America is Unilaterally Disarming Itself

Foreign direct investment flocked to America in 2007.  According to a preliminary analysis of the data available, the Bureau of Economic Analysis found that in 2007 foreign direct investment reached nearly record levels. 

The analysis found that foreign entities spent $267.8 billion to acquire or establish U.S. businesses in 2007.  That number is matched only by FDI in the U.S. in 2000, when foreign entities went on a spending spree, using $335.6 billion to gobble up American assets.

Allowing this insane amount of FDI in the U.S. is akin to American unilaterally disarming itself in an economic war.

The year-over-year increase in FDI for 2007 was 67 percent - a drastic increase, however, down from the 81 percent increase in 2006.

The majority of the money was used to acquire already existing American companies.  Those expenditures totaled $255 billion, while foreign entities spent just $21.9 billion to establish new U.S. businesses.

As usual most of that investment was directed at America’s floundering manufacturing sector.  All told, 44 percent of the total FDI in the U.S. in 2007 went to the manufacturing sector.  Nine percent was directed at the U.S. finance and insurance industry, five percent to the retail and wholesale trade industry and seven percent to the real estate sector.

Total FDI investment in the manufacturing sector jumped to $135.2 billion in 2007 from just $56.3 billion in 2006.  Most of that foreign cash was directed to companies that manufacture chemicals, transportation equipment, primary metals and machinery.

The largest foreign investors in the U.S. in 2007 were from Europe and the United Kingdom. The UK made up a sizable portion of FDI with the $67.5 billion the country used to acquire or start new American businesses.  Overall, European investment totaled $146.5 billion, an increase of 37 percent from 2006.  The second largest European investor in America in 2007 was France at $17.1 billion.

Elsewhere, Canada more than tripled its FDI in the U.S. in 2007, totaling $41.1 billion, up from just $12.1 billion in 2006.  Both the Middle East and Asian and Pacific regions more than doubled their FDI in the U.S. in 2007.

In 2007 FDI in the U.S. had the potential to affect 487,600 American workers.

America’s trading partners do not play by the same rules America adheres by and operate on a double standard when it comes to FDI.

China, with a massive sovereign wealth fund, has been using the global recession to acquire beleaguered companies and assets around the world - especially in America. Yet, when an American company attempts to buy a Chinese company, the deal is scuttled based on some arbitrary law or restriction.

Japan is another one of America’s largest trading partners that utilizes investment barriers to protect its domestic industries from foreign direct investment. The government uses strict controls to limit foreign direct investment in companies for mergers and acquisitions, portfolio investments and lending. These measures were originally motivated by the desire to prevent Americans from gaining ownership of the Japanese economy.

One of the ways in which the Japanese prevent hostile takeovers by foreign buyers is by utilizing a system of cross-holdings. Companies all hold stock in other companies, which makes it nearly impossible for anyone to gain a controlling interest. This system also promotes a stable business environment, since a strong economy benefits everyone.

This practice has worked so well that as of January 2008, foreign direct investment in Japan represented just three percent of gross domestic product, while in the U.S. it represented 14 percent.

In addition, Japan also uses rigorous standards, testing procedures and government procurement policy to keep the flow of foreign investment and manufactured imports at a trickle.

On the other hand all of America is up sale. From July 1978 to July 2008, America sold 16,613 of its best companies to foreign investors, allowing the profits and technological secrets in such industries to accrue to foreign owners. Moreover many of the key jobs (in research and development, for instance) go to foreign workers, while the profits go to foreign holding companies that boost the tax revenues of foreign governments.

Moreover, soon we will not even be able to gather this data. In June 2009, our own government will stop publishing a key report tracking foreign direct investments (FDI) into the U.S., essentially burying the problematic fact that America is for sale. Through the discontinuation of the Bureau of Economic Analysis’ (BEA) “New Investment Series,” the U.S. government and the American public will no longer be able to distinguish between FDI used to acquire existing U.S. assets from FDI used to establish new U.S. businesses. With the U.S. hiding the foreign money trail, the American public will no longer have the ability to track the rapid sell-off of America’s best companies to foreign interests.

This is certainly not a recipe for success. America should follow the lead of the Chinese and Japanese and begin taking steps to protect its vital industries, companies and assets from hostile takeover. China and Japan operate their economies as one big business fighting an economic war, it is time the U.S. joined the fight.

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