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Dancing on a Financial Volcano


The United States has become home to huge amounts of foreign investment, which some analysts say is eroding U.S. economic sovereignty. But proponents argue the free flow of capital is key for the global economy and America’s prosperity.

Foreign ownership of U.S. business is nothing new. Foreign money brought the Industrial Revolution to U.S. shores in the 1870s. In the early 20th century, British, German, Dutch, French and other foreign investors produced a variety of goods and services in America, including rayon, the first synthetic fabric, Mercedes cars and Michelin tires.

But Americans have historically been ambivalent toward foreign investments. They welcome their positive contributions, yet often resent their “alien” implications. The last time foreign ownership caused alarm came with the economic rise of Japan in the late 1980s. Japan’s high-profile acquisition of the iconic Rockefeller Center in New York City raised the issue of a foreign takeover to new heights.

The perceived biggest foreign investment threat now is China. The Chinese company CNOOK’s attempt last year to purchase the U.S. petroleum giant Unocal, triggered a public outcry, with the U.S. Congress demanding that President Bush block the deal on national security grounds. Much the same attitude inflamed the recent public debate over the proposed acquisition of several American port facilities by a Middle Eastern government-owned company.

Staggering Trade Deficit

But many analysts note that such debate often ignores the fact that the U.S. is itself a major net foreign investor.

Edward Graham, a senior analyst at the Institute for International Economics in Washington and co-author of a forthcoming book, U.S. National Security and Foreign Direct Investment, notes that American companies purchase more equities abroad than the world invests in America, thereby having greater control of foreign assets than foreigners have of U.S. interests.

He says, “The United States is both a source of direct investment and a user of direct investment. In fact, U.S. investment abroad at the moment exceeds direct investment in the United States by about $500 billion. So actually, the United States is a major net investor in the world. I would continue this kind of investment as part of globalization. I would also expect that the United States would continue to be both an investor and a recipient of direct investment.”

In 2003, foreign investors controlled nearly 16 percent of non-financial U.S. corporations, up from 11 percent a decade ago. And foreign managers employ about five percent of the American workforce.

Still, many observers warn that the sale of valuable U.S. assets is necessary in order to finance the massive foreign debt created by more consumption than production. Last year, the U.S. trade deficit exceeded $725 billion, totaling staggering $3.6 trillion in the past decade. Americans have spent that much money to buy oil, clothing, electronics, toys and countless other products from the rest of the world.

Recycled Dollars

Clyde Prestowitz, President of the Washington-based Economic Strategy Institute, says those dollars are returning to purchase American factories and other businesses and infrastructure. He adds that the U.S. needs a daily dose of about $3 billion dollars of capital to pay its creditors and could, by the end of this year, run a trade and government deficit of a trillion dollars.

“We consume more than we produce," says Prestowitz. "We have to finance that by borrowing money from the rest of the world by selling them treasury bonds or by selling them our ports, factories or real estate, and in return they put money in the U.S. Foreign central banks will eventually have so many dollars they won’t have to take anymore. And if we get to the point that foreign central banks won’t take any more dollars, we are then looking at a collapse in the value of the dollar and spiking interest rates -- recession if not depression.”

According to Clyde Prestowitz, who served as a trade negotiator in the Reagan administration, the seeds for transforming the U.S. economy from a production to a consumption base were planted long ago.

He underscores America – compared to other industrially developed nations – has the lowest savings rates and adds:“The U.S. economy has always been a high-consumption economy, but it has become extraordinarily so in the last decade-and-a-half. All the incentives are to buy and to consume. Take, for example, a house. You buy a house, you pay a mortgage, and interest on the mortgage, but you deduct that from your taxes. You get a home equity loan, and maybe you use that loan to buy a trip to Paris or buy a new car. You deduct the interest on that payment from your taxes. So we are subsidizing consumption in the U.S., where the rest of the world subsidizes savings."

Resilient Economy

But other analysts, including Irwin Stelzer, Director of Economic Policy Studies for the Hudson Institute here in Washington, disagrees that there is a financial crisis on the horizon. He says the U.S. economy had similar imbalances in the 1980s, which were successfully adjusted by a sliding dollar.

He argues, “Under President Ronald Reagan, we had a 40 percent devaluation of the dollar. Nobody even remembers it. Estimates from the International Monetary Fund and other institutions are that it would take about that much to get our current trade into balance. As long as it isn’t sudden, I don’t really see a major problem.”

In addition, says analyst Stelzer, the United States is much less dependent on foreign currencies than other countries are on the dollar, because the dollar is the world’s reserve currency.

He also points out that the American economy is by far the world’s strongest, “It’s growing by 4-to-5 percent a year. We don’t have inflation. House prices softened a tiny little bit in some markets. The labor market is very good; the unemployment rate is lower than I ever thought it could be. So I’m afraid, I’m among the optimists.”

Still, Stelzer, like other analysts, acknowledges the U.S. is in uncharted waters as the world’s largest economy has so much outstanding debt.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.