US Nat'l Security...or Protectionism?

♠ Posted by Emmanuel in , at 7/27/2007 01:59:00 PM
What we have here is yet another American effort to slow the inevitable: Given that America still continues to rack up massive current account deficits year in and year out, it is inevitable that foreigners will demand better than the "lousy" returns they get from American debt instruments according to Nouriel Roubini. Here is his commentary on foreigners buying equity stakes in US firms from the time when Chinese CNOOC was prevented from buying Unocal on, you guessed it, security grounds. The title says it all: "With the US current account deficit close to a trillion dollars of course foreigners will soon own most of the US capital stock":

The current political saga and debate about the purchase by a Dubai-based company of the management of six US ports misses the most crucial point: with a US current account deficit running towards $900b this year and probably above one trillion $ next year, in a matter of a few years foreigners may end up owning most of the U.S. capital stocks: ports, factories, corporations, land, real estate and even our national parks. This is basic accounting: if you run a current account deficit (import more than export, spend more than your income, save less than you invest) you need to borrow from the rest of the world to finance such excess of spending (on private and public consumption and investment) over your national income. And you need to borrow on net every year to the tune of the current account deficit. That is why countries that run current account deficits become net foreign debtors. There are only two ways in which this accumulation of foreign liabilities of a debtor country can occur: either debt (when you issue private or government bonds purchased by foreigners and when you borrow in the form of bank or other loans from foreigners) or equity that can take the forms of FDI (foreign direct investment when non-residents acquire a domestic firm or other domestic assets such as real estate or when they build a new factory in the US) or portfolio investment in the equity market. So, it is either debt or equity but in either case the foreign liabilities of the US go up and foreigners increase debt or equity claims against the US. It is as simple as that and, with a trillion $ current account deficit the US foreign liabilities will increase every year by a trillion dollars.

Now, until recently, foreigners have financed the US current account deficit more in the form of debt rather than equity. Since a good fraction of this current account deficit was driven in the 2004-2005 period by the growing US fiscal deficit, the foreigners have piled up more and more Treasury bills and bond. Indeed, by now over 53% of all Treasuries are held by non-residents, a good fraction of which by foreign central banks. But, increasingly, foreigners are starting to realize that exchanging their goods and services for lousy low-return IOUs of the US government is a most lousy deal for them. Why to hold Treasuries that give you a mediocre 4.5% return over 30 years when you can instead buy higher return capital such as US corporation, US factories, ports, real estate and any other asset currently owned by American in this great land of ours?

According to today's edition of the Financial Times, it seems America is keen on finding more ways to stave off the inevitable as much as it can by more closely scrutinizing prospective buyers of American firms on "security grounds." Again, it seems that the beggar (debt happy Uncle Sammy) is trying to be choosy as to how his creditors fund his profligacy. Whether Sammy gets his way, though, is an open question:
US takeovers by foreign state-owned companies will face heightened scrutiny by the inter-agency panel that investigates deals on national security grounds following the passage of a law that revamps the treasury-chaired vetting process.

The Foreign Investment and National Security Act, signed into law on Thursday by President George W. Bush, requires the Committee on Foreign Investment (Cfius) to conduct a full 90-day investigation of takeovers by government-owned companies unless the treasury secretary, or another cabinet-level official or deputy, determines they would not impair US national security...

“There are questions all around the world: how open is the US to foreign investment? What this bill does – it’s balanced – it really clarifies how we focus on those relatively few cases where there are national security issues. That’s where we want to spend our time,” Mr Paulson said.

The new law also intensifies scrutiny of deals involving critical technologies and infrastructure. [Take that, security threat China.]

The former Goldman Sachs chief executive said the new law made clear that the US needed to “look more closely” at takeovers by state-owned companies, but he was quick to add that the country remained “very open to investment”.

The bill was signed into law at a crucial time, according to some Washington observers who expect an influx of deals in coming months by government-controlled companies and investment vehicles eager to buy into US equities. In the past, such deals, such as the proposed takeover of Unocal by CNOOC of China, have elicited criticism from some lawmakers in Congress who say they represent a threat to US security and competitiveness.

Mr Paulson said the vast majority of investments in the US by foreign-state owned groups were focused on reaping greater returns and not necessarily assuming control of US assets. He added: “I’m not saying control is a bad thing”.

“We welcome direct investment, whether it’s [for] control or not control. There were a number of them last year that were reviewed by Cfius, that were resolved very quickly and quietly and without controversy,” Mr Paulson said.

Congress began formulating legislation to amend the Cfius process last year after the executive branch panel was lambasted for approving the takeover of port terminals by Dubai Ports World.