American Power After Afghanistan
How to Rightsize the Country’s Global Role
Canada will now permit new foreign direct investments only when they bring "significant benefit" to Canada. The determination of "significant benefit" is explicitly to be a policy decision of the cabinet, based on five criteria: the contribution of the proposed investment to "the level and nature of economic activity in Canada," including employment, use of Canadian components, and exports; the degree and significance of Canadian participation in the enterprise; the effect on productivity, technological development and innovation in Canada; the effect on industrial competition; and the compatibility of the investment with the economic and industrial policies of the national and provincial governments.
The following scenario thus becomes almost inevitable. The Canadian cabinet will approve a large and controversial U.S. investment. Nationalist opposition will charge a sellout of Canadian interests. The government will respond that the investment brings "significant benefit" to Canada.
But Canadian politics will not permit the simple assertion of "national interest" by the governing party. Opponents of the investment (and of the governing party) will enumerate the alleged injury it brings to Canada. The government will be forced to counter by specifying the benefits which, in its view, outweigh the disadvantages. It will thus publicly reveal, for example, that the investment will bring x thousand additional jobs and y million dollars of additional exports to Canada.
International conflict becomes certain at this point. The AFL-CIO will charge that the x thousand jobs have been exported from the United States to Canada, validating its case against foreign investment by U.S. firms. The Treasury Department will charge that Canada has diverted the y million dollars of exports from the United States, weakening the U.S. balance of payments and the dollar. One virtually certain result is intensified U.S.-Canadian hostility. Another, which is a theme of this article, is an intensification of political pressure in the United States against all foreign investment by American firms.
Such overt efforts by Canada to capture an increasing share of the benefits of foreign investment would by themselves have a significant impact on U.S. policy, because Canada remains by far the largest single recipient of U.S. investment and because the rapid flow of communications between the two countries assures that adversely affected American interests will become aware of the situation. But the new Canadian policy is only illustrative of one of the basic global trends of the 1970s. Virtually every country in the world which receives direct investment-which means virtually every country in the world, big or small, industrialized or developing, Communist or non-Communist, Left or Right-is levying increasingly stringent requirements on foreign firms.
The objective of these policies of host countries is to tilt the benefits brought by multinational companies as far as possible in their favor and to minimize the costs to them which can be associated with such investments. Few countries any longer ask the simplistic question: "Do we want foreign investment?" The issue is how to get foreign investment on the terms which are best for them, and indeed to use the power of the firms to promote their own national goals.
Host countries are adopting a variety of strategies to achieve this objective. Most are applying much more sensible general economic policies, and thus removing such sources of windfall profits for the firms-and losses for the countries-as overvalued exchange rates and undervalued interest rates. In addition, most are seeking to position themselves as strongly as possible to negotiate better deals on the whole range of relevant issues with applicant firms. They list broad criteria for judging specific applications, require detailed statements from applicant firms on the effects of their proposals, and then seek the best mix of benefits they can achieve without deterring the investor. This effort of host countries to negotiate maximum benefits and minimum costs from foreign investors will shortly become the focus of the entire international debate about multinational firms.
Efforts by host countries to maximize their returns from foreign investors are, of course, nothing new. There are four features, however, which differentiate the present markedly from the past. First, virtually all host countries are now adopting such policies, whereas only a few did so before. Second, the policies themselves are becoming more evident and explicit and hence will attract increasing attention in the home countries of the firms, particularly the United States.
Third, host-country objectives are now much broader and deeper. Governments throughout the world are accepting responsibility for an increasing number of economic and social objectives-such as regional equity, better income distribution and the development of indigenous high-technology industries-in addition to the traditional macroeconomic goals of full employment, growth and price stability. Developing countries are also seeking to reduce unemployment directly rather than assuming that it will fall automatically with economic growth.
Thus governments are seeking additional policy instruments, to meet an increased number of policy targets. With the explosive acceleration of international economic interpenetration, external forces can hinder-or assist-the successful use of traditional domestic policy instruments. Multinational firms, as the chief engine of interpenetration, represent both a major threat to the success of internal policies and a major opportunity for help. Host countries are thus virtually compelled by their own political imperatives to seek to exert a maximum impact on the detailed behavior of almost all incoming direct investments.
Fourth, host-country efforts are now far more likely to succeed because of fundamental shifts in the world economic and political environment that have put many host countries in a far stronger position than before. They have large and rapidly growing markets, especially when they are members of regional arrangements, such as the European Community or the Andean Pact, which discriminate against imports from outsiders. Many represent highly productive, lower-cost "export platforms" from which multinational firms can substantially improve their global competitive positions. Those possessing key raw materials are in a particularly strong position, both with companies in the extractive industries themselves and with companies which use the materials;1 producers of raw materials have now demonstrated the ability to get together to promote their common interests, rather than compete with each other to the benefit of outsiders. And the indigenous talent that has emerged in even the least developed, as the result of a generation of economic growth with heavy emphasis on advanced education, enables host countries both to perceive accurately their national interests and take maximum advantage of their stronger positions. Outside help in negotiating with the firms is also increasingly available for those countries which still need it. So the firms can no longer dictate, or even heavily influence, host-country policies as they may have done in the past; the dependencia syndrome, under which foreign and domestic elites collude against the national interests of host countries, is rapidly disappearing.
In addition, host countries now have a far wider array of options in pursuing their objectives. Not long ago the multinational firm was the only source of large-scale capital, advanced technology and superior management. Not long ago the United States was virtually the sole source of large chunks of investment capital, technological know-how and marketing skills. Not long ago security considerations devolving from the cold war enabled the United States to dominate its allies, most small countries, and the international rules and institutions which governed world economic relations.
Now, however, the multinationals have lost much of their power because the attributes which they once monopolized, and which could only be obtained in package form, can be increasingly "unbundled"-capital obtained in the private markets, technology licensed from a variety of sources, management hired directly. Increasing numbers of European and Japanese companies offer formidable competition for American multinationals-and are often willing to invest on terms more generous to host countries, to make up for their delayed emergence on the world scene. Capital, technology and other skills can be bought in Europe and elsewhere, as well as in America. With the onset of détente, host countries large and small no longer fear to cross the United States by challenging U.S.-based firms and the international economic environment which helped them flourish in the 1950s and 1960s. Multinational firms based in the United States, recognizing these basic changes and with their own international exposure greatly increased by virtue of their rapid global expansion, complete the circle by seeking in virtually all cases to accommodate to the new leverage of host countries and by eschewing the backing of the U.S. government.
In short, sovereignty is no longer at bay in host countries. To be sure, the degree of this shift in power differs from country to country, and from industry to industry. It is virtually complete in most industrial host countries and some developing countries as well, and is well underway in many other developing countries. Only in a few countries-industrial as well as developing, and indeed including the United States itself-have new host-country policies on foreign investment not yet begun to emerge.
The shift in power and resulting policy is further along in extractive than in manufacturing industries. Within manufacturing, it is further advanced for low-technology investments and those aimed at the local market than for high-technology investments and those which use the country as an "export platform." But the trend appears inexorable.
What about the effects of this trend on home countries-that is, the countries from which investment comes, via multinational firms based there-in particular the United States? Before addressing that question, we need to take a closer look at the specific requirements being levied on the multinational firms.
These requirements derive from the policy objectives of the host countries. They differ in degree from country to country, but fall into three broad categories: domestic economic objectives, foreign economic policy objectives, and national control over the local subsidiaries of the foreign-based firms.
In the first category, the most direct requirement is job quotas for nationals. This has both a quantitative and a qualitative aspect. Developing countries with high rates of aggregate unemployment simply impose overall job requirements. Indonesia requires that 75 percent of all employees of foreign-based firms be Indonesian within five to eight years; Nigeria and Morocco sharply limit the access to alien labor of such firms. In both industrial and developing countries, such job requirements are often part of "regional policies": Canada, France, Iran, the Netherlands, and the United Kingdom, among others, offer major incentives to enterprises to bring jobs to "depressed areas." (In some countries, regional authorities themselves add to the list of requirements.) In addition, layoffs may be forbidden (Italy, some recent cases in France) or made very costly (Germany, Belgium), so that the firm is locked tightly into any level of employment which it initially recruits.
Qualitative job requirements are prevalent in both industrial countries and the new middle class of semi-developed countries. Argentina requires at least 85 percent of management, scientific, technical and administrative personnel to be Argentine. Singapore judges investment applications partly by the ratio of skilled and technical workers to be included in the work force. An increasing number of industrialized countries, particularly in Europe, are requiring the firms to carry out locally both a significant share of their total research and development and some of their most advanced research. Training of local workers is another requirement, aimed at both more and better jobs.
Two measures used to pursue both domestic and foreign economic objectives are "value-added" and "anti-concentration" requirements. To avoid becoming mere entrepôts for foreign firms, developing countries will now often require domestic production of a certain share of final output. This promotes the employment objective, both in the new industry itself and in those local industries which supply it; and furthers its balance-of-payments objective by raising the net foreign exchange return from the investment.
To avoid excessive industrial concentration, which can lead both to higher prices at home and to an impaired competitive position in world markets, some countries-particularly more developed ones-either reject foreign investments (especially take-overs) which would create excessive market power or let them proceed only if steps are taken to guard against such an outcome. Germany, the United States and Canada are particularly concerned with this issue.
Many developing countries are pursuing a similar aim through different means. Some multinational firms have traditionally limited or excluded competition among their own subsidiaries (and the parent) by dividing up world markets for each of their products. One result is that subsidiaries in particular countries are barred completely from the export market, or limited to a particular region. Global competition may be reduced as a result, and the export (and hence total production) opportunities of the country hosting the hobbled subsidiary are certainly reduced. Led by the Andean Pact, developing host countries are banning any such limitations on the distribution of local production by the subsidiaries (and any other tie-in clauses that would restrict the subsidiaries' use of the parents' technology).
Host countries are now promoting balance-of-payments objectives in several ways. A special target has been the trend in most multinational firms toward local financing, a practice which both limits the inflow of capital and diverts scarce local capital.
From 1957-1965, for example, only 17 percent of the investments of U.S.-based firms in Latin America originated outside the host country.2 From 1965 until early 1974, U.S. policy actually promoted the trend toward local financing by limiting (first voluntarily, then mandatorily from 1968) the capital outflows of U.S. firms-but not their actual investments. Now a reaction has set in. Australia was one of the first countries to require external capital to come with the firm, largely in retaliation against the U.S. capital controls. Many hosts now require external financing for foreign investments, and others achieve the same purpose by limiting subsidiaries' access to domestic capital. On the other side of the capital account, a widening array of countries (e.g., Brazil, India, the Andean Pact) limit tightly the repatriation of capital investment and even profits.
Requirements that the investing firm export a sizable share of output are even more important, because they go directly to the location of world production, jobs and the most sensitive aspects of each country's external position. Andean Pact countries will permit foreign investors to avoid divestiture only if they export more than 80 percent of their output outside the group. Mexico permits 100 percent foreign ownership only if the firm exports 100 percent of its output. India requires foreign investors to export 60 percent of output within three years. Practically every host developing country-and many host developed countries-attach very high priority to the export criterion.
As with jobs, the export requirement is qualitative as well as quantitative. Many countries are seeking to upgrade and diversify their export base, and so require foreign investors to push the processing of raw materials or the assembly of components a stage or two further than might otherwise occur. A particular objective is building high-technology exports.3
Some efforts are still being made to get foreign firms to replace imports as well. Canada recently barred a major U.S. computer company from competing for government contracts unless it helped Canada achieve balanced trade in that sector, by replacing imports as well as exporting. However, host countries are increasingly emphasizing exports because such a focus permits larger-scale production, greater efficiency, and more jobs and growth for the longer run. The shift requires more explicit policies toward the foreign investor and more affirmative action by the firms (especially if the host country is to avoid the costs to its wider objectives of excessive export subsidies and undervalued exchange rates). In addition, larger production runs by the subsidiaries mean greater potential conflict with the economic interests of the home country. This issue well illustrates the increasing clashes among countries which may arise.
Finally, virtually all host countries are seeking majority (if not complete) ownership of local subsidiaries of foreign firms. Many are seeking a major share in day-to-day management as well. The objective is to increase the likelihood that the subsidiary will respond positively to the national policies of the host country rather than to the global strategy of the corporate family, headquartered in the United States or another home country, and perhaps to the global strategy of the government of the home country as well.
Some of these host-country policies treat the multinational firm differently from local companies, though many do not. The main point, however, is not whether the policies are discriminatory. The significance is their clear intent to shift toward the host country the package of benefits brought by the foreign firms. To the extent that they do so successfully to an important degree, they trigger a potentially important new source of international conflict. To the extent that they do so through measures which produce results different from market-determined outcomes, there is increased justification for such clashes and even greater likelihood that they will occur.
The firms themselves may have little or no objection to these host-country policies. They may be relatively indifferent, within fairly broad limits, as to where to locate sizable portions of their production and how to finance it.4 They may quite easily accommodate to host-country requirements on a majority, if not all, of the issues raised. The alacrity with which many firms have accepted the exceptionally detailed and far-reaching conditions imposed by Communist host countries is the most dramatic example, but the phenomenon is common. If too many firms do not play, a host country will sense that it has pushed too hard and retreat on the least important of its concerns, until it finds the mix that will maximize its interests.
The cooperativeness of the firms is promoted by the newly powerful positions of the host countries, as outlined above. It is often further accelerated by specific inducements. Some of the most frequent are favored tax treatment, export subsidies, "location grants" within the context of regional policies, subsidized training of local labor, prohibitions of strikes, preferred access to local credit, and protection against imports.
These considerations round out the strategies of the host countries. To maximize their returns, they must not only harness the activities of the firms but assure that the investments actually proceed. Thus they utilize the traditional mix of carrot and stick. The greater the incentives, the further the firms will, of course, tilt toward complying with the requests of their hosts.
Thus, a second broad trend is toward collaboration between the multinational firms and their hosts, and greater distance between the firms and their home governments. Few firms any longer appeal to their home government for support against host governments even in cases of outright nationalization, let alone to deal with the growing array of economic and political requirements which they face. Some firms, particularly in the natural resources industries, seek to limit the leverage of host countries by blending together capital from a variety of countries and selling their output forward to buyers in a variety of countries, to increase the problems for the host if it takes extreme action.5 But even this strategy does not deter the achievement of the host's primary objectives; indeed, it may promote them by enhancing the inflow of external capital and assuring a diversified export market. And most firms, in recognition of the current balance of power, are in fact cooperating fully with their hosts. The oil industry is the most obvious recent case in point, but the trend is certainly widespread.
This analysis differs sharply from the picture painted in the recent debates in the United Nations and elsewhere, where the developing countries (and even some developed countries) continue to attack the alleged alliance against them of multinational firms and home-country governments. The difference can be explained partly by the usual lag in perceptions of overall bargaining power by the bargainer who is catching up step by step; partly by the dominance of the rhetoric by politicians whose perceptions are shaped by images, rather than by the technocrats who are implementing the new policies; partly by the zeal of the developing countries to stick together, which requires them to adopt the position of the weakest among them; and perhaps mainly by the overwhelming tactical advantage of keeping the home countries tagged as defenders of the multinationals and aggressors against host-country interests. As in the case of raw material prices, some of the traditionally have-not countries suffer from intellectual lag and others find it highly convenient to maintain the rhetoric of the past though it no longer bears much relation to reality. Their tactics can succeed as long as the home countries fail to recognize what is really happening. But reality in the field of foreign direct investment cannot be submerged much longer.
The main impact of these new global trends is on the home countries of the multinational firms. It falls most heavily on the United States, the largest home country by far.
If host countries are achieving an increasing share of the benefits brought by multinational firms, someone else is receiving a decreasing share. As just outlined, this "loser" is seldom the firms themselves; indeed, they may gain more from the incentives than they lose from the requirements. In some cases, countries which are neither home nor host to the company may lose-as when a Brazilian subsidiary of a U.S. firm competes with German sales in the world automobile market.
But the United States, as the home country, may frequently be on the losing side of the new balance in two senses. Host-country inducements to American firms may attract economic activity and jobs away from the United States, in some cases without economic justification. Traditionally, the United States has forcefully opposed policies which discriminated against foreign investors; now it increasingly finds its national interests threatened by policies which discriminate in favor of those firms. And host-country requirements may skew the results of U.S. investments against the overall U.S. national interest.
To be sure, many foreign direct investments represent non-zero-sum games: as in all classical market behavior, world welfare improves. It is also conceivable that all parties benefit from some of those investments. Some host-country measures may also help home countries, such as the United States; if a host country breaks up the global allocation of markets by a multinational firm, the home country may benefit more from lower prices than it loses in oligopoly rents. And some host-country policies (such as placing a few directors on the boards of subsidiaries) essentially bring them psychic rather than financial income, and have no adverse impact on anyone.
However, there is always the issue of how to divide the benefits even when all parties do gain. Indeed, there may be losses to the United States (through the firms) even when more economically sensible host-country policies increase world welfare by eliminating or reducing market imperfections which profited the firms in the past. Most important, many investments are largely indifferent to location and hence are close to zero-sum games; in such cases a decision that is one party's gain is another party's loss. Furthermore, world welfare may actually decline as a result of some foreign investments, such as those induced primarily by host-country tax preferences and those which increase global market concentration, even though host countries gain from them. So there is great latitude for home countries to lose when host countries successfully tilt the benefits of the investment package in their own direction.
The balance-of-payments aspects are the clearest case in point. Existing world demand for a product may often be relatively fixed in the short run, especially for the processed goods and high-technology items which countries are avid to produce. Thus there is a limit to world exports. If Brazil requires General Motors to export a certain share of its production in order to remain in business (or to retain its favored tax treatment), U.S. automotive exports may decline even though no such shift was dictated by purely economic considerations. Similarly, the U.S. capital which Brazil requires General Motors to use to construct its plant may not be automatically offset by other capital inflows into the United States. Similar shifts in benefits can occur with respect to jobs, technology or other economic aspects of investment whose outcome is altered by host-country policies.
The effects of shifts in ownership and management control imposed by host countries are more subtle, and more difficult to trace. In the past, control of foreign natural resources by U.S. companies generally increased the likelihood that those resources would be available to the United States in a crisis; now, however, the seizure of effective control by most host countries has rendered the United States as uncertain as all other countries in this area. Increased host-country control renders the firms less susceptible to the extraterritorial reach of the U.S. government. And shifts in effective control reduce the likelihood that the United States will derive monopoly rents or other benefits from the overseas activities of U.S. firms.
Such shifts of investment-induced benefits from the United States to host countries may, from many points of view, be desirable. They may distribute world income more equitably. They may reduce some of the tensions which have clouded interstate relations heretofore, because host governments felt inferior to the firms and hence susceptible to ill treatment by them.
However, these shifts may not always be so benign from the standpoint of the home country. Indeed, the United States now finds itself in a most peculiar position. Negotiations between U.S.-based multinational firms and host countries are having an increasingly important bearing on the national interests of the United States. The interests of the host countries are represented through their governments. The interests of the firms are represented directly. But the third major actor in the drama is at present wholly unrepresented.
In the past, some observers would have brushed off this apparent asymmetry on three counts: that U.S.-based firms could be counted on to represent U.S. national interests explicitly, or at least advance them inadvertently; that the United States was so powerful economically that any costs to its economy would be easily absorbed (and perhaps welcomed officially in view of U.S. support for economic development elsewhere); and that any such costs would be quite small anyway in view of the insensitivity of the U.S. economy to external events and the marginal economic importance of foreign investment.
Each of these considerations has now changed dramatically, as part of the change in the overall economic and political environment noted in Section III.6 Many "U.S.-based" firms have become truly multinational and thus, quite logically and defensibly from their standpoints, pursue a set of interests which may not coincide closely with any of several concepts of U.S. national interests. Indeed, as discussed above, many firms now respond much more clearly to host-country interests, because those host countries have both achieved a much stronger position vis-à-vis the firms and articulated far more clearly than home countries what they expect the firms to do.7 In their constant quest for legitimacy and acceptance, the firms will naturally slide toward those who care most about their activities and who direct policies at them most explicitly.
And it is obvious that the U.S. economy is not so healthy that it can blithely ignore the effects of a phenomenon as large as direct investment. Such investment now accounts for more than 20 percent of the annual plant and equipment expenditures and profits of U.S.-based firms, and both numbers are rising rapidly. The corporations and the AFL-CIO agree that the phenomenon has an important impact on U.S. jobs and the balance of payments (though they disagree whether that impact is positive or negative). The United States is increasingly affected by world commodity arrangements, the structure of world markets and changes in exchange rates, all of which are influenced importantly by multinational firms.
It is thus both undesirable and completely unrealistic, in both economic and political terms, to anticipate continued abstention by the U.S. government from involvement in the foreign direct investment activities of U.S.-based enterprises. The British government has for several years made foreign exchange available to U.K.-based firms only if they can demonstrate that their foreign investments will benefit Britain's balance of payments, through exports and profit remittances. The Swedish government has had similar restrictions, and has just passed legislation which will also enable it to block foreign investments by Swedish firms which hurt its economy or foreign policy. Japan and, to a lesser extent, France have also traditionally used a variety of government levers to try to assure benefits to the home country from the foreign activities of their firms. So the United States is virtually alone, among home countries, in not playing an active role toward foreign investment by national enterprises.
As in host countries, the issue will not be whether or not to permit foreign investment as a general rule. Nor will it primarily focus on the simplistic U.S. concerns of the past: "prompt, effective and adequate" compensation for nationalized properties, avoidance of barriers to U.S. investment or discrimination against it, codes of conduct to legitimize the firms. The issue will sometimes be whether to permit a specific investment. But it will primarily be the terms on which investments proceed, and the equitable sharing of the resulting impact on the national economies involved.
As the United States seeks to fill the empty chair which currently marks most international discussion of its foreign direct investment, the likelihood of international conflict will rise sharply. For at stake is nothing less than the international division of production and the fruits thereof. Indeed, "the kinds of techniques used by governments both to attract and to constrain multinational firms sometimes look like the largest nontariff barriers of all."8 Unless host countries cease their efforts to tilt the benefits of investment in their own direction, which is unlikely (and undesirable unless accompanied by other steps to help them achieve their legitimate objectives), the clash of these particular national interests could become a central problem of world economics and politics.
Over the coming decade, international investment policy could therefore replicate to an unfortunate degree the evolution of international trade policy in the interwar period. At that time, trade was the dominant source of international economic exchange. As governments accepted increasing responsibility for the economic and social welfare of their populations, particularly with the onset of the Depression, they sought to increase their national shares of the international benefits which resulted from trade. Other governments would not accept such diversion, and either emulated the moves of the initiators of controls or retaliated against them. There were no international rules and institutions to deter and channel such conflict. The result was trade warfare, and the deepening and broadening of the Depression.
Some observers fear that another depression looms on our contemporary horizon. Others wonder whether a Great Inflation, which in my view is more likely, will similarly lead countries desperately to pursue nationalistic measures in an effort to export their problems and insulate themselves from external pressures. Either cataclysm would greatly intensify the problem under discussion. Indeed, the national clashes outlined here might already have arisen much more frequently had not the postwar world economy progressed so successfully until recently.
Even without such extreme underlying conditions, however, the struggle for the international location of production will almost certainly continue to grow in both magnitude and impact on all countries concerned. Foreign direct investment and multinational enterprises have now replaced traditional, arms-length trade as the primary source of international economic exchange. As indicated throughout, host countries are increasingly adopting explicit policies to tilt in their directions the benefits generated by those enterprises. The impact of these efforts may turn out to be even greater than their trade predecessors of the 1930s, both because the economic interpenetration of nations is now more advanced than in the 1920s and because governments now pursue so many more policy targets.
Indeed, the U.S. government has already begun to voice opposition in international forums to the tax subsidies and other incentives which artificially lure U.S. firms to invest abroad, and the changes in U.S. taxation of foreign income proposed by the Treasury Department in April 1973 were largely aimed at countervailing such practices. Much stronger U.S. reactions can be envisaged over the next few years. The original AFL-CIO attack against foreign investment by American firms, as embodied in the Burke-Hartke bill, was based on ambiguous aggregate data and a handful of unrepresentative individual cases. Hence it made little headway. The efforts of the Treasury Department to limit direct investment outflows in the middle 1960s were similarly stymied by ambiguities over the effect of the outflows on the balance of payments.
But now labor, those concerned with the balance of payments, and the many other opponents of multinational enterprises will have a much stronger case: the shifting of benefits from the United States to host countries through the overt policy steps of those host countries. Such groups will ask how the U.S. government can sit idly by and let such shifts occur, just as similar American groups have since the 1930s-correctly and usually successfully-insisted that the U.S. government retaliate against the efforts of other countries to tilt the benefits of trade through subsidizing exports to the United States, blocking imports from the United States, or other measures of commercial policy which injured U.S. economic interests. And there are no domestic or international rules and procedures through which to channel such protests, like those developed for trade after World War II to avoid a repetition of the interwar experience.
The problem is further exacerbated by the subtlety and variety of inducements offered, and requirements levied, by host countries. A tariff or import quota is easy to see, and is usually known publicly. But a regional investment grant can be negotiated privately with a firm, and portrayed as "purely domestic" in any event if exposed. Export or job quotas, which are by their nature negotiated on a case-by-case basis, are even less obvious. The universal call for "transparency" of the operations of multinational firms must be joined by a call for transparency of the policies of many host countries toward those firms.
The scenario envisaged at the outset of this article can thus be concluded as follows. After the Canadian government approves the proposed investment, because it transferred x thousand jobs and y million dollars of exports from the United States to Canada, the U.S. government-under intense domestic political pressure-decides to retaliate. It seeks to bar the particular investment, either directly or by declaring that the foreign tax credit will not apply to its profits.
Either approach, however, requires legislation. Congress, probably supported by any Administration in power, properly decides that such legislation should cover the overall issue of foreign investment rather than a single case or even a single country. The legislation clearly derives from a foreign action to pull jobs and exports away from the United States, and more examples of such actions, by a growing list of host countries, are added to the debate each day. The whole discussion may even take place with unemployment rising and the trade balance slipping. Thus the new legislation slaps a licensing requirement on all foreign investment and eliminates the tax credit altogether, except perhaps for investments where host countries avoid levying any requirements on U.S.-based firms.
Canada and most other host countries of course stick to their guns, being unable politically to back down in favor of multinational firms and at the dictates of the U.S. government. Foreign-based multinationals quickly begin to fill the void, and the United States begins to lose the many advantages conferred on it by the foreign investments of U.S.-based firms. Many of these firms then seek to "leave the United States," but the Treasury pursues them. In the end, as in the trade wars of the interwar period, the results include open political hostility among nations, a severe blow to the world economy, and a shattering of investor confidence.
Hopefully, the world will learn from its past mistakes and prevent this scenario from ever occurring. To do so, host countries should limit their efforts to skew the activities of multinational firms, perhaps by following the Australian example of insisting on "no adverse effects" rather than the Canadian example of requiring "significant benefit." But many will not do so unless some other power countervails the power of the firms. Nor will many of them, particularly the developing countries, do so unless they find other ways to meet their legitimate national aspirations.
It follows that home countries, particularly the United States, should take steps to help developing host countries achieve their goals in less disruptive ways. Such measures should encompass trade policy, commodity arrangements, and foreign assistance.9
More narrowly, home countries will also need tools that can be used to counter efforts of host countries that go beyond reasonable norms. For example, legislation increasing taxation of the foreign income of American corporations to offset tax inducements offered by host countries would be a precise analogy to present laws, in the trade field, that provide for countervailing duties against export subsidies by foreign governments. And a mechanism is needed to deal with individual cases where problems arise, analogous to the present escape clause in the trade area providing for temporary protection where U.S. interests are injured by particular import flows.
But such measures by home countries could simply lead to a series of retaliatory and counter-retaliatory steps between them and host countries. Thus international investment wars will be prevented only by the adoption of a truly new international economic order, just as the trade wars of the 1930s were prevented from recurring in the postwar period only by the creation of a new international order based on the GATT, the IMF, the World Bank and American leadership.
The new order will have to include international rules governing investment itself, to limit the jousting for benefits between home and host countries and to provide a channel for the disputes that will inevitably arise among them, however ambitious the preventive rules. It will have to limit the power of the firms in ways acceptable to host countries, and provide alternative means for the latter to reduce domestic unemployment and expand exports. Multinational enterprises have a vital interest in the creation of such a new order, because they will otherwise be caught increasingly in the struggle between host and home countries; it will no longer be possible for them to side with home countries due to the weakness of the hosts, as in the 1950s and early 1960s, nor with hosts due to the inattention of the home countries, as in the late 1960s and early 1970s.
There are already many reasons to begin the construction of a new international economic order to replace the order of the first postwar generation, which has collapsed: the globalization of inflation, international monetary instability, the growing use of export controls, the scrambles for oil and other natural resources, the dire needs of the resource-poor countries of the "Fourth World" and the abilities of the new "middle class" of semi-developed countries to help in assisting them.
The threat of investment wars adds another crucial issue to the list for global economic reform. Fortunately, this particular threat has not yet become acute. There is time to deal with it carefully and constructively, instead of waiting for a series of crises to force hasty reaction. To begin to do so would both defuse the emotional issues raised by the existence and spread of multinational enterprises, and begin to apply the tested principles of international rules and cooperation to one of the major new features of the postwar world economy.
1 See C. Fred Bergsten, "The New Era in World Commodity Markets," Challenge, Sept.-Oct. 1974.
3 This emphasis on high-technology exports may affect a country's balance of payments less than its industrial structure. In a country whose exchange rate is floating, such as Canada, any increase in the exports of the promoted sector will produce upward movement in the currency, which will tend to limit exports (and increase imports) in other sectors.
4 For an excellent analysis of this range see Paul Streeten, "The Multinational Enterprise and the Theory of Development Policy," World Development, Vol. 1, No. 10 (October 1973). He counsels host developing countries to marry cost-benefit analysis of their own needs to bargaining-power analysis of how far they can push. However, he views many host countries as weaker in their relations with multinationals than do I.
5 See Theodore H. Moran, "Transnational Strategies of Protection and Defense by Multinational Corporations: Spreading the Risk and Raising the Cost for Nationalization in Natural Resources," International Organization, Vol. 27, No. 2 (Spring 1973).
7 This in turn reflects a far clearer appreciation by host than home countries of the effects on them of multinational firms, and thus a far clearer idea of the ends to which they might want to harness foreign investors. There has been much more extensive analysis of the effects of foreign investment on host countries than of the effects on home countries, a situation which a forthcoming book on U.S. policy toward such investment by the present author, Thomas Horst and Theodore Moran seeks to help balance.
8 A. E. Safarian and Joel Bell, "Issues Raised by National Control of the Multinational Corporation," Columbia Journal of World Business, Winter 1973, p. 16.
9 See C. Fred Bergsten, "The Threat From The Third World," Foreign Policy, Summer 1973.