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Foreign Investment in the U.S. (1)
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Arthur F. Burns Papers
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The original documents are located in Box B48, folder "Foreign Investment in the U.S. (1)"
of the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Dr. Burns donated to the United States
of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 14, 1971
To Chairman Burns
Subject: Recent activity of foreigners
From John D. Stoffels not
in the U.S. stock market.
STRICTLY CONFIDENTIAL HIGHLY SENSITIVE
After the Board meeting this morning, I made contact
with Andrew J. Melton, Chairman of the Executive Committee of
Smith, Barney (a colleague of Bill Grant). Mr. Melton put me in
touch with the head of Smith, Barney's European operations who is
based in Paris but was in New York for the day.
Smith, Barney deals with approximately 150 large institu-
tional clients on an active basis; they are not a speculatively
oriented house and have few individual foreign clients, but their
institutional business is substantial by European capital market
standards.
Total trading volume in Smith, Barney's foreign operations
is up 73 per cent for the first quarter 1971 as compared with the
first quarter of 1970. There has been a slight increase in trading
volume by their foreign customers in the past two weeks, and this
was attributed by them to investors' disenchantment with the liquidity
(or lack thereof) in the Eurodollar market, a disenchantment that led
them to the U.S. equity markets as the most liquid investment outlet
for U.S. dollars. Throughout 1971 thus far, foreigners have been
slight net buyers in the U.S. stock market.
An updated table of available Treasury data on foreign
purchases of U.S. stocks is being prepared and will be sent to
FORD is LIBRARY GERALD
you on Monday.
CC: Messrs. Partee & R. Solomon
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date May 23, 1972.
To
Governor Brimmer
Subject:
From
Samuel Pizer SNP
STRICTLY CONFIDENTIAL (FR)
This note relates to the question that you asked on
Monday morning regarding the fund established by the German
government to help finance German direct investments in the
United States. I am attaching a copy of a statement giving the
details of the establishment of that fund, which was part of
the German-American offset agreement of August 1969. The
assets in the fund are held at the New York Federal Reserve
Bank, invested in Treasury bills and U.S. Government agency
securities. The attached table shows the amounts held in that
account. As you will see the account was built up to the full
amount by June 30, 1971 ($166 million). Since that time there
has obviously been only a minor use of the fund, possibly
because potential German investors did not find the terms on
which they could obtain these funds sufficiently attractive.
Attachments
cc: Chairman Burns
Governor Mitchell
Governor Daane
Governor Sheehan
Mr. R. Solomon
Mr. Bryant
Mr. Reynolds
Mr. Gemmill
Mr. Hersey
Mr. Katz
Mr. Norwood
Mr. Wood
Mr. Sammons
Mr. Irvine
Mr. Roxon
Mr. R. Smith
Mr. Promisel
Mrs. Junz
FORDO is GERALD LIBRARY
May 23, 1972
STRICTLY CONFIDENTIAL (FR)
KW Account at F.R. Bank of New York
(In millions of dollars)
U.S. Treasury
U.S. Govt.
Date
Bills
Agency securities
Total
Change
1970 - June 30-Nov. 30
56.0
---
56.0
Dec. 31
111.6
--
111.6
55.6
1971 - Jan. 31
111.6
-
111.6
--
Feb. 28
111.0
--
111.0
-.6
Mar. 31
110.9
- -
110.9
-.1
Apr. 30
110.5
--
110.5
-.4
May 31
110.4
--
110.4
-.1
June 30
166.0
--
166.0
55.6
July 31
166.1
--
166.1
.1
Aug. 31
166.2
--
166.2
.1
Sept. 30
136.5
29.0
165.5
-.7
Oct. 31
136.5
29.0
165.5
--
Nov. 30
135.5
29.0
164.5
-1.0
Dec. 31
135.5
29.0
164.5
--
1972 - Jan. 31
117.9
42.0
159.9
-4.6
Feb. 29
103.7
57.0
160.7
8
Mar. 31
103.5
57.0
160.5
-.2
Apr. 30
103.5
57.0
160.5
--
May 18
103.6
57.0
160.6
.1
R.
GERALD
FORD LIBRERA
Enclosure # 2
UNCLASSIFIED
of Frankfurt's A-153
KREDITANSTALT FUR WIEDERAUFBAU
6 Frankfurt am Main
April 2, 1970
Financing Contributions of Kreditanstalt für Wiederaufbau
for German Direct Investments in the U.S.A. under the
German-American Offset Agreement 1969/71
I. Introductory Remarks
Under the German-American Offset Agreement of August19, 1969
an amount not exceeding the equivalent of DM 600 million will
be made available by Kreditanstalt für Wiederaufbau (KfW) to
assist in the financing of direct investments by German firms
in the U.S.A. The relevant funds first raised by KfW on the
capital market and invested for a limited period in U.S.
Government or Government Agency securities can finally be
converted into financing contributions to German direct
investments in the U.S.A.
II. Object of Financing
Financing contributions may be made to direct investments by
German firms in the U.S.A., in particular for investments of
small and medium-sized firms that might not otherwise have
ready access to the capital márket.
Such direct investments may either be in the form of a new
establishment of an enterprise in the U.S.A., which the German
investor undertakes by itself or jointly with American part-
ners, or the purchase of a stockholding in an already existing
U.S. corporation. However, only new investments are eligible
for financing under this program; refinancing of investments
already made or under way will be excluded.
A further prerequisite for the granting of financing contri-
butions is a well-scrutinized and profitable project, the
proper execution of which is guaranteed.
UNCLASSIFIED
GERALD FORD LIBRARY
Enclosure # 1
UNCLASSIFIED
of Frankfurt's A- 153
German Firms in the U.S.A.
Total: 176
of which Manufacturers:
46
Division by Branches:
Manufacturers of Machinery and Machine Tools
Plastics and Rubber Working Machinery
4
Textile Machinery
10
Mining and Oil Field Machinery
4
Conveying Systems
a
GERALO FORD LIBRARY
Wood Working Machinery
2
Food Industry Machinery
3
Wire Weaving and Fabricating Machines
2
Paper and Packaging Machinery
4
Cryogenic Machinery
2
Construction Machinery
2
Office Machinery, Cash Registers
4
Graphic Machinery
2
Metals and Metal Products
13
Steel and Iron
5
Non-ferrous Metals
2
Instruments and Fittings
9
Electrical and Electronic Industry
30
Components
4.
Consumer Goods, Household Appliances
14
Electromedical Apparatus, Communications
4
Motor Vehicles, Motors, Aircraft
8
Holdings
1
Chemical Industry
31
Plastics
7
Pharmaceutics
5
Essential Oils and Products
3
Forwarding and Transportation
8
Chinaware. Glass, Ceramics
4
Garment Industry, Sewing Machines
8
Insurance
4
Photography
5
Engineering Offices
4
Hail Order Hluses
1
Jewelry, Costume Jewelry
1
Publishing Houses
2
Coal
1
Banking, Security Trading
5
Discrepancies in the sub-totals are explained by the fact
that many companies are active in more than one branch.
UNCLASSIFIED
Enclosure # 2
UNCIASSIFIED
of Frankfurt's A-153
2
III. Methods of Financing
In the interest of a most flexible and versatile handling
of this financing instrument, the following contributions
may be made to assist in the financing to be arranged by
the relevant German investor:
- a stockholding of KfW, for a limited period, in
the American subsidiary of the German investor,
- the granting of convertible loans, in special cases
also the granting of other than convertible loans,
to the American subsidiary of the German investor.
These measures may also be combined with one another.
The Offset Agreement stipulates that the financing contri-
butions may not exceed 50 percent of the total investment
to be arranged by the German firm, i.e. the KfW-portion must
not exceed the amount to be paid by the German investor out
of its own resources. For projects of firms having already
made investments in the U.S.A. or belonging to a group of
corporations that has already invested in the U.S.A., the
financing contribution per investment will not exceed
DM 32 million.
The financing contributions will on principle be given on a
long-term basis. In general, the maximum will be a term of
10 years, in exceptional cases of up to 15 years. The other
conditions will depend on KfW's procurement costs for
raising the funds.
Contracting partner of K1W will in the case of loans be the
American corporation in which the German investor interested
in obtaining a financing contribution undertakes a direct
investment. Supplementary contracts with the German investor
will be required if the American firm cannot furnish adequate
security for the loan; in the case of stockholdings for a
limited period, these contracts will, inter alia, determine
the time and the conditions of the subsequent purchase of such
stockholding by the investor.
The scope of KfW's influence within the framework of such
financing contributions will mainly depend on the risk
involved and on the form of its engagement; KfW will not
exercise any management functions.
GERAL FORD LIBRARY
UNCLASSIFIED
Enclosure # 2
UNCLASSIFIED
of Frankfurt's A-153
3
IV. Procedure
Inquiries regarding the granting of financing contributions
are to be addressed to KPW (6000 Frankfurt am Main, Palmen-
gartenstrasse 5-9). Although it will on principle be the
American subsidiary of the German investor that will become
the borrower, resp. the firm in which KfW's stockholding
will be held, it is nevertheless advisable for the German
investor to establish contact with KfW already at an early
stage of the investment project. The application may also
be submitted via the investor's German bankers and should
include details of the intended investment.
BERALD FORD LIBRARY
UNCLASSIFIED
February 19, 1973
To:
Mr. Ralph Bryant
From: R. F. Gemmill
Subj: Mills' proposal to suspend U.S. taxes on interest and dividends
of foreigners
As reported in the Washington Post (Feb. 17, 1972, page A-3),
Rep. Mills proposed "an immediate temporary suspension of U.S. taxes
on interest and dividend payments earned by foreigners on investments
in this country." The purpose of this action would be to encourage
an inflow of foreign capital. The following comments might be made
on this proposal:
1) A temporary suspension of U.S. taxes on foreign investment
income would not attract foreign long-term capital, since the benefits
would only be temporary. Although such a measure could, in theory,
stimulate inflows of short-term capital, it should be noted that
interest paid to foreigners on bank deposits is already exempt from
U.S. taxes (and will be until the Foreign Investors Tax Act comes
into force at the end of 1975). Moreover it is not clear that it
is in the U.S. interest to seek to stimulate short-term inflows
(which might well have the effect of preventing needed exchange
rate adjustment.)
2) A "permanent" removal of U.S. taxes from foreign
investment income could attract some additional foreign long-term
capital inflow. Although no quantitative estimate of the added
inflow can be provided, it should be noted that: (a) most of the
BERMED FORD LIBRARY
- 2 -
foreign long-term investment in the United States at present comes
from industrialized countries with which we have tax treaties:
(b) the treaties provide for relatively low rates of U.S. withholding
tax on foreign income; (c) foreign taxpayers can generally claim
credit against their foreign tax liabilities for any U.S. taxes
withheld. Elimination of U.S. taxes on foreign investment income
would benefit principally foreign investors from countries that
do not have tax treaties with the United States and/or investors
who pay no foreign taxes (and hence cannot claim credit for U.S.
taxes paid.)
3) The Fowler-McKinney Task Force, established by President
Kennody in 1963 to recommend measures that might encourage foreign
investment in the United States, considered the advisability of
eliminating U.S. taxes on foreign investment income. The report
makes no formal mention of this issue, but in my judgment discussions
by the Task Force clearly indicated that the reason for not making
a favorable recomendation on the issue was the desire not to establish
the United States as a major tax haven.
4) A general tax exemption for foreign investors might
increase the ease of tax evasion by U.S. residents who could acquire
foreign addresses.
OFFICE BECEINED
6N:1:38
GERALI LIBRARY
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BOARD OF СОЛЕВИОВЕ 2121EM
FEDERAL RESERVE SYSTEM
BOARD GOVERNORS
1973 AUG-7 PM 1:38 1:
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date August 7, 1973
To
Governor Robert C. Holland
Subject:
From
Charles J. Siegman
C55
Ralph Bryant requested that I send you the attached note
by Robert Gemmill responding to your July 17 memo to Chairman Burns.
Your memo has been circulated to others in the Division,
and further thought is being given to the issues raised in the memo.
In addition to assessing means of a shorter-term nature along the
lines suggested in your memo that attempt to increase the attractiveness
to foreigners of dollar holdings, several economists are evaluating
longer-term proposals that aim to reduce the potential of undesirable
shifts of foreign dollar holdings. As part of the Division's work
dealing with international monetary reform, we are appraising the
merits and limitations of proposals to consolidate outstanding
dollar balances and proposals that would establish rules for the
management of countries' currency reserves.
Attachment.
cc: Chairman Burns
Governor Daane
FORD is LIBRARY GERALD
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date July 20, 1973
To
Mr. Ralph C. Bryant
Subject: Initial reactions to
From
Robert F. Gemmill
Gov. Holland's memo of July 17
(1) Tax deductions on returns paid to foreign owners of U.S. securities
a. Interest earned by foreigners on bank deposits (and, I believe,
also on acceptances) is presently exempt from U.S. taxes, and will be until
the Foreign Investors Tax Act comes into effect at the end of 1975. The
effective date of the Act might be further postponed, but that would hardly
appear necessary now if the policy objectives are short-term.
b. We could seek an amendment of U.S. tax laws to exempt other
short-term instruments (Government securities), but I doubt that this would
have any practical significance, given current interest rates.
c. Some problems involved in suspension of U.S. taxes on interest
and dividend payments to foreigners are set forth in the attached memo
(February 19, 1973) -- especially points 2-4.
(2) Possible reduction of reserve requirement on Eurodollar borrowings
a. Our view may depend in good part on our assessment at any
particular time of the marginal source of funds to the Eurodollar market.
Increased Eurodollar borrowings by U.S. banks might lead to an increased
U.S. payments surplus on official settlements -- if, for example, Japanese
were supplying funds to the Eurodollar market, and in the process reducing
Japan's official reserves. Alternatively, if increased Eurodollar borrow-
ing by U.S. banks raises Eurodollar deposit rates the main impact could be
on the demand for EEC currencies, with a consequent improvement in the
dollar exchange rates of these currencies.
GERALD FORD LIBRARY
Mr. Bryant
-2-
(b) If we find that we do want to promote a firming of deposit
rates in the Eurodollar market, I would prefer to seek it through a trans-
fer of official balances from the market to the U.S., rather than through
short-term borrowing by U.S. banks. Reduction in outstanding official
placements in the market is more consistent with our long-term objectives
than is an increase in interest-sensitive borrowings.
(3) Treasury borrowing in the Eurodollar market
(a) The Treasury and Ex-Im notes issued in 1971 had two purposes
-- to mop up Eurodollars and to reinforce the incentives banks had to retain
Eurodollar bases. Any Treasury borrowing at the present time would only
serve to mop up Eurodollars. It might be regarded as a first bite of
funding.
(b) If the Treasury is to issue special, high-interest dollar
obligations to foreigners, in order to firm Eurodollar rates, as under #2
above, it would appear most appropriate for the Treasury to issue the
securities selectively to foreign central banks -- facilitating the shift-
ing of official funds from Eurodollar placements to U.S. securities.
With any special Treasury issue, it will be necessary to avoid
having foreign private investors substitute that issue for existing dollar
assets held in the United States -- and also to prevent similar shifting
by U.S. investors. Limiting sale of the special Treasury issue to foreign
central banks would help avoid these types of substitution; techniques
would have to be developed (if possible) to avoid similar shifting of
official balances from other U.S. instruments.
BERALD FORD LIBRARY
Mr. Bryant
-3-
(4) Treasury borrowing of Euro-DM
a: Assuming that the Treasury acquired DM in the process
(and is not issuing a dollar obligation repayable in DM), it will have
marks available for sale on foreign exchange markets or for direct sale
to the Bundesbank. Would we want marks for either of these purposes,
and if so, wouldn't it be more advantageous to obtain them through swap
drawings?
b. Say's Law may operate here. If we are concerned about
shifts of foreign reserves from dollars to marks won't we merely
compound the problem by issuing U.S. Government obligations denominated
in marks? Such an instrument might well be more attractive to foreign
central banks than Euro-DM deposits, or even than deposits in the
Bundesbank.
c. Since the Euro-DM rate is merely the Eurodollar rate plus
the forward premium or discount, wouldn't we be better advised to
operate directly on either the Eurodollar rate or the forward rate (or
both) rather than to sell DM obligations?
GERALD FORD LIBRARY
MENRY S. REUSS, WIS.
WILLIAM S. MOORHEAD. PA.
BILL FRENZEL, MINN.
THOMAS M. REES, CALIF.
JOHN B. CONLAN, ARIZ.
RICHARD T. HANNA, CALIF.
U.S HOUSE OF REPRESENTATIVES
CLAIR W. BURGENER, CALIF.
WALTER E. FAUNTROY, D.C.
ANDREW YOUNG, GA.
FORTNEY H. (PETE) STARK, IR., CAL
SUBCOMMITTEE ON INTERNATIONAL FINANCE DEC 21 PM 12: 34
ROBERT G. STEPHENS, JR.,
OF THE
COMMITTEE ON BANKING AND CURRENCY
NINETY-THIRD CONGRESS
OFFICE OF RECEIVED THE CHAIRMAN
WASHINGTON, D.C. 20515
# 25xx
December 19, 1973
B4a
Dr. Arthur F. Burns
Chairman
Board of Governors
Federal Reserve System
Washington, D.C. 20551
Dear Chairman Burns:
We were so very pleased to have you testify
before the Subcommittee on International Finance.
You are a most cordial and expert witness.
During the hearings, the matter of foreign invest-
ment in the United States came up, and you said that you
would be interested in seeing our staff reports on the
subject. Accordingly, I enclose a copy of the two reports
on Foreign Direct Investment in the U.S. and on Foreign
Investment in U.S. Stocks and Bonds. The copy of the
former report does not include the appendices, as they run
to several hundred pages and have not yet been reproduced.
However, we will furnish any that are of interest to you
and will send you the complete report as soon as it is
printed. We would certainly welcome any comments you may
have on these reports.
Thank you again for appearing before the Subcommittee
and for joining me for lunch afterwards. With best wishes
and warm regards, I remain
Sincerely Havy yours,
Henry B. Gonzalez
Member of Congress
Chairman
Enclosures (2)
FORD i LIBRARY GERALD
FOREIGN DIRECT INVESTMENT
IN THE UNITED STATES
STAFF REPORT
of the
SUBCOMMITTEE ON INTERNATIONAL FINANCE
COMMITTEE ON BANKING AND CURRENCY
House of Representatives
93rd Congress, First Session
October 1973
FORD i LIBRARY GERALD
w
FOREIGN DIRECT INVESTMENT
b
IN THE UNITED STATES
STAFF REPORT
of the
SUBCOMMITTEE ON INTERNATIONAL FINANCE
COMMITTEE ON BANKING AND CURRENCY
House of Representatives
93rd Congress, First Session
October 1973
LIBRARY GERALD ? FORD:
Preface
Twice during the last two years the Subcommittee on Inter-
national Finance was called on to approve a devaluation of the dollar.
In the hearings on this legislation and in other hearings held by the
Subcommittee, it became clear that improvement in the U.S. balance
of payments and rehabilitation of the dollar are multifaceted problems
and that devaluation alone is not sufficient.
One of the most significant problems facing the dollar is
the overhang - the enormous foreign holdings of U.S. dollars. The
overhang is a major cause of the dollar's problems in the foreign
exchange markets and a major hurdle to monetary reform.
The rapidly increasing amount of foreign direct investment
in the U.S. may represent an important means of reducing the overhang
and improving the U.S. balance of payments, according to witnesses
appearing before the Subcommittee. The boom in foreign direct invest-
ment in the United States may be partly the result of the dollar devaluations.
In view of the Subcommittee's concern about the dollar over-
hang and its interest in the effects of the dollar devaluations, the Staff
of the Subcommittee examined foreign direct investment in the United
States and prepared this material on the subject.
In the context of this report foreign direct investment means
substantial ownership and control of complete business entities - fac-
tories, commercial facilities, corporations. The term does not include
portfolio investment in debt and equity securities, which does not involve
control of management decisions or active operation of a business.
FORD LIBRARY
FOREIGN DIRECT INVESTMENT IN THE UNITED STATES
CONCLUSION:
Foreign direct investment in the United States is booming.
In 1973 it resumed the upward trend that began in 1966 but which was
interrupted by international monetary crises in 1971 and 1972. Among
the principal factors behind the increase in foreign direct investment in the
U.S. have been the devaluations, and subsequent decline, of the dollar.
In the short run the increase in foreign direct investment in the
United States will be beneficial to the U.S. balance of payments and aid
in reducing the dollar overhang. But over the long term, foreign direct
investment will have a negative effect on the balance of payments and
result in a dollar outflow. This negative effect is the exact opposite of
the effect of U.S. foreign direct investment abroad, which is a major
positive contributor to our balance of payments.
The increase in foreign direct investment in the U.S. must be
viewed as a boost for our balance of payments that is almost unrelated
to the dividend and other outflows to foreigners on their investments here.
The outflow will occur whether or not there is any new inflow, for the
outflow is income to foreigners on previous investments. (In fact 1973
may be only the third year since 1962 in which new capital inflows ex-
ceed the dividend and other outflows.)
Fears of foreign domination or control of the American economy
or industry are not realistic. The amount of foreign direct investment in
the U.S. is now, and will continue to be, miniscule compared with the
total U.S. economy and the total assets of U.S. business.
Introduction
In all of the talk about U.S. investment abroad, it is sometimes
GERALD FORD LIBRARY
-2-
overlooked that many foreign companies produce in the U.S. market
and make long term investments in a wide variety of business enter-
prises. Foreign investment in the U.S. is certainly not as large as U.S.
investment abroad, but it is growing rapidly. U.S. direct investment
abroad has a book value of over $90 billion versus only $15 billion of
foreign direct investment in the U.S. The investment of foreign capi-
tal in the U.S. is not a new phenomenum; it is the large volume of invest-
ment that is new. European and Japanese businessmen are flocking to
the U.S. in record numbers - acquiring land, and industrial and service
facilities; building new factories; buying divisions and subsidiaries of
U.S. companies; and making tender offers for publicly owned companies.
This report examines:
-The amount of foreign direct investment in the United States.
-Why foreigners invest in the U.S.
-Who is investing in the U.S.
The balance of payments effects of this investment.
-The role of States and the Federal Government in attract-
ing foreign direct investment.
This reportdoes not deal with foreign portfolio investment in
the United States, i.e. investment in stocks, bonds and other securities.
The term foreign direct investment covers those investments in which
a foreign company builds new industrial or commercial facilities, ac-
quires control of a going business, or otherwise makes a long term invest-
ment for the purpose of actively controlling and operating a business.
FORD
Amount of Foreign Direct Investment in the United States
GERALD
LIBRARY
Recent activity by foreign industrial firms, especially those
from Canada, Japan and Germany, in acquiring plant sites in the United
States indicates that the upward trend that began in 1966 and was inter-
rupted in 1971 and 1972 has resumed in 1973. The value of foreign investment
-3-
in the United States at the end of 1973 may be as high as $15. 9 billion,
an increase of $1. 5 billion over 1972. Of this $1.5 billion increase,
$1 billion will be net capital inflows.
The value of foreign direct investment in the U.S. rose $708
million in 1972 to $14, 363 million at yearend, following a rise of only
$385 million in 1971. The 1972 increase consisted of reinvested earn-
ings of $548 million and net capital inflows of $160 million. The latter
is a net of $302 million in new investments and outflows of $142 million
in other capital accounts, mostly intercompany accounts.
The value of foreign direct investment in the U.S. increased
substantially in the period 1962 to 1972, from $7. 4 billion at yearend
1961 to $14. 4 billion at yearend 1972. The rate of growth showed a
marked increase after 1966: From yearend 1961 to yearend 1966,
foreign direct investment grew an average of $332 million per year,
while from yearend 1966 to yearend 1972, it grew an average $893 million
per year. These figures correspond to annually compounded growth
rates of about 4 percent and 8 percent respectively. (U.S. direct invest-
ment abroad has been growing at a rate of around 10 percent). Addi-
tional data on the historical trends of foreign direct investment in the
U.S. may be found in the attached excerpts from the Survey of Current
Business published by the Department of Commerce.
The two main components of the annual addition to the foreign
direct investment position in U.S. enterprises have been net capital inflows
and reinvested earnings; valuation adjustments have been small. Of
the approximately $7 billion added to the value of foreign direct investment
in the years 1962 through 1972, $2. 7 billion came from net capital
inflows while $4.3 billion were reinvested earnings, and there were about
$100 million in valuation adjustments.
Why Foreigners Invest in the U.S.
Why should foreigners invest here, and why should there be
GERALOR FORD LIBRARY
-4-
such a dramatic increase in the amount of foreign direct investment in
the United States? In broad terms, Europeans and Japanese companies
have been seeking to establish themselves in the United States, just as
American companies have moved abroad to be closer to the markets for
their goods and services.
However, the most important reason for the increase in direct
investment has been the devaluation of the dollar. Successive devaluations
of the dollar and the decline in the dollar since the last devaluation have
sharply boosted the purchasing power of many foreign currencies in
terms of the dollar.
There are a great many other reasons for the increase in foreign
direct investment in the U.S., including:
-A higher rate of inflation abroad. McGraw Hill Publications
Co. forecasts that overall inflation in 1974 will be 6.6 percent in the
Common Market, 7.5 percent in Japan and 4.0 percent in the U.S. The
virus of inflation is spreading worldwide, but it remains lower in the U.S.
-Shortage of labor in some countries. In recent year S Northern
European firms have had to import labor, principally from Southern Europe.
-Improvement in U.S. productivity.
-Shortage and high cost of land for expansion abroad. U.S.
plant-site land costs are lower than in many areas located in more densely
"
populated nations.
-The rise of protectionism in the United States and the threat
of U.S. import restrictions and other trade barriers. (U.S. companies
have made many investments abroad for precisely this reason, e.g. in
the case of the Common Market.)
-The persistent U.S. balance of payments deficit, the result of
which is the enormous foreign holdings of dollars. Investment in the U.S.
provides a good outlet for these dollars owned by foreign companies.
-Rising labor costs abroad. Hourly compensation in the U.S.
FORD : GERALD LIBRARY
-5-
has increased at an annual average rate of 6.7 percent since 1967.
In Canada hourly wage rates have risen 8. 1 percent since 1967. In
Japan, they are up 17 percent. Today the average West German fac-
tory worker makes $1.00 less than his American counterpart. Two
years ago the wage differential was $2.00, according to the Bureau of
Labor Statistics. Another way of measuring the extent of the change
is to convert 1972 unit labor costs into dollars at the exchange rates
prevailing as of June, 1973. From 1970 U.S. unit labor costs increased
by only 3 percent. On the other hand, Italian costs went up 36 percent,
French costs 44 percent, Belgian costs 52 percent, and both Japanese
and German unit costs 60 percent.
-A declining stock market which has put the cost of buying the
earning power of many American firms at bargain basement levels.
Many U.S. stocks are selling today at record low prices in relation
to earnings. Foreigners can therefore buy cheap stocks with cheap
dollars.
-Countries which have policies of providing incentives for com-
panies to invest abroad. Japan gives tax breaks to companies invest-
ing in new U.S. ventures.
-The 1967 Securities and Exchange Commission action, in
which it modified its rules regarding financial reporting of foreign-
owned U.S. firms. The new regulations allow such firms' accounting
practices to deviate from those commonly employed by U.S. firms in
order to mesh better with those of their foreign parents.
-The merger movement among European firms. Given the
scale of the U.S. economy, the size of the required investment in the
U.S. is large by European standards. The larger, merged firms have
been better able to meet the U.S. market challenge since the late 1960's.
In its brochure on foreign direct investment, the Bank of America
identifies other advantages and reasons for foreigners investing in the U.S.:
GERALD FORD LIBRARY
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-Facilities in the United States put non-U. S. firms within the
world's richest market and enhance their ability to compete for U.S.
business.
-Firms with facilities in the United States have more ready
access to the large U.S. equity and debt markets than those in overseas
locations.
-Numerous industrializing communities in the United States
have programs to encourage new industry by assisting in its financing,
location and employee training.
-It gives non-U.S. firms a close-up look at methods being for-
mulated to respond to the environmental and consumer-protection con-
cerns now arising in the United States and aids overseas management
to prepare for the time when these issues will be primarily considera-
tions in their home countries.
-It is easier for such firms to keep abreast of and to incorpor-
ate new technology developed in the United States. (Of course, the foreign
firms also bring technology when they come into the U.S.)
-It enables overseas firms to become privy to and utilize manage-
ment and marketing techniques originating here.
Of course there are some fears of foreign companies about
investing in the U.S., including:
-Antitrust laws, despite assurances from the U.S. Government
that the laws' intent is to preserve - for foreigners and Americans alike -
a competitive, non-cartelized economy.
-Securities and Exchange Commission reporting requirements,
though this fear has eased since 1967, when the SEC modified its rules.
-Unions. European and Japanese companies, which are more
accustomed to congenial attitudes of company unions, are wary of militant
U.S. unions.
Immigration regulations. Foreign businessmen have run into
some difficulty bringing managerial and technical workers to this country.
GERALD FORD LIBRARY
-7-
-Foreign companies think that the U.S. is too big a market.
They think in terms of national markets, the kind that they are used to.
In its assistance programs, the Department of Commerce shows foreign
companies how regional and area markets within the U.S. market can be
worked out, where every point in that market can be within one day's
shipping to principal customers.
Who is Investing in the United States
At the end of 1972 the country with the largest direct investment
in the U.S. was the United Kingdom, with $4, 581 million out of a total
of $14, 363 million. In second place was Canada, with $3, 612 million.
Over 84 percent of the total foreign direct investment in the U.S. is
held by four countries: United Kingdom, The Netherlands, Canada and
Switzerland.
At yearend 1972, the foreign direct investment in the United
States was as follows (in $ millions):
Canada
$ 3,612
Europe
10,441
United Kingdom
4,581
European Economic Community
3,874
Belgium & Luxembourg
307
France
321
Germany
807
Italy
108
Netherlands
2,331
Other Western Europe
1, 986
Sweden
254
Switzerland
1,595
Other
138
Japan
-132 -
Latin America and other Western
Hemisphere
298
Other
145
Total
$14,363
Though Japan has greatly increased its investment in 1973, it
was not a major factor through 1972. Japan shows a negative balance
GERALD FORD LIBRARY
in the above table, as debt repayments in 1971 statistically pushed the
value of their investment to below zero from $229 million in 1970.
Despite new inflows in 1972, the balance remained negative at yearend.
Omitting the loans made by Japanese parent companies to their U.S.
subsidiaries, the United States-Japan Trade Council estimates Japanese
direct investment in the U.S. to have been $350-500 million. at yearend
1972.
Despite the acceleration in investment here by foreigners,
there has been little change over the period 1962-1972 in the distri-
bution of foreign direct investment by country of ownership.
Manufacturing comprises 50 percent of the total foreign direct
investment, while petroleum accounts for 23 percent and insurance and
other finance, 17 percent. In 1962, the respective percentages were
38, 19 and 25 percent.
At yearend 1972 the industry distribution was as follows (in
$ millions):
Petroleum
$ 3,243
Manufacturing
7,228
Insurance and Other Finance
2,411
Trade
523
Other
958
$14,363
Which foreign companies are investing in the United States?
The Department of Commerce publishes a "List of Foreign Firms
with Some Interest/Control in American Manufacturing and Petroleum
Companies in the U.S." This list (attached) shows investments from
21 countries and approximately 600 foreign companies, which own or
have major investments in over 900 U.S. companies. The list does not
include American subsidiaries of foreign companies in finance, banking
and insurance, nor trading companies established solely for sales and
service.
GERALD FORD LIBRARY
The Department of Commerce list continues to expand at a
rapid rate. For example, in September, Kawasaki Motors Corp. of
Japan announced plans to build a $20 million plant in the U.S. to manu-
facture motorcycles. And Volvo of Sweden announced plans to build
a $ 100 million automobile assembly plant in Chesapeake, Virginia.
Most European owned companies are in the East; most Japan-
ese investments are in the West, notably in Alaska. During the past
decade, however, the fastest growth in foreign ownership has been in
the South. New York leads the states in foreign owned or controlled firms,
followed by New Jersey, South Carolina, Pennsylvania and California.
Most of this report deals with the kind of foreign direct invest-
ment where a foreign company builds a new manufacturing facility or
otherwise makes an investment to begin a new product line or introduce
a product from its own country. However, there has been a dramatic
increase in 1973 in another type of foreign direct investment: acquisi-
tion of an American company by tender offer or merger, or by purchas-
ing a subsidiary or division of a company. As discussed elsewhere in
this report, among the principal reasons for the increase in this type
of investment are the low prices in the stock market and devaluations
of the dollar. Among the investments made in this manner have been
the following:
-A sharply contested tender offer by Liquifin AG, a unit of
Liquigas S.p.A., the Italian industrial and petrochemicals company,
for 52 percent of the shares of Ronson Corp.
-A $ 105 million cash acquisition by Nestle Alimentana SA,
the Swiss-based multinational food-products company, of the Stouffer
Corp. division of Litton Industries.
-A $182 million acquisition by an American subsidiary of
British-American Tobacco Co. of 23 percent of the shares of Gimbel
Brothers, Inc., the department store chain.
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-The purchase of 44. 9 percent of Franklin Stores, a major
discount chain, by Slater-Walker, Ltd. of London.
-A $290 million takeover bid by Canada Development Corp.,
an agency of the Canadian Government, for Texasgulf Inc. Texasgulf
is fighting this bid in the courts.
-The purchase of Olin Corp. 's aluminum division by the Swiss-
controlled Consolidated Aluminum Corp.
-The $21. 8 million agreement whereby United Dominions Trust
Ltd., Britain's largest financial house, acquired 90 percent of Commercial
Trading Co., a privately owned, New York based commercial financing
firm.
-Britain's Lloyd's Bank is moving into California with a $115
miliion agreement to purchase nearly all of the stock of the First Western
Bank and Trust €o.
The Japanese are closely trailing the British in investment
aggressiveness. Besides buying up real estate, vast stretches of
timberland, coal and copper mines in the U.S., the latest Japanese ven-
ture involves an agreement to purchase for $125 million, 50 percent
of the aluminum processing subsidiary of American Metal Climax Inc.
Four Japanese companies are estimated to have an investment
of about $126 million in timber operations in Alaska alone. Japanese
companies, as pointed out in the attachments, are eagerly investing
in hotels, golf courses and other resort properties, farmland, and land
for industrial parks, warehousing operations, fast-food restaurants
and residential housing.
The Japanese have not yet joined the British in the tender offer
approach to direct investment, as it has not been the traditional Japan-
ese business style.
The Middle East oil producing countries are beginning to accumu-
late large amounts of dollars from sales of petroleum, and they could
FORD & GERALD LIBRARY
-11-
amass a hoard of over $100 billion by 1980 according to many estimates.
These Middle East countries are not a factor in foreign direct invest-
ment in the U.S. due to the political climate and their usual preference
for portfolio investment. How much these countries may invest in
the U.S. is as yet unknown.
To complete the picture of foreign direct investment in the
United States would be activity by Communist countries - the Soviet
Union is reportedly investing heavily in real estate in the Washington
metropolitan area, as well as in the San Francisco bay area.
Balance of Payments Effects
There are several ways in which foreign direct investment
in the United States affect the balance of payments.
First there is the inflow of dollars for the investment itself.
In the balance of payments terminology this is described as new invest-
ment, consisting of the first reported capital inflow to establish or
acquire a new company or operation in the U.S. and the cost of acqui-
sition of additional shares of existing companies. The average annual
amount of new investment in the period 1962-1972 was $264 million,
and the amount in 1972 was $302 million.
However the key figure in the balance of payments is not new
investment but net new investment (or net capital flow), which is a net
of the new investment and various outflows including such items as loan
repayments and intercompany accounts. The net new investment by
foreigners averaged $250 million per year in the period 1962-1972.
The estimate for net new investment in 1973 is $1 billion, but it could
vary considerably from this figure depending on the outcome of several
large deals which are still being negotiated or litigated.
The net new investment inflow for the period 1962-1972 was:
1962
$132 million
1967
258
1963
-5
1968
319
1964
-5
1969
832
1965
57
1970
1,030
1966
86
1971
-115
FORD is LIBRARY GERALO
1972
160
The decline in 1971 is attributed to the international mone-
tary crisis that occurred in that year causing potential foreign inves-
tors to postpone their investments. The low amount of investment in
1972 was a result of the continuing international monetary uncertainty.
The second important factor in foreign direct investment in
the U.S. is the outflow of dollars to foreign countries in the form of
dividends and other payments. Foreigners have been investing in the
United States for many years, and as a result there is an outflow of
dollars in dividends, branch earnings and interest payments. This
outflow, which can be termed "foreigners' balance of payments income",
averaged $470 million per year over the period 1962-1972.
Most current analyses of foreign direct investment in the U.S.
say that in the short run such investment will have a positive effect
on the U.S. balance of payments. However in the long run repatriated
dividends and other payments will more than offset these increased
flows resulting in a negative effect on the balance of payments, as has
been the case with the United States abroad.
In 1972 the U.S. new foreign direct investment abroad was
$3. 4 billion while earnings on all U.S. investment abroad were $10. 4
billion, a $7 billion positive effect on the U.S. balance of payments.
This large-income returned to the U.S. was a result of the over $90
billion in investments U.S. companies have abroad.
Hence by the nature of the investment process, foreign direct
investment in the U.S. will eventually be a negative factor in the U.S.
balance of payments. If in the long run U.S. investment abroad has
been good for our balance of payments, then it is clear that foreign
investment in the U.S. will be in the long run bad for our balance of
payments. The magnitude of U.S. investment abroad is so large that
income on our investments abroad will always exceed foreigners' in-
come on their investments here. Hence the overall effect of direct in-
&
FORD
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vestment in both directions will remain positive.
The overall effect of foreign direct investment in the U.S. is
the net of (a) net new investment and (b) foreigners' balance of payments
income. The total net new investment in the U.S. for the period 1962-
1972 was $2.7 billion while the foreigners' balance of payments income
was $5.2 billion. Therefore there has been a substantial net outflow as
a result of foreign direct investment in the last eleven years, as shown
in the following table (outflows are shown as minuses):
Outflows -
Inflows -
Foreigners Balance of
Net New
Payments Income
Investment
1962
$ 2242 million
$ 132 million
1963
-284
-5
1964
-269
-5
1965
-367
57
1966
-436
86
1967
-443
258
1968
-468
319
1969
-518
832
1970
-552
1,030
1971
-739
-115
1972
-857
160
totals
$-5,175
$2,749
In 1973 the foreigners' balance of payments income could be
around $900 million. Therefore with net new investment of around
$1 billion, the overall effect of foreign direct investment in the U.S.
on our balance of payments in 1973 may be a positive $100 million.
As shown above, during the period 1962-1972 the overall effect
of foreign direct investment on our balance of payments was negative.
However with the large increase in the amount of foreign investment,
the inflows of new investment into the U.S. should exceed the outflows
for some years to come. At some point the outflows will begin to ex-
ceed the inflows, as has been the case for other countries which have had
U.S. investment.
R.
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It is very important to keep the differences in the inflows and
outflows clear. The outflows (foreigners' balance of payments income)
will occur whether or not there is any inflow (net new investment). The
outflow is income on previous investments. Therefore the estimated net
new investment of $1 billion in 1973 is correctly viewed as an almost un-
related boost in the balance of payments and a reduction in the foreign
overhang of dollars.
The U.S. balance of payments also benefits from the import
savings that usually occur when the foreign firm begins manufacturing
products here in lieu of exporting to the US. A good example of this
effect is the planned Volvo automobile assembly plant. Volvo auto-
mobiles for the U.S. market will be produced here rather than exported
from Sweden to the U.S. (though initially most of the parts to be assem-
bled will be brought into the U. S.).
Another related effect is that exports may result from new
direct investment. In the case of Volvo, automobiles may be exported
to other countries in the Western Hemisphere from the U.S. rather
than from Sweden. Hence the new Volvo plant and similar plants may
reduce imports and also increase exports. But specific data on the
effects of import sub'stitution and new exports are not available in U.S.
balance of payments statistics.
Role of States and the Federal Government
The efforts of the Department of Commerce are mainly directed
at enc ouraging and assisting foreign direct investments in the United
States by the industrialized nations- Western Europe, Canada and Japan.
The Department of Commerce has two Industrial Development Attaches
in Europe to spearhead this program. One is head quartered in Paris,
with responsibility for activities in Germany, France, Switzerland,
Austria, Italy and Spain. The other is in Brussels, handling United
FORD & GERALD LIBRARY
-15-
Kingdom, Belgium, The Netherlands and all of Scandinavia. Also
the commercial sections of the U.S. embassies in these nations are
actively working with individual investors as well as doing local pro-
motional work aimed at increasing the number of potential investors.
The Department of Commerce feels that their most produc-
tive effort is the "Invest-in-U.S. A. " conferences, which they arrange
in Europe and Japan. These conferences are designed to provide poten-
tial investors with basic facts about investing and doing business in the
United States and to provide a forum in which State industrial develop-
ment agencies can have face-to-face meetings with the potential investors.
The Department of Commerce also organizes State Reverse
Investment Missions. These missions, often led by the State's Governor,
are made up of experts from the States who are capable of providing
fairly detailed data pertaining to industrial plant locations. The missions
prospect for new investors, as well as follow up on leads provided by the
Department of Commerce.
The Department of Commerce does not encourage or have any-
thing to do with foreign tender offers or takeovers of American companies,
an activity which has increased considerably in 1973.
The Department of Commerce does not recommend that special
incentives to foreign investors be offered by the Federal Government.
In view of the rising trend of foreign investment in the U.S. and the
awareness of industrial firms in Canada, Japan and Europe of the need
to produce here in order to maintain their market positions and to produce
here inside potential trade barriers, Commerce officials feel that in-
centives are unnecessary.
Most states offer a wide variety of incentives to companies to
locate in their states (not just foreign companies, but U.S. companies as
well). The incentives include tax credits and exemptions, worker training
and recruitment, financing assistance, and plant site location services,
LIBRARY GERALD R. FORD
including state-built industrial parks. Some states maintain permanent
offices in Europe to scout potential investors.
As stated in the Council on International Economic Policy
Annual Report (March 20, 1973):
The United States has always had a policy of welcoming
foreign investment. While total foreign holdings here amount
to less than half of comparable American investment abroad,
these inflows of capital are nevertheless regarded as having
a significant and beneficial impact on our income, employment
and our balance of payments.
There are no monetary exchange controls on such
foreign investments and no requirements limiting the re-
patriation of capital or of earnings. Our embassies abroad,
as well as special missions from individual states, actively
encourage foreign direct investment in this country.
U.S. antitrust laws are sometimes cited as restric-
tive of foreign investment. Like other U.S. laws, however,
antitrust regulations apply with equal force to all U.S.
domiciled firms, regardless of the nationality of their ownership.
The Department of Commerce prepared an "Informal Survey
of Legal Provisions Affecting Foreign Investment in the United States" in
March, 1971 (attached). This survey points out that the basic general
policy of the United States is to admit and treat capital on a basis of
equality with domestic capital. However, in examining possible varia-
tions from this general policy, it should be noted that a substantial por-
tion of the jurisdiction over doing business in the United States belongs
to the states. Federal laws concerning foreign investment in the U.S.
generally apply to enterprises considered sensitive either because of a
close relationship with national defense, because they play a fiduciary
role, or because they involve the exploitation of certain natural resources.
Such enterprises include fresh water shipping, domestic radio commu-
nications, domestic air transport, hydroelectric power and mineral
exploitation on Federal lands.
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As the level of foreign direct investment in the United States
increases, there may be a rising concern that foreigners may take over
or dominate the U.S. economy and industry. But in fact fears of foreign
domination or control are unfounded.
Foreign direct investment in the U.S. is miniscule compared
with the total U.S. economy and will remain so. For example, gross
private domestic investment in the U.S. (from the GNP accounts) in
1972 was $178 billion, while net new investment from abroad is expected
to be around $1 billion in 1973. The total foreign investment in the
U.S. of $14. 4 billion at yearend 1972 is insignificant compared with
total assets of all corporations in the U.S. of $2. 4 trillion and total
net worth of $728 billion (as of 1969, the most recent figures avail-
able).
The value of foreign direct investment in the U.S. may grow
at an annual rate of around 8 to 10 percent on a base of $15 billion. At
this rate of growth it does not seem likely that foreigners will ever
come close to controlling U.S. industry. In fact foreigners may have
more cause for concern about U.S. investment abroad, which is growing
at an annual rate of close to 10 percent on a 1973 base of over $90 billion.
There is certainly the possibility that foreign companies by
investing in the U.S. may at some time control large shares of some
markets in the U.S. (In fact in some cases now foreign companies
have substantial shares of markets without direct investment, e.g.
the export of compact cars to the U.S. and raw materials such as nickel
of which the U.S. does not have sufficient supplies). But is unlikely
that foreign companies could control many markets or industries given
the enormous size of the U.S. economy compared with the potential amount
of foreign investment in the U.S.
Americans are now getting the opportunity to see what other
countries have experienced - investment from abroad. For years U.S.
business has invested abroad and as a result has leading market shares
and percentages of invested capital in many industries in many foreign
FORD & GERALD LIBRARY
countries. It is likely that the reverse will happen on a lesser scale in
the United States.
There is no cause for alarm that foreign interests will dominate
or control the American economy. U.S. investment abroad has been
good for the United States and for the world economy; foreign invest-
ment in the United States will be good for our economy and the world's.
*****
List of Attachments
Letter from Frederick B. Dent, Secretary of Commerce to Chairman
Henry B. Gonzalez, Subcommittee on International Finance.
September 7, 1973.
Foreign Direct Investments in the United States in 1972. Survey of
Current Business. August, 1973.
Foreign Direct Investments in the United States, 1962-71. Survey
of Current Business. February, 1973.
Informal Survey of Legal Provisions Affecting Foreign Investment in
the United States. Bureau of International Commerce, U.S.
Department of Commerce. March, 1971.
Europeans, Japanese Find the Time is Ripe to Acquire U.S. Firms.
The Wall Street Journal. June 22, 1973.
Foreigners Reverse Tide by Investing in the U.S. The Money Manager.
September 4, 1973.
European Direct Investments in the United States. Harvard Business
Review. July-August, 1973.
Wave of Foreign Investors. The Washington Post. June 24, 1973.
FORD is LIBRARY 9ERV70
Net Foreign Investment in the U.S. May Rise Six-Fold to $1 Billion
in 1973. The Money Manager. August 6, 1973
Foreign Aluminum Expands in the U.S. Business Week. September 29, 1973.
Texasgulf Fights a Canadian Takeover. Business Week. August 18, 1973.
Multinationals: Foreigners Search for U.S. Acquisitions. Business
Week. May 19, 1973.
The Foreign Invasion. Time. April 2, 1973
Japanese Investment in the United States, Council Report No. 60.
United States-Japan Trade Council. October 4, 1973.
Japanese Trading Companies, Flush with Cash, Are Eagerly Investing
in U.S. Real Estate. The Money Manager. May 21, 1973.
Japanese Concerns Lift Direct Investing Overseas. The New York Times.
April 15, 1973.
Japan's Foreign Investment Machine (excerpts). Business Week.
March 24, 1973.
Welcome Mat for Foreign Companies - States Ask Japanese to Create
U.S. Plants. The New York Times. February 18, 1973.
Direct Foreign Investment in the United States. Bank of America,
January 1973.
Foreign Direct Investors in the United States: List of Foreign Firms
with Some Interest/Control in American Manufacturing and
Petroleum Companies in the United States. U.S. Department
of Commerce. October 1973.
Foreign Business Investments in the United States. U.S. Department
of Commerce, Office of Business Economics. 1962.
Census of Foreign-Owned Assets in the United States. U.S. Treasury
Department. 1945.
Foreign Investment in the United States-A Danger to Our Welfare and
Sovereignty? Federal Reserve Bank of St. Louis Review.
October 1973.
NASDA Efforts in Attracting Foreign Direct Investment. National Associa-
tion of State Development Agencies. September 1973.
Policy Statement on Foreign Investment in the United States with draft
task force report. Chamber of Commerce of the United States
of America. November 9, 1973.
Japanese Investments in Hawaii, Hawaii '73 Annual Economic Reveiw.
Bank of Hawaii, Honolulu, Hawaii. August 1973.
Foreigners Invest in U.S. Coal Operations. The Wall Street Journal.
December 3, 1973.
LIBRARY GERALD FORD
FOREIGN INVESTMENT IN U. S. STOCKS AND BONDS
STAFF REPORT
of the
SUB COMMITTEE ON INTERNATIONAL FINANCE
COMMITTEE ON BANKING AND CURRENCY
HOUSE OF REPRESENTATIVES
93rd CONGRESS, FIRST SESSION
November 1973
FORDO & 074870 LIBRARY
PREFACE
During the last two years the world has been in a state of
monetary crisis - seemingly a perpetual crisis. The U. S. dollar
has been a major cause, participant, and victim of this crisis.
Twice during this two-year period the Subcommittee on International
Finance has processed legislation modifying the value of the dollar.
And during this period the Subcommittee has held special hearings
to review the progress toward monetary reform - a reform revolving
to a great degree around the problems of the dollar. In fact, the
key to the entire problem of a satisfactory monetary system (and
reasonable trade arrangements as well) is the rehabilitation of the
dollar.
The United States has been having serious balance of payments
problems, resulting in enormous foreign holdings of dollars. Current
forecasts of the balance of payments situation are not optimistic about
a reduction in the amount of foreign held dollars. This "overhang" of
dollars is a hurdle to monetary reform and an irritant in the foreign
exchange markets.
The problems of the dollar cannot be solved easily or with a
single action. While the solutions to the problems can be complex, the
essence is simply - bring the dollars home! The U.S. securities
markets offer outstanding possibilities to attract some of these foreign
owned dollars and thereby reduce the overhang.
FORD & LIBRARY GERALD
FOREIGN INVESTMENT IN U. S. STOCKS AND BONDS
CONCLUSION
The Staff of the Subcommittee on International Finance
recommends legislation to eliminate the withholding tax imposed by
the United States on interest and dividend payments to foreigners.
Removal of this tax will play a significant role in the rehabilitation
of the U. S. dollar by reducing the enormous overhang of foreign-
owned dollars. It may also attract new foreign capital into important
housing and other securities markets which are short of capital.
*
*
*
*
Since the 1930's the United States has imposed taxes at a
rate of 30% on interest and dividend payments to foreigners. This tax
has inhibited the flow of capital into the United States and has produced
little tax revenue. In a letter to Chairman Gonzalez, Mr. Nicholas
A. Rey, Vice President of Merrill Lynch, Pierce, Fenner & Smith wrote
that elimination of the tax would be an important stimulus to significantly
increased flows of foreign long-term capital to the United States.
Elimination of the tax on interest and dividend payments to foreigners
would:
-Help bring home substantial amounts of the over $80 billion
hel in private hands abroad.
-Yield significant benefits to the U. S. balance of payments.
BERALD FORD LIBRARY
-Increase the flow of funds into the U. S. real estate and
building industries by making such fixed income investments as
mortgages and real estate investment trust shares attractive to
foreigners.
-Increase foreign investments in U.S. corporate bonds and
yield oriented common and preferred stocks such as those issued by
U. S. utility companies.
-Tend to reduce interest rates in the United States.
-Help to re-establish the United States as an international
financial center by making U.S. investments competitive with the
Eurodollar and Eurobond markets which are not subject to withholding
taxes.
Paul Heffernan wrote in The Money Manager of July 23, 1973:
"As for stocks and bonds issued in the United States under the
Securities and Exchange Commission surveillance, the 30% withholding
tax enforced by Uncle Sam on interest and dividend income to foreigners
has become an anachronistic deterrent to any reduction of the overhang
of foreign-owned dollars that right now is admittedly the most formidable
barrier to the dollar winning lasting stability in the foreign exchange
market. This depression-born official tax psychosis continues to
prevail, seemingly unmoved by the reasons for the collapse of the
dollar in the international market and the need for applying resuscitatives
when called for. "
The United States imposes taxes at a flat 30% rate on gross
interest and dividend payments to foreigners. The tax is withheld at
the source of the dividend or interest payment. The 30% rate has been
FORD
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GERALD
LIBRARY
reduced or eliminated for residents of a number of industrialized
countries with which the United States has double taxation treaties.
In no case is the tax rate below 15% for dividends even for countries
for which the tax treaties have entirely eliminated the withholding tax
on interest income.
The United States does not have tax treaties with many of the
countries which are potentially significant sources of investment
capital for the U. S., e.g., Hong Kong and countries of the Middle
East and Latin America, And it is doubtful that the U. S. will have tax
treaties with these countries in the foreseeable future.
Many market observers feel that without this tax, foreign held
dollars would flow more readily into the U. S. securities markets. The
U. S. markets have a breadth, depth and variety of investment media
found nowhere else in the world. In the last fifteen years, foreigners
have been net purchasers of U.S. corporate securities in every year
but two. However, foreigners have purchased stocks principally
for their growth potential (there is no capital gains tax for foreigners).
Removal of the withholding tax on dividends may therefore greatly
increase capital flows into U.S. equities since many foreigners are also
yield oriented.
Foreigners have made only minimal investment in interest-
bearing debt securities in the United States. Those foreigners wishing
to purchase fixed income dollar investments can invest in the Eurodollar
market where there is no withholding tax. Removal of the U.S. with-
holding tax would permit the purchase of a variety of debt securities
including corporate bonds, convertible bonds and mortgages.
FORD
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GERALD
LIBRARY
It is impossible to make an accurate prediction of the extent
to which sales of U.S. securities to foreigners would increase if
withholding taxes were removed. According to the New York Stock
Exchange, one of the leading brokerage firms took a survey of its
international office managers on this issue. Almost all of the
managers felt significant increases in sales of U.S. corporate stock
to foreigners would result. The estimated increases ranged from 10
to 30 percent. Indications were that removal of the tax would open
a new market for foreign purchases of U.S. utility common and preferred
stocks.
While there is no guarantee that removal of the tax will result
in a greatly increased flow of funds, the cost to the U.S. Government
would be insignificant. Total income from the withholding tax was less
than $200 million in 1969, the latest year for which data is available. And
of this amount only about $20 million was attributable to the tax on
interest payments. Much of the remaining $180 million may be due to
inter-corporate dividends. Hence, the tax collected on dividend and
interest payments to foreign portfolio investors must be considerably
less than $100 million. Revenue losses from elimination of the tax
may well be offset by increases in the income tax collected, as greater
income is generated in the U. S. economy from the new investment here.
It may be argued that elimination of the withholding tax would
be unfair to the ordinary U.S. citizen, who pays income tax on dividends
and interest income. However, under the international principles
of taxation, individuals should be subject to tax in their country of
GERALD FORD LIBRARY
-4-
residence. The U.S. has already removed the tax for citizens
of some countries, so complete elimination of the tax would not be
a real change in tax principle. The benefits to be gained from removal
of the tax should far outweigh any feelings of discrimination by U.S.
citizens.
If the U.S. withholding tax on foreigners is lifted, other
countries will not necessarily follow suit. U.S. citizens may
continue to be taxed by foreign countries on their dividends and interest
income. Unilateral elimination of the withholding tax may reduce the
leverage of the U.S. in obtaining similar tax benefits for U.S. citizens
in foreign countries. However, it would not reduce the possibility
of negotiating thorough tax treaties in the long run with those countries
which want treaties.
A popular argument against removal of the tax may be that
it would promote tax evasion by U.S. citizens, according to Merrill,
Lynch, Pierce, Fenner & Smith. People may argue that removal of the
withholding tax would tend to stimulate tax evasion by Americans who
would send their money abroad and reinvest it in the United States. It is
highly doubtful that a 15 to 30% withholding tax can be much of an
obstacle to tax evasion when compared with U.S. income tax rates.
Moreover, the real incentive already exists in that there is no capital
gains tax on foreign investment in the United States. The way to prevent
tax evasion is through continued and enhanced enforcement of the law in
the United States, improved reporting requirements by U.S. citizens and
through the exchange of information with tax authorities of other countries
which is built into U.S. tax treaties. In addition, it should be possible
FORD & LIBRARY
-5-
to draft the withholding tax elimination legislation in such a way as
to have the taxes reapply at the discretion of the President after
a reasonable period of time to countries which are unwilling to
exchange tax infor mation with the United States.
Critics may raise the argument that removal of the tax
would encourage the takeover of U.S. companies by foreigners. This
is unlikely since most corporate takeover strategies would not be based
on just the earning of dividends, which would be sent home to the foreign
country. The profit and other financial calculations made by a foreigner
in deciding whether to take over a U.S. business would not depend on
the existence or removal of the tax. In fact in many cases foreigners
would reinvest the profits in the business in the U.S. rather than re-
patriate them in the form of dividends to their own country where they
would be taxed. However, to meet the objective of attracting foreign
held dollars into U.S. stocks and bonds, it would not be necessary to
remove the withholding tax on dividends paid by subsidiaries to their
foreign parent companies.
There may be disadvantages in removing the withholding tax,
but these seem insignificant compared to the potential benefits. The
positive effect on the U.S. balance of payments would range from hundreds
of millions to billions of dollars. An increase of just 30% above the net
amount of stocks purchased in 1972 would result in a new inflow of $680
million. The investment by foreigners in interest-bearing securities has
been so low in the past that it is difficult to extrapolate in calculating
a potential increase. But given the size of the Eurobond market and the
FORD
GERALD
LIBRARY
-6-
amount of foreign-owned dollars which would be attracted to interest-
bearing securities, the increase would certainly be in the hundreds
of millions of dollars.
These dollars would be attracted into the United States at a
low cost. If the withholding tax on intercorporate dividends were not
removed, the cost to the Treasury may be less than $100 million. Yet
the taxpayers should benefit by much more than this thr ough the reduction
of interest rates, the flow of funds into the mortgage and utility securities
markets, and the many positive effects of a stronger dollar.
Attachments
Letter from Nicholas A. Rey, Vice President, Merrill Lynch, Pierce,
Fenner & Smith Inc. to Chairman Henry B. Gonzalez, Sub-
committee on International Finance. August 15, 1973.
Letter from James J. Needham, Chairman, The New York Stock
Exchange to Chairman Henry B. Gonzalez, Subcommittee
on International Finance. July 30, 1973.
Dividend Withholding Tax on Foreign-Held Securities Stymies Inflow
of Capital, by Peter J. Tanous. The Money Manager.
October 23, 1973.
LIBERTY GERALD ? FORD
-7-
ONE LIBERTY PLAZA
165 Broadway, New York, NY 10006
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
PHONE: (212) 768-1212
CABLE: MERILSEC NEW YORK
TELEX: 223366
August 15, 1973
The Honorable Henry B. Gonzalez,
Chairman
Subcommittee on International Finance
of the Committee on Banking and Currency
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Chairman:
In Mr. Anderson's absence I am taking the liberty of
responding to your letter of August 3 concerning the U.S. with-
holding taxes on interest and dividend payments to foreigners.
We strongly believe that elimination of these taxes
would be an important stimulus to significantly increased flows
of foreign long-term capital to the United States. It would:
-- help to bring home substantial amounts of the
over $80 billion held in private hands abroad;
-- yield significant benefits to the U.S. balance
of payments;
-- increase the flow of foreign funds into the U.S.
real estate and building industries by making such
fixed income securities as mortgages and real estate
investment trust shares attractive to foreigners;
-- increase foreign investments in U.S. corporate
bonds and yield oriented common and preferred
stocks such as those issued by U.S. utility com-
panies;
-- tend to reduce interest rates in the United States;
FORD i LIBRARY GERALD
Mr. Henry B. Gonzalez
Page Two
August 15, 1973
-- help to re-establish the United States as an
international financial center by making U.S.
investments competitive with the Eurodollar
and Eurobond markets which are not subject to
withholding taxes.
1. The Taxes
As you may know, since the 1930's, the United States has
imposed taxes withheld at the source at a flat 30% rate on gross
interest and dividend payments to foreigners. However, the 30%
rate has been reduced or eliminated for residents of a number of
industrialized countries with which the United States has double
taxation treaties. Attached is a list of the countries with which
the U.S. has treaties and the applicable withholding tax rates.
The average U.S. withholding tax is around 15% for residents of
these countries.
The U.S. does not have treaties which reduce the tax with
the vast majority of countries around the world among which are
numbered some very substantial sources of funds for investment
in the United States, for example, Hong Kong, and the countries
of Latin America and the Middle East. In view of the history of
unsuccessful attempts to negotiate treaties with many of these
countries, it is doubtful that the withholding tax rates could
be reduced in the foreseeable future through a negotiation of
treaties with a significant number of additional countries.
While the Swiss tax treaty reduces the rate to 15% on div-
idends and 5% on interest, these rates apply only to Swiss residents.
Thus, under the treaty, when an Arab or Latin American invests in
the U.S. through his Swiss account, Switzerland withholds additional
amounts and remits them to the United States in order to bring the
tax paid by such investors to the 30% rate. It is important to
note that the vast majority of funds available in Switzerland for
investment in the United States is for the account of non-Swiss
residents.
FORD
GERALD
LIBRARY
Mr. Henry B. Gonzalez
Page Three
August 15, 1973
In many cases, foreign nationals can credit against
their domestic tax bills withholding taxes paid to the United
States. However, the procedures involved are cumbersome and,
therefore, do not facilitate the free flow of funds to the
United States particularly in the case of individual foreign
investors.
GEBRADA
FORD
GERALD
LIBRARY
2. The Effects of Elimination
While it is not possible to project an exact dollar
figure for the increase in investment in the U.S. which would
result from removal of the taxes, it could well be several bil-
lions of dollars over time. As you know, foreigners already
have a strong appetite for U.S. equities. Their net purchases
of U.S. common stocks were $697 million in 1970, $836 million
in 1971 and $2.268 billion in 1972. However, these stocks have
generally been bought for their growth potential. There is no
U.S. capital gains tax applicable to foreigners. Removal of the
withholding tax on dividends would greatly increase flows into
U.S. equities as substantial numbers of foreigners are also yield
oriented. In particular, it would open several important new
markets for foreign purchasers including utility common and
preferred stocks and real estate investment trust shares, two
industries which are in dire need of new sources of funds, if
their ever increasing capital expenditures are to be financed at
reasonable costs.
Investments by foreigners in interest-bearing debt secu-
rities have been minimal. While accurate statistics which would
measure these flows are not available, the closest approximation
indicates that net foreign purchases of U.S. bonds were $347 million
in 1970 and $233 million in 1971. In 1972 net sales of $81 million
were made.
1
These purchases are so low to a considerable degree
1 These figures are from line 67, Table 6, U.S. balance of payments
article, Survey of Current Business, June 1973, U.S. Commerce Depart-
ment. Both the Treasury and Federal Reserve monthly bulletins give
statistics which seem to show substantially higher foreign bond
purchases. It is important to note that these latter statistics
include purchases of Euro-bonds issued by U.S. companies and U.S.
bonds acquired by international organizations, neither of which
are subject to U.S. withholding tax and, therefore, must be exclu-
ded for this purpose.
Mr. Henry B. Gonzalez
Page Four
August 15, 1973
because of the U.S. withholding tax, since foreigners inter-
ested in fixed income dollar investments can buy Euro-dollar
bonds which carry no withholding tax. Dollar denominated Euro-
bond sales in the past five years have averaged $2.4 billion
and were $3.9 billion in 1972. Removal of the tax on interest,
would for the first time permit substantial purchases of U.S.
debt securities including corporate straight and convertible
bonds as well as mortgages and government bonds. This will
occur even if interest rates in the U.S. are somewhat lower
than abroad because there is a shortage of first-class, liquid
investments outside the United States.
3. Implications for U.S. Tax Policy
The effect on U.S. Treasury revenues of the removal of
the taxes would be slight. Total income from these taxes was
less than $200 million in 1969, the latest year for which data
is available. Of this amount only about $20 million was attri-
butable to the tax on interest payments, an indicator of the
small size of foreign investment in interest bearing U.S. sec-
urities. Of the remainder, a significant portion was due to inter-
corporate dividends paid by subsidiaries to their foreign parent
companies, a tax which would not need to be removed to meet the
objectives outlined herein. In addition, revenue losses from
removal of the taxes, should be more than offset through the
income tax as greater income is generated in the U.S. economy
from additional investment here.
Some have argued that removal of these taxes would dis-
criminate against American citizens who would, of course, continue
to be subject to U.S. income tax on their debt. and equity investments.
However, it is a principle of international taxation that individuals
should be subject to tax in their country of residence and/or nat-
ionality. In any event, the benefits to be derived for the United
States in this time of monetary crisis and high interest rates far
outweigh any such discrimination. Moreover, removal of the with-
holding tax would not be unprecedented since our tax treaties
already reduce or eliminate the taxes for foreign residents in
several countries. In a sense, this move would eliminate existing
GERALD FORD LIBRARY
Mr. Henry B. Gonzamez
Page Five
August 15, 1973
discrimination as between foreigners from different countries.
In addition, it is important to note that the U.S. capital gains
tax does not apply to foreigners. Finally, the United States
would join a significant group of industrialized countries,
with which we must compete for funds, which do not tax interest
paid to non-residents.
Others have argued that removal of the withholding tax
would tend to stimulate tax evasion by Americans who would send
their money abroad and reinvest it in the United States. It
is highly doubtful that a 15 to 30% withholding tax can be much
of an obstacle to tax evasion when compared with U.S. income
tax rates ranging as high as 70%. Moreover, the real incentive
already exists in that there is no capital gains tax on foreign
investment in the United States. The way to prevent tax evasion,
of course, is through continued and enhanced enforcement of the
law in the United States, improved reporting requirements by
U.S. citizens and through the exchange of information with tax
authorities of other countries which is built into U.S. tax treaties.
In addition, it should be possible to draft the withholding tax
elimination legislation in such a way as to have the taxes reapply
at the discretion of the President after a reasonable period of
time to countries which are unwilling to exchange tax information
with the United States.
It is also argued that the United States would reduce its
ability to negotiate future double taxation treaties because if
it unilaterally relinquished the right to withhold tax on interest
and dividends it would reduce its leverage to exact similar con-
cessions from other countries. The United States already has
treaties with most industrialized countries. Developing countries,
with whom the U.S. generally does not have treaties, are unwilling
for economic and political reasons to diminish their ability to
tax dividends and interest paid to investors abroad, because this
would lead to additional profits remitted abroad. In the face of
this, the willingness of the United States to reduce taxes withheld
from citizens of less developed countries does not seem to provide
much leverage in any case.
*
*
*
GERALD FORD LIBRARY
Mr. Henry B. Gonzalez
Page Six
August 15, 1973
We very much hope that the above information will be
of interest to you. If you have any further questions or if
we can be of further assistance to you on this important matter
please let us know.
Very truly yours,
Nicholas Nicholas A. Rey Rey
Vice President
NAR/1r
Attachment
LIBRARY GERALD ? FORD
Table of Tax Treaties
Tax Treaties In Effect Between the
United States and Foreign Countries
Rate of U.S. Tax
Estate
Gift
Withholding at Source
Tax
Tax
Country
Dividends
Interest
Treaty
Treaty
AUSTRALIA
15%
30%
Yes
Yes
AUSTRIA (Except
Mortgage Interest)
15%
-0-
-
-
BARBADOS*
15%
30%
-
-
BELGIUM
15%
15%
-
-
CANADA
15%
15%
Yes
-
CONGO, REPUBLIC OF
15%
15%
-
-
DENMARK
15%
-0-
-
-
FINLAND
15%
-0-
Yes
-
FRANCE
15%
10%
Yes
-
GERMANY,
FED. REPUBLIC OF
15%
-0-
-
-
GREECE
30%
-0-
Yes
-
IRELAND
15%
-0-
Yes
-
ITALY
15%
30%
Yes
-
JAMAICA*
15%
30%
-
-
JAPAN
15%
10%
Yes
Yes
LUXEMBOURG (A)
15%
-0-
-
-
MALAWI*
15%
-0-
-
-
NETHERLANDS
15%
-0-
-
-
NETHERLANDS
ANTILLES (A)
15%
-0-
-
-
NEW ZEALAND
15%
30%
-
-
NIGERIA*
15%
30%
-
-
*Former colony of United Kingdom, now independent. The U.K.
NORWAY
15%
-0-
Yes
-
Treaty as it was extended to this colony continues to apply.
PAKISTAN
30%
30%
—
-
**Aden, Antigua, British Honduras, Dominica, Falkland
RWANDA
15%
15%
-
-
Islands, Gambia, Grenada, Montserrat, (St. Christopher,
SIERRA LEONE*
15%
30%
Nevis & Anguilla Federation), St. Lucia, St. Vincent, Sey-
-
-
chelles, U.K. Virgin Islands.
SOUTH AFRICA,
(A) Payments to corporations in Netherlands Antilles and Lux-
UNION OF
30%
30%
Yes
-
embourg are subject to 30% tax unless special require-
SWEDEN
15%
-0-
-
-
ments contained in the treaties are met. The Netherlands
SWITZERLAND
15%
5%
Yes
Antilles includes Aruba, Bonaire, Curaçao, Saba, St. Eus-
-
TRINIDAD and TOBAGO
25%
30%
tatius and the Netherlands part of St. Martin.
-
-
ZAMBIA*
15%
-0-
(B) United Kingdom includes only Great Britain (England, Scot-
-
-
land and Wales) and Northern Ireland, but excludes the
UNITED KINGDOM (B)
15%
-0-
Yes
-
Channel Islands and the Isle of Man.
SO. RHODESIA
Withholding at 30% is required on lump sum payments from
(as U.K. colony)
15%
-0-
-
-
qualified pension or annuity plans, except to residents of
OTHER U.K.
Canada, Germany, Sweden and United Kingdom. For these
COLONIES**
15%
30%
countries, the treaty and regulations should be referred to
-
-
for details.
FORD
GERALD
LIBRARY
ALBERT W. JOHNSON, PA.
HENRY B. GONZALEZ, TEX., CHAIRMAN
J. WILLIAM STANTON, OHIO
HENRY S. REUSS, WIS.
PHILIP M. CRANE, ILL.
WILLIAM S. MOORHEAD, PA.
BILL FRENZEL, MINN.
THOMAS M. REES, CALIF.
JOHN B. CONLAN, ARIZ.
RICHARD T. HANNA, CALIF.
U.S. HOUSE OF REPRESENTATIVES
CLAIR W. BURGENER, CALIF.
WALTER E. FAUNTROY, D.C.
ANDREW YOUNG, GA.
FORTNEY H. (PETE) STARK, JR., CALIF.
SUBCOMMITTEE ON INTERNATIONAL FINANCE
ROBERT G. STEPHENS, JR., GA.
OF THE
COMMITTEE ON BANKING AND CURRENCY
NINETY-THIRD CONGRESS
WASHINGTON, D.C. 20515
August 3, 1973
B4a
Mr. Harry Anderson
Chairman
Merrill Lynch International
One Liberty Plaza
New York, New York 10006
Dear Mr. Anderson:
The Subcommittee on International Finance is
concerned about the foreign holdings of U.S. dollars
and the resulting monetary instability. In a Forbes
magazine article, you suggested a method of bringing
many of these dollars back to the United States: get
rid of the withholding tax on interest paid to foreigners
on domestic corporate bonds. You say that the U.S. levies
this tax, but 1t does not produce revenue for the Treasury
because we don't sell bonds as a result of this tax.
I would very much appreciate your providing us with
additional information on your idea, e.g., the pros and
cons, the amount of corporate bonds which are being sold
to foreigners now and the amount which might be sold if
the tax were removed, the cost to the Treasury of such a
plan, and the possible reactions of the U.S. and foreign
bond markets.
Thank you for your time and courtesy, and with best
wishes, I remain
Sincerely yours,
Henry B. Gonzalez
Member of Congress
Chairman
FORD
GERALD
LIBRARY
THE
New York Stock
Exchange
July 30, 1973
James J. Needham
The Honorable Henry B. Gonzalez
Chairman and
Chief Executive Officer
Chairman
Subcommittee on International Finance
U.S. House of Representatives
Washington, D. C. 20515
Dear Mr. Gonzalez:
I am delighted to respond to your letter of July 19th
asking for data on foreign purchases of stocks and
bonds, as well as your request for ideas we may have
on attracting additional foreign investment into the
United States securities markets.
One of my first official acts as the Chairman of the
New York Stock Exchange was to establish an Advisory
Committee on International Capital Markets. That
Committee's primary function is to propose policies
which will strengthen the role of the United States
as a world capital center. This Committee includes
some of the most distinguished and knowledgeable in-
dividuals in the area of capital markets and inter-
national finance, as well as prominent men who have
served at the highest levels of government. A list
of its members is attached.
To assist the Committee in its deliberations and ad-
ministrative work, an International Finance Division
has also been established at the New York Stock Ex-
change. The table below, which shows historical data
on foreign purchases and sales of domestic securities,
was prepared by this Division.
GERALO FORD LIBRARY
New York Stock Exchange, Inc. Eleven Wall Street New York, New York 10005
- 2 -
Foreign Purchases and Sales
of Corporate and Other Securities
(In Billions of Dollars)
All
Stocks
Bonds
Securities
Net
Net
Net
Foreign
Foreign
Foreign
Year
Purchases
Sales
Purchases
Purchases
Sales
Purchases
Purchases
1958
$ 1.4
$ 1.5
$( .1)
$ .4
$ .3
--
--
1959
2.2
1.9
.4
.4
.3
$ .1
$ .4
1960
2.0
1.8
.2
.4
.4
.1
.3
1961
3.1
2.7
.3
.3
.4
( .1)
.2
1962
2.3
2.1
.1
.3
.4
( .1)
.1
1963
2.7
2.5
.2
.3
.2
--
.2
1964
3.1
3.4
( .3)
.5
.3
.2
( .2)
1965
3.7
4.1
( .4)
.7
.6
--
( .4)
1966
4.7
5.1
( .3)
1.6
.5
1.0
.7
1967
8.0
7.3
.8
2.2
1.9
.3
1.1
1968
13.1
10.8
2.3
4.4
2.5
2.0
4.2
1969
12.4
10.9
1.5
3.1
1.9
1.2
2.7
1970
8.9
8.3
.6
2.5
1.5
1.0
1.6
1971
11.6
10.9
.7
2.9
2.3
.7
1.4
1972
14.3
12.1
2.1
4.7
2.8
1.8
4.0
1973
Jan.- -
May (p)
5.5
4.2
1.3
3.0
1.2
1.8
3.1
P = Preliminary
Note: Numbers may not add up due to rounding.
FORD is 07V830 LIBRARY
-3-
As you can see, net foreign purchases of domestic
securities have consistently had a favorable impact on
our balance of payments since 1966. Moreover, since
the mid-sixties, foreign activity in U.S. securities
has mushroomed. The estimates of future foreign activity
in the equity markets which the NYSE had prepared in
1971 (see Perspectives on Planning enclosed) now appear
on the low side. The current uncertainties prevailing
in the international money markets and the lack of confi-
dence in the dollar make predictions about the level of
future foreign interest extremely hazardous.
The starting point for attracting additional foreign
investment has to be the pursuit of prudent fiscal and
monetary policies by our government. Foreign invest-
ment will not materialize to its fullest unless uncer-
tainties surrounding the future strength of the U.S.
dollar are laid to rest. To restore foreign confidence
in the dollar, the United States must achieve a surplus
in its international balance of payments, which in turn
requires a major reduction in our rate of inflation.
There is one major area where I believe our government
can take action to attract additional foreign invest-
ment into this nation's securities markets. This is the
withholding of taxes on interest and dividend income
received by foreigners. While some progress has been made
in recent years regarding tax treaties between the U.S.
and other nations, there remain many countries for which
no such treaties have been concluded. For example, tax
treaties have not been agreed upon with nations located
in the Middle East. This can serve to restrict large
inflows of capital from an area of the world where huge
monetary reserves will be accumulating into the 1980's.
At the present time, foreigners hold over $80 billion
in U.S. dollars. We strongly believe that potential
inflows of foreign-held dollars overwhelm any revenue
loss from a unilateral repeal of withholding taxes
(the U.S. obtained just over $190 million from the
withholding tax in 1969). Moreover, we feel that at-
tempts by U.S. citizens to avoid taxes by this chan-
nel can be resolved through appropriate administrative
machinery.
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- 4 -
The effect that imposition of a tax on interest and
dividends received by foreigners can have on discour-
aging portfolio investment by such parties is acknowl-
edged by governments which have such taxes. In order
to reduce foreign inflows, the German government levied
a withholding tax on foreign owned German bonds in
1969. This attempt turned out to be successful. It
stands to reason if withholding taxes have checked
foreign inflows, their elimination should encourage
such flows.
It is impossible to make an accurate prediction of the
extent to which sales of U.S. securities to foreigners
would increase if withholding taxes were removed. How-
ever, one of the leading brokerage firms took a survey
of its international office managers on this issue.
Almost all the managers felt significant increases in
sales of U.S. corporate stock to foreigners would re-
sult. The estimated increases ranged from 10 to 30
percent. Indications were that removal of the tax
would open a new market for foreign purchases -- U.S.
utility common and preferred stocks.
In summary, I believe that the withholding tax is a
deterrent to foreign participation in the U.S. securi-
ties markets. Its repeal would assist both our bal-
ance of payments and securities markets significantly.
If I can be of any further assistance, please let me
know. Furthermore, the staff of our Research Depart-
ment, particularly Dr. William C. Freund, Vice Presi-
dent and Chief Economist, would be delighted to re-
spond to an invitation to meet with you or any members
of your staff regarding programs to attract additional
foreign investment into the U.S. capital markets.
Sincerely yours,
Enclosures
Jains Jhudhan
GERAALO FORD LEBRARY
HENRY B. GONZALEZ, TEX., CHAIRMAN
ALBERT W. JOHNSON, PA.
HENRY S. REUSS, WIS.
J. WILLIAM STANTON, OHIO
WILLIAM S. MOORHEAD, PA.
PHILIP M. CRANE, ILL.
THOMAS M. REES, CALIF.
BILL FRENZEL, MINN.
RICHARD T. HANNA, CALIF.
WALTER E. FAUNTROY, D.C.
U.S. HOUSE OF REPRESENTATIVES
JOHN B. CONLAN, ARIZ.
CLAIR W. BURGENER, CALIF.
ANDREW YOUNG, GA.
FORTNEY H. (PETE) STARK, JR., CALIF.
SUBCOMMITTEE ON INTERNATIONAL FINANCE
ROBERT G. STEPHENS, JR., GA.
OF THE
COMMITTEE ON BANKING AND CURRENCY
NINETY-THIRD CONGRESS
WASHINGTON P.C 20515
B4a
Mr. James J. Needham
Chairman of the Board
New York Stock Exchange
11 Wall Street
New York, New York 10005
Dear Mr. Needham:
The Subcommittee on International Finance is
very concerned about the enormous foreign private
holdings of U.S. dollars and the projected increases
in these holdings. One significant means of attract-
ing many of these dollars back to the U.S., is the
purchase of stocks and bonds in the securities markets
here by foreign investors.
I would appreciate your providing me with data
on the historical and forecasted purchases of stocks
and bonds by foreign investors. I would also like
your comments on methods of attracting more foreign-
held dollars into the U.S. securities markets,
especially if there is a role for the U.S. Government.
Thanking you for your assistance, I remain
Sincerely yours,
Henry B. Gonzalez, M.C.
Chairman
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Dividend Withholding Tax on Foreign-Held Securities Stymies
Inflow of Capital
By Peter J. Tanous, Vice President of Smith Barney & Co.
(The Money Manager: October 23, 1973)
At a time when free trade is a topical subject, the United
States still imposes restrictive measures on both the inflow and out-
flow of capital.
The reasons for imposing limitations on the outflow of capi-
tal are familiar: the U.S. has had a serious balance of payments
problem in recent years. As a result, the Interest Equalization
Tax was imposed in 1963 as a "temporary measure" and has been
maintained, in somewhat modified form, ever since.
In addition, in 1968, the Office of Foreign Direct Invest-
ments was established and administered provisions for a manda-
tory system to restrict the dollar outflow for direct investment
abroad.
The IET imposes a tax on American investments in securi-
ties of other countries - except for Canada and a number of less-
developed countries - to the effect of discouraging investment abroad.
It seems reasonable to assume, however, that if the U.S.
wants to discourage an outflow of capital it ought to be interested
in encouraging an inflow of capital. Yet, paradoxically, there is
a law that has just the opposite effect: the withholding tax on interest
and dividends on U.S. securities held by foreigners.
The withholding tax has been in effect since 1913 when it
was made part of the Internal Revenue Code of 1913. One can sur-
mise the many reasons that prompted its inclusion but the most likely
derived from a sense of fairplay.
At that time, Americans were about to be subjected to a
true income tax, a measure that was of obvious limited popularity.
Interest and dividends on securities were included as taxable income.
So, the reasoning undoubtedly went, if Americans owning
American securities were obliged to pay a tax on their income from
those securities, then it would be unfair to allow foreigners owning
American securities to escape tax on them.
Furthermore, since the U.S. would not have the authority
to tax foreign nationals living in their own countries, the only way
to achieve the same result would be to tax the interest or dividend
before it left the country: hence, the withholding tax.
&
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Over the years, the original tax has been modified in sep-
arate tax treaties with different nations but by and large, the with-
holding tax is either 15% or 30% on dividends and, in most cases,
30% on interest.
When the draftsmen of the original tax legislation included
the withholding tax, they probably could not have foreseen the effects
the tax would have on this country's balance of payments 60 years
later. Oddly enough, this effect is only beginning to be recognized now.
As capital markets developed in this century, Wall Street
emerged as the financial center which provided essential ingredients
of opportunity, information, and liquidity. The New York Stock
Exchange attracted a growing foreign interest and in the late 1960s,
net capital flows in U.S. stocks purchased by foreigners reached
very sizable proportions.
In the early part of that decade the net inflow on foreign
purchases of U.S. stocks was generally in the $200 million to $400
million range. In 1967 it exceeded $700 million and in 1968 hit a
record $2.2 billion. The net capital inflow declined after 1968 to
$1. 4 billion in 1969, $626 million in 1970, $731 million in 1971,
and surged again to $2. 1 billion in 1972.
While this dramatic rise in foreign interest was occuring,
the withholding tax was acting as a disincentive to foreign investors
who were primarily interested in income. If the United States was
going to withhold 15% or 30% of the interest and dividends, then
clearly the U.S. market was not the place to go for income.
In the meantime, as foreigners' interest in our equity mar-
kets was growing, a parallel development was occurring abroad.
The Interest Equalization Tax reduced U.S. interest in foreign securi-
ties at a time when, in retrospect, investments abroad would have
served American investors well.
On the other hand, this measure provided a dramatic growth
to the Eurobond market. This growth was fueled by the fact that
Europeans were penalized by the withholding tax when they bought
U.S. securities; thus, high-yielding, dollar-denominated securi-
ties became quite attractive.
The Eurobond market (in dollars and other currencies) grew
from less than $200 million in the early 1960s to more than $6 billion
in 1972. There is now an estimated $25 billion in Eurodollar bonds
outstanding.
The rapid growth of the Eurobond market created some new
problems, particularly because most of the Eurobond issues were
relatively small and there was little in the way of an aftermarket. A
few firms geared up to trade Eurobonds but the markets remained
FORD & LIBRARY
thin and bond orders in excess of 50 or 75 bonds often encountered
resistance.
Most of the Eurobonds were taken up by European banks
and placed in clients' portfolios. A number of bond funds were
created by major banks throughout Europe. Today, Eurobond funds
alone count assets of about $3 billion, including those bond funds managed
by the three largest Swiss banks.
George Dunesme, of the Banque de Bruxelles in Brussels,
manages one of the largest bond funds in Europe, the Renta Fund,
which has $400 million in assets. His problem is typical of major
bond buyers overseas - large amounts of funds invested and a limited
aftermarket in which to maneuver.
His dilemma and that of other European money managers
is twofold: the Eurobond market offers little selectivity as com-
pared with the U.S. bond markets while the burgeoning size of their
funds forces them to make sizable commitments in a single issue.
Moreover, the aftermarket liquidity problem, particularly
in convertible bonds, appears to be getting worse. As Mr. Dunesme
says: "How can you expect a bond trader to maintain an inventory
of 4 3/4% convertible bonds when he must pay 12% short term in-
terest to carry it? "
Mr. Dunesme, and undoubtedly many other managers, are
eager to place money in the U.S. bond markets but, of course, the
withholding tax forestalls their participation. Because the U.S.
bond market is by far the most liquid in the world and because this
market also offers the greatest selectivity, most money managers
are willing to enter the market at some sacrifice in yield.
It is true that the yields in the Eurobond market are often
higher than yields for comparable credits in the U.S., but the with-
holding tax makes the sacrifice too great.
Clearly there is a firm desire on the part of foreign money
managers to invest their yield-sensitive funds in the United States.
As our balance of payments begins to improve, we could well use
the support that would result from the repatriation of a substantial
amount of dollars to our bond markets.
It may be a worthwhile exercise to speculate on just how
much money would come back to the United States if the withhold-
ing tax were eliminated. There are several ways to look at these
possibilities.
For one, in 1972 foreigners had net purchases of U.S. corp-
FORD
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orate bonds of $1, 788 million despite the disincentive of the with-
holding tax. We do not know, however, what percentage of these
purchases were in convertible bonds, where the yield is of less
importance than the capital gains prospects.
Second, there is an estimated $25 billion in long term Euro-
dollar bonds now outstanding. If the withholding tax were removed,
and these bondholders were free to invest in the U.S. without penalty,
one can probably conservatively estimate that 10% to 20% of these
bondholders would want to invest directly in the U.S. bond markets.
This alone would provide a $2.5 to $5 billion boost in our
balance of payments. This is but one source of potential new investors.
In the U.S. bond markets, $19.4 billion in new corporate
bonds were issued in 1972. Again, if we assume conservatively that
10% of this total could be placed abroad without the withholding tax,
we gain another $2 billion or so in inflow.
In 1972, there were $3.29 billion dollars in new long term
issues floated in the Eurobond market. It can be assumed that a
sizable number of Eurobond investors would opt for the U.S. bond
market over the Eurodollar market if they could.
In other words, the very first year that the withholdin,
tax is removed, we might expect an improvement in our balance
of payments of perhaps $4 billion to $6 billion.
So far, it appears that no one can lose from the removal
of the withholding tax. Foreign investors would gain the diversity
and liquidity the seek, U.S. securities dealers would gain a signi-
ficant new clientele, and most importantly, our balance of pay-
ments would be served with a welcome gain. It appears indeed that
there is nothing to lose.
However, the fact that the withholding tax does exist has
resulted in some revenue to the United States. The amount of reve-
nue received by the U.S. Government in 1970 through withholding
on interest and dividends of securities held by foreigners was
$200, 133, 000 on income earned abroad of $1, 458, 985, 000.
Although the statistics are not broken down, it is probably
safe to assume that the bulk of this revenue is derived from with-
holding tax on dividends of stock purchased by foreigners essentially
for capital gains, not income. In any case, these revenues would
be lost if the withholding tax were eliminated.
There are some extenuating factors. According to the In-
ternal Revenue Service, an astounding 655, 893 documents were
filed by withholding agents in 1970 alone in order to administer the
tax. The elimination of the withholding tax would also mean the
GERALD FORD LIBRARY
elimination of this imposing paperwork burden, and the expense
associated with it.
It may be fair to state that the net loss of revenue will be
a small price if it can secure a multi-billion dollar annual inflow
to help our balance of payments. But compelling as the case for
the removal of the withholding tax may appear, it has attracted sur-
prisingly little attention until recently. Now, at least the issue is
being discussed.
Rep. Wilbur Mills, chairman of the House Ways and Means
Committee, is known to be considering the removal of the withhold-
ing tax. Rep. Henry S. Reuss, chairman of the Joint Economic Sub-
committee on International Monetary Affairs, is aware of it.
Recent testimony by securities industry officials before
Sen. Lloyd M. Bentsen, Jr. 's Subcommittee on Financial Markets
suggests that as much as 15% to 30% more U.S. common stock could
be sold abroad if the withholding tax were ended.
But although press reports have noted the possible effect on
the stock market, no mention has been made of the bond business,
which would be the beneficiary of the end of the tax.
It is important that the issue is now being discussed, it
deserves the active support of the investment banking and brokerage
community, obviously from those firms who stand to gain import-
antly from a significant foreign investment in our bond markets.
Furthermore, it should be comforting to know that an effort
on the part of the industry to eliminate the withholding tax will have
an effect that goes beyond the self-serving benefit, in that a substan-
tial boost to our balance of payments is likely to ensue.
The effort can be carried even further in the spirit of the
true liberalization of capital flows. The Interest Equalization Tax has
now been on the books for ten years. It has been renewed several
times and is currently scheduled to expire on June 30, 1974.
Early this year, members of the Securities Industry Asso-
ciation's International Finance Committee appeared before the House
Ways and Means Committee which was then considering the question
of the renewal of the IET.
The SIA committee did not, at that time, ask for the complete
elimination of the IET in view of its possible value in upcoming trade
and monetary talks, but it did propose some modifications.
The proposed changes were based on persuasive evidence pre-
sented by the SIA committee that the IET was not an effective deterrent
to capital outflows.
is
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Indeed, as Anthony M. O'Connor, a first vice president of
Smith Barney and a member of the SIA committee, pointed out, when
a foreign security attracts investor attention in the U.S. the IET
does not act to inhibit investment in it.
An extreme example is the fact that U.S. investors have
been willing to purchase shares of Sony at a premium price of more
than 50% on the Japanese market price. The premium is due to
Japanese restrictions on foreign ownership but nevertheless the
example illustrates the willingness of American investors to pay
that premium for a stock they believe in.
As the sophistication of the U.S. institutional investors
in international investment grows, this trend can only accelerate.
We can assume, nevertheless, that the elimination of the
IET would cause some outflow of dollars from the United States.
The outflow would, however, undoubtedly be dwarfed by the inflow
we can expect from the removal of the withholding tax on U.S. securi-
ties held by foreigners.
There is, accordingly, a practical case to be made for the
joint removal of the IET and the withholding tax in the hopes it would
yield the following results:
-A substantial inflow of funds to the U.S. stock and bond
markets.
-A needed improvement in our balance of payments, thus
enhancing the value of the dollar in overseas markets, and encourage
yet further investment in U.S. securities.
-Provide a vast new market for U.S. bonds and high-yield-
ing stocks and the revenues generated from the sale thereof.
-Through the elimination of the IET, provide a truly inter-
national capital market with free access and movement in both direc-
tions, and return the international financial markets center to the
United States.
As was said earlier, it is fortunate that this subject is re-
ceiving some attention at the appropriate legislative levels. It now is
incumbent on the securities industry to lend its full support to the
efforts to end the withholding tax and the IET.
There is much to be gained by all parties affected by the taxes -
investors, the securities industry and not least, the national interest.
R.
GERALD
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LIBRARY
APR 13 1974
The Honorable
Peter H. Flanigan
Assistant to the President for
International Economic Affairs
The White House
Washington, D. C.
Dear Peter:
I have no difficulty with the general thrust of your
paper, "U.S. Policy and Objectives on International Investment,"
but I do have a for comments on some of the sections.
Under General Investment Objectives on page 2, where the
term "established investore" is used under II, I presume this
is meant to refer to foreign investors. In III of that section
it might be better to any "foreign investors are not subjected
to special inducements or constraints," rather than suggest
they be protected from politically notivated inducements in
general (since our interest is not directed against national
policies adopted to influence over-all investment activities,
but to insure that such policies are applied without discrimination).
The paragraphs at the top of page 3 concentrate on the
imposition of exchange controls 80 a form of governmental inter-
ference with market forces. In many cases, including our own, the
restraints on the investments take the form of quotas rather than
the application of exchange controls per se, and I would suggest
that these paragraphs be broadened to take that fact into account.
In the second paragraph on that page, reference is made to actions
affecting the competitiveness of outerprises controlled by foreign
investors "in their local business activities;" I would strike
that last phrase since we would also be concerned with discrimina-
tion against foreign-owned companies in the conduct of their
foreign operations. An example would be restricting their
access to local capital markets for purposes of investing abroad.
At the bottom of page 3 and the top of page 4, some of
the concerns that governments have with foreign investments in
their territory are identified. We might recognize more explicitly
GERALD FORD LIBRARY
Mr. Flanigan
Page 2
here that there 40 great concern in some countries about the extent
to which key sectors of industry are controlled abroad, and that
some internationally agreed criteria might be developed as guide-
lines in this area.
The question of fair and equitable treatment of the taxes
paid in total and to various countries by the multi-national corpora-
tions is attracting & great deal of attention these days and perhaps
deserves more than a passing note at the top of page 8.
I trust these comments will be useful. Since I an interested
in this issue, I hope you will keep me informed of further developments.
Sincerely yours,
(signed) Arthur
Arthur F. Burns
SPita
4/11/74
GERALD FORD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date July 17, 1975
To
Governor Wallich
Subject: Committee on Foreign Investment
From
Donald B. Adams DBA
in the United States
The cabinet-level Committee on Foreign Investment is scheduled
to meet on Friday, July 18 to try to establish an Administration position
towards a recently announced deal involving the Rumanian government and
a U.S. coal company.
According to my information from a member of the Committee's
supporting office at Commerce, the Rumanians and Island Creek Coal
Company (a subsidiary of Occidental Petroleum) have initialed a $15
million agreement forming a joint venture to exploit some coal fields
in the United States. The Rumanian government has not been receptive
to Committee efforts to delay the deal pending a Committee review of
its potential effects on U.S. national interests. Thus, this situation
is the first test of the Committee's effectiveness in carrying out
its mandate when the government with which it is supposed to negotiate
is recalcitrant.
It is noteworthy that the Committee learned of the planned
deal only through the American Embassy in Bucharest. Thus it is
evident that the Committee's intention to rely for information on
established bilateral commissions (such as those with Iran and Saudi
Arabia) may prove inadequate.
cc: Chairman Burns
Governor Holland
FORD & GERALD LIBRARY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
inamissval
1975 JUL 17 PM 2:52
RECEIVED
OFFICE OF THE CHAIRMAN
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