other contributors carry this idea even further, suggesting that we are selling off our birthright.

America is borrowing to support consumption, not long-term development. Professor Kahn strikes a note that others echo. The real problem lies in the use to which we put the capital that is flowing into the country. The villain, he argues, "is not the foreign capital, which is financing our profligacy. The

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villain is the profligacy itself." Others talk about our consumption "binge." Henry Kaufman, president of Henry Kaufman & Company, and participant in the Touche Ross-NYU roundtable, points out that the inflow of money in recent years "has financed U.S. consumption, which may not contribute to future economic prosperity." During the 19th and early 20th centuries, in contrast, the nation borrowed to finance its economic growth.

The causes of this inflow of foreign investment are complex—and not all bad. Nearly every contributor cites reasons for the acceleration of foreign investment in the United States. First, usually on any list, is the weak dollar. Much of this foreign investment, write Pat Choate, a vice president at TRW Inc., and Linda Spencer, a policy analyst at TRW Inc., is taking "advantage of the historic economic opportunity created by the weak dollar to rapidly buy up undervalued American assets...." Professor Susan Tolchin agrees, citing the attraction that "fire-sale prices" of American real estate and businesses have for foreign investors.

Those cheap prices, Choate and Spencer continue, are only the "frosting on the cake."
There are other and equally compelling reasons for investing in America: "Foreign buyers
have long been attracted by America's political stability, easy access to the world's largest
market, and the hedge that their U.S. investments provide against resurgent protectionism."

To a large degree, the participants in the Touche Ross survey agree. For them, political stability is the major reason for the accelerating rate of foreign direct investment. Running a close second is "favorable exchange rates."

Budget and trade deficits form the greatest threat to America's future. For our contributors, those twin deficits, federal budget and trade, stand both as major causal factors in the accelerating flood of foreign investment and

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as threats to America's future. Senator Nancy Kassebaum's concern, for example, lies not so much in the amount of foreign investment as in the lack of domestic investment. "The real and potential problems created by our own economic disorder are far more serious—and demanding of serious attention—than the problems now connected to foreign investment. Our towering deficits in the federal budget and balance of trade are financial hemorrhages that must be staunched." With one exception, our contributors agree that dealing with these deficits—especially the federal budget deficit—stands first on any list of the nation's priorities. That exception, furnished by John Rutledge and Deborah Allen in a reprinted Fortune article, focuses on the trade deficit, which the authors claim is actually good for the American economy. In their view, the trade deficit "represents nothing more than future export sales for American companies." American debts can be repaid "only by exporting American-made goods."

Foreign direct investment has provided American industry with new and necessary capital. Many contributors believe that America may be able to export its way out of debt because foreign investment has provided the capital to help us rebuild. For example, former Senator Howard Baker points out that the surge in foreign investment has come just when the United States needed it most. "In the face of aging industrial equipment, low capital expenditures, outdated modes of management and production, and increased foreign competition, foreign individuals and companies have intravenously strengthened our industrial base." Another participant in the Touche Ross-NYU roundtable, Elliott L. Richardson, senior partner, Milbank, Tweed, Hadley & McCloy, notes how foreign investments have helped U.S. manufacturers "introduce and ... develop new technologies." Moreover, he says, these investments "help upgrade U.S. competitiveness by strengthening skills in such areas as quality control."

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Closing doors to foreign investment makes little sense. Erecting barriers against foreign investment finds little support—either in the Touche Ross survey or among our contributors. Eighty-two percent of the survey respondents, for example, oppose broad protectionist legislation. A significant exception, however, is cited by all our contributors—industries vital to the nation’s security. Restrictions on foreign investment in defense contractors, for example, are appropriate.

A European perspective on the effects of protectionism is furnished by David M. Veit, president of Pearson Inc. At the Touche Ross-NYU roundtable, he speaks as one "who has been on the receiving end of American investment overseas." By restricting foreign investment, he says, the United States "will just have to borrow elsewhere." In addition, by erecting barriers to investment just as Europe is "starting to open up and ... be somewhat more receptive to foreign investment," the United States will be showing a "terrible sign of weakness." And William E. Brock argues that imposing controls on foreign direct investment or beginning a new era of protectionism must be seen as nothing less than insane.

What our contributors do want is fairness, a "level playing field," or reciprocity—the opportunity to invest equally in the countries that invest in the United States. As Rand Araskog, chairman and chief executive of ITT Corporation, says during our roundtable, "I'd like to see ... a standard of fairness. In countries where U.S. corporations receive inequitable treatment, we should set terms and conditions that make them equal or else prohibit further investment—both inbound and outbound—with those countries." At the same roundtable, Peter G. Peterson, chairman of The Blackstone Group, points out that reciprocity became a foreign trade issue during the 1980s. "Reciprocity in foreign investment will become a political and economic issue in the 1990s."

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In his article, Henry Kissinger draws on recent history to hazard a look ahead. His subject is nothing less than the state of our nation. I will use his ideas to close this introduction.

Is America in decline? he asks. His answer is a qualified no. The "prophets of gloom" who see America in shambles, "confuse decline with adjustment," he writes. They see an America that is "going the way of sixteenth century Spain." In reality, America is "seeking-not always wisely or with sufficient dispatch-to find its place in an increasingly polycentric world." America has not become weaker, militarily or economically. Rather, Dr. Kissinger says, "other nations have grown increasingly stronger, particularly in the economic arena."

Americans must recognize "that the relatively orderly and predictable world of the postwar era is disappearing, to be superseded by a more normal-and therefore more chaotic-world of multiple power centers." Our challenge, he continues, is to realize that "we live in a time of change." As a result we, and the rest of the democratic West, must "design a set of policies that accommodate to that reality in ways that assure that the new world our children will inherit is better than the one passed on to us." Doing so will take all our "collective wisdom and strength..." and leadership "in forging this new alliance."

If we fail, Dr. Kissinger warns, America will find itself in decline. "If we succeed, we will have reaffirmed what Americans have always believed-that the United States is not bound by the heavy hand of history."

The challenge is in our hands.

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A Touche Ross Opinion Survey

More than a century has passed since foreign investment reached its peak in post-Civil War America. In the late 1800s, for example, Europeans owned more than $3 billion worth of U.S. railroad securities—about one-third of the whole and more than twice the country’s total national debt.

Today, foreign investors are again flooding the United States with money. They own $1.5 trillion in U.S. assets, including $262 billion in foreign direct holdings (ownership or control of 10 percent or more of a U.S. company)—an increase of some 215 percent since 1980.

Although the current run-up in foreign investment recalls what happened in the 19th century, when foreign money helped Americans achieve the world's highest standard of living, its benefits today are less clear.

Does the rapid growth in foreign investment pose a threat to the economy and security of the United States, as some contend? Or, as others argue, does it actually strengthen U.S. interests by bringing in needed capital, introducing new technologies, and creating jobs for Americans?

Seeking answers to these and other questions, Touche Ross surveyed 519 top-ranking U.S. business executives for their views on the impact of foreign investment in the United States. Conducted in November 1988, the survey sought opinions on a wide range of topics, from whether foreign investment improves U.S. productivity to whether Congress will pass protectionist legislation limiting foreign direct investment.

Has the build-up in foreign investment in recent years helped or hurt the U.S. economy? Based on the survey's findings, a majority of the respondents (55 percent) say it benefits the U.S. economy, while 31 percent say it creates little cause for alarm. Only 14 percent find it threatening.

The survey reveals that respondents whose companies are based in the Southeast are least concerned; those with companies headquartered in the Mountain states express the greatest apprehension.

Broken out by industry, concern is the lowest among respondents whose companies are in transportation and utilities, while those in aerospace and defense express the greatest unease.

In judging the influence of foreign direct investment on various regions of the United States, 50 percent of those surveyed rate the Pacific Coast states as having benefited the most from foreign direct investment, followed by the Northeast, 25 percent; the Southeast, 17 percent; North Central, 15 percent; South Central, 15 percent; and Mountain, 1 percent.

Asked which five industry groups have been helped the most by foreign direct investment, respondents answered by listing automotive, real

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estate, health care, manufacturing, and investment banking—ranked in that order.

On the flip side, the five industries that respondents ranked as having suffered the most include automotive (the only industry receiving the highest rating in *both* categories), insurance, commercial banking, apparel and textiles, and health care.

Although respondents are bullish about the effect of foreign investment on the economy, they judge its impact on other U.S. interests less favorably. For example, 21 percent of those surveyed believe that foreign investment threatens U.S. social and cultural institutions. This view is strongest among survey participants from companies headquartered in the Mountain states and from companies in the retailing industry.

Among those surveyed who say that foreign investment does not imperil the country's socio-cultural underpinnings, respondents in the Southeast express the least concern, as do those whose companies are in the financial institutions industry.

In terms of benefits derived from foreign direct investment, more than two-thirds (67 percent) of those polled say it increases the country's economic productivity. By industry, respondents from the automotive industry represent the highest percentage (81 percent) citing this benefit; the lowest percentage (50 percent) includes aerospace and defense and real estate and construction.

Foreign direct investment also creates jobs for U.S. workers, say 86 percent of those surveyed. This finding holds true for a majority of respondents regardless of their titles, ages, board positions, and company locations and forms of business

(national or multinational companies). Respondents in the transportation and utilities industry account for the highest percentage (97 percent) agreeing that foreign direct investment creates new jobs. The lowest percentage (74 percent) is in agriculture and food processing.

Another benefit cited by 22 percent of the respondents is that foreign ownership of U.S. companies improves management-labor relations. Respondents in the energy industry account for the largest percentage (36 percent) of those agreeing that such ownership improves management-labor relations. Forty-six percent of those respondents who say it hampers relations represent companies based in the Mountain states.

What consequences would have followed if, five years ago, foreign direct investment had slowed or had been limited by Congress? Almost half (49 percent) the respondents say a recession would have resulted, 42 percent cite higher interest rates, and 33 percent mention greater unemployment. Nevertheless, a quarter of those surveyed say reductions or restrictions on foreign direct investment would have produced no economic problems. (Percentages total more than 100 because respondents checked more than one choice.)

In view of the respondents' opinions on the benefits of foreign direct investment versus the consequences of doing without it, it comes as no surprise that 82 percent of the respondents oppose congressional measures limiting foreign direct investment and that 79 percent oppose any efforts restricting passive investment in stocks, notes, and bonds. What's more, 82 percent believe that Congress will not pass protectionist legislation.

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Yet in an apparent contradiction, when asked whether the United States should restrict or even prohibit foreign direct investment in industries vital to the country's national interest, 71 percent of the respondents say yes. Of those who do, nearly all (99 percent) cite "defense industries" as candidates for special consideration, followed by "vital industries", such as health care and energy.

Among the survey's other highlights, respondents rank political stability as the number one reason for the rapid increase in foreign direct investment, followed by favorable exchange rates, access to U.S. markets to guard against the possibility that Congress would enact protectionist legislation, continued economic growth, and free-trade philosophy. Access to advanced technology failed to place among the top five, which is notable because such access is often cited as a goal of foreign direct investment.

In fact, in a separate question, respondents were asked whether the pursuit of technological advantage plays a key role in foreign direct investment. In keeping with the previous finding, only 15 percent of those surveyed say it does to a great extent.

The survey also reveals that 40 percent of the respondents believe the country's trade deficit will be eliminated within the next four years—a finding that seems to dovetail with their opinion that foreign direct investment helps the U.S. economy.

### PROFILE OF THE SAMPLE.
Out of the total sample of 519 survey respondents, 71 percent are corporate officers, and 30 percent are chief executive

officers. More than half the corporate officers represent businesses with annual sales of $1 billion or more. Sixty-two percent of the CEOs manage companies having sales or assets of at least $500 million.

Nearly three-fifths of those polled sit on two or more boards of directors; 84 percent are at least 45 years old; 52 percent list multinational companies as their primary affiliation, and 44 percent represent companies in which foreigners have some investment.

The respondents' primary industry identifications are: financial institutions, including commercial and investment banks and insurance companies, 21 percent; manufacturing, 18 percent; retailing, including apparel and textiles and drugs, pharmaceuticals, and cosmetics, 7 percent; high technology, including telecommunications, 6 percent; education, 6 percent; real estate and construction, 6 percent; agriculture and food processing, 5 percent; and transportation and utilities, 5 percent. Industries with less than 5 percent representation include consulting, health care, law, and media.

Regionally, 33 percent of the respondents live in the Northeast, 11 percent in the Southeast, 29 percent in the North Central states, 9 percent in the South Central states, 3 percent in the Mountain states, and 15 percent in the Pacific Coast states.

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FOREIGN INVESTMENT
IN THE UNITED STATES:
A SIGN OF U.S.
STRENGTH OR WEAKNESS?
A ROUNDTABLE DISCUSSION

For Touche Ross's

report on the *Impact of Foreign Investment in the United States*, we asked Richard R. West, dean of New York University's Leonard N. Stern School of Business, to bring together several prominent business leaders and former government officials for a roundtable discussion on foreign investment in the United States. Participants include:

Rand V. Araskog, chairman and chief executive of ITT Corporation.

Henry Kaufman, formerly of Salomon Brothers, now president of Henry Kaufman & Company.

Peter G. Peterson, former Secretary of Commerce, who is now chairman of The Blackstone Group.

Elliot L. Richardson, former Secretary of Defense and of Commerce, as well as Attorney General of the United States and current resident partner in the Washington office of Millbank, Tweed, Hadley & McCloy.

David M. Veit, president of Pearson Inc., a New York-based holding company for the U.S. assets of Pearson PLC. The British company has interests in publishing (including the *Financial Times*) and investment banking (including Lazard Frères).

Richard R. West, the dean of the Leonard N. Stern School of Business at New York University.

Following are excerpts from their January discussion, which was moderated by Dean West.

RICHARD R. WEST: Let me begin, if I may, by briefly quoting two well-known economists on the subject of direct foreign investment in the United States.

The first quote, published last December in *The Wall Street Journal*, comes from Milton Friedman, the Nobel laureate. He says: "It is a mystery to me why, to take a specific example, it is regarded as a sign of Japanese strength and U.S. weakness that the Japanese find it more attractive to invest in the U.S. than in Japan. Surely it is precisely the reverse—a sign of U.S. strength and Japanese weakness.... [Capital inflows] are precisely how the U.S. managed to grow so rapidly in the 19th century—by financing investment with funds from Britain and elsewhere. It was a good deal for the foreign investors but also for the U.S."

The other quote is from Harvard economist Benjamin Friedman. In his current bestselling book, *Day of Reckoning*, he writes: "Nobody would suggest that increasing foreign ownership of Zaire's assets or Ecuador's, or for that matter Argentina's or Brazil's, reflects the enhanced stability of these countries' political systems or of the attractiveness of their business climates, but rather their inability to export enough to finance their imports plus to service the debt they owe. The same circumstances with the same result have suddenly emerged in America."

Obviously, these are two very different views of foreign investment in the United States. From your perspective, does one more accurately portray the role of foreign investment in the United States today?

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**ELLIOT L. RICHARDSON:** I think both statements contain partial truths. It is true that compared with other nations, the United States is an attractive place in which to invest given our markets, political stability, and so on. Yet Milton Friedman's statement ignores Japan's high rate of savings, which seek opportunities for investment that are not available in Japan.

In the case of Ben Friedman's comparison of, say, Zaire and the United States, the calculation that Zaire is a good place in which to build a plant for production of backloaders, for instance, or forklifts may be a reflection of that country's potential market and political stability. It suggests that you can sell more forklifts to Zaire if you have a plant there using and training local labor, transferring technology, and contributing to the country's overall capacity to be a customer than if you simply tried to sell it forklifts built in the United States and shipped across the Atlantic.

**DAVID M. VEIT:** It's also an issue of balance, one in which need meets opportunity—need in the sense that the United States has to finance its deficits and opportunity for investors who perceive a genuine benefit to investing in the United States.

In the past couple of years, my company has spent about a billion dollars in direct investments in the United States. We did it not because we wanted to help finance U.S. deficits but because we saw strategic business opportunities here.

I believe the same holds true for the Japanese, or the British or the French, for that matter. I don't think they would make investments here if they didn't consider them attractive business opportunities.

**RAND ARASKOG:** Most economists are a little right or a little wrong, but Milton Friedman's all wrong. It makes no sense to me how he could

view the current situation as a sign of American strength and Japanese weakness. It's like saying that the Chicago Bears are stronger than San Francisco 49ers because they let the 49ers score four touchdowns.

**HENRY KAUFMAN:** What Milton Friedman tends to forget is that in the 19th century, the United States relied on foreign capital to finance investments and economic growth.

By contrast, the inflow of money from abroad in recent years has financed U.S. consumption, which may not contribute to future economic prosperity. That's a significant difference and one that has to be recognized.

**PETER G. PETERSON:** I agree with Henry. One of the most interesting points in Ben Friedman's book is that it's very important to examine the context and the purposes of foreign capital inflows. As he points out, much of the foreign capital of the late 1800s financed genuine investment, such as railroads and industrial production. And though our debt level was high, within two or three decades it had dropped significantly vis-à-vis the rest of the world, because these investments produced future returns.

As was just pointed out, a large part of today's foreign investment, which is about twice the previous record level, is for consumption. It seems to me that if we continue along this path for another 10 years, it'll be far less sustainable than the foreign investment of the late 1800s.

**WEST:** Some people say that in the early 1980s, foreigners invested in the United States for sound business reasons. Indeed, the argument goes that foreign demand for dollars to invest in the United States was so strong it drove up the dollar and

I think you could build a strong case that these investments, particularly in manufacturing, strengthen the U.S. economy.

—Elliot L. Richardson

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gave foreigners the chance to earn what they needed by selling relatively cheap goods to U.S. consumers. However, from 1984 on, the argument goes, America's demand for foreign-made goods has been so insatiable that foreigners have found themselves accumulating many more dollars than they might want to invest here, with the result that their recent investments, made with depreciated dollars, reflect a need to simply do something—almost anything—with their export earnings. Is there anything to this train of thought?

KAUFMAN: I think it's important to recall that in the early 1980s, while the United States was in the vanguard of world economic growth, other industrial nations were experiencing moderate or subnormal economic growth. At the same time, foreign investment in the developing countries had virtually ceased, largely because these countries experienced mounting debt problems.

It is quite understandable, then, that under these circumstances—high growth in the United States, sluggish growth in the rest of the industrial world, and difficult-to-get growth in the developing world—the United States would be the recipient of large inflows of foreign capital.

PETERSON: I remember a conversation I had with Milton Friedman when I was President Nixon's assistant for international economic affairs. We were discussing the country's rising trade deficit and Japan's undervalued yen, and he said: "Well, if those irrational Japanese want to ship us products at artificially low prices that increase our standard of living and accept a bunch of paper in return, we ought to be thrilled."

Now it seems to me that since the Japanese today are buying real assets with all that paper, it isn't just a matter of paper for consumer goods; it's

a matter of paper for real U.S. assets being bought far less expensively than 15 years ago.

RICHARDSON: Yet the flow of foreign money into direct investment in the United States is relatively low—about 22 percent of all foreign investment. And although Japan's share is increasing the fastest, it still ranks behind Great Britain and the Netherlands, with Canada a close fourth. I should note for completeness, however, that the Association for Foreign Investment in America predicts that Japan will overtake the Netherlands in 1989 as the second-largest foreign investor.

I think you could build a strong case that these investments, particularly in manufacturing, strengthen the U.S. economy. They export more than U.S.-owned manufacturers. They introduce and help develop new technologies. They help upgrade U.S. competitiveness by strengthening skills in such areas as quality control. And in some instances, they prevent plants from being closed that otherwise would be shut down by their U.S. owners.

ARASKOG: I don't know how accurate the statistics are on the real value of Japanese investment in the United States, but I suspect they're low. The state of Hawaii is essentially Japanese-owned. And look at the cities of Los Angeles and New York, where the Japanese have tremendous real estate holdings.

Also, I disagree with the suggestion that if foreigners are investing in major real assets here, it's okay, but when they're putting their money into portfolio investments, it's not. Negotiating a lease with a foreign investor who owns your office building is a lot different from dealing with one who owns only a 5 percent interest in that building.

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What worries me about the current level of foreign investment in the United States is the lack of public concern about where it might go. Right now, I think it's acceptable and, in some cases, beneficial. But we may quickly be approaching a point where that might not be the case.

**KAUFMAN:** No one around this table is saying that the United States has reached the breaking point. We can stretch that rubber band. But as we stretch it, we become more and more beholden to others and less and less independent, rational decision-makers.

**VEIT:** As one who has been on the receiving end of American investment overseas, I'd like to say that the United States is not going to solve its economic problems by restricting foreign investment. The country will just have to borrow elsewhere.

Secondly, I think it's tragic that just as the European market is starting to open up and to be somewhat more receptive to foreign investment, the United States seems to be turning the other way. I think it's a terrible sign of weakness.

**RICHARDSON:** The United States hasn't really said that it doesn't want foreign investment. There is a rising tide of apprehension, with strong emotional undertones. But when you ask, "Should we restrict foreign investment, or make it the subject of some sort of review process, as in Canada?" the answer tends to be no.

**ARASKOG:** What I'd like to see is a standard of fairness. In countries where U.S. corporations receive inequitable treatment, we should set terms and conditions that make them equal or else prohibit further investment—both inbound and outbound—with those countries.

In many parts of the world, especially in the Far East, if you want to be a partner in a joint venture, you have to come in as a minority share-

holder. In Latin America you can put the money in, but you can only take it out as a percentage of annual income or as a percentage of the capital investment.

**RICHARDSON:** Of course, what we're talking about is a radical, unilateral extension of restrictions on foreign direct investment. Yet in a narrower sense, I believe we face a choice between reciprocity versus national treatment.

The question then arises, Which is the fastest path to free investment? Would we, by matching the more restrictive practices of other countries, reduce the overall increase in worldwide economic growth and prosperity? Or would we be better off keeping our own capital markets open while pressing other countries to do the same?

One of the arguments made by the Reagan administration against both the Exxon-Florio national security provision and the Bryant amendment, attached to last year's trade bill, was that these were moves in the wrong direction from the standpoint of long-term U.S. interests, which have always favored new opportunities for U.S. investment in other countries. It was argued that these two measures would appear to signal a retreat into economic nationalism, which would weaken our hand in trying to persuade other countries to recognize that their long-term interests also lie in reduced restrictions.

**ARASKOG:** I agree we've got to keep foreign markets open. But I don't believe the United States has been aggressive enough—and here the media can play a big part—in pointing out the differences between investing in one country versus another. For example, which countries allow U.S. businesses to repatriate dividends and income and which do not?

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**KAUFMAN:** It seems to me that this issue of a level playing field encompasses both political and financial issues. If our country's debt problems persist, foreign creditors and equity owners are going to be concerned about the United States' financial and economic well-being because of their substantial interests here. As such, they may be reluctant to push to fulfill their own national aspirations for fear of harming their U.S. holdings.

The United States is very much concerned about the well-being of Brazil, Mexico, and Argentina. Why? Not just for political reasons, as important as they are, but also because our financial institutions have so much money tied up there.

The current situation requires a higher level of political and financial sophistication than would be necessary if we were the only country between the Atlantic and the Pacific Oceans, or if Japan was an island unto itself. In today's interdependent world, no country is an island.

**PETERSON:** What's been said, in effect—and I agree with it—is that just as reciprocity has become an issue in foreign trade in the 1980s, reciprocity in foreign investment will become a political and economic issue in the 1990s. For example, foreign direct investment in Japan is at an extraordinarily low level—on average, about one-tenth that of the OECD countries.

Now, going back to an earlier point, for those who are terribly concerned about foreign direct investment in the United States and suggest that we should restrict it, what would happen if the United States tomorrow passed a draconian law blocking direct investment?

**KAUFMAN:** First of all, equity prices would go down because the expectation of further demand for shares of American corporations would diminish, as you'd be taking an important buyer—the

foreign investor—out of the market. Secondly, since we're a debtor country, we would have to offer higher interest rates to foreigners to compensate them for investing in an increasingly uncertain economy. Also, the financial markets would become more volatile.

**ARASKOG:** I would add that we would probably trigger a worldwide recession, in part because of concern among other countries that our next step would be nationalization. I think the result would be disastrous, and we'd be unable to cope with it.

**PETERSON:** I'm not much of a student of economic history, but the insouciance with which we're building up our foreign debt makes me think of what happened to Great Britain during its 'stop and go' period. Perhaps Mr. Veit can tell us what actually happened during that period?

**VEIT:** I'm perhaps even less an economic historian than yourself. But I do know that during this time, Britain was the ultimate debtor nation. It received loans from the International Monetary Fund, imposed exchange controls, and instituted a lot of other policies common to countries that have a large debt.

How did Britain work its way out of debt? Not by restricting direct foreign investment but by controlling government spending, passing trade union legislation, and cutting personal income taxes.

**WEST:** So, it was domestic economic policy.

**VEIT:** Yes, but also industrial policy. We increased productivity in many areas by copying the industrial practices of the best foreign companies, whether Japanese or American.

The key to doing all this was a very strong government, which brings me to my next point.

23

(L)

Many of us in Europe sometimes stand back in
amazement watching what does or doesn't happen
in Washington. For all the good intentions of a
president or a congressional leader, it's amazing
how difficult it is for them to actually implement
economic policy.

KAUFMAN: Do you think that Europe's financial
and economic integration in 1992 will open up
markets or will it aggravate some of the problems
we've been talking about?

VEIT: It's very difficult to predict. I mean just
look at the numbers of consultants retained by
every multinational corporation to advise them on
the effects of 1992.

Ironically, I think one of the reasons why Brit-
ish investment in the United States has risen is
because many companies are not yet convinced
that 1992 will make a tremendous difference in
Europe. Obviously, Mrs. Thatcher has grave reser-
vations at the moment about what 1992 will mean
for Europe, both economically and politically.

WEST: Let's talk for a moment about other issues
that are sometimes put on the table with regard to
direct foreign investment. For example, how about
issues relating to national security? Are these
issues of concern only for companies that use
them for an excuse for not wanting foreign compe-
tition, or is there more to it than that?

RICHARDSON: Over the years, cases have been
brought under the security clause originally
enacted in the Trade Expansion Act of 1962, Sec-
tion 232, for products ranging from textiles to ball
bearings.

The analogous provision relating to foreign
direct investment is Executive Order 11,858 of
1975, which established the interagency Commit-
tee on Foreign Investment in the United States,

chaired by the secretary of the Treasury. In addi-
tion, the 1988 trade law gave the president broad
authority to block a merger, acquisition, or take-
over of a U.S. business by a foreign person on
national security grounds.

We did have the proposed Fairchild-Fujitsu
acquisition not long ago in which, after a deadlock
within the executive branch over how to define
guidelines that would apply to this situation, the
acquisition was simply abandoned rather than
forced to resolution—notwithstanding that
Fairchild is already owned by a French company.

ARASKOG: I recall the government making a
distinction between Fairchild being owned by the
French versus the Japanese.

RICHARDSON: Meanwhile, as I mentioned, the
Exon-Florio amendment in effect codifies the
obligation of the president to address any foreign
acquisition from the standpoint of whether it
might jeopardize national security. A number of
proceedings have already been brought, and this
morning's *Washington Post* discusses the situation
with respect to silicon wafers and the potential
sale by Monsanto of a subsidiary to Huels, A.G.,
a West German firm.

The irony of it all is that from the standpoint
of mobilization or U.S. defense production, many
key components of American weapons systems
already are manufactured abroad. So it's hard, in
any given case, to say that an acquisition of a par-
ticular manufacturer would threaten our national
security when another equally important compo-
nent vital to our defense needs has to be imported.

PETERSON: I have an anecdote that illustrates
how immensely political terms like 'national secu-
rity' are. In 1971, I was given the assignment of
negotiating a textile agreement with Japan. Presi-

What's to stop
a foreign firm from
taking over ITT,
especially when it
tells our
government, "Don't
worry, we'll
spin off the defense
technology
operations to
American
investors?"

—Rand V. Araskog

24

dent Nixon remembered vividly that he had won the 1968 election by a slim electoral margin and that he owed his victory almost entirely to the textile states. The textile industry had indicated it would contribute something like $2 million—which was real money in those days—to the president's 1972 campaign if he could resolve the textile matter.

Well, we kept half the government lawyers in Washington busy working on the issue. Then, one day, my friend, John Mitchell, U.S. Attorney General and, incidentally, head of President Nixon's campaign, proposed that the United States use the national security clause to impose textile quotas. I told him there wasn't any doubt that technically, the president could do that. But I said, 'John, what is your rationale for protecting textiles on national security grounds?'

He explained: "There are more workers employed in the textile industry than other industry. Jobs equate to economic security and economic security relates to national security, ergo we should impose quotas."

Notwithstanding this story, the question is: Are there not indeed situations in which the country's national security is affected by foreign investment but which are not currently adequately covered?

**ARASKOG:** There are specific areas but I don't think they are protected. For example, as part of my company's $3.4 billion backlog with the Department of Defense, we have a contract under which we've protected the life of the B-52 bomber over 40 years.

Now, I used to think this type of defense work was protected. But the way the SEC and the Justice Department have been acting and, to a degree, the Defense Department, who knows? What's to stop a foreign firm from taking over ITT,

especially when it tells our government, "Don't worry, we'll spin off the defense technology operations to American investors"?

**RICHARDSON:** Through my affiliation with the Association for Foreign Investment in America, of which I'm chairman, I've been focusing on what guidelines might look like in this area.

The question is whether or not national security is affected. And it's exceedingly difficult to answer when you look at such variables as the extent to which we already depend on overseas sources, the market share of the enterprise to be acquired, and the time it would take in a national emergency to step up production from other sources. I don't really know at this juncture whether it's even possible to determine with clarity or objectivity what standards ought to apply.

**PETERSON:** My experience has been that when someone tries to define a set of guidelines for a term such as 'national security'-much less 'productive investment'-it implies a rational process by which men of reasonable goodwill can agree or disagree. But I think the odds are high that once such a proposal, however well-intentioned, has worked its way through the executive branch and Congress, the meaning of such benign-sounding words as 'national security' will have become a political issue.

For example, consider how difficult it is to define national security vis-à-vis, say, even the Soviet Union. Just a few years ago, there was a school of thought that argued that the Soviet Union was near bankruptcy and that any attempt on our part to contribute to its economy was against our national security interests. This school of thought presumed that confronted with bankruptcy, the Soviet regime would yield, would soften. But there was an opposing school of thought that said the

25

worst thing that could happen would be for the
Soviet economy to collapse, because its military
would make a grab for scarce resources and would
become more repressive.

Now when you have a gulf in presumptions of
these dimensions, it's awfully hard to come up
with criteria with which everyone will agree and
apply equally, because their basic perceptions,
indeed philosophies, about the Soviet Union are
so different.

**WEST:** How about investments outside the area of national security? Is there any reason to restrict investments in, say, broadcasting, newspapers, or book publishing?

**VEIT:** I think and would hope that a British educational publisher would be considered *persona grata* in the United States. On the other hand, I can well understand that someone might ask, "Why would we want a British educational publisher teaching our children the history of the Civil War?" It's one thing if we're educating them in science or computers and quite another if we're teaching them American history.

The response is that American publishers
now have a large share of the market for educa-
tional textbooks in the United Kingdom. If we are
willing to let Americans educate our children, is
there any real reason why British publishers
should not participate in the U.S. market?

**WEST:** Your company is the owner of the *Financial Times* of London. Would you take it unkindly if a foreigner owned your newspaper?

**VEIT:** Yes, there would be tremendous concern about foreign ownership of the *Financial Times*. When Rupert Murdoch bought a 20 percent interest in our company, Parliament expressed great concern. I think the British government does view the ownership of newspapers as special, and I think other countries feel the same way.

**RICHARDSON:** Since we've talked about Exxon-Florio and its role in restricting security-related investment in the United States, there are statutory provisions that impose restrictions in a number of other sectors, including radio and television broadcasting, notwithstanding any direct showing of national security. Coastal and inland shipping, air transportation within the United States, and the production and use of nuclear power are some of the other sectors where the United States can restrict or ban foreign investment.

**PETERSON:** I think this is a good area—defining the rules of the road, a kind of GATT for investment. If every country can arbitrarily and subjectively define, at any given moment, what is and isn't in their national interest, we're going to have tremendous problems as the world becomes more interdependent and as pressures grow for real reciprocity for a two-way street in trade and investment.

26

The issue of escalating foreign investment in the United States has become a focus of discussion among U.S. policymakers concerned about the country's economic prospects and competitive position in the world market. In the Omnibus Trade and Competitiveness Act of 1988, for example, Congress enacted a measure calling for federal review of foreign investments that might threaten U.S. national security. Last year, the House of Representatives passed a measure to increase U.S. monitoring of foreign purchases in this country. The bill was reintroduced in the House in January.

Where do U.S. legislators stand on the issue of foreign investment? Do they believe it supports this country's economic objectives, or are they concerned that it threatens our prospects for the long term? How has it affected U.S. businesses? Has it increased jobs in this country? Should the United States restrict foreign purchases here? Are the legislative initiatives that have been introduced sound policy? Are additional measures necessary?

These and other critical questions were put to the U.S. Congress in a recent opinion survey on the impact of foreign investment in the United States. Nearly 17 percent of the Congress—90 senators and representatives—responded. The survey was

conducted by the Congressional Economic Leadership Institute and Touche Ross in January and February 1989.

Of the total sample of survey participants, 82 percent are representatives, and 18 percent are senators. Fifty-eight percent are Democrats, and 41 percent are Republicans. The largest single group of respondents—26 percent—represent states and districts in the North Central United States; 21 percent represent constituents in the Northeast; 19 percent represent the Southeast; 12 percent represent the South Central and 12 percent the Mountain region; and 10 percent represent the Pacific region.

Members of Congress generally believe that foreign investment in U.S. assets bolsters the country's economy. Forty-three percent of those members of Congress surveyed say the recent increase in foreign holdings, to $1.5 trillion, in U.S. government securities, bank deposits, manufacturing facilities, financial institutions, and real estate helps the economy. An additional 6 percent believe that these investments benefit specific industries. Twenty-six percent say that foreign investment threatens the economy, and 13 percent say it imperils particular industries.

Concern about foreign investment is divided along party lines. Indeed, more than three-quarters of the Republican respondents concur that foreign investment is a boon to the U.S. economy; only 11 percent believe it poses a threat. In contrast, less than one-quarter (21 percent) of the Democrats surveyed say it helps the economy, while 37 percent say it poses a threat.

By region, legislators most concerned about the effect of foreign investment on the economy represent districts in the Southeast, where foreign

27

investment is highly concentrated: 41 percent of
those surveyed who represent this region say that
it threatens our economy. More than one-quarter
(27 percent) of the respondents from the South
Central and Mountain states believe that foreign
investment threatens the economy.

Though most members of Congress believe for-
eign investment helps the U.S. economy, the
majority are nevertheless concerned about the
recent, precipitous rise in foreign investment in
this country. In fact, nearly two-thirds of the
members surveyed say they are worried about
escalating foreign investment in general, and 58
percent express concern about escalating foreign
direct investment (ownership or control of 10 per-
cent or more of a U.S. company).

However, there is consensus that the current
health of the U.S. economy is due in part to the
rapid rise in foreign investment in the United
States in recent years. More than half of the legis-
lators responding believe that were it not for the
rise in foreign direct investment, or had Congress
restricted it, the United States likely would have
suffered from higher interest rates. Nearly one-
third assert that an economic recession probably
would have occurred. Lawmakers most certain
that U.S. economic stability has been linked to for-
eign investment are Senate Republicans. Least
certain are House Democrats.

Moreover, nearly two-thirds of the respondents
say that stable U.S. employment is partly attribut-
able to foreign purchases in this country. In fact,
the vast majority (71 percent) of those surveyed
believe that foreign direct investment has
increased the total number of jobs in the United
States.

But they are less sure that these investments have
boosted employment in their home states and dis-
tricts: less than half (49 percent) report this to be
the case.

Most surprising is the response from senators and
representatives from the Northeast. While for-
eign-owned affiliates account for a relatively high
7 percent of manufacturing jobs in the Northeast-
ern states, only 26 percent of the respondents
from this region believe that foreign investment
has increased jobs in their area. On the other
hand, 78 percent of the respondents from the
Pacific region, where foreign ownership accounts
for 9 percent of all manufacturing jobs, believe
that foreign investment has indeed provided more
employment for their constituents.

Perhaps due to their belief that foreign investment
has contributed to the stability of the U.S. econ-
omy, Congress is hesitant to legislate broad
restrictions on general foreign investment. Nearly
three-quarters (71 percent) say they would oppose
such legislation, whereas 20 percent say they
would support it. Republicans are more likely
than are Democrats to express opposition: 89 per-
cent of the Republicans oppose such legislation,
but only 58 percent of the Democrats oppose it.
And by a significant margin, more senators
oppose such a measure than do representatives.

Currently, what members seem to want most is
more information about foreign investment in the
United States. This is underscored by the com-
ment of one legislator, who writes, "The data now
available are not adequate for making sound
policy."

28

Indeed, nearly two-thirds (61 percent) of the respondents concur that the U.S. government does not monitor nor collect enough information on foreign direct investment. Legislators from the Southeast (82 percent) and the Northeast (74 percent) voice the strongest support for additional information.

Moreover, two-thirds of those polled would support legislation to increase the amount of information collected. And the majority (59 percent) favor legislation that would require foreign investors to disclose investment-related data if their holdings in U.S. companies exceeded a certain percentage.

With nearly half (48 percent) the respondents agreeing that the United States has lost more technology than it has gained as a result of foreign investment, an overwhelming number of members of Congress would consider limiting foreign access to critical U.S. technologies. Indeed, even those who would not support legislation for disclosure of foreign investment would support some measure to restrict access to critical industries. Almost three-fourths (70 percent) favor legislative restrictions on foreign access to certain industries essential to our national interest, and an additional 10 percent say some sectors of the economy should be totally off limits to foreign investors. One member of Congress adds, "The most difficult task is to draw the appropriate lines on defense-sensitive foreign involvement that potentially could compromise national security."

Nearly all (90 percent) the legislators participating in the survey say they would be concerned for the national interest if foreign owners held a significant or majority share of the U.S. aerospace and defense industry. Sixty-nine percent of those polled would also be concerned about major foreign holdings in the U.S. high-technology industry.

Fifty-seven percent would worry about such holdings in commercial banking and energy; 48 percent would worry about foreign holdings of this extent in U.S. telecommunications and media.

Congress also appears willing to use foreign investors' access to the U.S. market as a bargaining chip to open foreign markets for U.S. businesses. Fifty-six percent of the members surveyed say they would support a bill that directly ties foreign investment in the United States to equal access for U.S. investors abroad. The strongest support for such legislation comes from members in the Northeast, the South Central, and the Mountain regions.

Concerning the effect of foreign direct investment on U.S. industry, many more respondents indicated that it has been beneficial than those who say it has been harmful.

When asked which U.S. industries have benefited most from foreign direct investment, half the respondents chose the automotive industry. It is interesting to note, however, that only 39 percent of the legislators from the North Central region, where the lion's share of America's automotive companies are headquartered, say that this industry has benefited the most.

Forty percent of the members of Congress polled say that the U.S. real estate industry has benefited most. This finding is particularly notable since foreigners have dramatically increased their U.S. real estate holdings and now claim ownership to nearly half the prime commercial real estate in Los Angeles, 40 percent in Houston, and one-third in Washington, D.C.

More than one-third (37 percent) of those polled say that the U.S. manufacturing industry—10 percent of which is now controlled by foreigners—has

31

gained the most from foreign direct investment. Twenty-six percent say investment banking, and 21 percent cite commercial banking.

When legislators were asked which industries have been most hurt by foreign direct investment, the automotive industry again headed the list, but by a smaller percentage (19 percent) than the 50 percent who feel this industry has benefited. Eighteen percent say that the apparel and textile industries have suffered as a result of foreign direct investment; the same percentage say the high technology industry has suffered most. Other industries that respondents believe have been damaged by foreign ownership include the automotive parts industry (14 percent) and manufacturing (13 percent).

Members of Congress tend to be most concerned about the effects of rising foreign investment on industries heavily concentrated in their home districts and states, though they also tend to support the many incentive programs now offered by state and local governments to lure even more foreign investment. By a margin of 7 percent (49 percent to 42 percent), members of Congress polled say that local, state, and federal enticements are "good policy." And in the Southeast, where states have created extensive incentive packages to attract foreign investors, 71 percent of the members say that such policies are wise.

Congress is evenly divided on whether to enact legislation that would encourage governors to reduce the growing competition among states for foreign investment. Those most in favor of such a measure are Senate Democrats, 88 percent of whom would support this type of legislation. Fewer than half the Senate Republicans agree. House Democrats favor such a bill more so than their Republican counterparts, though by a lesser margin.

A comparison of the attitudes of members of Congress, as revealed in this survey, and those of business leaders, in the survey Touche Ross conducted late in 1988 (see page 12), points out that the business community and Congress agree on many issues, although business is more strongly positive about foreign investment. Following are the major points of agreement.

**FOREIGN INVESTMENT IS GOOD FOR THE U.S. ECONOMY.** Even though Congress is well disposed toward foreign investment in the United States, the business community is even more so. While just under one-half of the members of Congress responding to the survey say that foreign investment either benefits the economy overall or benefits particular industries, 55 percent of the business leaders responding say that foreign investment benefits the economy.

**BROAD LEGISLATION TO LIMIT OR RESTRICT FOREIGN DIRECT INVESTMENT IS NOT DESIRABLE.** Both Congress and the business community are strongly against any broad legislation that would restrict or limit foreign direct investment. Eighty-two percent of the business leaders say they do not support broad legislation to limit or restrict the amount of foreign direct investment in the United States, a position with which 71 percent of the members of Congress agree.

**THE PRESENT RATE OF FOREIGN INVESTMENT MAY HAVE DELETERIOUS EFFECTS OVER THE LONG TERM.** Both the business community and Congress express concern about the long-term effects of the escalation of foreign investment, although the concern in Congress appears to be greater than it is in the business community. Fifty-eight percent of the members of Congress polled say they are concerned about the rise in foreign

The majority...
favor legislation that
would require
foreign investors to
disclose investment-
related data if their
holdings in U.S.
companies exceeded a
certain percentage.

(LC)

32

direct investment, whereas 21 percent of the business leaders say that the current acceleration of foreign investment threatens the country's social and cultural foundations.

While Congress generally does not support broad restrictive legislation for foreign investment, most legislators believe that more government data are necessary to monitor foreign purchases in the United States. Indeed, 66 percent of the members polled say they would support legislation to increase the amount of information collected by the U.S. government, and 59 percent say they would support legislation requiring mandatory disclosure when a foreign investor owns or controls a specified percentage of a company. Clearly, members of Congress responding to the survey feel the extent of foreign investment in this country bears close scrutiny.

FOREIGN DIRECT INVESTMENT IN THE UNITED STATES HAS HELD DOWN INTEREST RATES AND UNEMPLOYMENT AND MAY HAVE PREVENTED A RECESSION. Fifty-four percent of the congressional respondents say that, if foreign direct investment had not increased or if it had been limited by legislation in the last five years, interest rates would have risen; 63 percent say unemployment would have gone up. Nearly one-third—30 percent—think a recession would have occurred.

Eighty-six percent of the business leaders agree that foreign direct investment has created jobs for

U.S. citizens, and one-third say it has prevented high rates of unemployment. Forty-two percent say that it has held down interest rates, but nearly one-half—considerably more than the 30 percent of the members of Congress—say that recession would have likely occurred.

FOREIGN INVESTMENT IN INDUSTRIES ESSENTIAL TO OUR NATIONAL SECURITY

WARRANTS CONCERN. Ninety percent of the members of Congress responding to the survey say they would be concerned if foreign interests owned a significant or majority share of the U.S. aerospace and defense industry.

Seventy-one percent of the business leaders responding to the Touche Ross survey feel that certain industries should be defined as essential to the U.S. national interest and that foreign direct investment in these industries should be prohibited or restricted by legislation. Nearly all (99 percent) of those who feel some type of restriction should be imposed say that the defense industries should be so protected.

There is little doubt, then, that members of Congress and the business community agree that foreign investment in the United States has been of great benefit to this country. Both are concerned, however, about issues of national security and the future effects on this country of so rapid an increase in foreign investment.

33

(i)

Representative
John Bryant
Democrat, Texas

Since 1981, known
foreign investment in American farmland, factories, banks, businesses, real estate, government securities, and other assets has tripled, to more than $1.5 trillion.

In 1982, the United States was the world's largest creditor nation; today, it is the largest debtor, with a foreign debt surpassing that of Brazil, Mexico, Argentina, Venezuela, the Philippines, and Nigeria combined.

Through holdings of U.S. securities, foreign investors now own more than 16.5 percent of the national debt. The United States is so dependent on foreign capital for debt financing that when the government of Japan delayed a routine purchase of Treasury Department securities in spring 1987, interest rates in this country jumped by more than a percentage point.

The dramatic surge in foreign investment in the United States—and our growing reliance on it as a means of funding our debt and buying foreign products—is the greatest change now occurring in the U.S. economy. For the past eight years, America has been selling off its productive capacity to sustain a high national lifestyle—selling off its family jewels to pay for a night on the town. And though this dependency on foreign money may

hold far-reaching implications for American prosperity and security, we are ill-equipped to understand them.

The reason is simple: policymakers at all levels of government lack the hard and reliable information needed to assess the impact of foreign investment on the health and well-being of the U.S. economy, technological base, and national defense. Unlike virtually every other country, we do not require disclosure of basic information on foreign ownership in a way that lends itself to sound analysis and informed decision-making.

While some argue that the escalation in foreign investment bodes well for the country by creating jobs and financing our deficits, others claim just the opposite—that we are mortgaging our economic future to foreigners. Of course, the truth probably lies somewhere in between. But we cannot know for sure until we have all the facts.

In this case, however, getting the facts is part of the problem. Although a hodgepodge of 16 federal agencies collects data on foreign investment, the information is both fragmented and inaccurate and thus holds scant value for policymakers.

Take, for example, the Commerce Department's Bureau of Economic Analysis (BEA), which is often referred to as the best source of information available on foreign ownership. However, the BEA keeps much of its information secret—even from Congress. The data it does publish comprise aggregate statistics only, which are of little use to policymakers whose decisions must rest on detailed research and analysis.

What's more, the statistics themselves are incomplete. By its own admission, the Commerce Department overlooked at least $223 billion in foreign capital entering the United States between

34

1981 and 1987—an oversight that Commerce
labels a “statistical discrepancy.” Is it any wonder
that the department refuses to vouch for the accu-
racy or completeness of its own records?

As serious as these problems are, however, they
are just the tip of the iceberg. Not only is the infor-
mation on foreign investment fragmented and
imprecise, but it also fails to identify who exactly
is making the investment. Why? Because no U.S.
government agency requires disclosure of foreign
investors' true identities, thereby inviting for-
eigners to conceal their investments by using
anonymous dummy corporations and other
sleights of hand.

For example, the Agriculture Department lists
270,000 acres of Texas farmland owned by resi-
dents of the Netherland Antilles—one acre for
every man, woman, and child living in that coun-
try. Because the registered landowners are
dummy corporations, we cannot say for certain
who the true owners are. They may be legitimate
businesses, but they may also be agents of a hos-
tile nation, or narcotics smugglers laundering
drug money.

The consequences of this ignorance could be
grave. In the 1970s, for example, the Central
Intelligence Agency stumbled on a Soviet plot to
gain access to sophisticated U.S. technology by
secretly purchasing three banks that had loaned
money to companies in California's Silicon Valley.
The CIA learned of the deception only by accident
after investigating a peculiar lending pattern by a
Soviet bank in Singapore.

In an attempt to remedy these shortcomings in
information available to policymakers, I have
authored legislation in Congress for the past five

years that would require foreign investors to regis-
ter and disclose their major U.S. holdings. Passed
twice by the House of Representatives in the
100th Congress, the Foreign Ownership Disclo-
sure Act, or Bryant amendment, as it is commonly
called, was attached to the omnibus trade bill in
1987. After intense lobbying by foreign interests
and the Reagan Administration, the measure was
deleted last spring in final negotiations by a joint
House-Senate conference committee on the trade
bill, but it passed the House again as a separate
bill in October by a vote of 250 to 170—a margin
of support 40 votes greater than when the bill was
first approved.

I reintroduced the Foreign Ownership Disclosure
Act (HR 5) in the House on January 3, the first day
of the 101st Congress. A companion bill will be
introduced in the Senate by Tom Harkin (D-Iowa).
The priority given to the bill by the House leader-
ship, reflected in the bill's low number, and
increasing bipartisan support make early consid-
eration probable.

The bill prescribes two investment thresholds,
each having different reporting requirements. The
first threshold applies to foreign-owned interests
of more than 5 percent in U.S. businesses or real
estate valued in excess of $5 million. For this
threshold, the bill asks investors to disclose who
they are, where they live, the percentage of inter-
est they hold, and the value of the asset in which
they have an interest—information that would fit
on a postcard.

The second threshold deals with foreign holdings
of more than 25 percent in U.S. businesses with
assets or annual sales exceeding $20 million. For
this threshold, the bill asks investors to report

35

general financial information of less detail than
what publicly owned American corporations
already disclose to the Securities and Exchange
Commission.

The Bryant amendment does *not* include provi-
sions restricting or prohibiting foreign invest-
ment, nor does it require foreigners to preclear
their investments with the U.S. government. It
simply asks major foreign investors to sign in *after*
they have walked through our open door—to let us
know what they have purchased and to conduct
their business in the light of day. The United
States would still be the world's most open country
for foreign investment—in stark contrast to most
nations, which impose preclearance and protec-
tionist restrictions on American investors.

Ironically, the Reagan Administration's aggressive lobbying against the Bryant amendment coincided with its vigorous support of the U.S.-Canada Free Trade Agreement, which guarantees Canada's right to continue its policy of requiring U.S. investors to not only register but also preclear investments in that country-investments that Canada may restrict. These requirements far exceed any of the simple reporting provisions contained in the Bryant amendment.

Moreover, registration of the type envisioned by
the bill was endorsed by the Organization for Eco-
nomic Cooperation and Development in its 1984
“Declaration and Decisions on International
Investment and Multinational Enterprises,”
signed by the United States, other major Western
industrialized nations, and Japan.

Who would have access to the information
afforded by the Bryant amendment, and how
would that information benefit policymakers?

The data on foreign investment would be available
to authorized Commerce Department officials,
congressional committees and subcommittees,
and the General Accounting Office (GAO). The
information may also go to an agency-yet to be
determined-in each state. In addition, qualified
researchers and analysts could apply to the Secre-
tary of Commerce for confidential access to the
data.

Information from the Bryant amendment could
help policymakers pinpoint the effects-both
good and bad-of foreign investment and deter-
mine what it means to this country's future.
Among the questions the bill could help answer
are these:

* At what point would foreign control of a vital U.S. industry endanger our national security? The Energy Department estimates that 23.5 percent of our domestic oil refineries are foreign-owned and that foreign ownership in the oil industry has tripled, to more than $33 billion, since 1981. Today, Saudi Arabia owns half of Texaco's refining and marketing operations, Venezuela holds a 50 percent share in Citgo's refinery division, and Kuwait owns a large stake in British Petroleum-parent company of Standard Oil of Ohio, holder of the lion's share of Alaska's 5-billion-barrel Prudhoe Bay oil reserve. In fact, Kuwait's holding of almost 30 percent of British Petroleum was of such concern to the British government that it recently ordered a reduction in Kuwait's share.

How much of the rest of our petroleum industry is
foreign owned? Where is that ownership concen-
trated? What are the effects of such ownership on
our energy independence? Only with data of the
type envisioned by the Bryant amendment can we
answer these questions.

Not only is the
information
on foreign investment
fragmented and
imprecise, but it also
fails to identify
who exactly is making
the investment.

36

* Are foreigners anonymously funneling money into U.S. election campaigns? Though prohibited by U.S. law from making campaign contributions, foreigners are borrowing a page from American politics and setting up political action committees (PACs) affiliated with U.S. companies they either own or control. While the Federal Election Commission (FEC) has asked Congress for guidance on this issue, the practice continues so long as the PACs do not take direction from foreign-owned or foreign-controlled companies.

Unfortunately, the FEC cannot enforce this requirement under current law. According to Thomas Harris, former FEC chairman, not only is it impossible to determine whether any PACs are taking direction from abroad, but it is also impossible to identify which U.S. companies with PACs are foreign owned or foreign controlled. The Bryant amendment would help redress this deficiency.

* When is foreign investment creating American jobs and other economic opportunities, and when is it displacing them? In 1987, three members of the House asked the GAO to focus on these very questions in a study of foreign investment in the U.S. auto and auto parts industries. As noted

in the final report, GAO investigators could not answer these questions fully and accurately due to insufficiently reliable data. Instead, the GAO had to rely on interviews with union officials and auto executives to arrive at its tentative conclusion—that foreign investment in the car-making industries may have created 112,000 American jobs or eliminated 45,000.

With three million American workers dependent on foreign companies for their livelihood, the United States has a right to request—and receive—information concerning these companies' financial strengths and weaknesses. The Bryant amendment would give us that information.

In the 1800s, foreign investment helped build this country. But we are no longer an emerging nation; we are and should continue to be the world's industrial leader. We cannot risk squandering that leadership by ignoring the effects of foreign money on our prosperity and national security—indeed, on our sovereignty as a nation. We need information on which to make sound policy judgments in the face of the greatest economic challenge of our time. We need more and better information about the foreign flags flying over our country.

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Senator Nancy L. Kassebaum
Republican, Kansas

In most discussions about the rising tide of foreign investment in the United States, the talk frequently focuses on the word *foreign*, with all its loaded meanings, and too often fails to move on to a serious discussion of the latter, and more important, word *investment*. Our domestic dialogue on this issue quickly concedes the value of and the need for investment, but it stumbles over adjectives.

As with nearly all political issues, there is little new in this kind of preoccupation. Nor is it unusual for our views to move back and forth across a spectrum of feeling. On foreign investment in particular, we have passed repeatedly through phases of elation, concern, and outright alarm throughout our history. Given the recent surge of foreign investment, it is not surprising that concern also is rising at this point. In 1971, direct foreign investment totaled about $18 billion. By the end of 1987, the total had reached $262 billion and by all indications was still rising rapidly.

Concern about this flood of foreign money is understandable. It increases a notch every time we hear about the Japanese buying another hotel or office building, a British financier launching a new hostile takeover of a major American company, or German investors buying the ranch just

down the road. There is a sense that we are losing control, that we are forfeiting our heritage, and that we are squandering our future.

These feelings may be based on legitimate concerns, but they frequently spawn calls for action and legislative remedies that are not only misdirected but also counterproductive. We are urged into the role of a doctor who treats the fever and ignores its cause. We focus on the investment and the source of its funding without fully examining the underlying economic realities that produced it. Like many other Americans, I have real concerns about increasing foreign investment. These concerns include the current trends, some of the tactics used by foreign investors, and the long-term implications of continuing on our present course.

However, in a nutshell, my primary concern is not that we have too much foreign investment but that we have too little domestic investment. In short, the real and potential problems created by our own economic disorder are far more serious—and demanding of serious attention—than the problems now connected to foreign investment. Our towering deficits in the federal budget and balance of trade are financial hemorrhages that must be staunched. In the midst of these financial drains, it would be foolhardy to cut off or even actively discourage foreign transfusions of money that have been essential to our continued economic health.

That this is well understood by most observers is demonstrated by the focus of our debate over foreign investment. The attention nearly always concentrates on foreign *direct* investment—the purchase of factories, land, equipment, and other such assets. Little attention is paid to foreign purchases of *financial* assets such as federal or corporate bonds, which in fact have increased at the

38

highest rate. I know of no member of Congress who has demanded that foreigners stop buying our bonds, and for good reason. Without such foreign lending, our bond market would nosedive, interest rates could skyrocket, and the economy could be forced into recession. Mere rumors that the Japanese are slowing purchases of U.S. Treasury bonds are enough to send tremors through our financial markets. There is good reason to be concerned about such a situation, but bashing Tokyo would be like yelling at a banker for lending you money.

In fact, there is cause for concern about foreign bond purchases because of the financial implications. The new Economic Report of the President notes that government interest payments to foreigners now account for 2.6 percent of all government spending and 18.7 percent of net government interest payments. In short, we are paying foreigners $28.4 billion a year in interest for lending their money to the federal government. If the money borrowed is then used to finance current consumption rather than investment—as much of it is—we add no new productive capacity to our economy, no new jobs, and no new source of income to pay interest in future years. This is the equivalent of living off your savings. Even the wealthiest nation on earth cannot do that forever.

Foreign direct investment, on the other hand, is in many ways more beneficial because it often represents actual investment that saves or creates jobs for Americans, installs new factories and productive capacity, and enhances both the demand for and the supply of goods in our own market and overseas. The benefits of such investment are well understood and ardently sought, as demonstrated by the long line of states and cities that forms at the door of any foreign investor planning a new factory.

The picture becomes more hazy and trouble often starts when a foreign investor takes over an existing asset. Here the benefits are less clear and, at times, negative. The least provocative situation comes with the foreign purchase of a failing U.S. company, which clearly can be useful. It can preserve jobs, add new financial muscle, and provide the ability to survive and expand.

The foreign purchase of a healthy, profitable, and well-managed U.S. corporation is another matter, often accompanied by shouting. A case in point is Sir James Goldsmith's hostile takeover bid in 1986 for the Goodyear Tire and Rubber Company, which has a major plant in my home state. On that occasion, I was quick to register my own objections—not because the investor was foreign but because the deal itself was foreign to common sense. To me, the Goodyear case was an example of how hostile takeovers, leveraged buyouts, and other financial wheeling and dealing have helped Wall Street make the federal government look like a paragon of economic virtue. When it was over, Sir James had a $90 million profit and Goodyear had a huge load of new debt.

Only one foreign aspect of the Goodyear case seems truly pertinent to me. Disguised foreign subsidiaries were used to allow Goldsmith to acquire 11.5 percent of Goodyear's stock before he was required to disclose his presence to the market. This tactic is but one of many examples where government regulation has failed to keep pace with the revolution that has transformed financial markets in the past decade. I believe it is essential that we do far more to assure that government watchdogs can track and, where necessary, intervene in this rapidly changing environment. The goal should not be arbitrary discrimination

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against foreign investors, but strict enforcement of
long-standing and essential prohibitions against
unfair advantage, shady dealing, and outright
fraud, regardless of its source or nationality.

The same principle of tough, uniform enforce-
ment of federal law should guide our policies on
foreign investment in general. Barring compelling
reasons to single out foreign investments, they
should be treated essentially the same as domestic
investments—no unfair advantage and no selec-
tive disadvantage. However, I do support one
major exception to this general guide. Last year,
Congress gave the president discretionary author-
ity to block foreign investments in U.S. businesses
that could affect our national security. While this
new law is viewed by many foreign investors as
potentially discriminatory, I believe there is a
valid national interest in such authority, as many
other nations have made clear in their own laws
and practices on foreign investment.

I would add one other caveat. Our present policy,
and my own views, are predicated on open, fair
markets. Nations that discriminate against Ameri-
can investors—and a number do so aggressively—
must mend their ways or face the possibility that
the current situation will be reassessed in much
greater depth with much deeper concern for all
sides. European actions in moving forward on the
1992 market unification will be of particular
interest.

As we inaugurate a new president and a new Con-
gress begins its work, I suspect that foreign invest-
ment and all its subsidiary issues will remain in
the national spotlight. There undoubtedly will be
renewed calls for special restrictions and selective
actions against foreign "intrusions" in our econ-
omy. Such demands will rise and fall with the gen-
eral flow of foreign investment and the particular
prominence of specific investments. A radical
break from current policy appears at this point to
be as unlikely as it would be unwise.

There even is modest cause to hope that we can
begin to address the underlying economic prob-
lems that feed both foreign investment and the
alarm it creates. Without serious action on the
federal budget deficit and further real progress on
the trade deficit, the current symptoms of our eco-
nomic weakness will only grow worse and the
urge to try superficial treatment will only
increase. A recent news headline proclaimed, with
much overstatement: "America on the Auction
Block!" It is time to stop growling at the bidders
and to start examining how we arrived at this
point. Then we can find productive ways to safe-
guard not only our inheritance but our future.

Nations that
discriminate against
American investors
... must mend their
ways or face the
possibility that
the current situation
will be reassessed...

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Representative
Richard A. Gephardt
Democrat, Missouri

The 1980s have seen major changes in the position of the United States in the world economy. In the last eight years, America has tried to purchase short-term economic growth by running up "twin towers" of budgetary and trade deficits. President Reagan's supply-side revolution has meant that foreign countries have increasingly supplied our products and capital. If current trends continue, our net foreign debt will top $1 trillion by early next decade.

These changes go to the core of America's vision of itself and its future. We're all familiar with the buzzwords that symbolize these changes. But we need to seriously think about these changes.

America has been transformed under the Reagan administration from the world's largest creditor nation to the world's largest debtor. But we need to look beyond that simple, albeit frightening, fact.

The real problem is that America has been forced to abandon its traditional role of providing capital, which fueled development in the Third World, financed the Marshall Plan to rebuild Europe, and projected our vision of a progressive capitalism throughout the world. Instead, we see America

You don't need to use too much imagination to conjure up images of international bankers in Tokyo or Bonn setting the course of America's economy. Americans must face the reality that foreign investors are already transforming their economic power in this country into political power.

One day we are leading in foreign policy, the next we're pushing Treasury bills. We're forced to keep our interest rates high to attract foreign capital and sell our assets at bargain rates. We shouldn't be concerned that foreigners are investing here—but we need to be concerned about the underlying weakness in our economy.

For the last two years, considerable attention has been given to the increase in foreign investment in the United States. This rapid increase is cause for legitimate concern.

Many other countries restrict or at least require disclosure of foreign investment patterns. It is important for the United States to know the extent of this investment. Not to limit it, but to examine its long-term implications for our economy.

Since the Plaza Accord in September of 1985, the dollar has depreciated by more than 50 percent against the yen and the mark. The cheap dollar combined with a surplus of capital overseas has resulted in an enormous increase in foreign investment in America.

The current $1.5 trillion in foreign holdings is equivalent to one-fifth of the shares on all U.S. stock exchanges. In direct investment, foreign

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investors now own 10 percent of the U.S. manufac-
turing base and 13 million acres of American
farmland. They also own 45 percent of the prime
commercial real estate in Los Angeles, 40 percent
in Houston, and 33 percent in Washington, D.C.
And in the last year, foreign takeovers of U.S. cor-
porations tripled. Moreover, rising foreign invest-
ment is draining U.S. capital and wealth, as for-
eign investors export much of the $40 billion a
year they earn on their investments.

Our foreign debt now exceeds that of the next six
runners-up—Brazil, Mexico, Argentina, Vene-
zuela, the Philippines, and Nigeria—combined.

A survey last March found that 78 percent of
Americans favor legal restrictions on foreign
investment here; 40 percent want to ban it
altogether.

I don't share this view.

Foreign investment is not bad *per se*—but too much of it too quickly indicates an underlying weakness in an economy. Our budget and trade deficits have vastly increased our appetite for foreign capital. Despite our efforts to address our twin deficits, this trend will continue in the future.

The United States wants to invest and has invested
in foreign countries. This is negative only if a
country's weakness causes too much rapid invest-
ment. Right now, foreign investment helps us take
care of our huge budget and trade deficits.

But we should use the fact of this rapid investment
to get America to take the necessary steps to
improve its economic performance and to con-
vince countries like Japan to help us do that by
dropping trade barriers.

At the same time that we continue to welcome for-
eign investment, we must be careful about the pol-
itics surrounding this issue.

At last year's vice-presidential debate, Senator Quayle was asked to respond to a statement made by a top official of the Japanese Economic Planning Agency, who bragged that Japan is now in a position to influence the value of the dollar, our interest rates, and even our stock prices, and the official warned that one day maybe they'd do just that.

America cannot allow this to happen.

Foreign investment and trade barriers are topics
that often bring out emotional feelings. Some-
times our referring to a country's behavior as
"unfair" causes an emotional reaction in that
country and vice versa.

While we must not put limits on most foreign
investment made in this country, it is important for
us to analyze it. And in some areas, like strategic
industries vital to our defense and industrial base,
we should keep tabs on who owns what. It's vital to
our future.

The focus on foreign investment during the last
several years has been mainly on the Japanese.
Their investments in our country—ranging from
Treasury bills to real estate to plants and equip-
ment—has been the most noticeable.

But Japanese investment in the United States is
less than that of Great Britain, the Netherlands, or
other European countries. It's necessary for poli-
cymakers and the public to understand the
changes occurring in this important area.

Yet the Reagan administration fought the passage
of a simple disclosure provision known as the

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Bryant amendment. The Bryant amendment only requires disclosure of major foreign-owned interests in our country.

The amendment would not place limits on any investments here, in contrast to the investment policies of many other countries. Japan, for example, completely prohibits foreign ownership of 25 percent or more in high-technology companies and 50 percent or more in energy companies. Preclearance is necessary in most cases, and the criteria are so vague that almost any investment could be prohibited.

The Reagan administration claimed that we already had an adequate base of information. This simply is not the case. The Commerce Department has indicated that its records for 1981-85 have a "statistical discrepancy" that leaves at least $177 billion in foreign investment unaccounted for. This is only one of the many agencies credited by the administration with having a handle on the problem.

The United States will continue to have an open door to investors from foreign countries. At the same time, we must demand reciprocity from other countries.

As I said earlier, we must also take the rapidity of foreign investment as a signal that we need to make some changes to get America's economic house in order. I don't want American assets sold at bargain rates to attract foreign investment because we can't invest in ourselves.

We need to revitalize our economy by making further progress on reducing our enormous budget deficit. We must expand our educational efforts in math, science, and language to give our students the tools they will need to compete in the future. We need to expand our research and development efforts to reinvigorate our industry. These and other necessary steps will help to put us back on the right economic path.

The debate on the impact of foreign investment will surely continue to be at the top of our economic policy agenda. We should pass a disclosure provision like the Bryant amendment so that we can understand the changes that are occurring rather than try to examine the problem based on hearsay and inaccurate information.

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(L)

William E. Brock
Former U.S. Senator
Former Secretary of Labor
President of William Brock
Associates

G

Growing apprehension over foreign direct investment in the United States is understandable but nevertheless misplaced. Foreign purchases of such high-profile firms as Firestone, CBS Records, and Doubleday, along with concentrated real estate purchases in Hawaii, downtown Los Angeles, and Manhattan, grab the spotlight and create a sense of uneasiness in many Americans. Even the Dallas Cowboys, "America's team," have been approached by interested foreign buyers.

Politicians in Washington, sensing this discomfort, are becoming more and more vocal about the dangers of "selling out America"—at the same time that their counterparts in state capitals are actively courting investors abroad. While the Bryant amendment was not included in the final version of the 1988 trade legislation, efforts to discourage inward direct investment were working their way through the legislative maze by the end of the congressional session. Alarmists are once again attempting to put advocates of an open world trading and investment system on the defensive in elevating this issue to the front political burner in 1989.

Before charting a dangerous policy course, it is important to take a step back and conduct a balanced analysis of foreign direct investment's key

driving forces, the primary concerns it engenders, and the opportunities it provides. In the final analysis, efforts to restrict foreign direct investment are every bit as short-sighted and counterproductive as protectionist trade measures on imports.

DRIVING FORCES BEHIND FOREIGN INVEST-

MENT Recent increases in foreign direct investment in the United States are a reflection of both a continuing pattern of internationalization and a growing U.S. reliance on foreign capital.

Ever-tightening trade and financial linkages are creating centrifugal forces that increasingly integrate the United States with the global economy. In the immediate era following World War II, this process was predominantly a one-way street, as the United States was in a position of internationalizing the rest of the world while remaining relatively invulnerable to outside forces at home.

It is only in the past two decades that the impact of internationalization has started to hit home—largely as a consequence of successful U.S. post-war reconstruction efforts, U.S. leadership in promoting an open world economy, and the global strategies of multinational corporations. The creation of a global marketplace combined with the liberalization of trade and investment flows has created powerful competitive pressures for companies to adopt global research, production, and marketing strategies in order to exploit comparative advantages and respond to consumer demands.

The internationalization of the U.S. economy is reflected in both trade and investment figures. Since 1970, the trade sector of the U.S. economy, exports plus imports, has doubled as a percentage

46

of GNP to nearly 25 percent. The investment side of the equation has been even more dramatic: U.S. investment abroad has increased steadily from $165 billion in 1970 to $1.2 trillion in 1987, while foreign investment in the United States jumped from $107 billion to over $1.5 trillion. This investment took many forms, ranging from corporate debt and equity to government securities, to real estate.

The portion of these funds that represents an ownership stake of 10 percent or more is called direct investment. U.S. direct investment abroad now totals $315 billion, while foreign direct investment in this country has reached $283 billion. A majority of that direct investment is concentrated in the manufacturing sector, but with the liberalization of banking and financial services, about 40 percent of world foreign direct investment is now in the service sectors.

Internationalization of the U.S. economy does not fully account for rapid increases in foreign investment during this decade, as the United States has become increasingly reliant on foreign funds to support its consumption binge. This binge is reflected both in the budget deficit, the federal government's recent habit of spending $160 billion more than it takes in annually, and the trade deficit, the American public's purchase of $100 billion more goods and services from abroad than it produces each year. A traditionally low rate of savings in this country takes on added significance in this environment of large-scale government "dissaving" and trade deficits.

The plain fact is that the domestic pool of capital is insufficient to support these levels of spending. Without the ability to import capital from abroad, the United States would face a dire financial crisis

with a resulting mix of higher interest rates, increasing inflation, and a rapid reduction in standard of living.

### CONCERNS ABOUT FOREIGN DIRECT INVEST-

MENT It is clearly the speed with which foreign direct investment in this country is escalating, as much as its absolute value, that is raising eyebrows. Direct investment in the United States has tripled in the 1980s, causing some to claim that the United States is being bought out and losing sovereignty. The truth of the matter is, however, that in relation to U.S. investment abroad and the overall size of the U.S. economy, inward direct investment is well within reasonable standards and far from a level that might call U.S. sovereignty into question:

* Overall U.S. direct investment abroad still exceeds foreign direct investment in the United States. In addition, because these measures are normally estimated by book instead of market value, the relatively older U.S. investments are more underestimated than the relatively newer foreign investments.

* Foreign investors still own no more than 5 percent of U.S. assets. The U.S. economy generates over $4.5 trillion dollars worth of goods and services each year.

* Japan has been a focal point in the policy debate, despite the fact that Japan ranks only third in overall direct investment in this country—behind the United Kingdom and the Netherlands and slightly ahead of Canada. At the same time, the U.S. share of direct investment in each of these four countries is larger than their share of direct investment here.

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* U.S. direct investment abroad and foreign direct investment here both increased at about the same rate of 19 percent in 1987.

The dangers of growing U.S. reliance on foreign capital are real. U.S. freedom of action will be increasingly tightened as we become ever more dependent on foreign capital to support current and past consumption. Nevertheless, a focus on limiting direct investment is misplaced and dangerous. Foreign influence will result much more from overall investment flows than from the more stable, one-sixth portion that represents direct investment. Moreover, U.S. concerns would be far more constructively addressed by taking steps to limit U.S. demand for foreign capital than by shooting ourselves in the foot with restrictive measures on its supply.

Strategic considerations are a concern, but couching economic defensiveness in terms of national security does not serve the long-term interests of the United States. Sufficient precautions are already in place with respect to foreign direct investment. Foreign investors are subject to the same antitrust provisions, Securities and Exchange Commission requirements, and other laws that apply to U.S. companies. The Defense Department has extensive safeguards with respect to sensitive government contracts and foreign ownership. CFIUS, an interagency committee, has been in place for 10 years to review foreign direct investment that might have significant national security implications. Finally, presidential powers to block direct investment on national security grounds were beefed up in the 1988 trade legislation.

### OPPORTUNITIES CREATED BY FOREIGN DIRECT INVESTMENT
The opportunities created by foreign direct investment in this country in terms of growth, technology, and jobs should not be understated. By expanding and renovating our industrial base, foreign investment helps build the long-term competitiveness of the U.S. economy. U.S. affiliates of foreign-based companies now employ over three million Americans—saving jobs in faltering companies and industries as well as creating new jobs. The inward transfer of foreign research facilities and production techniques contributes greatly to the U.S. technology base and is already stimulating the competitiveness of U.S. counterparts and joint venture partners. And foreign-based firms replace imports with U.S.-produced goods and services, while adding significant export capacity. These contributions are all the more important in the context of working out of the large trade and financial imbalances of the 1980s between the United States and the world economy.

For many years, the United States has been the most vocal advocate of an open world trading and investment system—often confronting overseas many of the same fears now being expressed at home. It is ironic that at the same time, countries throughout the world are realizing the benefits and opportunities created by an open investment policy, the United States is beginning to have second thoughts. Within the past year, the South American countries in the Andean Common Market repealed a controversial disincentive to foreign direct investment, and Canada agreed to phase out its screening mechanism as part of the U.S.-

> Without the ability to import capital from abroad, the United States would face a dire financial crisis...

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Canada Free Trade Agreement. U.S. efforts to promote further liberalization through the Uruguay round of the GATT process, the OECD, and bilateral negotiations would be negated by a U.S. retreat at home.

**CONCLUSION** It is illogical to blame the thermometer for indicating uncomfortably high temperatures. Why then are we so quick to blame trade deficits or high levels of foreign direct investment for our ailments? These, too, are simply signals of more fundamental factors at work.

We are borrowing far too much in order to satisfy our hunger for immediate consumption, while saving far too little. For a generation, we have failed to

give our youth an education adequate to the demands of today's jobs. For virtually all of the postwar era, our government has lacked the political integrity to live within its means. These are the sources of the current heat.

Meddling with the thermometer—through protectionism or controls on foreign direct investment—is insane. Not only would we distort the signal, but we would divert attention from the imperatives of increasing the rate of savings, radically improving public education, dealing effectively and quickly with federal deficits, and shifting our tax system toward one that burdens consumption and favors earnings, savings, and investment.

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WE SHOULD LOVE THE
TRADE DEFICIT*

John Rutledge, Chairman, and
Deborah Allen, President
of the Claremont
Economic Institute

IT IS GIVING FOREIGNERS THE DOLLARS TO INVEST IN RETOOLING AMERICAN INDUSTRY, MAKING THE UNITED STATES COMPETITIVE AGAIN.

The trade deficit, according to many politicians and economists, is the Darth Vader of the American economy. It exports high-paying manufacturing jobs to low-wage countries, makes us the biggest debtor nation in the world, and threatens to impoverish our children. Having totaled an estimated $173 billion last year, critics say, the deficit must be cut at any cost, by raising taxes to discourage Americans from buying foreign goods and by punishing those foreign countries, like Japan and Taiwan, that don't buy enough U.S. products.

We take another view: that the trade deficit is good for the American economy. Our highly publicized international indebtedness—the United States became a net debtor in 1985 after being a creditor for the better part of this century—represents nothing more than future export sales for American companies. That's because U.S. debts can be repaid only by exporting American-made goods.

The United States does not have a deficit problem; it has a capital problem. Abnormally low savings rates, tight money, and the loss of a number of tax exemptions in the 1980s have created a great shortage of funds and of capital goods in the American economy. This is much like the capital shortages experienced by Japan and Germany at the close of World War II. The trade deficit is the result of our need for capital flows to redress the nation's shortage.

Basic accounting demands that if you run a deficit, then you must have capital inflows to finance it. But it is also true the other way around: the deficit provides foreigners with the dollars they are now using to make new investments here. As such, the deficit is part of a reverse Marshall Plan, in which the capital-rich countries of the world, like Japan and Taiwan, are investing in the reindustrialization of America. It is the window through which we are importing the machines and other capital goods we need to retool our industrial companies.

During the early part of the decade the strong dollar made capital goods cheaper to import than to produce at home. The failure of U.S. capital goods producers to invest in plant and equipment also meant that these imports were of better quality than the goods we manufactured domestically. Without the trade deficit we could not earn our way back to competing in the world marketplace.

If they are allowed to work their magic without political meddling, the rejuvenating capital flows from abroad are exactly what's needed to push the U.S. trade position from deficit back into surplus by the early 1990s. Foreign buyers will be ready

Exports are rising in actual dollars, but the value of imports has risen too, and the trade deficit, like Old Man River, just keeps rolling along.

*Reprinted by permission from the "Other Voices" section of Fortune magazine, February 29, 1988; © 1988 Time Inc. All rights reserved.

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then, in effect, to exchange the U.S. stocks, bonds, and office buildings they now own for U.S.

exports. But protectionist-minded politicians, particularly in an election year, will likely try to cut the deficit and so dam up those capital flows. It is not the trade deficit but misguided attempts to make it go away that represent the real risk to the world economy in 1988—the possibility of a complete trade meltdown and worldwide recession.

According to standard arguments, the trade deficit was caused by a consumer spending binge on Hondas, Toyotas, and now Hyundai's made with cheap foreign labor. The result was less work and lower incomes for American workers, whose high-paying manufacturing jobs were being exported to Japan, Taiwan, and Korea.

The standard view is wrong on three counts: first, the U.S. economy in the 1980s was the most incredible job-creating machine the world has ever seen. Although America was losing manufacturing jobs until the dollar declined, it has added over 13 million net new jobs since 1980—more than all of Europe has created since 1960.

Employment rates are at an all-time high, and unemployment is down to 5.7 percent of the labor force. New employees aren't all filling low-paying McJobs, either. Any way you measure real output and total income, they have increased significantly in the 1980s.

Second, foreign labor is no longer cheap. On a productivity-adjusted basis, at today's deflated dollar exchange rates, U.S. labor costs are now among the lowest of the major industrial countries. That's a reason why so many foreign and domestic producers are moving plants to the

United States. For the past two years, U.S. manufacturing productivity has apparently grown faster and unit labor costs have fallen further than in Japan. Since 1982, productivity growth in U.S. manufacturing has been running at a phenomenal 4.7 percent per year, double the 2.4 percent growth we enjoyed between 1960 and 1982.

Manufacturing labor costs per unit of product have fallen by 1.5 percent per year since 1982, compared with an increase of 4.2 percent per year from 1960 to 1982. In 1987 the decline in U.S. unit labor costs accelerated to 2.5 percent. This means that U.S. producers can lower their prices and raise their profits at the same time. And it means American manufacturers are getting more competitive again.

Third, Hondas and other consumer goods are not the only factors in the trade deficit. According to a recent Morgan Stanley report, *America's Persistent Trade Gap*, by Stephen Roach, capital goods were the single largest contributor to the worsening of the merchandise trade deficit during the 1980s. Measured in 1982 dollars, these imports accounted for $51 billion, or 31 percent of the $167 billion swing from a $3 billion surplus in the third quarter of 1980 to a $164 billion deficit in the third quarter of 1987.

The next largest contributor was not cars but industrial supplies and materials, which account for 25 percent, or $42 billion, of the swing in the trade deficit. Altogether, capital goods and industrial supplies and materials accounted for $93 billion, or 56 percent, of the swing in the trade deficit, vs. $73 billion, or 44 percent, of the swing accounted for by autos and other consumer goods.

51

So the ships that arrive in Long Beach haven't been bringing us only Hondas; they have also been unloading the machines and other supplies to help build the Honda factory in Ohio or the Toyota plant in Kentucky that will begin production later this year.

Since fewer jobs means fewer votes, however, our fearless leaders are hellbent (for election) to get rid of the trade deficit at any cost. Many of the presidential candidates have announced their intentions to balance trade and reduce imports. Both houses of Congress have passed bills that included measures to restrict trade. The Commerce Department is looking into whether the Japanese are dumping because they are not raising prices fast enough to reflect the full drop in the dollar. The White House and the Treasury Department, while talking free trade out of one side of their mouths, have been dollar-bashing out of the other in an attempt to stanch imports.

These policies have been a total flop. Exports are rising in actual dollars, but the value of imports has risen too, and the trade deficit, like Old Man River, just keeps rolling along. In fact, it seems that the more the Treasury tries to beat the dollar down, the bigger the trade deficit gets.

But this shouldn't worry us, since the capital goods we import are essentially stockpiles of future output waiting to be released by American workers. Adding to our stock of capital goods increases our capacity to produce in the future. This ultimately means lower prices for consumers. By the end of 1988, for example, we will have the capacity to produce about two million Japanese cars each year right here in the United

States. In an already soft auto market, these extra cars mean better prices for the consumer. Workers who are hired for these new factories will be more productive and better paid than they are now. These new jobs will replace the work that will be lost at outdated factories.

While importing capital goods helps create a trade deficit, employing these capital goods to produce high-quality, low-cost products to take the place of imports and be used for export helps make it go away. For example, every Camry that rolls off the assembly line at Toyota's new Georgetown, Kentucky, plant will be sold to one of two kinds of customers. Someone will buy the car who was already going to buy a Toyota, in which case Toyota will have to ship one auto fewer from Japan to the United States and the trade deficit will decline. Or, a driver who was going to buy a different car will buy a Camry, which will increase Toyota's U.S. market share and help force U.S. rivals to cut prices or increase quality, becoming more competitive in world markets. The effect is already occurring: the deficit is declining and Toyota's market share is growing.

Honda likes its U.S. operation so well that it will build a second plant in Ohio to take advantage of our high productivity and low costs. Some of the output from these factories is scheduled for export to Japan and to other countries. Even though the profits may go back to Japan, these exports will have long-term benefits for the U.S.

In the 1990s, when our new low-cost capacity is producing goods to export or to replace imports, the U.S. trade accounts will switch from deficit to surplus in a big hurry. As we argued above, it is

52

not possible to import capital without running a matching trade deficit. In the same way, foreign owners of U.S. assets—the assets they acquired because of our multibillion-dollar net foreign debt position—can cash in and bring their money home only by buying American-made goods. We should view our foreign debts the same way a store looks at customers who hold gift certificates: as future exports sales in the cash drawer.

As long as Japan and our trading partners have a large stockpile of funds and the United States has an effective capital shortage, private capital is

going to flow from those countries where it earns a low return to the high-return United States. We will continue to have a trade deficit until this capital imbalance is repaired. Attacking foreign investors with protectionist legislation both delays the capital flow we need and makes it, and our stock and bond markets, more volatile. We should be welcoming the capital goods that are reindustrializing American industry and making us competitive again.

55

Pat Choate,
Vice President, TRW Inc.
and
Linda Spencer,
Policy Analyst, TRW Inc.

In France, Australia,
Canada, and Japan, an American investor must
have the permission of the government to estab-
lish a subsidiary. American investors can practi-
cally forget about trying forcibly to acquire a for-
eign firm in these and most other nations. Indeed,
many governments encourage domestic compa-
nies to structure themselves so foreigners cannot
purchase even a significant minority position
without the targeted company's approval.

By contrast, the United States has no preregistra-
tion requirements for foreign owners. It does not
systematically monitor buyouts or hostile take-
overs. Unlike most foreign companies, American
businesses are structurally vulnerable to hostile
foreign takeovers; such takeovers are made easy
in America because of lax federal regulatory and
monitoring policies.

Indeed, there are few U.S. restrictions on foreign
investment. The federal government limits foreign
participation in classified defense contracts and
ownership of enterprises associated with atomic
energy, hydroelectric power, communications, air
transport, coastal and inland water shipping, fish-
ing, and development of federally owned lands
and mineral resources. A number of state and
local governments impose limitations on foreign
purchases of farmland and banks. In all other

industries, European, Japanese, and other foreign
investors are given a virtually free hand to buy
American companies or build new facilities.
Indeed, America's federal, state, and local govern-
ments subsidize the foreign buyouts of U.S. com-
panies or foreign start-ups with gifts, low-interest
loans, and tax concessions.

Given the great disparity between the foreign own-
ership policies of other nations and those of the
United States, it appears that either the govern-
ment of the United States knows something that
other governments do not, or vice versa. What is
clear, however, is that foreign owners have seized
the opportunity created by a cheap dollar to rap-
idly buy up key American assets.

Foreign interests already hold more than $1.6 trillion in American assets, including one-tenth of the U.S. manufacturing base, one-fourth of all commercial loans, one-third of the prime commercial urban real estate, and one-half of all municipal underwriting, and control of a diverse list of such critical industries as consumer electronics, concrete, and advertising. Even more striking, foreign ownership in the United States has been growing at a hyper-pace, expanding 31 percent each year since 1981.

The pace of foreign investment—already fast—is accelerating. Between 1980 and 1987, it grew by 215 percent, five times greater than that by which U.S. foreign direct investment abroad expanded during the same time period. At this rate, foreign ownership in America is sure to double—perhaps even triple—by 1995.

Nearly $1.5 trillion of the U.S. assets in foreign
hands are portfolio investments; government
securities, bank deposits, and stocks. Put into
perspective, foreign creditors now hold roughly

56

20 percent of the U.S. federal debt. As foreign governments have become America's bankers, they have gained the political whip hand over the U.S. government, giving them the ability to force concessions on defense, trade, and foreign policy issues in return for a willingness to bankroll the ongoing binge of America's debt-financed federal spending.

Another $300 billion of foreign ownership consists of American companies and real property. The weak dollar has dramatically slashed the prices of these assets for foreign buyers, but the cheap price is merely frosting on the cake. Foreign buyers have long been attracted by America's political stability, easy access to the world's largest market, and the hedge that their U.S. investments provide against resurgent protectionism.

Seven nations claim more than 80 percent of the total foreign ownership in America. By rank, they are the United Kingdom, the Netherlands, Japan, Canada, France, West Germany, and Switzerland. In 1987, the United Kingdom had $75 billion of American assets; the Netherlands had $47 billion; Japan had $33 billion.

What is striking about these ownership patterns, however, is that Japanese purchases are growing at a significantly faster pace than those of any other country. Between 1980 and 1987, Japanese investment expanded more than 600 percent. At this rate, Japan will be the largest foreign owner in America by 1991. Statements by officials of Japan's Ministry of Industry and Trade and Industry (MITI) only underscore this: they acknowledge that one basic MITI goal for yen-rich Japan is to increase its share of total production in offshore locations from 5 percent in 1988 to 20 percent in

1999. If this occurs, Japanese ownership in the United States may more than quadruple.

Of course, U.S. companies also have massive foreign holdings. According to the Department of Commerce, these investments are worth some $330 billion. Moreover, Commerce's estimates may understate the true value of America's assets abroad by $200 billion or more, since the lion's share of these investments was made prior to the 1980s, and the figures are based on historic book value rather than current worth.

These U.S. assets, however, were accumulated over several generations as part of long-term strategies by U.S. companies to expand their global operations. The surge of foreign ownership in the United States in the 1980s, on the other hand, has been more like the Oklahoma Land Rush of a century ago, with prospective buyers rushing out to claim undervalued American assets for their portfolios.

As a consequence of this land-rush mentality, most of the increased foreign ownership has come in the form of buyouts of established operations rather than new, start-up firms. A recent General Accounting Office (GAO) survey reveals that foreign acquisitions of U.S. companies increased from 6 percent of all transactions in 1984 to more than 13 percent for the first half of 1988. Notably, a preponderance of foreign acquisitions are hostile takeovers. The GAO study reports that 75 percent of the $15.5 billion in foreign takeovers during the first half of 1988 were opposed by the boards of the acquired companies.

While many of these purchases are made to take advantage of the historic economic opportunity created by the weak dollar to buy undervalued

57

American assets, other purchases are made because of the political stability in the United States, to gain a foothold in the vast American market, or to engulf U.S.-owned competitors. Still other purchases enable foreign companies to circumvent U.S. trade policy and international agreements. After the Japanese agreed to increase their imports of American beef over the next three years, for example, Japanese companies began to buy U.S. cattle ranches and small meat plants such as Washington Beef, Inc., of Yakima, Washington, enabling them to take advantage of this market-opening measure negotiated on behalf of the U.S. beef industry.

Foreign investment, of course, has its advantages. It has facilitated the financing of the federal budget deficit at a time when the federal authorities were unwilling to act responsibly and match their expenditures and revenues. It has provided capital for Wall Street, financing for many U.S. companies, some jobs, some new technology, and—sometimes—improved labor-management relationships.

Yet these advantages are often overstated. Had the federal government been unable to finance its budget deficit, it would not have been able to ignore the deficit's rise. Much of the foreign capital made available to Wall Street has been used for a senseless wave of takeovers, leveraged buyouts, and other destructive financial maneuvers that have forced a short-term mindset in the U.S. corporate community.

The number of jobs created by foreign purchases, moreover, has been vastly overstated. Indeed, the figure of nearly three million jobs usually cited as having been created by foreign investment is unsubstantiated. The Department of Commerce

does not know what percentage of these three million jobs has been "created" and how many have simply been shuffled from American-owned firms to foreign-owned firms through takeovers of existing companies. Moreover, this estimate includes all workers employed not only by foreign-owned companies, but also by all U.S. firms that have at least 10 percent foreign ownership.

Preliminary estimates for 1987 reveal that of the 331,000 jobs claimed to have been created by foreign owners that year, only 15,000—or less than 5 percent—were created by the establishment of new operations within the United States. For 1986, the Commerce Department figures also reveal that U.S. affiliates of foreign firms laid off 334,000 American workers due to liquidations and cutbacks. The net number of new jobs created by foreign companies is nominal at best and may actually be negative.

Also, many foreign purchases are little more than an inexpensive and quick way to access and then transfer advanced U.S. technology overseas. For instance, when Kubota Ltd., Japan's largest producer of agricultural machinery, decided to enter the computer business, it bought five small U.S. companies that specialized in software and super-computer technology. Less than two years after Kubota's first U.S. acquisition in 1986, the company began manufacturing a minisupercomputer.

Finally, as foreign owners increase their investments here, they also deepen their involvement in America's domestic politics. Political action committees (PACs) of foreign affiliates here, for instance, contributed more than $2 million during the 1988 election cycle; foreign companies and their governments now wield more political power in Washington than all but a few of the largest American industries. While no one questions

...75 percent of the $15.5 billion in foreign takeovers during the first half of 1988 were opposed by the boards of the acquired companies.

58

the right of foreign companies to Washington rep-
resentation, the raw political power of foreign
owners to shape U.S. trade policies to their own
purposes is a troubling and unexplored new devel-
opment on the American political scene.

Rapidly expanding foreign investment in the
United States may or may not require changes in
U.S. policy. Today, we lack the basic data and anal-
yses needed to make such a determination.

Because the survey instruments used to calculate
foreign investment in the United States were
designed to measure balance of payment flows,
they provide only the roughest information about
the foreign owners themselves, or which indus-
tries and technologies foreigners now possess.

Among the many consequences of this informa-
tion gap is that the Defense Department does not

know who controls the critical industries that pro-
duce the key technologies used in America's most
advanced weapon systems.

Equally important, increased foreign ownership
of U.S.-based production facilities diminishes the
capacity of American trade negotiators to use
market access as a lever to open foreign markets to
U.S.-owned companies.

As their restrictive investment policies indicate,
other nations think in terms of both trade and
investment policy. Perhaps it is time for the United
States to consider doing the same. After all, the
ability to buy productive American assets is at
least as important to foreign competitors and their
governments as their ability to export goods and
services to the United States. The question, there-
fore, is whether something so valuable should be
given so freely.

59

Howard H. Baker, Jr.
Former Senate Majority Leader
Former White House
Chief of Staff

Abraham Lincoln said, "Our government rests in public opinion. Whoever can change public opinion can change the government."

I have an unyielding faith in the strength and goodness of the American people and in our political system—which is the best in the world. But too often our newspapers and magazines print articles and editorials that escalate unnecessary fear in our hearts rather than educate us regarding an issue. Our natural response is to seek legislation to quell that fear, and, as is their job, legislators scramble to respond. Yet all too often they respond to the public fear rather than analytically assessing the issue to determine a measured response. As a result, the legislators increase governmental restrictions and regulations, complicating rather than solving the perceived problem.

Foreign Direct Investment (FDI), which is defined as ownership of 10 percent or more of the equity in a business by a foreign individual or enterprise, is just such an issue. For several years, headlines have been implying that the Japanese are buying up our country, stripping us of our industrial base, economic autonomy, and technological superiority. In response, various legislators have introduced bills or amendments to bills to Congress in an attempt to regulate FDI.

Any significant regulation is inappropriate. FDI has strengthened our economy and in no way jeopardized our national security or technological superiority. While we have a significant interest in maintaining domestic ownership of domestic enterprise, that interest is neither universal nor seriously threatened. Moreover, even if FDI were a legitimate economic or national security concern, regulating FDI would only curb the symptom, not eliminate the cause.

FDI HAS STRENGTHENED OUR LOCAL AND NATIONAL ECONOMY. FDI has increased at a time when our country has needed it the most. In the face of aging industrial equipment, low capital expenditures, outdated modes of management and production, and increased foreign competition, foreign individuals and companies have intravenously strengthened our industrial base. By purchasing some of our ailing plants and businesses, they have infused needed capital, merged failing management styles with new techniques, and imported improved technological processes, producing competitive products at lower prices. As a result, these plants and businesses have survived, and even thrived, strengthening both our local and national economies.

Workers who would have lost their jobs have continued working; indeed, new jobs have been created. Three million Americans now work for businesses owned in part by foreigners. Additionally, local governments have strengthened their tax bases, increasing local revenues available for better education and community services.

Perhaps the most striking example of such revitalization is the Bridgestone (Japanese) purchase of Firestone. Before the acquisition, one Firestone plant in my home state of Tennessee, having

60

already laid off 400 employees, faced a complete shutdown. At that time, the plant produced 600 tires per day. After Bridgestone took over, the plant produced 3,000 tires per day, and, needless to say, maintained vital employment levels.

This infusion of capital has strengthened all of corporate America, not just the local citizens and acquired businesses. We have had the opportunity to learn new managerial techniques and to take advantage of foreign research and development. For example, the Japanese have exported their streamlined managerial processes and their wonderful ability to compact electronic devices into smaller and smaller packages. As a result, those U.S. companies eager to learn no longer lag in international competition but have propelled themselves to the forefront, again ready to lead the world.

We, as consumers, have benefited from the increased domestic competition created when foreign entities purchase our domestic means of production. As foreign ownership has improved processes, increased competition has forced our own companies to do the same. Thereby, we have benefited from lower prices, improved product quality, and broader product choices.

Of course we should not overemphasize the role of FDI in our economy, just as the critics should not inflate its detrimental effects. Foreign entities own only 5 percent of our assets, while the market value of our direct investment in their countries greatly exceeds FDI in the United States. Moreover, FDI has not been the sole cause of the resurgence of the American economy during the 1980s. Certainly supply-side tax incentives, a controlled money supply, and internal competition have been important. However, by allowing an

open-door policy to FDI, we have fueled the fire of competition initiated by the policies of the Reagan administration in the early 1980s.

**EXAGGERATED CRITICISMS.** Though understandable, the criticisms of FDI have been exaggerated.

Some have argued that the decline of the dollar has enabled foreign investors to purchase direct investments at bargain-basement prices.¹ However, while the short-term relative price of a plant, for example, might initially be lower in terms of yen or francs (because of a devalued dollar), competitive bidding among foreign purchasers actually drives the price in U.S. dollars higher. As a result, domestic sellers receive higher, not lower, prices for their plants than if we were to block foreign bidding.

Others lament the allegedly increasing influence foreign companies will have on our political system if FDI continues unchecked. Up to now, however, foreign influence has been *de minimis*. For example, the actual contributions of foreign company PACs are relatively low. The amount they paid to congressional candidates in one recent year averaged $796.² Additionally, many foreign companies respect their host and do not involve themselves in local politics.³

Moreover, because total FDI is so minimal (as stated, only 5 percent of total U.S. assets), foreign influence is hardly a threat. We are a nation that, with open arms, has embraced the people of the world, unafraid of the effect that different cultures and ideas will have on our political system. We

1. "Foreign Money, U.S. Fears," New York Times Magazine, December 13, 1987.

2. "Foreign Owners," National Journal, September 19, 1987, 2333

3. Ibid.

61

should not change this open-arms policy because
of an unfounded fear of the unknown. We remain
firmly in control of our destiny and our political
system, and foreign ownership of some businesses
will not alter that.

Other critics are concerned that countries with
interests inimical to ours will learn our technolog-
ical secrets and then use them against us. Cer-
tainly, we need to protect some secrets, but exist-
ing legislation sufficiently does that. For example,
foreign investment is prohibited in nuclear energy,
and in other industries foreign participation is
limited.

Other criticisms are exaggerated as well. For
example, the idea that foreign ownership could
lead to havoc in the event that foreign owners pull
out of the country does not conform with the gen-
eral notion that foreigners will act in self-interest.
To pull investments out quickly would cause these
persons or businesses great loss, since an over-
supply of businesses and plants would drive prices
below market. And even if foreign owners were
willing to incur such losses, Americans could then
benefit by purchasing at below-market prices.

OPEN-DOOR POLICY. Communications networks
have increased dramatically over the past decade,
linking continents once completely separated by
thousands of miles of ocean. Likewise, modern
transportation has reduced from days to hours the
distance between countries, providing virtually
instant access to goods and services abroad.
Increasingly, we are becoming a world economy,
not independent economies that have no bearing
on the economies of other nations. The European
community has recognized this and thus formed
the European Common Market and set the goal of
unification in 1992.

With foresight, American managers recognized
this trend as early as the 1950s when they invested
heavily in Europe, particularly in West Germany.
At the time, those European countries reacted in
much the same way we are reacting today, fearing
that foreign ownership would erode the domestic
industrial base. Yet the opposite proved true.
American multinational corporations enhanced
production methods and introduced new technolo-
gies into the European communities. Additionally,
the influx of capital strengthened the industrial
bases of those countries, making them competi-
tive in the aftermath of World War II, and so the
influence of the American multinational corpora-
tions diminished. Market forces led by an open-
door policy promoted by the United States
enabled these countries to regain economic
strength and autonomy.

If we will only live by what we have promoted, and
maintain an open-door policy, our economy will
be strengthened and the influence of FDI will
diminish naturally, without legislative effort. For
example, here is the way market forces will proba-
bly work.

The trade deficit is the single most significant
incentive foreign companies have had to invest in
U.S. assets. Foreign companies and individuals
have enjoyed a surplus of U.S. dollars, and rather
than invest those dollars purely in passive U.S.
assets, such as Treasury securities, stocks, or
bonds, they decided to diversify and place one-
sixth of their foreign investment in the United
States and direct investments.

The fact that Americans are demanding more
goods from other countries, and other countries
are demanding more goods from third-party
countries relative to their demand for American

62

goods, indicates that Americans have lost some of
their ability to produce competitive goods at com-
petitive prices. Thus, to regain a competitive edge,
American businesses must strengthen and
streamline production processes and refine prod-
uct lines. As this is done, American products will
again be desired internationally relative to other
countries' goods, thereby reducing the trade defi-
cit. When that happens, FDI in the United States
will decrease, and Americans will begin to repur-
chase many of the plants and businesses currently
owned by foreign enterprises.

No governmental intervention is necessary. Artific-
cially capping or regulating FDI only attacks the
symptom and does not cure the disease itself. To
cure, the United States absolutely must become
more competitive worldwide, and free market
forces will require this of us.

CONCLUSION Foreign direct investment is not a serious threat. Only 5 percent of domestic assets

are owned by foreign companies, and only 1 per-
cent of those are owned by the Japanese. In fact,
Great Britain has the most significant stake in U.S.
assets, followed by the Netherlands, Japan, and
Canada.

The market value of U.S. FDI in other countries is significantly greater than that held by foreign companies in the United States. For example, the U.S. earned $52.3 billion, while foreign FDI in the United States earned only $10.5 billion. We have an important interest in maintaining an open-door policy—at least if we would like other countries to do the same for us. Moreover, regulations currently in place will adequately protect national security interests, and other areas of concern are negligible.

The best response to the perceived problem of FDI
is to rely on market forces and the cyclical nature
of a worldwide economy.

63

(L)

## BUYING INTO AMERICA

Susan J. Tolchin
Professor of Public Administration,
George Washington University

The surge in foreign investment is a new experience for Americans, who are more accustomed to dominating the international marketplace than reacting to it. This trend is accelerating at a rapid rate, spurred by the drop in the dollar and the relaxation of anti-trust enforcement. It has affected the American economy with an impact that is only beginning to be appreciated.

Bolstered by the strong showing of the yen, deutsch mark, pound, and other currencies against the hapless dollar, foreign investors have moved with unprecedented boldness. Today, foreign investment in the United States—including both direct and portfolio investment—outstrips U.S. investment abroad, as it approaches the $2 trillion mark, a tenfold increase since 1974. Foreign companies and governments are buying up American oil and gas companies and are making significant inroads into a host of other industries, including the construction industry, machine tools, automobiles and auto parts, food, and tire production. More than half the nation’s cement industry and four of the nation’s top chemical companies are foreign owned.

More than 21 percent of total U.S. bank assets are now owned by foreign investors, up from 16 percent last year, and the figure is climbing. If this

trend continues at the present rate, by the year 2000 nearly 80 percent of U.S. bank assets will be controlled by overseas owners. Foreign investors have also become the new lions of Wall Street, as indicated by recent purchases of investment banking firms.

Foreign investors have bought land, skyscrapers, and shopping centers in virtually every state of the union and hold large chunks of prime downtown real estate in cities across the nation. Over half of downtown Los Angeles is foreign owned; 30 percent of downtown Houston; 33 percent of Washington, D.C.; and over 20 percent of Manhattan. National landmarks, such as the Watergate complex in the nation's capital, Arco Plaza in Los Angeles, and the U.S. Department of Justice Building, have all been sold to foreign investors. Lee Iacocca, the chairman of Chrysler, has questioned whether it is a good idea to lose control over so much real estate and become a "nation of tenants."

America's fire-sale prices have fostered an environment even more conducive to hostile takeovers than it is to U.S. raiders. In the spring and summer of 1988, daily headlines tracked the surge in foreign takeover activity, the Campeau (Canadian) purchase of Federated Stores; the Bridgestone (Japanese) acquisition of Firestone's tire division; and the Saudi purchase of Texaco's oil refineries and marketing division.

Of seven major takeover battles in the fall of 1988, four were conducted by British investors: Pillsbury was successfully raided by Grand Met, a British conglomerate. Farmers Group Inc., the nation's seventh-largest insurance company, was acquired by Britain's Batus Industries, P.L.C. Robert Maxwell, the British publisher, acquired

64

Macmillan. And Koppers, a Pittsburgh-based construction and chemical company, was successfully taken over by Beazer, a British company. In the first six months of 1988 alone, hostile takeovers by foreign investors totalled $15.5 billion.

Even the People's Republic of China got into the act, purchasing a 50 percent stake in a California oil refinery and marketing operation, as well as timber interests in the Northwest and a lumber mill in New Jersey.

Americans are becoming increasingly aware of the fact that their nation is selling off its permanent assets more rapidly than it is selling its goods. As part of the shift toward a global economy, foreign investment continues to be coveted— and indeed subsidized—by American taxpayers, at the behest of leaders who are motivated by very real needs to create jobs and finance the deficit.

Until this year, the surge of foreign investment occurred without a national debate, and with only scant attention paid by Congress and the executive branch. The conventional wisdom, that foreign investment built this country in the nineteenth century and would help reindustrialize it today, dovetailed nicely with President Reagan's view that the escalation of foreign investment was a sign of America's economic health. But new evidence has emerged indicating that this has clearly become a national issue. There are growing concerns about America's increasing dependence on foreign investment and what this means to the future of our country.

American concerns over the mixed blessings of foreign investment were documented in two separate polls published in the spring of 1988 by U.S.

*News & World Report* and Smick-Medley Associates. The surveys showed significant public anxiety over growing foreign investment in the United States, with 79 percent of those polled favoring a law to limit the extent of foreign investment in business and real estate. Both polls also showed overwhelming public support for restricting foreign investment in cases affecting national security.

Political pressures across the nation have begun to reflect the polls. In Hawaii, Mayor Frank Fasi of Honolulu asked the state legislature to pass a law restricting further foreign purchases of residential real estate. The mayor of Flat Rock, Michigan, was defeated for reelection after the voters discovered he had given a 14-year tax holiday to Mazda. And in Kentucky, the $355 million incentive package for Toyota emerged as one of the major issues in the last gubernatorial campaign. (Former governor Martha Layne Collins answered her critics, who regarded the state's incentives as giveaways, by saying she'd "rather subsidize Toyota than subsidize unemployment.")

Foreign investment also emerged as an issue in the 1988 presidential campaign. Governor Michael Dukakis and Senator Lloyd Bentsen, the Democratic presidential and vice-presidential candidates, warned that foreign investment was eroding America's political and economic independence. Mr. Dukakis told a rally in Hartford, Connecticut, that the nation must start "selling more American goods and services and buying back our own bonds and land and factories from the Japanese and the Europeans and the Saudis and the Kuwaitis . . . who have been buying them from us." The Republican candidate, Vice President George

67

Bush, responded by comparing Dukakis with the Know-Nothing movement of the nineteenth century, which fought the immigration of Catholics to the United States.

Accusations of xenophobia, protectionism, and even racism increasingly spark this debate in an effort to discredit those who raise questions about the impact of foreign investment. While some of these accusations are true—in Pittsburgh, a local radio station likened raider Brian Beazer to the British redcoats in the War of Independence—most have no basis in fact.

In contrast to the Reagan administration's laissez-faire approach to foreign investment, Congress has responded with three separate hearings and one legislative victory. Overruling the objections of a small army of lobbyists, Congress gave the president the authority to bar any foreign investment that could jeopardize national security. The president previously could bar such investments only by declaring a state of national emergency, an action no president had ever taken. The Reagan administration reluctantly accepted this authority in the Exon-Florio amendment to the 1988 trade bill. The first test of this new amendment appeared in December 1988, with an investigation into the sale by Monsanto of its silicon wafer division. Many observers also expect increasing activity over Exon-Florio because of recent concern expressed by the Department of Defense (DOD) on the foreign investment issue: a DOD report issued in October 1988 warned in very strong terms that the nation was losing control to foreign owners of manufacturing technologies vital to the national defense.

Less successful was Congress's effort to attach the Bryant amendment to the trade bill. Passed twice by the House, the amendment sought to improve America's inadequate information on foreign investment. (Over 16 separate agencies collect data, most of it fragmented and incomplete.) Members of Congress, along with key staff aides, reported that they had never been lobbied as hard on any trade or investment-related issue. Senator Tom Harkin, Democrat from Iowa, testified before the Senate Commerce Committee that a foreign multinational corporation threatened to move its plant out of his state if he voted "wrong" on Bryant.

The battle to kill the Bryant amendment showed the tremendous power of foreign interests, as well as their readiness to use it. It was also a tactical error on their part for several reasons. Legislators and their staffs, for the most part, resented this usually threatening and heavy-handed pressure, and they have long memories. In addition, recent experience shows that information calms controversy: in the late 1970s, when Americans became concerned about foreign purchases of farmland, Congress passed legislation requiring the Department of Agriculture to collect information on an annual basis in this area. The issue quickly died down and was never raised again.

The Bryant amendment will emerge again in the next trade bill, probably in a stronger version. Its passage is likely, given the hard look U.S. political leaders are beginning to take at their country's growing dependence on foreign money. It is too reminiscent of America's dependence on foreign

68

oil, and just as America shook itself loose from the OPEC cabal, it must reduce its craving for foreign money. Much of the problem stems from the budget and trade deficits, which have sent the country into the position of net foreign debtor—by the end of 1988, the net foreign debt had reached $500 billion—when a few short years ago, in 1982, it was the world's largest creditor. Today, foreign investors hold 20 percent of the country's debt, and the figure is climbing.

America's entry into the global economy is exciting and inevitable. But the forces of the international marketplace have overwhelmed the nation's capacity to deal with them. The surge of foreign investment is one important example. The manner in which the nation's leaders respond will determine how we meet the most difficult economic challenge of our time: to retain U.S. sovereignty in the global economy.

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Alfred E. Kahn
Robert Julius Thorne Professor
of Political Economy,
Cornell University

The suddenly ballooning and stubbornly resistant deficit in our balance of trade in goods and services, coupled with our abrupt transformation since 1982 from the world's biggest creditor to its biggest debtor, worry us a great deal. Justifiably so. The increasing tendency for the huge inflows of foreign capital to involve direct acquisitions of American businesses rather than government securities, primarily, has generated an especial concern, vaguely expressed, that we may be "losing control over our own destiny," and has elicited suggestions that we ought to regulate or curb these investment in some way. Does that make sense?

The answer is no—apart from cases in which particular acquisitions may raise specific considerations of national security. Trying in any way to regulate or limit foreign investment in this country would be a perfect example of attacking the symptom rather than the disease.

The first thing to understand is why the capital has been flowing this way; or why—this is really the same question—we have been running annual trade deficits of $150 billion or so, forcing us more and more deeply into debt to the rest of the world.

There is widespread belief that much of the blame rests with the trade barriers and unfair competi-

tion that our products encounter in world markets. Yet we had a slight surplus in our balance of trade in goods and services as recently as 1982. I am unaware of any evidence that those barriers have gotten worse since then, let alone higher than the barriers we have constructed against such prominent foreign products as automobiles, steel, motorcycles, textiles, and sugar.

Besides, if the world had suddenly lost interest in our products after 1982, while we suddenly developed a great hunger for foreign products, dollars would have become a drug on the world's foreign exchange markets. By selling so much to us, foreigners would be earning so many more dollars than they needed in order to buy from us, that the foreign exchange value of the dollar would have plummeted. Instead, it soared between 1982 and 1985. Obviously, something more powerful was increasing the demand for dollars relative to the supply; what could that have been?

There was only one thing it could have been: a dramatic shift in the international flow of capital. Because of the liquidity crisis that afflicted the world's major debtor countries beginning in 1981-82, we suddenly ceased lending to them, drying up a huge annual supply of dollars abroad. Instead, both we and the rest of the world became very eager to invest in the United States, partly because of our rapid recovery and very high real interest rates. Our sudden shift from being a major exporter to being a major importer of capital meant a sharply increased international demand for dollars relative to the supply. That is what drove up the dollar's foreign exchange value. That increase in turn made our exports very expensive, foreign products very cheap, and produced the trade deficit. (That is a simplified, but essentially correct, view of the process.) As long as we remain

Foreign savings
have helped finance
the longest economic
recovery in our
peacetime history.

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a major importer of capital, we will inevitably
have an equivalent deficit in the balance of trade.
That's the only way in which foreigners can obtain
the dollars they need to buy our securities, our
factories, our land.

Were those capital imports good or bad for the
American economy? Both. In the short term, they
clearly helped. Under the pressure of the most sti-
mulative fiscal and monetary policies in peace-
time history—including an enormous and growing
federal budget deficit, which used up some 60
percent of our total national net savings, and a
rapidly expanding money supply—we quickly
increased our total national expenditures. The net
inflow of foreign savings supplemented our own
very low savings and so helped finance our rising
domestic investment expenditures and huge fed-
eral deficits. Correspondingly, the net inflow of
foreign goods and services supplemented our
domestic production in satisfying our rapidly
expanding demands. Either way you look at it, one
point is clear: foreigners grubstaked our recovery.
Foreign financing enabled the recovery to proceed
without substantially raising interest rates, which
would have choked it off. The net inflow of foreign
goods and services enabled our total national
spending to grow rapidly without reigniting
inflation.

In short, the rest of the world financed our recovery. In monetary terms, the world bought our securities and other assets. In real terms, it supplied us with more goods than we made available to it, thereby helping to satisfy our growing demand.

The other benefits of foreign investment here have
been longer-term in character. Foreign investment

has subjected American-owned and American-
run businesses to very healthy competition, and it
has brought us foreign technology and the effi-
cient practices of foreign managements. I under-
stand that Honda cars produced in this country
under Japanese management are at least as good
as the Hondas produced in Japan. Some American
companies and labor unions have been less than
ecstatic about this competition, but, to paraphrase
an old and much-abused aphorism, what's good
for the American consumer is not necessarily
what's good for General Motors or the UAW.

This does not mean that we can be complacent
about our increasing indebtedness to the rest of
the world. On the contrary. Just as we can't import
capital except in the form of a trade deficit, so we
can't run trade deficits without going more and
more deeply into debt. Sooner or later there will
be a day of reckoning.

Our increasing indebtedness means we bear an
inexorably growing burden of interest obligations
and profits accruing to foreigners. In 1987, these
exceeded earnings from our own investments
abroad for the first time in more than 70 years.
That difference can only increase as each year we
go further into hock by $150 billion or so. In the
past, we could spend beyond the levels of our
domestic production, because, on balance, we
were receiving income from our investments
abroad. Now, we are coming to the point where we
must consume less at home than we produce,
because we will have to send goods and services to
the rest of the world to fulfill our obligations.

So far, we have been able to put off that day of set-
tlement. We continue to receive more goods and
services from abroad than we export—because
foreigners continue to finance us. The dollar has

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declined precipitously for the last three years,
however, and it is now virtually back to its 1980
level. Foreigners have obviously become more
leery about holding dollars, which they fear will
decline in value—through inflation in this country,
relative to their home currencies, in foreign
exchange markets. They have already taken huge
losses, to the extent that they bought the dollars a
few years ago, at the prevailing very high prices in
terms of marks, francs, and yen.

For foreigners, the declining dollar is dramatically
reducing the cost of buying our land, our facto-
ries, and our banks. In effect, we are selling our
products abroad at lower and lower prices com-
pared with what we have to pay for imports. That,
too, means lower living standards, other things
being equal.

Other things are not necessarily equal. Going into
debt doesn't necessarily mean lower income in the
future. Whether it does or not depends on what
use one makes of that financing. Have we used
these foreign savings to increase our national pro-
ductivity and, therefore, our ability to pay foreign
investors back without a loss in living standards?

Foreign savings have helped finance the longest
economic recovery in our peacetime history. But—
and here is the ultimately troublesome fact—it has
been a recovery led by consumption. Gross invest-
ment has not increased as a percentage of our
gross national product, and net investment—net,
that is, of depreciation—has actually declined

sharply. And there is the problem—the very same
problem that gave us accelerating inflation in the
35 years after World War II: our attempt as a coun-
try to live beyond our means. In the earlier period,
the limitations on our total resources converted
that attempt into the frustration of inflation. In the
last five years, we have been able to satisfy those
ever-growing demands by going into debt to the
rest of the world. By supplementing our own
resources, this influx of foreign resources has
forestalled the inflation that would otherwise have
been the consequence. Beggars may be better off
selling assets than starving, but that isn't a very
good way to take care of their children.

So it is possible—mandatory, I think—to worry
about those growing foreign investments in our
country. But the villain is not the foreign capital,
which is financing our profligacy. The villain is
the profligacy itself.

As long as foreign investment continues here, it
enables us to put off the day of reckoning. When
the time comes to pay the piper, however, the cost
will be higher than before, because we put it off.
Discouraging foreign investment and cutting off
the inflow of capital would force us to curtail our
overspending, through higher interest rates, and,
almost certainly, by producing a further plunge of
the dollar. But that would be an irrational and inef-
ficient way of solving the problem: the rational
approach is to attack the disease, not the
palliative.

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IS AMERICA IN DECLINE?

Henry Kissinger
Former U.S. Secretary of State
Chairman, Kissinger
Associates, Inc.

OBSERVERS OF THE AMERICAN ECONOMY HAVE SUGGESTED THAT, ALTHOUGH FOREIGN INVESTMENT IN THE UNITED STATES MAY BE A BOON ECONOMICALLY, THE COUNTRY MAY BE SACRIFICING ITS LEADERSHIP IN WORLD EVENTS. AND SOME HAVE EVEN QUESTIONED WHETHER OUR VITAL SOCIAL AND ECONOMIC INSTITUTIONS ARE FAILING. INDEED, IS THE NATION IN DECLINE? THIS IS A MUCH LARGER QUESTION, ONE ON WHICH WE HAVE ASKED DR. KISSINGER TO COMMENT.

The recent presidential election rightly gave conventional wisdom a bad name. "CW," as one national news magazine called it, said George Bush could never overcome a 17 percent disadvantage in the polls; it also said that a sitting vice president could not be elected to the presidency. Here, as on so many other occasions over the past six months, CW has been about as accurate as the *Literary Digest's* 1936 prediction that Alf Landon would defeat Franklin Roosevelt.

A new conventional wisdom is now in the process of formulation in the minds of liberal academics and other elites who view themselves as foreign policy experts. Its thesis, as put forward most

recently by Professor Paul Kennedy in *The Rise and Fall of the Great Powers*, is that history is replete with examples of great nations that fell from grace because they spent too much on defense, unwisely sought to extend their reach beyond their ability to grasp, and slowly but surely sank to the status of second- or third-rate powers as others rose to take their place. The United States, so the argument goes, is now embarked on this same unwise course, and will-unless we reverse direction-follow those other powers into the ashcan of history.

Without dealing now with Professor Kennedy's historical analysis, let us look at the more immediately relevant issue of whether the United States is in fact in decline.

My own judgment is that these prophets of gloom confuse decline with adjustment, and that what they see as an America going the way of sixteenth century Spain is really an America seeking-not always wisely or with sufficient dispatch-to find its place in an increasingly polycentric world. It is not that the United States is weaker, either economically or militarily; rather, it is that other nations have grown increasingly stronger, particularly in the economic arena. While we and the Soviet Union continue to wield far greater military might than any other nation or group of nations, countries such as Japan and the members of the European Economic Community have become, or are becoming, economic superpowers whose views and very presence inevitably impact on the world order. We have, in short, moved from a postwar world in which we and the Soviet Union dominated the scene to a more traditional world of multiple centers of economic power; a world in which the still overwhelming military strength of the two

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superpowers, or the still great economic strength of the United States, is ever less able to direct the course of world events.

The test for the United States in the closing decade of the twentieth century will be how well we adjust to this changing reality. Nor are we alone in facing these changes. Whatever our problems, they pale when compared with those of the Soviet Union. Bedeviled by a stagnating economy, increasingly unable to compete in the race for high technology, and overextended abroad, Chairman Gorbachev has recognized that his only choice is to seek a far-ranging renovation of the system. Whether he can succeed in transforming a geriatric bureaucracy and introducing into the economy some degree of reward for individual performance without triggering massive instability remains to be seen. But by any measure, his problems far outweigh those of President Bush or his successors; the odds that we will come through this period of change whole and better able to deal with the challenges of the twenty-first century must be rated as substantially better than those of the Soviet Union.

This is not to argue that ours will be an easy road. The shifts in Soviet foreign policy, whether real or simply a rhetorical device to weaken Western cohesion, will clearly place additional strains on an already tense trans-Atlantic relationship. Some Western European leaders are already arguing that Chairman Gorbachev has so changed the Soviet Union that it no longer poses a significant threat to the West. Others, while less ready to rush to judgment, will find it increasingly hard, in the face of public opinion, to argue for the maintenance of present defense expenditures (to say nothing of an increase), or the continued need for Western cohesion during a time of apparently reduced East-West tensions.

West-West relations will also be increasingly complex in the years ahead. The single European market that the European Community intends to put in place by the close of 1992 is a case in point. That this event will clearly strengthen Community economic strength over time cannot be disputed. But whether it will strengthen the West as a whole will depend fundamentally on whether the Europeans create a protectionist market or one largely open to the flow of goods and services from abroad. European protectionism would inevitably trigger American retaliation and a slow but steady slide away from the relatively open trading system that has characterized the postwar years, toward the world of high tariffs and beggar-thy-neighbor policies that marked the decades between the two wars. Neither an open trading system nor a protectionist regime is inevitable; the final outcome will depend on recognition on both sides of the Atlantic that we have a collective obligation to accept some immediate sacrifice in order to assure that the new West European entity that will inevitably develop from the events that culminate in 1992 is a stabilizing factor on the world scene, and one that contributes to the collective strength of the democratic West.

The agenda at this time of transition holds other equally formidable challenges. As the United States and the Europe of the Common Market must find new ways to coexist and cooperate, so must we accept the new reality of a world in which Japan's role will be increasingly important. This incredibly productive and competitive island will, beyond question, be a major player in the world of the next century. Yet, as with the European Community, it remains to be seen whether the part Japan plays will contribute to a more stable international environment, or will be a proximate cause of a destructive competition between the

> *The test for the United States in the closing decade of the twentieth century will be how well we adjust to... changing reality.*

(L)

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Western democracies which could make the opening decades of the next century as unstable as were the early decades of this century.

The burden of debt now carried by the developing world, including but not limited to Mexico, Argentina, and Brazil, must also rank high as one of the issues crying out for attention as we close out the century. This issue has for too long been looked upon as an economic question to be dealt with through traditional mechanisms. The reality, however, is that Third World debt has long since become a political problem threatening the future of governments friendly to the United States and the viability of the international financial system. It is more than time that Western creditor nations recognized the seriousness of the crisis and moved collectively to ease the burden; the consequences of nothing more than continued palliative measures are the collapse of fledgling democratic governments, a rise of radical nationalist regimes, and growing instability in Latin America, Africa, and parts of Eastern Europe.

It is not possible, in so short a space, to do more than outline some of the most critical problems

facing the United States and the West as the century draws to a close. Nor is it possible to describe solutions, even if they could, at this stage, be known. What is important for Americans is to recognize that the relatively orderly and predictable world of the postwar era is disappearing, to be superseded by a more normal—and therefore more chaotic—world of multiple power centers. The challenge that America and the nations of the democratic West face is to recognize that we live in a time of change, and to design a set of policies that accommodate to that reality in ways that assure that the new world our children will inherit is better than the one passed on to us. It will take the collective wisdom and strength of the West to move through this time successfully, but that wisdom and strength can be enlisted in the cause of a better world order only if America takes the lead in forging this new alliance.

If we fail in this task, then perhaps we will find ourselves in decline. If we succeed, we will have reaffirmed what Americans have always believed—that the United States is not bound by the heavy hand of history.

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