Foreign investment. It sounds like a natural good for America. But are foreign companies actually investing in America, or using America to invest in themselves?
One thing is for sure: foreign investment rapidly increased in the 1990's. But if Japanese companies, for example, increase their investment in manufacturing in America, have we stopped to think about who gets the return on that investment? America may supply the labor, but the profits will go back to Japan. If Japanese companies invest in manufacturing in America, we supply the labor and they get the return on investment, but if American companies invest in America, we supply the labor and America gets the return on the investment.
Foreign investors would not be investing in America if they could not redeem their investments for greater profit. Therefore, they are foreign redeemers of dollars that used to be ours. In the 1980's, ownership of foreign land, factories and other assets by foreigners was seen as an American weakness, and a sign that Americans would take orders from distant masters that did not have America's best interest at heart. We would eventually forfeit control of our own destiny to those that were not primarily accountable to the American people or American stockholders. As a result, foreign companies enhanced their political and economic power, and some stole sensitive military technology that took decades to develop in the interest of the national security and protection of the American people. Still, since 1980, the number of Americans working for foreign bosses has increased over 2 ½ times. The debate over foreign investment has surfaced again simultaneously with the debate over free trade and the evidence of resulting job losses from such a trade policy. As more jobs are sacrificed in the name of free trade and the U.S. remains in recession, the economy will inevitably slide backward, demanding an even closer look into the advantages - if any - to foreign investment. Many Americans have forgotten about the massive Japanese foreign investment of the 1980's, but what if a similar economic invasion of our markets was to originate from Communist China? America's newfound patriotism since the September 11th tragedy may write a different chapter than if that catastrophic event had never taken place.
When foreigners assume ownership of U.S. land and factories, they become our landlords and holders of the mortgage on our national treasury. They dissipate wealth instead of creating it since their profits return to foreign lands and the taxes are paid to foreign governments.
Foreign owned companies pay fewer taxes to the United States government than comparable American owned companies. The more we support American owned companies, the stronger they will be and the less likely they will be to merge with or be taken over by foreign companies. Representative Bill Archer (R-TX), Chairman of the House, Ways and Means Committee, recently argued that as American companies merge with foreign companies and move their headquarters overseas, they inevitably pay less money to the IRS. The biggest recent example of a former American company merging with a foreign company is when Chrysler, the most successful automobile company in the 1990's (but not the biggest), was acquired by German-owned Daimler-Benz. Detroit and its workers will now take their orders - and layoff notices - from Stuttgart, Germany instead of Detroit, Michigan, and will have to fly across the Atlantic Ocean to protest corporate decisions.
When Daimler-Benz and Chrysler merged, Chrysler had a 44% stake in the newly formed company. By March of 1999, however, the percentage of American shareholders in DaimlerChrysler had dropped to 25%. Although the deal was passed off as a "merger of equals," it soon became obvious this was not to be the case. By June of 2000, Detroit could not keep up with the processing of resumes since so many former executives were leaving. Many of these same executives used to take pride in the fact that although Chrysler was the smallest American car company in the 1990's, it was still the most successful. "Fast is better than big" used to be the saying among Chrysler executives.
New CEO Jurgen Schremmp won and Chrysler lost. It would seem for a short time in the beginning that both would win, because at the time of the takeover, Chrysler was awash in profits. Differing from the initial announcement of a "merger of equals," Schremmp made Chrysler a mere subsidiary of the German automaker. Almost every aspect of making Chryslers, from design to production, was to be controlled by Schremmp from the German headquarters.
After the ink on the deal was dry, Schremmp spent the night drinking it up with his new American colleagues, leading them in the singing of songs which included "Bye, Bye, Miss American Pie."
By January 2001, when it was evident that Chrysler was in deep financial trouble, Schremmp tried to put an American face on Chrysler, saying "I will not rest until this company - this American icon - is back where it belongs, at the top of the industry. But it was too late. Chrysler had been solidified as a German company. Most of the former American executive talent had left out of cultural differences, and the workers morale wasn't faring too well either. In February 2001, within days of detailing plans to eliminate thousands of American jobs, Schremmp announced that German workers would be paid an 11% bonus. 140,000 hourly employees would get checks totaling nearly $1,500 each.
Any contribution Chrysler can make to DaimlerChrysler's bottom line will now further enable Airbus to compete with America's largest exporter - Boeing. Airbus is a heavily government-subsidized consortium of British Aerospace PLC, France's Aerospatiale Matra SA, Spain's Construcciones Aeronauticas SA, and the aerospace unit of DaimlerChrysler. In fact, Airbus won more orders than Boeing for the first time in history in 1999, the year after Chrysler merged with Daimler-Benz.
To be perfectly clear, the term "merger" can be deceiving. When a foreign company and an American company merge, the new company will either be American owned or foreign owned. If the newly-merged company is foreign owned, then the merger accounts to nothing more than foreign investment. There is no "merger of equals" or legitimate claim of having dual headquarters.
Despite the widely proclaimed positives of merger activity, most mergers fail to live up to their expectations. Several experts have estimated that 75% of all mergers fail to achieve their expected results. Over half of the merger deals between 1996 and 1998 actually reduced the stock prices of the companies involved, and over 80% of the merger deals saw stock prices stagnate. The year 2000 was the first in many years where upon announcement of a merger, the majority of stock prices fell. Merging companies often underestimate the stress of the employees involved, whose concerns include their continued employment and potential cultural conflicts should they survive the merger. Cultural questions were at the heart of the DaimlerChrysler merger. In their uneasiness that Germany would become too much like America, German workers wondered how Americans could live on less than six weeks of vacation, and wanted to know why American university students had to pay their own way. Even though Germany's unemployment rate is still over 8%, many unemployed Germans live better than employed Americans who earn low wages. In Germany, every company must have an equal number of representatives for both shareholders and workers on the board.
The merger of British Petroleum and Amoco was trumpeted as a merger of equals as well, but Amoco's executives found out differently as soon as the ink was dry on the deal. British executives made it clear that Amoco was to be run by British Petroleum's structured management and culture, and anyone who felt uncomfortable about it could join the other 10,000 recently fired employees. Before the signing of the merger, it was estimated that only 6,000 jobs would be eliminated. Most of the newly-revised 10,000 job losses would come from Amoco's existing U.S. operations, which further documents why foreign investment is a job destroyer and not a job creator.
Foreign investors are already reaping more gains from their U.S. investments than Americans take home from foreign investments overseas. In the first nine months of 1999, foreign companies announced U.S. purchases of more than double the value of 1998's volume to $256 billion, which is four times the volume for all of 1997.
According to census data in 1992 (the latest available), although foreign owned factories represented just 3% all employees in America's manufacturing industry, most of the businesses were acquired, rather than part of newly established operations or newly built factories. And according to the U.S. Department of Commerce, in the five years prior to 1992, foreign owned companies established 1,749 new U.S. plants. But according to IRS study in 1989, 72 percent of all foreign companies operating in the United States paid no U.S. taxes.
In 1995, the U.S. Commerce Department determined that foreign companies avoided paying one-half of their taxes due to the U.S. government. Foreign companies, despite their large investment in this country, create zero net jobs for Americans, because the overwhelming majority of Americans working with foreign bosses came through acquisitions of existing U.S. owned operations. And, when you take into account the layoffs that almost always accompany foreign acquisitions of existing U.S. companies, the number of jobs created by foreign investment may actually be negative.
Paul Craig Roberts, who helped President Reagan construct his tax cuts of the 1980's, says that "In 2000, 97 percent of direct investment by foreigners went for the purchase of existing U.S. assets," and that "we are not only losing our industrial jobs, we are losing ownership of our companies."
Foreign investment also makes us less independent, and gives us less of an authentic recent to celebrate Independence Day. As Charley Reese said in one of his syndicated columns, if you support interdependence instead of Independence, stay home on the fourth. Independence Day is more than going to see fireworks displays. It is about celebrating our independence as a nation, including economically, from other nations.
"A free people. . . should promote such manufactories as tend to render them independent on others for essential, particularly in military supplies," said George Washington in his first address to the U.S. Congress. Independence was likened to trade policy by our first president.
But with increased foreign investment, we become increasingly interdependent. Foreign companies, with so much investment in America, are no longer willing to take a passive interest in the make-up of our economy. With Honda and Toyota plants located in America, both companies feel that they should have a say in what a America's economic policy should be concerning the auto industry. Who could blame them? But should we grant concessions and tax breaks to companies of countries like Japan that discriminate against U.S. exports? Investing companies, foreign and domestic, want and expect to have a major voice in determining America's destiny, but we must be careful not to allow ourselves to reach the point where the majority of the American market is supplied by merely U.S. subsidiaries of foreign-owned companies. To the degree that this is true, it is to the same degree that we will have lost control of our own destiny.
Should we stop resisting foreign investment if the day comes that foreign companies did pay all the required taxes to the U.S. government, equaling the taxes paid by American companies? The answer is no. Both trade and economic independence are the reasons we should not.
Increasing foreign investment insures that our massive trade deficit will continue to expand. If we were to drastically reduce or eliminate foreign investment and resurrect substantial tariffs, we would both eliminate bidding for jobs with public funds and collect more revenue at the same time-a double positive hit to the U.S. Treasury of the United States.
When we buy imports, we send our dollars to foreign lands, which in turn use their new dollars (that used to be ours) to acquire our existing factories, land and banks. Then they get a seat at the table to tell us how our country and economy should be structured. Foreigners are doing this with American dollars that used to belong to Americans!
Foreign companies also have a tendency to target their investment so they are geographically closer to each other in locations where the lowest wages in America are paid. According to company officials in the automotive industry, Germans, for instance, are likely to be located where they can help other German companies.
One in eight American workers in manufacturing is employed by a foreign owned U.S. subsidiary. Even with all the talk of the United States and other first world countries investing in third-world countries, we are still the largest recipient of foreign investment.
Wanting to limit foreign investment in my country should not be construed as isolationist. A common argument is that with so many screwdriver operations (U.S. assembly facilities ultimately owned by foreign companies) that someone has to buy these products. And the fact remains that no matter how strong the arguments in this book, there will always be Americans who will buy foreign owned companies' products simply because they are "made in the USA."
Almost every country has limits on foreign investment in one form or another, with the United States having one of the fewest. U.S. stock exchanges accept more listings of foreign companies than any other country's exchanges. Japan smartly prohibits foreign ownership or control of key manufacturing and high-technology sectors. China requires foreign investors to find a domestic partner and requires much of the factory production to be exported so as not to compete head-to-head with Chinese companies, thereby wisely securing the Chinese market for the Chinese producer. Singapore limits foreign investment in newspaper companies to 3%.
According to the U.S. Commerce Department, spending by foreign investors to establish or acquire existing U.S. businesses increased 17% in the year 2000 from the prior year to record $320.9 billion. Until 1998, the foreign investment in the United States had never surpassed the $80 billion mark.
Listed on page XX are 137 automobiles, where they are made, the ownership of the automaker, and whether they are made with union or non-union labor. If you look through the entire list, you will notice that most foreign-owned automakers use non-union labor. But regardless of how you may feel about the labor movement in general, the fact remains that foreign automakers producing in the U.S. predominantly assemble their automobiles in low-wage states like Alabama and South Carolina, where American-owned automakers (Ford and General Motors) predominantly produce in high-wage union states like Michigan and Ohio.
This author has nothing against any state in our great country. We are all part of America and deserve jobs just like anyone else. The point I am trying to make is that this is one of many relatively unknown facts that give foreign-owned automakers huge cost advantages over American-owned automakers. Consider the following:
In 1997, the state of Alabama granted huge subsidies to Mercedes in exchange for a plant that would employ 1,500 people. What were the details of this huge incentive package? $300 million in tax breaks, $253 million in other direct incentives, $60 million in Alabama taxpayer money to send fellow Alabamans to Germany for training, and a promise to buy 2,500 of the new Mercedes SUV's at $30,000 each, representing another $210 million in guarantees. Based on just the initial $300 million grant alone, those 1,500 jobs will cost Alabama taxpayers $200,000 per job. Apparently Alabama, not Mercedes, will be paying those salaries for years to come. With deals like these, it's no wonder foreign automakers have stepped up production in the U.S. We'll even pay their workers' salaries for them!
But it didn't stop there. DaimlerChrysler decided in August of 2000 to build a second plant next to their existing plant in Alabama. The German company will reportedly receive an additional $150 million in government incentives for the expansion.
The original deal Mercedes crafted with Alabama caused such a backlash from Alabama citizens that it cost then-Governor Jim Falson his reelection bid, since voters in that state did not appreciate commitments to Mercedes that required school officials to raid education funds to the tune of $43 million. Education administrators refused to hand over the money, forcing Alabama to raid pension funds instead, and to secure financing at 9% interest to repay the borrowed funds.
The only difference between that financial shell game of tax incentives and the most recent deal of over $150 million in giveaways to Honda is that this deal is 30% less-costly than the former one. The announcement that Honda might hire 3,000 workers in the long run is reminiscent of trade concessions granted to China in exchange for promises that may never materialize in the future. Amazingly, Alabamans are receptive to the deal, for now, even though it will take at least 20 years, according to the University of Alabama's Center for Business and Economic Research, before Alabama breaks even. And that depends on more Honda suppliers moving into the area. Since there are currently only 18 Honda dealers in the entire state, that realization is not probable unless more attractive financial giveaways are offered. Losses to be recovered include over $100 million in free land, site construction preparation and training for future employees. Honda will also receive in excess of $50 million in additional tax incentives. Although Alabama will supposedly not have to raid any education or pension funds this time around, it is still a case of bidding for jobs with public taxpayer funds. These funds could have been used for education, health care, or any number of state government programs to serve the social needs of Alabama citizens.
Depriving a state of adequate funds for education is a vicious cycle to initiate, as hindering academic achievement may eventually dampen efforts to attract new employers with well-trained workers in the future. The Public School District in Toledo, Ohio is finding that out first hand. Tens of millions of dollars that could have worked for the benefit of over 38,000 students in the district went to grant various businesses tax abatements instead. Some of these companies are smaller and locally owned, and yet others are larger American-owned corporations. Owens Corning saves nearly $875,000 annually on school taxes, but German-owned DaimlerChrysler AG negotiated a $280 million incentive deal that will allow it to avoid paying $8 million in school taxes. Toledo is not an isolated case, however. Businesses surrounding the Memphis, Tennessee area have avoided paying so many taxes that would have funded public education that administrators are discussing eliminating programs such as high school athletics. Clearly, our schools and the communities they reside in will not improve with continued concessions like these.
But these large tax concessions did not start in the 1990's. Although Toyota did not start employing American workers until 1984, Toyota was given 1,500 acres of free land to construct an auto plant in 1987 in Georgetown, Kentucky. The auto plant was built by a Japanese steel company using Japanese steel. The U.S. government created a "special trade zone" so Toyota could import auto parts from Japan duty-free. Financing was handled by Mitsui Bank of Japan. Total federal and state grants and incentives exceeded $100 million. These subsidies, of course, were courtesy of your tax dollars.
Tennessee gave Nissan $11,000 per job for their Smyrna plant built in 1980. South Carolina coughed up $79,000 per job to convince Germany's BMW to build their plant in Spartanburg in 1992. Were you aware that our government was using your money to create jobs? Or are these merely job announcements where you and I foot the bill? Job announcements do make for great rhetoric for state governors' re-election campaigns. How many years will it take each factory worker in Alabama to pay back the $200,000+ in tax money that the government gave away? A conservative answer would be "several."
This is not to say that American companies are not granted incentives to build plants here. Cadillac received $100 million in incentives to build their latest plant in Michigan. It is my opinion that we should not be imitating the Third World by using public money to bid for jobs, but when given the choice between foreign investment (Toyota, Mercedes, Nissan) and American investment (General Motors and Ford), American investment is much better for America.
According to Site Selection Magazine, of the top 10 biggest investment deals in the year 2000, eight resulted in American companies investing in America. One was an American company, Motorola, investing in Scotland and the other was Nissan investing in Mississippi - a traditional example of foreign companies avoiding high wage rates in America.
The deal Alabama gave Mercedes makes the deal Michigan gave GM seems rather frugal. The point here is that these huge incentives that are offered to foreign companies are rarely offered to our own companies here at home. Such incentives allow foreign companies to save hundreds or even thousands of dollars in costs per automobile. And American companies acquire more of their parts from domestic sources, so more jobs are created in the America's automotive parts industry when we support American owned companies.
Of the wages that are paid to Americans employed in the automotive industry, it is the American companies (General Motors and Ford) that pay the highest wages. Plants owned by General Motors and Ford are highly concentrated mostly in the higher-wage union states such as Michigan and Ohio, where transplant factories are mostly located in lower-wage, non-union states such as Alabama and South Carolina. So by supporting the home team, we also support higher wages. But of course to support the home team, we have to know who the home team is. GM and Ford are the only home team players left since Chrysler was acquired by German automaker Daimler-Benz in 1999. The "big three" has now been reduced to the "big two."
One reason foreign auto companies locate plants in the United States is to squelch any possible uprising of protectionist or buy American sentiment. Should Congress decide to raise tariffs on automobile imports, foreign companies would avoid part of the blow since they already have factories in the United States. And, contrary to claims of free traders, importing companies pay the tariff. Free-traders would have you believe that the consumer always pays the tariff, but this is no more guaranteed than free-trade is guaranteed to lower consumer prices. Do you really think that Nissan lowered the price of their Sentra after they moved their plant from Kentucky to Mexico in 1998?
Abraham Lincoln said on several occasions that the consumer usually is not the one who pays the tariff, as it is normally paid by the importer or foreign manufacturer.
So we see that it is not only American companies that move factories beyond our borders. The fact is that Ford and General Motors have nearly twice as many models made in America than all foreign automakers, including Chrysler, combined.
To be fair, foreign auto makers don't always construct their plants in low-wage non-union States. Honda has one plant in Ohio - a state where higher union wages are present, although attempts to unionize the plant have failed. So consequently, Honda pays lower wage rates than GM in the same state. In fact, GM loses about $1,000 on every Cavalier they make in Ohio. And although Honda has a fraction of the factories in America that GM and Ford have, they claim they are taking a "huge risk" betting on America if the auto market were to experience a downturn. Apparently Chevrolet has accepted this huge risk, even with the reality of losing money some of their cars, while keeping production in the United States. Admittedly, GM and Ford have closed a number of factories over the last several years, but they still have far more factories in the U.S. than all foreign automakers combined.
Some of the Honda's assembled in Ohio are actually exported back to Japan. This presents a potentially dangerous scenario because we are putting a greater and greater emphasis on our ability to export and reduce our burgeoning trade deficit in the hands of our competition.
As Charlie Reese has said, "Toyota, public relations efforts notwithstanding, has its primary loyalty to Japan, as it should. If conditions arise in which Toyota must choose between what's in the best interest of its American subsidiaries and what's in the best interest of Japan, it will choose Japan. Anyone who loves his own country must necessarily respect others who love their countries."
If we love our country, and want to better be able to pay for the expense of preserving it, we should support not only the companies that produce in the United States, but also the ones headquartered here, since they pay the taxes that fund the cost of government and make preservation of this great nation possible.
Foreign investment also has political influences that reach into the campaign finance reform issue. Foreign nationals are prohibited from contributing to our local, state and federal election process, but U.S. subsidiaries of foreign owned companies are not. So by supporting foreign-owned companies, we are enabling the increase of foreign influence in American politics.
We may not be able to stop foreign investment in America, but we can stop giving foreign companies the money with which to invest. America needs more American investment, not more foreign investment.