Fallacies of Discouraging Foreign Investment in US
GROWING public concern with the amount of foreign direct investment in the US has led to calls for new laws regulating such investment. Critics worry that these investors, particularly the Japanese, are buying the soul of America. Unfortunately, it's easier to capture attention with doomsday projections and calls for new laws than with careful analyses. Many claims about foreign control of the US economy are exaggerated: Foreign direct investment in the United States accounts for less than 6 percent of total US assets and 1 percent of US land. Others are simply wrong: It is not the Japanese but UK investors that hold the largest share. We don't need more laws. Existing laws and regulations are more than sufficient to monitor inward foreign investment and safeguard national security.
In addition to Exon-Florio, there are already several federal laws that protect national security by imposing constraints on the transfer of technology and the export of sensitive goods. The Defense Department has comprehensive regulations covering the transfer and performance of government contracts involving classified information. The sale of defense articles and services is closely regulated by the International Traffic in Arms Regulations. In addition, the Export Administration Act restricts exportation of sensitive goods, data, and technology. Under the International Emergency Economic Powers Act, the president can take a wide range of actions if there is an unusual and extraordinary foreign threat to national security, foreign policy, or the US economy. Finally, there are restrictions on foreign investment in key industries, including nuclear energy, radio and TV, the airlines, and domestic shipping.
Yet several bills are pending before Congress to impose more regulation. One would extend current restrictions on foreign ownership of US broadcast media to cable properties. Another, an investment reciprocity measure (HR 3699) introduced by Rep. Campbell of California, provides that if a country denies national treatment to US investors, the United States may impose similar restrictions on that country's investors when they try to invest in the US. On January 29, Senator Riegle introduced a similar measure which would permit the Treasury to limit future expansion of foreign-owned banks where home countries discriminate against US-owned banks. Another bill would give the Secretary of Transportation broad authority to block certain investments in US airlines where the investment would effect a transfer of control to foreign persons.
Many critics of foreign investment in the US also recommend more reporting requirements. They argue that the US lacks good data on foreign investment. There are, however, several US laws that require foreign investors to file all kinds of information with federal agencies. Foreign investors and their US affiliates file initial and periodic update reports with the Commerce Department on their direct or indirect ownership of US businesses and nonresidential real estate. Foreign investors must also report certain investments in US agricultural land to the Secretary of Agriculture and are subject to the extensive disclosure regarding antitrust laws.
Hence, the federal government already collects substantial data on foreign investment, which it publishes in aggregate form. Indeed, a recent British Royal Institute for International Affairs report indicates that US foreign direct investment data is more detailed than the data of any other Group of Five nation. Additional reporting requirements are unnecessary.
Congress, however, is considering proposals to require additional reporting and dissemination of data. For example, the Bryant Amendment would require registration of many controlling and portfolio investments by foreign persons and would make the raw data more widely available, including to Congress. Also, Senator Murkowski's bill would permit disclosure of individual data to CFIUS. Allowing individual firms' data to be used for enforcement purposes would mark a major shift in a long-standing US policy of using the data only for information.
We must be careful not to inhibit foreign investment. Foreign investment is not a threat but a beneficial component of the US economy. Foreign investment helped build the US and it is providing investment capital today. Foreign investment builds plants, creates jobs for US workers, and promotes the transfer of technology and management practices. US affiliates of foreign firms provide more than 3 million jobs, account for 8 percent of US spending on plant and equipment and 21 percent of US exports, spend $6 billion a year on research and development, and pay $9 billion in annual federal income taxes (in addition to state and local taxes).
Discouraging foreign investment would have serious adverse consequences. Interest rates would rise and the cost of capital increase. Over time, US output and real wages would grow more slowly. The value of the dollar would decline. Consumers would pay more for imports. Moreover, our trading partners could retaliate by erecting their own barriers. Inhibiting foreign investment would reduce US competitiveness.
As the US presses foreign governments to open their markets to US investors, it must remain true to its own open policy. The benefits of foreign investment are too important and the costs of inhibiting it too dear. More regulation is unnecessary and counterproductive.