Category Archives: Finance & Investment

Xing-Out The Subsidies

Posted on by
Reply

Sallie James wants to abolish the Export-Import Bank. Probably not a bad goal. ExIm hasn’t had anything to do with imports in decades and its policies certainly smack of industrial policy (it isn’t known as “Boeing’s bank” for nothing). But there is one role that ExIm can still fill – that of counter-subsidy agency.

James acknowledges that – though her headline writer didn’t catch it. Her piece ended up being called “Time To X Out The Ex-Im Bank“, though that is not precisely her conclusion.

If Congress wants to help U.S. exporters compete with foreign firms backed by official export subsidies, it could accomplish that task with a far smaller footprint than the Ex-Im Bank currently creates. The first step in narrowing the bank’s scope should be to immediately restrict Ex-Im financing to only those cases in which—and only to the extent to which—an American exporter faces verifiable subsidized competition abroad. The next step should be to terminate the bank as soon as possible. Such corporate welfare programs have no rightful place on the U.S. trade policy agenda. In the meantime, negotiations to eliminate export subsidies worldwide should be vigorously pursued …

She advocates eliminating ExIm only when its counter-subsidy role is no longer needed. That is going to take some doing, but she is right that we can start hacking off the other bits of ExIm without delay. The problem is that our competitors have not become enlightened enough to get rid of their export finance subsidies. And, until they do, we are at a disadvantage when trying to compete with officially supported exports from other countries. James asks ExIm to produce evidence of foreign credit subsidies, but – while some stats are available from the OECD – this is not the sort of thing that other governments like to keep us informed about.

How much could you get for this bank?

She asks that ExIm only finance exports for which competing companies verifiably receive support from their governments. That is a pretty tough bar to meet, since our competitors are not likely to notify us of who they are supporting in which competitions. U.S. companies often suspect official interference in favor of their competitors, but proving it and measuring the value of those subsidies during the competition is probably an impossible ask. When I was a U.S. commercial officer, I often worked with American companies that suspected they were up against subsidized competitors – but the extent of the subsidy was unknowable until the competition was over, if then. Often the U.S. firm was approached by a foreign procurement official with gentle advice that they needed to “sweeten” their bid because their competitors were doing so. We rarely knew for certain if that was true or just a negotiating ploy by the foreign buyer.

By all means, cut ExIm back to what has become its essential role of countervailing lender or guarantor – and use it as a negotiating chip to convince others to stop predatory export lending. But don’t expect to achieve that nirvana anytime soon.

Want Jobs? Encourage FDI

Posted on by
Reply

Anybody want new jobs in America? Going after new foreign direct investment (FDI) is a dandy way to do it. Attracting FDI is entirely feasible and produces some great, often high-paying employment – as much as 30% more than standard U.S. pay scales. We may poor mouth our economy and there is unending bad news, but we too often ignore how the U.S. market looks to the rest of the world. It looks wonderful! Still the world’s strongest market, suffering a temporary slowdown in growth – the perfect time to enter and get ready to ride the next U.S. boom. We tend to think in straight-line predictions, but nothing stays the same in economics. There is always another boom coming; we just don’t know precisely when. That means the down times are a great time to attract investment. If the next boom has started, it is too late to build a new factory.

Since writing Monday’s post about Commerce’s new portal site for FDI, I have discovered a recent (and blessedly short) report that details the relationship between foreign direct investment and jobs. Here are the major take-aways:

• During the last ten years, majority-owned U.S. affiliates of foreign companies have employed between 5-6 million workers.
• FDI supported 2 million manufacturing jobs, which have been less affected by the sector-wide losses in employment than domestic manufacturing jobs.
• Workers at majority-owned U.S. affiliates of foreign companies receive 30% higher pay than non-FDI supported jobs.
• U.S. FDI totaled $194 billion in 2010, and $1.7 trillion over the last ten years.
FDI flows vary greatly year-to-year and generally follow the U.S. business cycle: FDI hit a low of $64 billion in 2003 and then surged to an historical peak of $328 billion in 2008.
• At present, relatively few countries invest in the United States. In fact, 84% of FDI in the U.S. in 2010 came from or through eight countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg, the Netherlands, and Canada.

Most of the employment created in the United States by foreign investors is in manufacturing – the jobs we popularly think we are losing to other countries.

FDI fills the jobs we think we are losing.

What can we do to obtain more FDI? The Commerce report suggests four avenues. One, of course, is to go after more investment from the top eight investing countries identified above. They already know the U.S. market and how to operate in it, and the apparently like it. A second approach is to make more effort to attract investment from other developed countries, such as Australia, Sweden, Belgium or Spain. The experience of the top eight gives them a good track record to follow.

It may take more work, but we can go after investors from economies that run a trade surplus with the United States. China, Mexico and the OPEC countries come to mind. Of course, I have to note that some of these (e.g., China) have shown interest in investing in the United States and have not always been welcomed by our political class.

And we can target countries that hold a lot of U.S. liquid assets (read U.S. bonds and dollars) to encourage them to turn those investments into something more concrete. Again, China and Belgium leap to the head of the chart.

One avenue the Commerce report doesn’t mention would be to go after the many and growing sovereign wealth funds around the world. (SWF has a whole different meaning these days.) Many of those are OPEC members, but not all. Singapore, for instance.

USG Seeks FDI. Finally.

Posted on by
Reply

Where, in all of America, should I invest?

The Federal Government has launched a new website to help entice foreign direct investment to America’s shores. Called SelectUSA, the site serves as a portal to the investment promotion sites of the fifty states, five territories and the District of Columbia. It also offers an exhaustive, but too confusing directory of federal incentives available to business. I can’t imagine how a middling-size foreign company is going to navigate their way through the Byzantine set of choices, except to assure themselves that there is gold in there somewhere and keep digging.

SelectUSA will improve and the site will grow. The story here is that it represents a profound change in policy for Washington and for federal agencies. Seeking investment has always been the province of the states and their sub-entities: regions, counties, cities and towns. During my career with the U.S. Commercial Service, commercial officers overseas were strictly enjoined from giving advice to potential investors that might discriminate between the states. Even if it was obvious that only certain states or cities made sense for an investment by a firm in the aviation industry, we weren’t supposed to tell them that. Attracting foreign investment was a states’ rights issue, and federal agencies were to stay far away. The result was that many states spent good money on having their own investment promotion offices overseas – and U.S. embassies were officially speechless on the subject, merely referring inquiries to the states. Some states do an excellent job (North Carolina comes to mind), others (most?) don’t even get into the game.

Of course, that conflicted with what our competitors were doing. Everybody else was offering one-stop shopping to attract investment to their country. If an auto parts supplier approached an Italian commercial officer, for instance, that officer would direct them straight to the major cities for the auto industry and provide cogent arguments why Torino might be better or worse for the investor than, say, Modena. For our competition, it is all about figuring out what the investor needs and then helping him to the part of your country that best meets those needs. We weren’t supposed to do that, a real handicap when representing a confusing market the size of a continent. (Though really good commercial officers often managed to have off-the-record discussions or offer extraordinarily broad hints.)

We played this game in spades in Germany when Daimler-Benz was making up its mind where to put a Mercedes plant in the United States. Mercedes is pretty smart and knew from the beginning which states were likely candidates. But that didn’t stop probably the majority of states and many cities sending their leaders on pilgrimages to Stuttgart to woo the Daimler board. We had to keep pleading for meetings even if it was clear the state in question didn’t have a prayer (nor do state governors like to hear that). But we had to play the states’ rights game. And we could not sit down with Mercedes and dispassionately discuss where it might make sense to invest.

I hear through the grapevine that the commercial officers have more leeway now to work with potential foreign investors. And SelectUSA is at least a beginning at getting comprehensive information out there. Though it still plays at being even-handed among the states, it is a beginning to actually helping potential investors to make up their minds. The next stop should be to unleash our commercial officers to actually help a foreign investor figure out which U.S. state or city best meets their needs. Of course, if that ever happens, we can expect a slew of complaints to Congress by states and cities not chosen. Some things never change.