In response to:
Restoring American Independence from the February 18, 1988 issue
To the Editors:
Contrary to my usual practice, I feel that I must comment on certain statements in Felix Rohatyn’s article [NYR, February 18], which have been the subject of much comment in the business and financial community and in certain government circles in Washington, and which I find very troubling. There is a danger that some of what he has to say might be interpreted as providing support for narrowly nationalistic policies that would call into question the commitment of the United States to an open, liberal environment for international trade and investment.
To begin with, he is right that even if we were to do all the things necessary to reduce our large trade imbalance, the deficit cannot be eliminated overnight. In the meantime, we will depend on an inflow of foreign capital to finance it.
Some portion of that capital inflow will take the form of foreign acquisitions of US companies, just as a significant share of capital flows to other countries by US companies have involved acquisitions.
Is this a good thing or a bad thing? Generally speaking, it is a good thing. As Mr. Rohatyn writes: “Most foreign investments pose no difficulties, and create employment as well as other beneficial economic activity.”
But for reasons Mr. Rohatyn does not specify, he maintains that “Americans may legitimately feel that some major institutions should be protected from foreign control.” I can understand how that feeling may be legitimate when clearly defined interests of national security are involved. In such cases, as Mr. Rohatyn acknowledges, “we currently have a review mechanism for foreign acquisitions of companies with defense-related activities,” as we should.
But he then goes on to write: “It would be logical to extend that kind of national security mechanism to other sensitive industries.”
He says that “to give such review mechanisms serious consideration should not be viewed as a xenophobic reaction.” He then asserts: “If currently distorted market conditions create a trend toward such acquisitions, a highly selective review mechanism may become necessary.”
Experts certainly differ on whether current market conditions are distorted. That depends on a view of the relationship of the dollar to other currencies at a time when the US trade deficit is still immense. And it depends on a view of such matters as what the appropriate level of the Tokyo stock market should be. These are not easy judgments to make, even for experienced financial professionals.
But what is clear to me is that introduction of a foreign investment review mechanism would almost certainly make it substantially more difficult to attract private capital from abroad. Instead, it would raise great doubts in the minds of investors, foreign and domestic alike, about this country’s commitment to preserving free and open markets. The ultimate result would be higher US interest rates, lower stock prices, higher domestic inflation, and slower economic growth.
Furthermore, I personally would question whether any review mechanism to screen intended foreign investments could be made to work in practice. What criteria could be established that could possibly distinguish objectively between “sensitive” and nonsensitive investments? Who would establish those criteria? And who would make those decisions? Political pressures would be enormous.
When I was Undersecretary of Treasury during the Carter Administration, we ran up against formidable implementation problems in the limited area of reviewing investments by foreign official institutions, where at least conceptually one could visualize motives for investment other than making profits.
But when you are talking about ordinary profit-seeking private businesses which invest to make money, which bring in new technology and management techniques, and which create jobs for Americans, I don’t know how you are going to administer some sort of investment review test.
Mr. Rohatyn also makes several points in the area of international trade policy. He says: “It is by no means certain that temporarily limiting foreign shares of certain of our main markets to reasonable percentages, by administrative means, might not be preferable to further significant currency devaluation, especially if such temporary restrictions were coupled with important domestic investment commitments and vigorous cost control.”
I am not sure what this sentence means. Is Mr. Rohatyn putting forward or opposing “temporary restrictions, especially if they were coupled with important domestic investment commitments and vigorous cost control”?
Admittedly, there are times when a government might decide on tactical grounds to take measures of that kind when the pros outweigh the cons in those particular circumstances.
But as a general principle, temporary trade restrictions, even when combined with useful undertakings by the domestic industry on investment and cost containment, are highly undesirable as an alternative policy to exchange rate adjustment. They could invite retaliation. Worse, they would play into the hands of politicians in other countries (and some in this country) all too eager to scuttle the current trading system for one based on managed trade.
Let’s be honest about it. The United States lost economic independence these last few years because our basic policies—as well as those of our leading trading partners—got out of balance. We have a lot to do in terms of reducing the size of the federal budgetary deficit, lowering the trade deficit, and raising the domestic savings rate before we can be said to have retained control of our economic and financial destiny.
But we will not restore economic strength and reassert US leadership by going the route of imposing restrictions on trade and investment.
Far from reasserting leadership, it would, in fact, contradict just about everything we have stood for in the world—and, in the process, would undermine the foundations of our postwar policy of nurturing a free and open environment for trade and investment.
At this moment, when populist and narrowly nationalistic rhetoric is all too apparent in the presidential campaigns, it is important not to invite possible misinterpretation that the United States should want to retreat inward in its fundamental economic and financial policies.
Perhaps Mr. Rohatyn will take the opportunity to clarify his position so that there is no possible misinterpretation on these matters of global and national significance.
Anthony M. Solomon
former President of the
Federal Reserve Bank of New York and
current Chairman of
S.G. Warburg (U.S.A.) Incorporated
New York City
Felix Rohatyn replies:
It is certainly true that setting up a review mechanism would not be a simple matter and would require careful study. That is one reason I made it clear that “I am not recommending that any restrictions now be adopted,” although here Mr. Solomon simply ignores what I wrote. He also ignores the existing statutory limits on foreign acquisitions of US airlines and US television stations; and he says nothing about statutory provisions for review by the Federal Reserve when foreign or domestic investors propose a change in ownership of more than 10 percent, or a change in controlling interest, of US banks.
There seems a consensus that such restrictions are defensible on grounds of national interest. They arose through the legislative and administrative process because responsible national leaders thought that they were needed. They do not “contradict just about everything we have stood for,” as Mr. Solomon would have it. They have not produced the negative economic consequences he refers to. There is no reason to predict that what I called a “highly selective” mechanism applying further limits in specific cases would necessarily have such effects if it were carefully conceived. As I wrote, and as Mr. Solomon should be aware, although again he ignores the point, “no other major industrial power in the world, certainly not Japan and not even Great Britain, allows major companies of strategic importance to be acquired by foreign interests without government approval.” These countries have not found the determination of their strategic economic interests to be impossible in the way Mr. Solomon suggests; and such a determination should not be beyond our policy-making processes now.
The real questions to be faced concern the potential effects on the US economy, and the US position in the world, of foreign control of strategically important institutions, for example large banks and leading producers of advanced technology and natural resources. It is worth nothing that, as a result of our different accounting and tax treatments, American companies in most cases cannot compete on an equal footing with foreign companies for US acquisitions. Nothing I wrote favored indiscriminate protectionist measures. But the case seems stronger than ever for serious consideration of the possible effects of foreign takeovers on a much larger scale than heretofore; of whether it would serve the public interest if many of the principal components of US economic strength were to come under foreign control; and of whether the rules should be changed to permit US companies to compete for domestic acquisitions on equal terms.
Finally, on the general principle that should govern trade policy, my basic position could hardly have been stated more clearly, although once again Mr. Solomon chooses to ignore it. “The US,” I wrote, “should maintain open trade markets and open financial markets for the benefit of all parties.” I went on to say, however, that our trading partners in Europe and Japan should be called on to make two kinds of contributions—greater participation in our defense burdens; and financing of the new capital requirements of the principal third world debtors. The actual fate of our trade balance will depend far more on our clarifying and pursuing these goals than it will on restating the familiar rhetoric of free trade.
May 12, 1988