On Foreign Ownership

At this Cafe Hayek blog post, commentators Ed Rector and Tony Hart echo similar concerns.  First, Ed:

In other words, foreigners owned 17.46% of US assets in 2000 and foreigners owned 26.41% of US assets in 2009.

What is overlooked in the series of posts on the trade deficit vs returning capital flows is that those foreign-owned US assets earn a return that is presumably paid to those foreign owners.

and now Tony:

So, Griswold tells us about US assets owned by foreigners. What about foreign assets owned by US citizens and businesses? And then compare the incomes going out and coming in.

Both echo concerns that a greater share of US assets (that is, assets that are located in the US), are now owned by foreigners.  For some reason, this is a bad thing (although neither elaborate why).  But there is little reason to be concerned in these numbers.

First, the capital stock of the US (and indeed the world) is not fixed.  The fact that a greater share of US assets are owned by foreigners does not necessarily mean that fewer assets are now owned by Americans.  Indeed, as Griswold’s data (in the linked blog post) show, American-owned assets have been rising, too!  Americans are getting more productive and foreigners want a piece of that pie, too.

Second, the fact that assets are foreign-owned is not, as is often insinuated (to be fair, not by these two comments) a national security threat.  If anything, it reduces security issues.  As economic ties build between areas, then the risk of conflict falls.  Foreigners earn returns on their investments, which makes the cost of going to war higher.  Sure, there may be some assets you don’t want owned by a potentially hostile foreign nation (power plants, weapon factories, etc), but that’s not what’s being bought.  Trust me, the Swedes aren’t going to weaponize their Ikea stores.

Third, in a direct response to Tony’s comment above, the fact that foreigners are investing more into the US than we are investing elsewhere is a good thing.  It’s not a sign of US weakness; it’s a sign of US strength.  It indicates the US holds better opportunities for investments than other options in the rest of the world.  Just logically, it doesn’t make sense that foreign-owned assets make the US weak: no one boards a sinking ship just to plunder its treasure.

Fourth, in direct response to Ed above, the fact that foreigners earn returns on their investments is, again, a good thing.  It means those assets are productive: their producing goods/services valued by Americans, they’re employing Americans (generating payroll and the like); in short, they’re being useful.  Again, this is a testament to the strength of the US economy, not a weakness.  The fact that the returns go to someone on the other side of an imaginary line is meaningless.

The tl;dr version of this post: I fear assets owned by a Chinese person no more than I do assets owned by a North Carolinian.

6 thoughts on “On Foreign Ownership

  1. Old nonsense; new foreigners. It was not all that long ago that the “progressive” magazines were lamenting the Japanese buying up American assets. The result: the Japanese overpaid for a lot of assets and had to sell them at much lower prices. But, that same old nonsense stirs people up and sells television advertising time, newspaper and news magazine advertisements, etc. It really is just nonsense.

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  2. On war: I don’t think the historical evidence shows that trade reduces the risk of war. If anything, it increases the risk. Take oil: is anyone here going to argue that oil had absolutely nothing to do with the recent spate of wars in the Middle East. The Gulf War especially: Saddam was mad at Kuwait supposedly directionally drilling under the border, meanwhile the Carter doctrine had roped us into a war if anyone threatened our supply lines.

    Then there was Japan pre-WWII. The attack on Pearl Harbor was a direct response to the US embargo on oil and gasoline we had instituted several months before.

    And speaking of oil. The US is virtually self-sufficient WRT petroleum products thanks to fracking. Is the US more or less likely to go to war as a result? A: Less likely.

    Then there’s China, of course. Already it’s throwing it’s weight around, by using trade to punish South Korea and Phillipines for resisting Chinese hegemony. And how did China suddenly become such a strategic threat? A: They did it thanks to US trade growing them into the world’s biggest economy. Show where in Mahan’s Influence of Sea Power that he says it is a brilliant idea to build up the economy of a strategic rival until it is larger than your own, and can therefore field a bigger navy? Don’t bother, it’s not in there. In 1990, there was no danger of war with China because China was weak. Now, because of US free trade policies, the risk of war with China is greater than anytime since 1953–and only looks to get worse.

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    • With respect, Warren, much of your comment is paranoia. There’s only one real point where you address an issue directly resultant from trade, and that’s WW2 Japan (which is a point in my favor). The others are distinct cases of border/property right disputes (Kuwait) or an assertion with no evidence (US oil independence).

      Interestingly, there is a good deal of historical evidence showing the stronger nations’ trade relationships with each other, the less the risk of war. The literature is well-expounded in this matter. But even without a literature review, a simple look at the world today will suffice: as globalization has risen, the number of inter-state wars, conflicts, and even civil wars have fallen considerably. The stability is especially pronounced in regions that have liberalized the most. Does correlation equal causation? Of course not. But it does give us a starting point.

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      • Here is the Carter doctrine from the horse’s mouth:

        Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force.

        Like my mom used to say, if the biggest export those countries had was dates, we never would have got involved. There’s no way it can be maintained that oil had nothing to do with the Gulf War. If you’ll recall, if you’re old enough, Iraq also invaded Saudi Arabia, and were only turned back by several days of fierce fighting with US and Saudi forces.

        Conversely, if we had been oil self-sufficient in the 1970s, the Arab oil embargo would have had about zero effect on us.

        There were a couple of nice examples of pure autarky: e.g., China and Japan in the 19th century. Did these nations go out of their way to start wars with other nations? No, what happened was European nations barged in, insisting on trade. As a result, China was dismembered and colonized. Japan modernized and became a belligerent.

        As for your claim there is a vast literature on how trading ties prevent wars, I’d like to see a reference or two. A bit of googling reveals lots of theory and little historical data for that claim. Think about it: When your trading “partners” explicitly view trade as war by other means, how can trade prevent war? A: It can’t.

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    • “is anyone here going to argue that oil had absolutely nothing to do with the recent spate of wars in the Middle East?”

      That is a very low standard of “absolutely nothing to do with.” But, oil was not the cause for the Middle Eastern wars.

      “The Gulf War especially: Saddam was mad at Kuwait supposedly directionally drilling under the border”

      No. Saddam lost a very long war with Iran. He promised much, but delivered little. He thought he could get away with invading and absorbing Kuwait, which he had long argued was the 19th Iraqi Province. Iraq was also having trouble repaying the $14 billion Iraq borrowed from Kuwait to pay for the Iraq-Iran War and Saddam felt that Kuwaiti production lowered the value of Iraqi oil. Does that mean the invasion of Kuwait was about oil? No. It was about Saddam’s desire to succeed militarily after getting beat by Iran.

      “meanwhile the Carter doctrine had roped us into a war if anyone threatened our supply lines.”

      Not our supply lines. The world’s. And, there were lots of threats and Carter did little about them.

      “The attack on Pearl Harbor was a direct response to the US embargo on oil and gasoline we had instituted several months before.”

      The attack at Pearl Harbor was to remove a strategic threat to Japan.

      “They did it thanks to US trade growing them into the world’s biggest economy.”

      False. They did it because Deng Xiaoping relaxed the communist party’s control over the economy.

      “In 1990, there was no danger of war with China because China was weak.”

      False. In 1990, China was less belligerent because of Deng. However, it still had a very strong army and nuclear weapons.

      “Now, because of US free trade policies, the risk of war with China is greater than anytime since 1953–and only looks to get worse.”

      No. The risk of war is greater now under Xi Jinping who is using tensions with neighboring countries and the US to foster nationalism and popular unity. The reality is his concern that the vast majority of people who are not doing well economically will overthrow the regime.

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  3. “The reality is his concern that the vast majority of people who are not doing well economically will overthrow the regime.”

    Yes. Xi, at least in comparison to US ruling elites prior to Trump, gets the fact that the legitimacy of a government derives from it’s ability to ensure that the vast majority of the people of the country do well economically.

    Meanwhile, free trade is premised on the THEORY “that the material, cultural, and spiritual improvements in the circumstances and conditions of man are best served when the members of the global community of mankind specialize their activities in a world-encompassing social system of division of labor.”

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