The policy shift, which was promoted internally by Robert Reich, the labour secretary and author of the best-seller entitled Who is Us?, is likely to have serious trade and tax-code implications. Moreover, if the US begins actively to court foreign companies, other countries will almost certainly follow suit, triggering fierce international competition for these multinational companies at a time of rising unemployment and under-employment.
There are other implications. In removing internal barriers to direct foreign investment, the US is likely to press other nations to open up with the aim of promoting trade gains. A study by the economist David Hale, widely cited by top US officials, suggests that Japan should be a target for these efforts. Indeed, Mr Hale concludes that the most effective way to reduce the massive trade deficit with Japan is through promotion of more American direct investment. He bases his conclusion on studies that show a direct correlation between foreign direct investment and trade gains.
Japan is a likely target: it has the lowest level of direct foreign investment of any industrial country - equal to only about 1 per cent of its capital stock, compared with levels in other countries of from 10 to 20 per cent. Its inward foreign investment, estimated at dollars 23bn, is tiny in comparison with outward foreign investment of about dollars 242bn. Based on per capita comparisons with other countries, Japan again ranks bottom at only dollars 180, compared with dollars 800 in Germany, dollars 1,600 in the US and dollars 2,000 in Britain.
Mr Hale suggests the US should adopt a hard line with Japan on foreign investment and US officials are listening. The low level of foreign investment in Japan is now seen as a big barrier to trade since there is a direct correlation between the trade and investment flows of multinationals. For example, the Commerce Department reports that 45.6 per cent of US imports come from 'related' parties.
A study by a Harvard professor, Dennis Encarnation, documented this trend. He reported that majority-owned foreign subsidiaries of both US and Japanese companies import far more from parent companies back home than they buy locally. For the US, which has been heavily involved in foreign direct investment since the 1950s, this has had important trade consequences. Shipments by US multinational parents to overseas subsidiaries have accounted for 65 per cent of exports since 1957.
The problem facing the Clinton administration is how to meld these goals into a coherent policy. At home, the Clinton team will be setting its trade goals, based not simply on the interests of US companies but all companies operating in the US and employing American workers. This would cover foreign-owned US plants that produce more than 11 per cent of all cars and light trucks sold in the US. Simultaneously, the administration must decide which foreign markets to press for opening.
Over the past two months, there has been much warring within the team over how to proceed. Mr Reich has argued that the nationality of a company makes no difference as long as its operations result in value added to the US economy and benefit to US workers. However, Laura Tyson, head of the Council of Economic Advisers, contends that nationality does count. Companies tend to keep their high-wage technical and management jobs within the home country, she says. A compromise was apparently reached at a cabinet meeting last week at which officials agreed that US companies operating US production facilities would come first but that foreign-owned companies employing US workers would also be a key priority.
The administration is now drafting guidelines that will become the policy blueprint that determines which markets to press for opening, and which companies - foreign and domestic - to aid with export financing, tax credits and possibly subsidies if the administration opts for an industrial policy.
These are very difficult waters to navigate, given the US system of special-interest lobbying and the emotional reactions produced by foreign investment. Who can forget the anti-Japanese outpouring following the purchase by a Japanese company of a big stake in Rockefeller Center? Given the historical track record, there is no question that foreign direct investment is beneficial. The trick is in the handling, and the Clinton administration must make its policies very clear so that there are no murky deals or issues of favouritism to provoke a backlash.Reuse content