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    "title": "Foreign Investment in the U.S. (1)",
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        "Arthur F. Burns Papers",
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        "Organization of Petroleum Exporting Countries",
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    "ocrText": "The original documents are located in Box B48, folder \"Foreign Investment in the U.S. (1)\"\nof the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Dr. Burns donated to the United States\nof America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nBOARD OF GOVERNORS\nOF THE\nFEDERAL RESERVE SYSTEM\nOffice Correspondence\nDate May 14, 1971\nTo Chairman Burns\nSubject: Recent activity of foreigners\nFrom John D. Stoffels not\nin the U.S. stock market.\nSTRICTLY CONFIDENTIAL HIGHLY SENSITIVE\nAfter the Board meeting this morning, I made contact\nwith Andrew J. Melton, Chairman of the Executive Committee of\nSmith, Barney (a colleague of Bill Grant). Mr. Melton put me in\ntouch with the head of Smith, Barney's European operations who is\nbased in Paris but was in New York for the day.\nSmith, Barney deals with approximately 150 large institu-\ntional clients on an active basis; they are not a speculatively\noriented house and have few individual foreign clients, but their\ninstitutional business is substantial by European capital market\nstandards.\nTotal trading volume in Smith, Barney's foreign operations\nis up 73 per cent for the first quarter 1971 as compared with the\nfirst quarter of 1970. There has been a slight increase in trading\nvolume by their foreign customers in the past two weeks, and this\nwas attributed by them to investors' disenchantment with the liquidity\n(or lack thereof) in the Eurodollar market, a disenchantment that led\nthem to the U.S. equity markets as the most liquid investment outlet\nfor U.S. dollars. Throughout 1971 thus far, foreigners have been\nslight net buyers in the U.S. stock market.\nAn updated table of available Treasury data on foreign\npurchases of U.S. stocks is being prepared and will be sent to\nFORD is LIBRARY GERALD\nyou on Monday.\nCC: Messrs. Partee & R. Solomon\nBOARD OF GOVERNORS\nOF THE\nFEDERAL RESERVE SYSTEM\nOffice Correspondence\nDate May 23, 1972.\nTo\nGovernor Brimmer\nSubject:\nFrom\nSamuel Pizer SNP\nSTRICTLY CONFIDENTIAL (FR)\nThis note relates to the question that you asked on\nMonday morning regarding the fund established by the German\ngovernment to help finance German direct investments in the\nUnited States. I am attaching a copy of a statement giving the\ndetails of the establishment of that fund, which was part of\nthe German-American offset agreement of August 1969. The\nassets in the fund are held at the New York Federal Reserve\nBank, invested in Treasury bills and U.S. Government agency\nsecurities. The attached table shows the amounts held in that\naccount. As you will see the account was built up to the full\namount by June 30, 1971 ($166 million). Since that time there\nhas obviously been only a minor use of the fund, possibly\nbecause potential German investors did not find the terms on\nwhich they could obtain these funds sufficiently attractive.\nAttachments\ncc: Chairman Burns\nGovernor Mitchell\nGovernor Daane\nGovernor Sheehan\nMr. R. Solomon\nMr. Bryant\nMr. Reynolds\nMr. Gemmill\nMr. Hersey\nMr. Katz\nMr. Norwood\nMr. Wood\nMr. Sammons\nMr. Irvine\nMr. Roxon\nMr. R. Smith\nMr. Promisel\nMrs. Junz\nFORDO is GERALD LIBRARY\nMay 23, 1972\nSTRICTLY CONFIDENTIAL (FR)\nKW Account at F.R. Bank of New York\n(In millions of dollars)\nU.S. Treasury\nU.S. Govt.\nDate\nBills\nAgency securities\nTotal\nChange\n1970 - June 30-Nov. 30\n56.0\n---\n56.0\nDec. 31\n111.6\n--\n111.6\n55.6\n1971 - Jan. 31\n111.6\n-\n111.6\n--\nFeb. 28\n111.0\n--\n111.0\n-.6\nMar. 31\n110.9\n- -\n110.9\n-.1\nApr. 30\n110.5\n--\n110.5\n-.4\nMay 31\n110.4\n--\n110.4\n-.1\nJune 30\n166.0\n--\n166.0\n55.6\nJuly 31\n166.1\n--\n166.1\n.1\nAug. 31\n166.2\n--\n166.2\n.1\nSept. 30\n136.5\n29.0\n165.5\n-.7\nOct. 31\n136.5\n29.0\n165.5\n--\nNov. 30\n135.5\n29.0\n164.5\n-1.0\nDec. 31\n135.5\n29.0\n164.5\n--\n1972 - Jan. 31\n117.9\n42.0\n159.9\n-4.6\nFeb. 29\n103.7\n57.0\n160.7\n8\nMar. 31\n103.5\n57.0\n160.5\n-.2\nApr. 30\n103.5\n57.0\n160.5\n--\nMay 18\n103.6\n57.0\n160.6\n.1\nR.\nGERALD\nFORD LIBRERA\nEnclosure # 2\nUNCLASSIFIED\nof Frankfurt's A-153\nKREDITANSTALT FUR WIEDERAUFBAU\n6 Frankfurt am Main\nApril 2, 1970\nFinancing Contributions of Kreditanstalt für Wiederaufbau\nfor German Direct Investments in the U.S.A. under the\nGerman-American Offset Agreement 1969/71\nI. Introductory Remarks\nUnder the German-American Offset Agreement of August19, 1969\nan amount not exceeding the equivalent of DM 600 million will\nbe made available by Kreditanstalt für Wiederaufbau (KfW) to\nassist in the financing of direct investments by German firms\nin the U.S.A. The relevant funds first raised by KfW on the\ncapital market and invested for a limited period in U.S.\nGovernment or Government Agency securities can finally be\nconverted into financing contributions to German direct\ninvestments in the U.S.A.\nII. Object of Financing\nFinancing contributions may be made to direct investments by\nGerman firms in the U.S.A., in particular for investments of\nsmall and medium-sized firms that might not otherwise have\nready access to the capital márket.\nSuch direct investments may either be in the form of a new\nestablishment of an enterprise in the U.S.A., which the German\ninvestor undertakes by itself or jointly with American part-\nners, or the purchase of a stockholding in an already existing\nU.S. corporation. However, only new investments are eligible\nfor financing under this program; refinancing of investments\nalready made or under way will be excluded.\nA further prerequisite for the granting of financing contri-\nbutions is a well-scrutinized and profitable project, the\nproper execution of which is guaranteed.\nUNCLASSIFIED\nGERALD FORD LIBRARY\nEnclosure # 1\nUNCLASSIFIED\nof Frankfurt's A- 153\nGerman Firms in the U.S.A.\nTotal: 176\nof which Manufacturers:\n46\nDivision by Branches:\nManufacturers of Machinery and Machine Tools\nPlastics and Rubber Working Machinery\n4\nTextile Machinery\n10\nMining and Oil Field Machinery\n4\nConveying Systems\na\nGERALO FORD LIBRARY\nWood Working Machinery\n2\nFood Industry Machinery\n3\nWire Weaving and Fabricating Machines\n2\nPaper and Packaging Machinery\n4\nCryogenic Machinery\n2\nConstruction Machinery\n2\nOffice Machinery, Cash Registers\n4\nGraphic Machinery\n2\nMetals and Metal Products\n13\nSteel and Iron\n5\nNon-ferrous Metals\n2\nInstruments and Fittings\n9\nElectrical and Electronic Industry\n30\nComponents\n4.\nConsumer Goods, Household Appliances\n14\nElectromedical Apparatus, Communications\n4\nMotor Vehicles, Motors, Aircraft\n8\nHoldings\n1\nChemical Industry\n31\nPlastics\n7\nPharmaceutics\n5\nEssential Oils and Products\n3\nForwarding and Transportation\n8\nChinaware. Glass, Ceramics\n4\nGarment Industry, Sewing Machines\n8\nInsurance\n4\nPhotography\n5\nEngineering Offices\n4\nHail Order Hluses\n1\nJewelry, Costume Jewelry\n1\nPublishing Houses\n2\nCoal\n1\nBanking, Security Trading\n5\nDiscrepancies in the sub-totals are explained by the fact\nthat many companies are active in more than one branch.\nUNCLASSIFIED\nEnclosure # 2\nUNCIASSIFIED\nof Frankfurt's A-153\n2\nIII. Methods of Financing\nIn the interest of a most flexible and versatile handling\nof this financing instrument, the following contributions\nmay be made to assist in the financing to be arranged by\nthe relevant German investor:\n- a stockholding of KfW, for a limited period, in\nthe American subsidiary of the German investor,\n- the granting of convertible loans, in special cases\nalso the granting of other than convertible loans,\nto the American subsidiary of the German investor.\nThese measures may also be combined with one another.\nThe Offset Agreement stipulates that the financing contri-\nbutions may not exceed 50 percent of the total investment\nto be arranged by the German firm, i.e. the KfW-portion must\nnot exceed the amount to be paid by the German investor out\nof its own resources. For projects of firms having already\nmade investments in the U.S.A. or belonging to a group of\ncorporations that has already invested in the U.S.A., the\nfinancing contribution per investment will not exceed\nDM 32 million.\nThe financing contributions will on principle be given on a\nlong-term basis. In general, the maximum will be a term of\n10 years, in exceptional cases of up to 15 years. The other\nconditions will depend on KfW's procurement costs for\nraising the funds.\nContracting partner of K1W will in the case of loans be the\nAmerican corporation in which the German investor interested\nin obtaining a financing contribution undertakes a direct\ninvestment. Supplementary contracts with the German investor\nwill be required if the American firm cannot furnish adequate\nsecurity for the loan; in the case of stockholdings for a\nlimited period, these contracts will, inter alia, determine\nthe time and the conditions of the subsequent purchase of such\nstockholding by the investor.\nThe scope of KfW's influence within the framework of such\nfinancing contributions will mainly depend on the risk\ninvolved and on the form of its engagement; KfW will not\nexercise any management functions.\nGERAL FORD LIBRARY\nUNCLASSIFIED\nEnclosure # 2\nUNCLASSIFIED\nof Frankfurt's A-153\n3\nIV. Procedure\nInquiries regarding the granting of financing contributions\nare to be addressed to KPW (6000 Frankfurt am Main, Palmen-\ngartenstrasse 5-9). Although it will on principle be the\nAmerican subsidiary of the German investor that will become\nthe borrower, resp. the firm in which KfW's stockholding\nwill be held, it is nevertheless advisable for the German\ninvestor to establish contact with KfW already at an early\nstage of the investment project. The application may also\nbe submitted via the investor's German bankers and should\ninclude details of the intended investment.\nBERALD FORD LIBRARY\nUNCLASSIFIED\nFebruary 19, 1973\nTo:\nMr. Ralph Bryant\nFrom: R. F. Gemmill\nSubj: Mills' proposal to suspend U.S. taxes on interest and dividends\nof foreigners\nAs reported in the Washington Post (Feb. 17, 1972, page A-3),\nRep. Mills proposed \"an immediate temporary suspension of U.S. taxes\non interest and dividend payments earned by foreigners on investments\nin this country.\" The purpose of this action would be to encourage\nan inflow of foreign capital. The following comments might be made\non this proposal:\n1) A temporary suspension of U.S. taxes on foreign investment\nincome would not attract foreign long-term capital, since the benefits\nwould only be temporary. Although such a measure could, in theory,\nstimulate inflows of short-term capital, it should be noted that\ninterest paid to foreigners on bank deposits is already exempt from\nU.S. taxes (and will be until the Foreign Investors Tax Act comes\ninto force at the end of 1975). Moreover it is not clear that it\nis in the U.S. interest to seek to stimulate short-term inflows\n(which might well have the effect of preventing needed exchange\nrate adjustment.)\n2) A \"permanent\" removal of U.S. taxes from foreign\ninvestment income could attract some additional foreign long-term\ncapital inflow. Although no quantitative estimate of the added\ninflow can be provided, it should be noted that: (a) most of the\nBERMED FORD LIBRARY\n- 2 -\nforeign long-term investment in the United States at present comes\nfrom industrialized countries with which we have tax treaties:\n(b) the treaties provide for relatively low rates of U.S. withholding\ntax on foreign income; (c) foreign taxpayers can generally claim\ncredit against their foreign tax liabilities for any U.S. taxes\nwithheld. Elimination of U.S. taxes on foreign investment income\nwould benefit principally foreign investors from countries that\ndo not have tax treaties with the United States and/or investors\nwho pay no foreign taxes (and hence cannot claim credit for U.S.\ntaxes paid.)\n3) The Fowler-McKinney Task Force, established by President\nKennody in 1963 to recommend measures that might encourage foreign\ninvestment in the United States, considered the advisability of\neliminating U.S. taxes on foreign investment income. The report\nmakes no formal mention of this issue, but in my judgment discussions\nby the Task Force clearly indicated that the reason for not making\na favorable recomendation on the issue was the desire not to establish\nthe United States as a major tax haven.\n4) A general tax exemption for foreign investors might\nincrease the ease of tax evasion by U.S. residents who could acquire\nforeign addresses.\nOFFICE BECEINED\n6N:1:38\nGERALI LIBRARY\nkedebye\nBOARD OF СОЛЕВИОВЕ 2121EM\nFEDERAL RESERVE SYSTEM\nBOARD GOVERNORS\n1973 AUG-7 PM 1:38 1:\nOFTHE CHAIRMAN\nOFFICE\ngonerSu squaress*\nINCLOSES the 0000 of pux GASBJON 82 n'e' residence apo conrq sednire\nr) V Securety CUX exemption Joz goretBu гилеврода wrape\nque nurseq ⑉ 0 mulox FUX релеи\"\nc\n, on cue reans noa spe quarno DOE CO веспрудар\nPA the Jose дохое crouzra spec cue LOSSOU for DOE meytuR\ntheought XII at and cousal atds to подздат INITION on assiss\n0'8\" CU200 ou gorerBu receive* me rebors\n30 add bezeblance RECEIVE betteU ods at\ngeneral I'll raes to recomming movenzes coup mq8pc toney&u\n3) THE JUSE Lonce' ph prosidenc\ncoxes burg\")\nauo box DO $10.00 (oug perce counos claim CIGATE [oz 0'8\"\nTo\\bas estate boothe add d.t.v xed avad for ob\n3003 mort storesval mylexol vileqtoatzq streand bluow\nof n'a' pexes ou record\nexects eBurnec spere goreyBu CVX gok end n'a' EXX08\nCUX or gonerRo Income) (c) goner@g cumbolers CUD croim\n(P) rue bronge for for LOCOO or n's\"\nfrom compretes step aproy no реде FOX CLOUDION)\ngozeyBu you8-com TO the aurseq proces UC breasup come\nS .\nBOARD OF GOVERNORS\nOF THE\nFEDERAL RESERVE SYSTEM\nOffice Correspondence\nDate August 7, 1973\nTo\nGovernor Robert C. Holland\nSubject:\nFrom\nCharles J. Siegman\nC55\nRalph Bryant requested that I send you the attached note\nby Robert Gemmill responding to your July 17 memo to Chairman Burns.\nYour memo has been circulated to others in the Division,\nand further thought is being given to the issues raised in the memo.\nIn addition to assessing means of a shorter-term nature along the\nlines suggested in your memo that attempt to increase the attractiveness\nto foreigners of dollar holdings, several economists are evaluating\nlonger-term proposals that aim to reduce the potential of undesirable\nshifts of foreign dollar holdings. As part of the Division's work\ndealing with international monetary reform, we are appraising the\nmerits and limitations of proposals to consolidate outstanding\ndollar balances and proposals that would establish rules for the\nmanagement of countries' currency reserves.\nAttachment.\ncc: Chairman Burns\nGovernor Daane\nFORD is LIBRARY GERALD\nBOARD OF GOVERNORS\nOF THE\nFEDERAL RESERVE SYSTEM\nOffice Correspondence\nDate July 20, 1973\nTo\nMr. Ralph C. Bryant\nSubject: Initial reactions to\nFrom\nRobert F. Gemmill\nGov. Holland's memo of July 17\n(1) Tax deductions on returns paid to foreign owners of U.S. securities\na. Interest earned by foreigners on bank deposits (and, I believe,\nalso on acceptances) is presently exempt from U.S. taxes, and will be until\nthe Foreign Investors Tax Act comes into effect at the end of 1975. The\neffective date of the Act might be further postponed, but that would hardly\nappear necessary now if the policy objectives are short-term.\nb. We could seek an amendment of U.S. tax laws to exempt other\nshort-term instruments (Government securities), but I doubt that this would\nhave any practical significance, given current interest rates.\nc. Some problems involved in suspension of U.S. taxes on interest\nand dividend payments to foreigners are set forth in the attached memo\n(February 19, 1973) -- especially points 2-4.\n(2) Possible reduction of reserve requirement on Eurodollar borrowings\na. Our view may depend in good part on our assessment at any\nparticular time of the marginal source of funds to the Eurodollar market.\nIncreased Eurodollar borrowings by U.S. banks might lead to an increased\nU.S. payments surplus on official settlements -- if, for example, Japanese\nwere supplying funds to the Eurodollar market, and in the process reducing\nJapan's official reserves. Alternatively, if increased Eurodollar borrow-\ning by U.S. banks raises Eurodollar deposit rates the main impact could be\non the demand for EEC currencies, with a consequent improvement in the\ndollar exchange rates of these currencies.\nGERALD FORD LIBRARY\nMr. Bryant\n-2-\n(b) If we find that we do want to promote a firming of deposit\nrates in the Eurodollar market, I would prefer to seek it through a trans-\nfer of official balances from the market to the U.S., rather than through\nshort-term borrowing by U.S. banks. Reduction in outstanding official\nplacements in the market is more consistent with our long-term objectives\nthan is an increase in interest-sensitive borrowings.\n(3) Treasury borrowing in the Eurodollar market\n(a) The Treasury and Ex-Im notes issued in 1971 had two purposes\n-- to mop up Eurodollars and to reinforce the incentives banks had to retain\nEurodollar bases. Any Treasury borrowing at the present time would only\nserve to mop up Eurodollars. It might be regarded as a first bite of\nfunding.\n(b) If the Treasury is to issue special, high-interest dollar\nobligations to foreigners, in order to firm Eurodollar rates, as under #2\nabove, it would appear most appropriate for the Treasury to issue the\nsecurities selectively to foreign central banks -- facilitating the shift-\ning of official funds from Eurodollar placements to U.S. securities.\nWith any special Treasury issue, it will be necessary to avoid\nhaving foreign private investors substitute that issue for existing dollar\nassets held in the United States -- and also to prevent similar shifting\nby U.S. investors. Limiting sale of the special Treasury issue to foreign\ncentral banks would help avoid these types of substitution; techniques\nwould have to be developed (if possible) to avoid similar shifting of\nofficial balances from other U.S. instruments.\nBERALD FORD LIBRARY\nMr. Bryant\n-3-\n(4) Treasury borrowing of Euro-DM\na: Assuming that the Treasury acquired DM in the process\n(and is not issuing a dollar obligation repayable in DM), it will have\nmarks available for sale on foreign exchange markets or for direct sale\nto the Bundesbank. Would we want marks for either of these purposes,\nand if so, wouldn't it be more advantageous to obtain them through swap\ndrawings?\nb. Say's Law may operate here. If we are concerned about\nshifts of foreign reserves from dollars to marks won't we merely\ncompound the problem by issuing U.S. Government obligations denominated\nin marks? Such an instrument might well be more attractive to foreign\ncentral banks than Euro-DM deposits, or even than deposits in the\nBundesbank.\nc. Since the Euro-DM rate is merely the Eurodollar rate plus\nthe forward premium or discount, wouldn't we be better advised to\noperate directly on either the Eurodollar rate or the forward rate (or\nboth) rather than to sell DM obligations?\nGERALD FORD LIBRARY\nMENRY S. REUSS, WIS.\nWILLIAM S. MOORHEAD. PA.\nBILL FRENZEL, MINN.\nTHOMAS M. REES, CALIF.\nJOHN B. CONLAN, ARIZ.\nRICHARD T. HANNA, CALIF.\nU.S HOUSE OF REPRESENTATIVES\nCLAIR W. BURGENER, CALIF.\nWALTER E. FAUNTROY, D.C.\nANDREW YOUNG, GA.\nFORTNEY H. (PETE) STARK, IR., CAL\nSUBCOMMITTEE ON INTERNATIONAL FINANCE DEC 21 PM 12: 34\nROBERT G. STEPHENS, JR.,\nOF THE\nCOMMITTEE ON BANKING AND CURRENCY\nNINETY-THIRD CONGRESS\nOFFICE OF RECEIVED THE CHAIRMAN\nWASHINGTON, D.C. 20515\n# 25xx\nDecember 19, 1973\nB4a\nDr. Arthur F. Burns\nChairman\nBoard of Governors\nFederal Reserve System\nWashington, D.C. 20551\nDear Chairman Burns:\nWe were so very pleased to have you testify\nbefore the Subcommittee on International Finance.\nYou are a most cordial and expert witness.\nDuring the hearings, the matter of foreign invest-\nment in the United States came up, and you said that you\nwould be interested in seeing our staff reports on the\nsubject. Accordingly, I enclose a copy of the two reports\non Foreign Direct Investment in the U.S. and on Foreign\nInvestment in U.S. Stocks and Bonds. The copy of the\nformer report does not include the appendices, as they run\nto several hundred pages and have not yet been reproduced.\nHowever, we will furnish any that are of interest to you\nand will send you the complete report as soon as it is\nprinted. We would certainly welcome any comments you may\nhave on these reports.\nThank you again for appearing before the Subcommittee\nand for joining me for lunch afterwards. With best wishes\nand warm regards, I remain\nSincerely Havy yours,\nHenry B. Gonzalez\nMember of Congress\nChairman\nEnclosures (2)\nFORD i LIBRARY GERALD\nFOREIGN DIRECT INVESTMENT\nIN THE UNITED STATES\nSTAFF REPORT\nof the\nSUBCOMMITTEE ON INTERNATIONAL FINANCE\nCOMMITTEE ON BANKING AND CURRENCY\nHouse of Representatives\n93rd Congress, First Session\nOctober 1973\nFORD i LIBRARY GERALD\nw\nFOREIGN DIRECT INVESTMENT\nb\nIN THE UNITED STATES\nSTAFF REPORT\nof the\nSUBCOMMITTEE ON INTERNATIONAL FINANCE\nCOMMITTEE ON BANKING AND CURRENCY\nHouse of Representatives\n93rd Congress, First Session\nOctober 1973\nLIBRARY GERALD ? FORD:\nPreface\nTwice during the last two years the Subcommittee on Inter-\nnational Finance was called on to approve a devaluation of the dollar.\nIn the hearings on this legislation and in other hearings held by the\nSubcommittee, it became clear that improvement in the U.S. balance\nof payments and rehabilitation of the dollar are multifaceted problems\nand that devaluation alone is not sufficient.\nOne of the most significant problems facing the dollar is\nthe overhang - the enormous foreign holdings of U.S. dollars. The\noverhang is a major cause of the dollar's problems in the foreign\nexchange markets and a major hurdle to monetary reform.\nThe rapidly increasing amount of foreign direct investment\nin the U.S. may represent an important means of reducing the overhang\nand improving the U.S. balance of payments, according to witnesses\nappearing before the Subcommittee. The boom in foreign direct invest-\nment in the United States may be partly the result of the dollar devaluations.\nIn view of the Subcommittee's concern about the dollar over-\nhang and its interest in the effects of the dollar devaluations, the Staff\nof the Subcommittee examined foreign direct investment in the United\nStates and prepared this material on the subject.\nIn the context of this report foreign direct investment means\nsubstantial ownership and control of complete business entities - fac-\ntories, commercial facilities, corporations. The term does not include\nportfolio investment in debt and equity securities, which does not involve\ncontrol of management decisions or active operation of a business.\nFORD LIBRARY\nFOREIGN DIRECT INVESTMENT IN THE UNITED STATES\nCONCLUSION:\nForeign direct investment in the United States is booming.\nIn 1973 it resumed the upward trend that began in 1966 but which was\ninterrupted by international monetary crises in 1971 and 1972. Among\nthe principal factors behind the increase in foreign direct investment in the\nU.S. have been the devaluations, and subsequent decline, of the dollar.\nIn the short run the increase in foreign direct investment in the\nUnited States will be beneficial to the U.S. balance of payments and aid\nin reducing the dollar overhang. But over the long term, foreign direct\ninvestment will have a negative effect on the balance of payments and\nresult in a dollar outflow. This negative effect is the exact opposite of\nthe effect of U.S. foreign direct investment abroad, which is a major\npositive contributor to our balance of payments.\nThe increase in foreign direct investment in the U.S. must be\nviewed as a boost for our balance of payments that is almost unrelated\nto the dividend and other outflows to foreigners on their investments here.\nThe outflow will occur whether or not there is any new inflow, for the\noutflow is income to foreigners on previous investments. (In fact 1973\nmay be only the third year since 1962 in which new capital inflows ex-\nceed the dividend and other outflows.)\nFears of foreign domination or control of the American economy\nor industry are not realistic. The amount of foreign direct investment in\nthe U.S. is now, and will continue to be, miniscule compared with the\ntotal U.S. economy and the total assets of U.S. business.\nIntroduction\nIn all of the talk about U.S. investment abroad, it is sometimes\nGERALD FORD LIBRARY\n-2-\noverlooked that many foreign companies produce in the U.S. market\nand make long term investments in a wide variety of business enter-\nprises. Foreign investment in the U.S. is certainly not as large as U.S.\ninvestment abroad, but it is growing rapidly. U.S. direct investment\nabroad has a book value of over $90 billion versus only $15 billion of\nforeign direct investment in the U.S. The investment of foreign capi-\ntal in the U.S. is not a new phenomenum; it is the large volume of invest-\nment that is new. European and Japanese businessmen are flocking to\nthe U.S. in record numbers - acquiring land, and industrial and service\nfacilities; building new factories; buying divisions and subsidiaries of\nU.S. companies; and making tender offers for publicly owned companies.\nThis report examines:\n-The amount of foreign direct investment in the United States.\n-Why foreigners invest in the U.S.\n-Who is investing in the U.S.\nThe balance of payments effects of this investment.\n-The role of States and the Federal Government in attract-\ning foreign direct investment.\nThis reportdoes not deal with foreign portfolio investment in\nthe United States, i.e. investment in stocks, bonds and other securities.\nThe term foreign direct investment covers those investments in which\na foreign company builds new industrial or commercial facilities, ac-\nquires control of a going business, or otherwise makes a long term invest-\nment for the purpose of actively controlling and operating a business.\nFORD\nAmount of Foreign Direct Investment in the United States\nGERALD\nLIBRARY\nRecent activity by foreign industrial firms, especially those\nfrom Canada, Japan and Germany, in acquiring plant sites in the United\nStates indicates that the upward trend that began in 1966 and was inter-\nrupted in 1971 and 1972 has resumed in 1973. The value of foreign investment\n-3-\nin the United States at the end of 1973 may be as high as $15. 9 billion,\nan increase of $1. 5 billion over 1972. Of this $1.5 billion increase,\n$1 billion will be net capital inflows.\nThe value of foreign direct investment in the U.S. rose $708\nmillion in 1972 to $14, 363 million at yearend, following a rise of only\n$385 million in 1971. The 1972 increase consisted of reinvested earn-\nings of $548 million and net capital inflows of $160 million. The latter\nis a net of $302 million in new investments and outflows of $142 million\nin other capital accounts, mostly intercompany accounts.\nThe value of foreign direct investment in the U.S. increased\nsubstantially in the period 1962 to 1972, from $7. 4 billion at yearend\n1961 to $14. 4 billion at yearend 1972. The rate of growth showed a\nmarked increase after 1966: From yearend 1961 to yearend 1966,\nforeign direct investment grew an average of $332 million per year,\nwhile from yearend 1966 to yearend 1972, it grew an average $893 million\nper year. These figures correspond to annually compounded growth\nrates of about 4 percent and 8 percent respectively. (U.S. direct invest-\nment abroad has been growing at a rate of around 10 percent). Addi-\ntional data on the historical trends of foreign direct investment in the\nU.S. may be found in the attached excerpts from the Survey of Current\nBusiness published by the Department of Commerce.\nThe two main components of the annual addition to the foreign\ndirect investment position in U.S. enterprises have been net capital inflows\nand reinvested earnings; valuation adjustments have been small. Of\nthe approximately $7 billion added to the value of foreign direct investment\nin the years 1962 through 1972, $2. 7 billion came from net capital\ninflows while $4.3 billion were reinvested earnings, and there were about\n$100 million in valuation adjustments.\nWhy Foreigners Invest in the U.S.\nWhy should foreigners invest here, and why should there be\nGERALOR FORD LIBRARY\n-4-\nsuch a dramatic increase in the amount of foreign direct investment in\nthe United States? In broad terms, Europeans and Japanese companies\nhave been seeking to establish themselves in the United States, just as\nAmerican companies have moved abroad to be closer to the markets for\ntheir goods and services.\nHowever, the most important reason for the increase in direct\ninvestment has been the devaluation of the dollar. Successive devaluations\nof the dollar and the decline in the dollar since the last devaluation have\nsharply boosted the purchasing power of many foreign currencies in\nterms of the dollar.\nThere are a great many other reasons for the increase in foreign\ndirect investment in the U.S., including:\n-A higher rate of inflation abroad. McGraw Hill Publications\nCo. forecasts that overall inflation in 1974 will be 6.6 percent in the\nCommon Market, 7.5 percent in Japan and 4.0 percent in the U.S. The\nvirus of inflation is spreading worldwide, but it remains lower in the U.S.\n-Shortage of labor in some countries. In recent year S Northern\nEuropean firms have had to import labor, principally from Southern Europe.\n-Improvement in U.S. productivity.\n-Shortage and high cost of land for expansion abroad. U.S.\nplant-site land costs are lower than in many areas located in more densely\n\"\npopulated nations.\n-The rise of protectionism in the United States and the threat\nof U.S. import restrictions and other trade barriers. (U.S. companies\nhave made many investments abroad for precisely this reason, e.g. in\nthe case of the Common Market.)\n-The persistent U.S. balance of payments deficit, the result of\nwhich is the enormous foreign holdings of dollars. Investment in the U.S.\nprovides a good outlet for these dollars owned by foreign companies.\n-Rising labor costs abroad. Hourly compensation in the U.S.\nFORD : GERALD LIBRARY\n-5-\nhas increased at an annual average rate of 6.7 percent since 1967.\nIn Canada hourly wage rates have risen 8. 1 percent since 1967. In\nJapan, they are up 17 percent. Today the average West German fac-\ntory worker makes $1.00 less than his American counterpart. Two\nyears ago the wage differential was $2.00, according to the Bureau of\nLabor Statistics. Another way of measuring the extent of the change\nis to convert 1972 unit labor costs into dollars at the exchange rates\nprevailing as of June, 1973. From 1970 U.S. unit labor costs increased\nby only 3 percent. On the other hand, Italian costs went up 36 percent,\nFrench costs 44 percent, Belgian costs 52 percent, and both Japanese\nand German unit costs 60 percent.\n-A declining stock market which has put the cost of buying the\nearning power of many American firms at bargain basement levels.\nMany U.S. stocks are selling today at record low prices in relation\nto earnings. Foreigners can therefore buy cheap stocks with cheap\ndollars.\n-Countries which have policies of providing incentives for com-\npanies to invest abroad. Japan gives tax breaks to companies invest-\ning in new U.S. ventures.\n-The 1967 Securities and Exchange Commission action, in\nwhich it modified its rules regarding financial reporting of foreign-\nowned U.S. firms. The new regulations allow such firms' accounting\npractices to deviate from those commonly employed by U.S. firms in\norder to mesh better with those of their foreign parents.\n-The merger movement among European firms. Given the\nscale of the U.S. economy, the size of the required investment in the\nU.S. is large by European standards. The larger, merged firms have\nbeen better able to meet the U.S. market challenge since the late 1960's.\nIn its brochure on foreign direct investment, the Bank of America\nidentifies other advantages and reasons for foreigners investing in the U.S.:\nGERALD FORD LIBRARY\n-6-\n-Facilities in the United States put non-U. S. firms within the\nworld's richest market and enhance their ability to compete for U.S.\nbusiness.\n-Firms with facilities in the United States have more ready\naccess to the large U.S. equity and debt markets than those in overseas\nlocations.\n-Numerous industrializing communities in the United States\nhave programs to encourage new industry by assisting in its financing,\nlocation and employee training.\n-It gives non-U.S. firms a close-up look at methods being for-\nmulated to respond to the environmental and consumer-protection con-\ncerns now arising in the United States and aids overseas management\nto prepare for the time when these issues will be primarily considera-\ntions in their home countries.\n-It is easier for such firms to keep abreast of and to incorpor-\nate new technology developed in the United States. (Of course, the foreign\nfirms also bring technology when they come into the U.S.)\n-It enables overseas firms to become privy to and utilize manage-\nment and marketing techniques originating here.\nOf course there are some fears of foreign companies about\ninvesting in the U.S., including:\n-Antitrust laws, despite assurances from the U.S. Government\nthat the laws' intent is to preserve - for foreigners and Americans alike -\na competitive, non-cartelized economy.\n-Securities and Exchange Commission reporting requirements,\nthough this fear has eased since 1967, when the SEC modified its rules.\n-Unions. European and Japanese companies, which are more\naccustomed to congenial attitudes of company unions, are wary of militant\nU.S. unions.\nImmigration regulations. Foreign businessmen have run into\nsome difficulty bringing managerial and technical workers to this country.\nGERALD FORD LIBRARY\n-7-\n-Foreign companies think that the U.S. is too big a market.\nThey think in terms of national markets, the kind that they are used to.\nIn its assistance programs, the Department of Commerce shows foreign\ncompanies how regional and area markets within the U.S. market can be\nworked out, where every point in that market can be within one day's\nshipping to principal customers.\nWho is Investing in the United States\nAt the end of 1972 the country with the largest direct investment\nin the U.S. was the United Kingdom, with $4, 581 million out of a total\nof $14, 363 million. In second place was Canada, with $3, 612 million.\nOver 84 percent of the total foreign direct investment in the U.S. is\nheld by four countries: United Kingdom, The Netherlands, Canada and\nSwitzerland.\nAt yearend 1972, the foreign direct investment in the United\nStates was as follows (in $ millions):\nCanada\n$ 3,612\nEurope\n10,441\nUnited Kingdom\n4,581\nEuropean Economic Community\n3,874\nBelgium & Luxembourg\n307\nFrance\n321\nGermany\n807\nItaly\n108\nNetherlands\n2,331\nOther Western Europe\n1, 986\nSweden\n254\nSwitzerland\n1,595\nOther\n138\nJapan\n-132 -\nLatin America and other Western\nHemisphere\n298\nOther\n145\nTotal\n$14,363\nThough Japan has greatly increased its investment in 1973, it\nwas not a major factor through 1972. Japan shows a negative balance\nGERALD FORD LIBRARY\nin the above table, as debt repayments in 1971 statistically pushed the\nvalue of their investment to below zero from $229 million in 1970.\nDespite new inflows in 1972, the balance remained negative at yearend.\nOmitting the loans made by Japanese parent companies to their U.S.\nsubsidiaries, the United States-Japan Trade Council estimates Japanese\ndirect investment in the U.S. to have been $350-500 million. at yearend\n1972.\nDespite the acceleration in investment here by foreigners,\nthere has been little change over the period 1962-1972 in the distri-\nbution of foreign direct investment by country of ownership.\nManufacturing comprises 50 percent of the total foreign direct\ninvestment, while petroleum accounts for 23 percent and insurance and\nother finance, 17 percent. In 1962, the respective percentages were\n38, 19 and 25 percent.\nAt yearend 1972 the industry distribution was as follows (in\n$ millions):\nPetroleum\n$ 3,243\nManufacturing\n7,228\nInsurance and Other Finance\n2,411\nTrade\n523\nOther\n958\n$14,363\nWhich foreign companies are investing in the United States?\nThe Department of Commerce publishes a \"List of Foreign Firms\nwith Some Interest/Control in American Manufacturing and Petroleum\nCompanies in the U.S.\" This list (attached) shows investments from\n21 countries and approximately 600 foreign companies, which own or\nhave major investments in over 900 U.S. companies. The list does not\ninclude American subsidiaries of foreign companies in finance, banking\nand insurance, nor trading companies established solely for sales and\nservice.\nGERALD FORD LIBRARY\nThe Department of Commerce list continues to expand at a\nrapid rate. For example, in September, Kawasaki Motors Corp. of\nJapan announced plans to build a $20 million plant in the U.S. to manu-\nfacture motorcycles. And Volvo of Sweden announced plans to build\na $ 100 million automobile assembly plant in Chesapeake, Virginia.\nMost European owned companies are in the East; most Japan-\nese investments are in the West, notably in Alaska. During the past\ndecade, however, the fastest growth in foreign ownership has been in\nthe South. New York leads the states in foreign owned or controlled firms,\nfollowed by New Jersey, South Carolina, Pennsylvania and California.\nMost of this report deals with the kind of foreign direct invest-\nment where a foreign company builds a new manufacturing facility or\notherwise makes an investment to begin a new product line or introduce\na product from its own country. However, there has been a dramatic\nincrease in 1973 in another type of foreign direct investment: acquisi-\ntion of an American company by tender offer or merger, or by purchas-\ning a subsidiary or division of a company. As discussed elsewhere in\nthis report, among the principal reasons for the increase in this type\nof investment are the low prices in the stock market and devaluations\nof the dollar. Among the investments made in this manner have been\nthe following:\n-A sharply contested tender offer by Liquifin AG, a unit of\nLiquigas S.p.A., the Italian industrial and petrochemicals company,\nfor 52 percent of the shares of Ronson Corp.\n-A $ 105 million cash acquisition by Nestle Alimentana SA,\nthe Swiss-based multinational food-products company, of the Stouffer\nCorp. division of Litton Industries.\n-A $182 million acquisition by an American subsidiary of\nBritish-American Tobacco Co. of 23 percent of the shares of Gimbel\nBrothers, Inc., the department store chain.\nFORD & GERALD LIBRARY\n-10-\n-The purchase of 44. 9 percent of Franklin Stores, a major\ndiscount chain, by Slater-Walker, Ltd. of London.\n-A $290 million takeover bid by Canada Development Corp.,\nan agency of the Canadian Government, for Texasgulf Inc. Texasgulf\nis fighting this bid in the courts.\n-The purchase of Olin Corp. 's aluminum division by the Swiss-\ncontrolled Consolidated Aluminum Corp.\n-The $21. 8 million agreement whereby United Dominions Trust\nLtd., Britain's largest financial house, acquired 90 percent of Commercial\nTrading Co., a privately owned, New York based commercial financing\nfirm.\n-Britain's Lloyd's Bank is moving into California with a $115\nmiliion agreement to purchase nearly all of the stock of the First Western\nBank and Trust €o.\nThe Japanese are closely trailing the British in investment\naggressiveness. Besides buying up real estate, vast stretches of\ntimberland, coal and copper mines in the U.S., the latest Japanese ven-\nture involves an agreement to purchase for $125 million, 50 percent\nof the aluminum processing subsidiary of American Metal Climax Inc.\nFour Japanese companies are estimated to have an investment\nof about $126 million in timber operations in Alaska alone. Japanese\ncompanies, as pointed out in the attachments, are eagerly investing\nin hotels, golf courses and other resort properties, farmland, and land\nfor industrial parks, warehousing operations, fast-food restaurants\nand residential housing.\nThe Japanese have not yet joined the British in the tender offer\napproach to direct investment, as it has not been the traditional Japan-\nese business style.\nThe Middle East oil producing countries are beginning to accumu-\nlate large amounts of dollars from sales of petroleum, and they could\nFORD & GERALD LIBRARY\n-11-\namass a hoard of over $100 billion by 1980 according to many estimates.\nThese Middle East countries are not a factor in foreign direct invest-\nment in the U.S. due to the political climate and their usual preference\nfor portfolio investment. How much these countries may invest in\nthe U.S. is as yet unknown.\nTo complete the picture of foreign direct investment in the\nUnited States would be activity by Communist countries - the Soviet\nUnion is reportedly investing heavily in real estate in the Washington\nmetropolitan area, as well as in the San Francisco bay area.\nBalance of Payments Effects\nThere are several ways in which foreign direct investment\nin the United States affect the balance of payments.\nFirst there is the inflow of dollars for the investment itself.\nIn the balance of payments terminology this is described as new invest-\nment, consisting of the first reported capital inflow to establish or\nacquire a new company or operation in the U.S. and the cost of acqui-\nsition of additional shares of existing companies. The average annual\namount of new investment in the period 1962-1972 was $264 million,\nand the amount in 1972 was $302 million.\nHowever the key figure in the balance of payments is not new\ninvestment but net new investment (or net capital flow), which is a net\nof the new investment and various outflows including such items as loan\nrepayments and intercompany accounts. The net new investment by\nforeigners averaged $250 million per year in the period 1962-1972.\nThe estimate for net new investment in 1973 is $1 billion, but it could\nvary considerably from this figure depending on the outcome of several\nlarge deals which are still being negotiated or litigated.\nThe net new investment inflow for the period 1962-1972 was:\n1962\n$132 million\n1967\n258\n1963\n-5\n1968\n319\n1964\n-5\n1969\n832\n1965\n57\n1970\n1,030\n1966\n86\n1971\n-115\nFORD is LIBRARY GERALO\n1972\n160\nThe decline in 1971 is attributed to the international mone-\ntary crisis that occurred in that year causing potential foreign inves-\ntors to postpone their investments. The low amount of investment in\n1972 was a result of the continuing international monetary uncertainty.\nThe second important factor in foreign direct investment in\nthe U.S. is the outflow of dollars to foreign countries in the form of\ndividends and other payments. Foreigners have been investing in the\nUnited States for many years, and as a result there is an outflow of\ndollars in dividends, branch earnings and interest payments. This\noutflow, which can be termed \"foreigners' balance of payments income\",\naveraged $470 million per year over the period 1962-1972.\nMost current analyses of foreign direct investment in the U.S.\nsay that in the short run such investment will have a positive effect\non the U.S. balance of payments. However in the long run repatriated\ndividends and other payments will more than offset these increased\nflows resulting in a negative effect on the balance of payments, as has\nbeen the case with the United States abroad.\nIn 1972 the U.S. new foreign direct investment abroad was\n$3. 4 billion while earnings on all U.S. investment abroad were $10. 4\nbillion, a $7 billion positive effect on the U.S. balance of payments.\nThis large-income returned to the U.S. was a result of the over $90\nbillion in investments U.S. companies have abroad.\nHence by the nature of the investment process, foreign direct\ninvestment in the U.S. will eventually be a negative factor in the U.S.\nbalance of payments. If in the long run U.S. investment abroad has\nbeen good for our balance of payments, then it is clear that foreign\ninvestment in the U.S. will be in the long run bad for our balance of\npayments. The magnitude of U.S. investment abroad is so large that\nincome on our investments abroad will always exceed foreigners' in-\ncome on their investments here. Hence the overall effect of direct in-\n&\nFORD\nGERALD\nLIBRARY\nvestment in both directions will remain positive.\nThe overall effect of foreign direct investment in the U.S. is\nthe net of (a) net new investment and (b) foreigners' balance of payments\nincome. The total net new investment in the U.S. for the period 1962-\n1972 was $2.7 billion while the foreigners' balance of payments income\nwas $5.2 billion. Therefore there has been a substantial net outflow as\na result of foreign direct investment in the last eleven years, as shown\nin the following table (outflows are shown as minuses):\nOutflows -\nInflows -\nForeigners Balance of\nNet New\nPayments Income\nInvestment\n1962\n$ 2242 million\n$ 132 million\n1963\n-284\n-5\n1964\n-269\n-5\n1965\n-367\n57\n1966\n-436\n86\n1967\n-443\n258\n1968\n-468\n319\n1969\n-518\n832\n1970\n-552\n1,030\n1971\n-739\n-115\n1972\n-857\n160\ntotals\n$-5,175\n$2,749\nIn 1973 the foreigners' balance of payments income could be\naround $900 million. Therefore with net new investment of around\n$1 billion, the overall effect of foreign direct investment in the U.S.\non our balance of payments in 1973 may be a positive $100 million.\nAs shown above, during the period 1962-1972 the overall effect\nof foreign direct investment on our balance of payments was negative.\nHowever with the large increase in the amount of foreign investment,\nthe inflows of new investment into the U.S. should exceed the outflows\nfor some years to come. At some point the outflows will begin to ex-\nceed the inflows, as has been the case for other countries which have had\nU.S. investment.\nR.\nFORD\nGERALD\nLIBRARY\n- -14-\nIt is very important to keep the differences in the inflows and\noutflows clear. The outflows (foreigners' balance of payments income)\nwill occur whether or not there is any inflow (net new investment). The\noutflow is income on previous investments. Therefore the estimated net\nnew investment of $1 billion in 1973 is correctly viewed as an almost un-\nrelated boost in the balance of payments and a reduction in the foreign\noverhang of dollars.\nThe U.S. balance of payments also benefits from the import\nsavings that usually occur when the foreign firm begins manufacturing\nproducts here in lieu of exporting to the US. A good example of this\neffect is the planned Volvo automobile assembly plant. Volvo auto-\nmobiles for the U.S. market will be produced here rather than exported\nfrom Sweden to the U.S. (though initially most of the parts to be assem-\nbled will be brought into the U. S.).\nAnother related effect is that exports may result from new\ndirect investment. In the case of Volvo, automobiles may be exported\nto other countries in the Western Hemisphere from the U.S. rather\nthan from Sweden. Hence the new Volvo plant and similar plants may\nreduce imports and also increase exports. But specific data on the\neffects of import sub'stitution and new exports are not available in U.S.\nbalance of payments statistics.\nRole of States and the Federal Government\nThe efforts of the Department of Commerce are mainly directed\nat enc ouraging and assisting foreign direct investments in the United\nStates by the industrialized nations- Western Europe, Canada and Japan.\nThe Department of Commerce has two Industrial Development Attaches\nin Europe to spearhead this program. One is head quartered in Paris,\nwith responsibility for activities in Germany, France, Switzerland,\nAustria, Italy and Spain. The other is in Brussels, handling United\nFORD & GERALD LIBRARY\n-15-\nKingdom, Belgium, The Netherlands and all of Scandinavia. Also\nthe commercial sections of the U.S. embassies in these nations are\nactively working with individual investors as well as doing local pro-\nmotional work aimed at increasing the number of potential investors.\nThe Department of Commerce feels that their most produc-\ntive effort is the \"Invest-in-U.S. A. \" conferences, which they arrange\nin Europe and Japan. These conferences are designed to provide poten-\ntial investors with basic facts about investing and doing business in the\nUnited States and to provide a forum in which State industrial develop-\nment agencies can have face-to-face meetings with the potential investors.\nThe Department of Commerce also organizes State Reverse\nInvestment Missions. These missions, often led by the State's Governor,\nare made up of experts from the States who are capable of providing\nfairly detailed data pertaining to industrial plant locations. The missions\nprospect for new investors, as well as follow up on leads provided by the\nDepartment of Commerce.\nThe Department of Commerce does not encourage or have any-\nthing to do with foreign tender offers or takeovers of American companies,\nan activity which has increased considerably in 1973.\nThe Department of Commerce does not recommend that special\nincentives to foreign investors be offered by the Federal Government.\nIn view of the rising trend of foreign investment in the U.S. and the\nawareness of industrial firms in Canada, Japan and Europe of the need\nto produce here in order to maintain their market positions and to produce\nhere inside potential trade barriers, Commerce officials feel that in-\ncentives are unnecessary.\nMost states offer a wide variety of incentives to companies to\nlocate in their states (not just foreign companies, but U.S. companies as\nwell). The incentives include tax credits and exemptions, worker training\nand recruitment, financing assistance, and plant site location services,\nLIBRARY GERALD R. FORD\nincluding state-built industrial parks. Some states maintain permanent\noffices in Europe to scout potential investors.\nAs stated in the Council on International Economic Policy\nAnnual Report (March 20, 1973):\nThe United States has always had a policy of welcoming\nforeign investment. While total foreign holdings here amount\nto less than half of comparable American investment abroad,\nthese inflows of capital are nevertheless regarded as having\na significant and beneficial impact on our income, employment\nand our balance of payments.\nThere are no monetary exchange controls on such\nforeign investments and no requirements limiting the re-\npatriation of capital or of earnings. Our embassies abroad,\nas well as special missions from individual states, actively\nencourage foreign direct investment in this country.\nU.S. antitrust laws are sometimes cited as restric-\ntive of foreign investment. Like other U.S. laws, however,\nantitrust regulations apply with equal force to all U.S.\ndomiciled firms, regardless of the nationality of their ownership.\nThe Department of Commerce prepared an \"Informal Survey\nof Legal Provisions Affecting Foreign Investment in the United States\" in\nMarch, 1971 (attached). This survey points out that the basic general\npolicy of the United States is to admit and treat capital on a basis of\nequality with domestic capital. However, in examining possible varia-\ntions from this general policy, it should be noted that a substantial por-\ntion of the jurisdiction over doing business in the United States belongs\nto the states. Federal laws concerning foreign investment in the U.S.\ngenerally apply to enterprises considered sensitive either because of a\nclose relationship with national defense, because they play a fiduciary\nrole, or because they involve the exploitation of certain natural resources.\nSuch enterprises include fresh water shipping, domestic radio commu-\nnications, domestic air transport, hydroelectric power and mineral\nexploitation on Federal lands.\n&\nFORD\nGERALD\nLIBRARY\nAs the level of foreign direct investment in the United States\nincreases, there may be a rising concern that foreigners may take over\nor dominate the U.S. economy and industry. But in fact fears of foreign\ndomination or control are unfounded.\nForeign direct investment in the U.S. is miniscule compared\nwith the total U.S. economy and will remain so. For example, gross\nprivate domestic investment in the U.S. (from the GNP accounts) in\n1972 was $178 billion, while net new investment from abroad is expected\nto be around $1 billion in 1973. The total foreign investment in the\nU.S. of $14. 4 billion at yearend 1972 is insignificant compared with\ntotal assets of all corporations in the U.S. of $2. 4 trillion and total\nnet worth of $728 billion (as of 1969, the most recent figures avail-\nable).\nThe value of foreign direct investment in the U.S. may grow\nat an annual rate of around 8 to 10 percent on a base of $15 billion. At\nthis rate of growth it does not seem likely that foreigners will ever\ncome close to controlling U.S. industry. In fact foreigners may have\nmore cause for concern about U.S. investment abroad, which is growing\nat an annual rate of close to 10 percent on a 1973 base of over $90 billion.\nThere is certainly the possibility that foreign companies by\ninvesting in the U.S. may at some time control large shares of some\nmarkets in the U.S. (In fact in some cases now foreign companies\nhave substantial shares of markets without direct investment, e.g.\nthe export of compact cars to the U.S. and raw materials such as nickel\nof which the U.S. does not have sufficient supplies). But is unlikely\nthat foreign companies could control many markets or industries given\nthe enormous size of the U.S. economy compared with the potential amount\nof foreign investment in the U.S.\nAmericans are now getting the opportunity to see what other\ncountries have experienced - investment from abroad. For years U.S.\nbusiness has invested abroad and as a result has leading market shares\nand percentages of invested capital in many industries in many foreign\nFORD & GERALD LIBRARY\ncountries. It is likely that the reverse will happen on a lesser scale in\nthe United States.\nThere is no cause for alarm that foreign interests will dominate\nor control the American economy. U.S. investment abroad has been\ngood for the United States and for the world economy; foreign invest-\nment in the United States will be good for our economy and the world's.\n*****\nList of Attachments\nLetter from Frederick B. Dent, Secretary of Commerce to Chairman\nHenry B. Gonzalez, Subcommittee on International Finance.\nSeptember 7, 1973.\nForeign Direct Investments in the United States in 1972. Survey of\nCurrent Business. August, 1973.\nForeign Direct Investments in the United States, 1962-71. Survey\nof Current Business. February, 1973.\nInformal Survey of Legal Provisions Affecting Foreign Investment in\nthe United States. Bureau of International Commerce, U.S.\nDepartment of Commerce. March, 1971.\nEuropeans, Japanese Find the Time is Ripe to Acquire U.S. Firms.\nThe Wall Street Journal. June 22, 1973.\nForeigners Reverse Tide by Investing in the U.S. The Money Manager.\nSeptember 4, 1973.\nEuropean Direct Investments in the United States. Harvard Business\nReview. July-August, 1973.\nWave of Foreign Investors. The Washington Post. June 24, 1973.\nFORD is LIBRARY 9ERV70\nNet Foreign Investment in the U.S. May Rise Six-Fold to $1 Billion\nin 1973. The Money Manager. August 6, 1973\nForeign Aluminum Expands in the U.S. Business Week. September 29, 1973.\nTexasgulf Fights a Canadian Takeover. Business Week. August 18, 1973.\nMultinationals: Foreigners Search for U.S. Acquisitions. Business\nWeek. May 19, 1973.\nThe Foreign Invasion. Time. April 2, 1973\nJapanese Investment in the United States, Council Report No. 60.\nUnited States-Japan Trade Council. October 4, 1973.\nJapanese Trading Companies, Flush with Cash, Are Eagerly Investing\nin U.S. Real Estate. The Money Manager. May 21, 1973.\nJapanese Concerns Lift Direct Investing Overseas. The New York Times.\nApril 15, 1973.\nJapan's Foreign Investment Machine (excerpts). Business Week.\nMarch 24, 1973.\nWelcome Mat for Foreign Companies - States Ask Japanese to Create\nU.S. Plants. The New York Times. February 18, 1973.\nDirect Foreign Investment in the United States. Bank of America,\nJanuary 1973.\nForeign Direct Investors in the United States: List of Foreign Firms\nwith Some Interest/Control in American Manufacturing and\nPetroleum Companies in the United States. U.S. Department\nof Commerce. October 1973.\nForeign Business Investments in the United States. U.S. Department\nof Commerce, Office of Business Economics. 1962.\nCensus of Foreign-Owned Assets in the United States. U.S. Treasury\nDepartment. 1945.\nForeign Investment in the United States-A Danger to Our Welfare and\nSovereignty? Federal Reserve Bank of St. Louis Review.\nOctober 1973.\nNASDA Efforts in Attracting Foreign Direct Investment. National Associa-\ntion of State Development Agencies. September 1973.\nPolicy Statement on Foreign Investment in the United States with draft\ntask force report. Chamber of Commerce of the United States\nof America. November 9, 1973.\nJapanese Investments in Hawaii, Hawaii '73 Annual Economic Reveiw.\nBank of Hawaii, Honolulu, Hawaii. August 1973.\nForeigners Invest in U.S. Coal Operations. The Wall Street Journal.\nDecember 3, 1973.\nLIBRARY GERALD FORD\nFOREIGN INVESTMENT IN U. S. STOCKS AND BONDS\nSTAFF REPORT\nof the\nSUB COMMITTEE ON INTERNATIONAL FINANCE\nCOMMITTEE ON BANKING AND CURRENCY\nHOUSE OF REPRESENTATIVES\n93rd CONGRESS, FIRST SESSION\nNovember 1973\nFORDO & 074870 LIBRARY\nPREFACE\nDuring the last two years the world has been in a state of\nmonetary crisis - seemingly a perpetual crisis. The U. S. dollar\nhas been a major cause, participant, and victim of this crisis.\nTwice during this two-year period the Subcommittee on International\nFinance has processed legislation modifying the value of the dollar.\nAnd during this period the Subcommittee has held special hearings\nto review the progress toward monetary reform - a reform revolving\nto a great degree around the problems of the dollar. In fact, the\nkey to the entire problem of a satisfactory monetary system (and\nreasonable trade arrangements as well) is the rehabilitation of the\ndollar.\nThe United States has been having serious balance of payments\nproblems, resulting in enormous foreign holdings of dollars. Current\nforecasts of the balance of payments situation are not optimistic about\na reduction in the amount of foreign held dollars. This \"overhang\" of\ndollars is a hurdle to monetary reform and an irritant in the foreign\nexchange markets.\nThe problems of the dollar cannot be solved easily or with a\nsingle action. While the solutions to the problems can be complex, the\nessence is simply - bring the dollars home! The U.S. securities\nmarkets offer outstanding possibilities to attract some of these foreign\nowned dollars and thereby reduce the overhang.\nFORD & LIBRARY GERALD\nFOREIGN INVESTMENT IN U. S. STOCKS AND BONDS\nCONCLUSION\nThe Staff of the Subcommittee on International Finance\nrecommends legislation to eliminate the withholding tax imposed by\nthe United States on interest and dividend payments to foreigners.\nRemoval of this tax will play a significant role in the rehabilitation\nof the U. S. dollar by reducing the enormous overhang of foreign-\nowned dollars. It may also attract new foreign capital into important\nhousing and other securities markets which are short of capital.\n*\n*\n*\n*\nSince the 1930's the United States has imposed taxes at a\nrate of 30% on interest and dividend payments to foreigners. This tax\nhas inhibited the flow of capital into the United States and has produced\nlittle tax revenue. In a letter to Chairman Gonzalez, Mr. Nicholas\nA. Rey, Vice President of Merrill Lynch, Pierce, Fenner & Smith wrote\nthat elimination of the tax would be an important stimulus to significantly\nincreased flows of foreign long-term capital to the United States.\nElimination of the tax on interest and dividend payments to foreigners\nwould:\n-Help bring home substantial amounts of the over $80 billion\nhel in private hands abroad.\n-Yield significant benefits to the U. S. balance of payments.\nBERALD FORD LIBRARY\n-Increase the flow of funds into the U. S. real estate and\nbuilding industries by making such fixed income investments as\nmortgages and real estate investment trust shares attractive to\nforeigners.\n-Increase foreign investments in U.S. corporate bonds and\nyield oriented common and preferred stocks such as those issued by\nU. S. utility companies.\n-Tend to reduce interest rates in the United States.\n-Help to re-establish the United States as an international\nfinancial center by making U.S. investments competitive with the\nEurodollar and Eurobond markets which are not subject to withholding\ntaxes.\nPaul Heffernan wrote in The Money Manager of July 23, 1973:\n\"As for stocks and bonds issued in the United States under the\nSecurities and Exchange Commission surveillance, the 30% withholding\ntax enforced by Uncle Sam on interest and dividend income to foreigners\nhas become an anachronistic deterrent to any reduction of the overhang\nof foreign-owned dollars that right now is admittedly the most formidable\nbarrier to the dollar winning lasting stability in the foreign exchange\nmarket. This depression-born official tax psychosis continues to\nprevail, seemingly unmoved by the reasons for the collapse of the\ndollar in the international market and the need for applying resuscitatives\nwhen called for. \"\nThe United States imposes taxes at a flat 30% rate on gross\ninterest and dividend payments to foreigners. The tax is withheld at\nthe source of the dividend or interest payment. The 30% rate has been\nFORD\n-2-\nGERALD\nLIBRARY\nreduced or eliminated for residents of a number of industrialized\ncountries with which the United States has double taxation treaties.\nIn no case is the tax rate below 15% for dividends even for countries\nfor which the tax treaties have entirely eliminated the withholding tax\non interest income.\nThe United States does not have tax treaties with many of the\ncountries which are potentially significant sources of investment\ncapital for the U. S., e.g., Hong Kong and countries of the Middle\nEast and Latin America, And it is doubtful that the U. S. will have tax\ntreaties with these countries in the foreseeable future.\nMany market observers feel that without this tax, foreign held\ndollars would flow more readily into the U. S. securities markets. The\nU. S. markets have a breadth, depth and variety of investment media\nfound nowhere else in the world. In the last fifteen years, foreigners\nhave been net purchasers of U.S. corporate securities in every year\nbut two. However, foreigners have purchased stocks principally\nfor their growth potential (there is no capital gains tax for foreigners).\nRemoval of the withholding tax on dividends may therefore greatly\nincrease capital flows into U.S. equities since many foreigners are also\nyield oriented.\nForeigners have made only minimal investment in interest-\nbearing debt securities in the United States. Those foreigners wishing\nto purchase fixed income dollar investments can invest in the Eurodollar\nmarket where there is no withholding tax. Removal of the U.S. with-\nholding tax would permit the purchase of a variety of debt securities\nincluding corporate bonds, convertible bonds and mortgages.\nFORD\n-3-\nGERALD\nLIBRARY\nIt is impossible to make an accurate prediction of the extent\nto which sales of U.S. securities to foreigners would increase if\nwithholding taxes were removed. According to the New York Stock\nExchange, one of the leading brokerage firms took a survey of its\ninternational office managers on this issue. Almost all of the\nmanagers felt significant increases in sales of U.S. corporate stock\nto foreigners would result. The estimated increases ranged from 10\nto 30 percent. Indications were that removal of the tax would open\na new market for foreign purchases of U.S. utility common and preferred\nstocks.\nWhile there is no guarantee that removal of the tax will result\nin a greatly increased flow of funds, the cost to the U.S. Government\nwould be insignificant. Total income from the withholding tax was less\nthan $200 million in 1969, the latest year for which data is available. And\nof this amount only about $20 million was attributable to the tax on\ninterest payments. Much of the remaining $180 million may be due to\ninter-corporate dividends. Hence, the tax collected on dividend and\ninterest payments to foreign portfolio investors must be considerably\nless than $100 million. Revenue losses from elimination of the tax\nmay well be offset by increases in the income tax collected, as greater\nincome is generated in the U. S. economy from the new investment here.\nIt may be argued that elimination of the withholding tax would\nbe unfair to the ordinary U.S. citizen, who pays income tax on dividends\nand interest income. However, under the international principles\nof taxation, individuals should be subject to tax in their country of\nGERALD FORD LIBRARY\n-4-\nresidence. The U.S. has already removed the tax for citizens\nof some countries, so complete elimination of the tax would not be\na real change in tax principle. The benefits to be gained from removal\nof the tax should far outweigh any feelings of discrimination by U.S.\ncitizens.\nIf the U.S. withholding tax on foreigners is lifted, other\ncountries will not necessarily follow suit. U.S. citizens may\ncontinue to be taxed by foreign countries on their dividends and interest\nincome. Unilateral elimination of the withholding tax may reduce the\nleverage of the U.S. in obtaining similar tax benefits for U.S. citizens\nin foreign countries. However, it would not reduce the possibility\nof negotiating thorough tax treaties in the long run with those countries\nwhich want treaties.\nA popular argument against removal of the tax may be that\nit would promote tax evasion by U.S. citizens, according to Merrill,\nLynch, Pierce, Fenner & Smith. People may argue that removal of the\nwithholding tax would tend to stimulate tax evasion by Americans who\nwould send their money abroad and reinvest it in the United States. It is\nhighly doubtful that a 15 to 30% withholding tax can be much of an\nobstacle to tax evasion when compared with U.S. income tax rates.\nMoreover, the real incentive already exists in that there is no capital\ngains tax on foreign investment in the United States. The way to prevent\ntax evasion is through continued and enhanced enforcement of the law in\nthe United States, improved reporting requirements by U.S. citizens and\nthrough the exchange of information with tax authorities of other countries\nwhich is built into U.S. tax treaties. In addition, it should be possible\nFORD & LIBRARY\n-5-\nto draft the withholding tax elimination legislation in such a way as\nto have the taxes reapply at the discretion of the President after\na reasonable period of time to countries which are unwilling to\nexchange tax infor mation with the United States.\nCritics may raise the argument that removal of the tax\nwould encourage the takeover of U.S. companies by foreigners. This\nis unlikely since most corporate takeover strategies would not be based\non just the earning of dividends, which would be sent home to the foreign\ncountry. The profit and other financial calculations made by a foreigner\nin deciding whether to take over a U.S. business would not depend on\nthe existence or removal of the tax. In fact in many cases foreigners\nwould reinvest the profits in the business in the U.S. rather than re-\npatriate them in the form of dividends to their own country where they\nwould be taxed. However, to meet the objective of attracting foreign\nheld dollars into U.S. stocks and bonds, it would not be necessary to\nremove the withholding tax on dividends paid by subsidiaries to their\nforeign parent companies.\nThere may be disadvantages in removing the withholding tax,\nbut these seem insignificant compared to the potential benefits. The\npositive effect on the U.S. balance of payments would range from hundreds\nof millions to billions of dollars. An increase of just 30% above the net\namount of stocks purchased in 1972 would result in a new inflow of $680\nmillion. The investment by foreigners in interest-bearing securities has\nbeen so low in the past that it is difficult to extrapolate in calculating\na potential increase. But given the size of the Eurobond market and the\nFORD\nGERALD\nLIBRARY\n-6-\namount of foreign-owned dollars which would be attracted to interest-\nbearing securities, the increase would certainly be in the hundreds\nof millions of dollars.\nThese dollars would be attracted into the United States at a\nlow cost. If the withholding tax on intercorporate dividends were not\nremoved, the cost to the Treasury may be less than $100 million. Yet\nthe taxpayers should benefit by much more than this thr ough the reduction\nof interest rates, the flow of funds into the mortgage and utility securities\nmarkets, and the many positive effects of a stronger dollar.\nAttachments\nLetter from Nicholas A. Rey, Vice President, Merrill Lynch, Pierce,\nFenner & Smith Inc. to Chairman Henry B. Gonzalez, Sub-\ncommittee on International Finance. August 15, 1973.\nLetter from James J. Needham, Chairman, The New York Stock\nExchange to Chairman Henry B. Gonzalez, Subcommittee\non International Finance. July 30, 1973.\nDividend Withholding Tax on Foreign-Held Securities Stymies Inflow\nof Capital, by Peter J. Tanous. The Money Manager.\nOctober 23, 1973.\nLIBERTY GERALD ? FORD\n-7-\nONE LIBERTY PLAZA\n165 Broadway, New York, NY 10006\nMERRILL LYNCH, PIERCE, FENNER & SMITH\nINCORPORATED\nPHONE: (212) 768-1212\nCABLE: MERILSEC NEW YORK\nTELEX: 223366\nAugust 15, 1973\nThe Honorable Henry B. Gonzalez,\nChairman\nSubcommittee on International Finance\nof the Committee on Banking and Currency\nU.S. House of Representatives\nWashington, D.C. 20515\nDear Mr. Chairman:\nIn Mr. Anderson's absence I am taking the liberty of\nresponding to your letter of August 3 concerning the U.S. with-\nholding taxes on interest and dividend payments to foreigners.\nWe strongly believe that elimination of these taxes\nwould be an important stimulus to significantly increased flows\nof foreign long-term capital to the United States. It would:\n-- help to bring home substantial amounts of the\nover $80 billion held in private hands abroad;\n-- yield significant benefits to the U.S. balance\nof payments;\n-- increase the flow of foreign funds into the U.S.\nreal estate and building industries by making such\nfixed income securities as mortgages and real estate\ninvestment trust shares attractive to foreigners;\n-- increase foreign investments in U.S. corporate\nbonds and yield oriented common and preferred\nstocks such as those issued by U.S. utility com-\npanies;\n-- tend to reduce interest rates in the United States;\nFORD i LIBRARY GERALD\nMr. Henry B. Gonzalez\nPage Two\nAugust 15, 1973\n-- help to re-establish the United States as an\ninternational financial center by making U.S.\ninvestments competitive with the Eurodollar\nand Eurobond markets which are not subject to\nwithholding taxes.\n1. The Taxes\nAs you may know, since the 1930's, the United States has\nimposed taxes withheld at the source at a flat 30% rate on gross\ninterest and dividend payments to foreigners. However, the 30%\nrate has been reduced or eliminated for residents of a number of\nindustrialized countries with which the United States has double\ntaxation treaties. Attached is a list of the countries with which\nthe U.S. has treaties and the applicable withholding tax rates.\nThe average U.S. withholding tax is around 15% for residents of\nthese countries.\nThe U.S. does not have treaties which reduce the tax with\nthe vast majority of countries around the world among which are\nnumbered some very substantial sources of funds for investment\nin the United States, for example, Hong Kong, and the countries\nof Latin America and the Middle East. In view of the history of\nunsuccessful attempts to negotiate treaties with many of these\ncountries, it is doubtful that the withholding tax rates could\nbe reduced in the foreseeable future through a negotiation of\ntreaties with a significant number of additional countries.\nWhile the Swiss tax treaty reduces the rate to 15% on div-\nidends and 5% on interest, these rates apply only to Swiss residents.\nThus, under the treaty, when an Arab or Latin American invests in\nthe U.S. through his Swiss account, Switzerland withholds additional\namounts and remits them to the United States in order to bring the\ntax paid by such investors to the 30% rate. It is important to\nnote that the vast majority of funds available in Switzerland for\ninvestment in the United States is for the account of non-Swiss\nresidents.\nFORD\nGERALD\nLIBRARY\nMr. Henry B. Gonzalez\nPage Three\nAugust 15, 1973\nIn many cases, foreign nationals can credit against\ntheir domestic tax bills withholding taxes paid to the United\nStates. However, the procedures involved are cumbersome and,\ntherefore, do not facilitate the free flow of funds to the\nUnited States particularly in the case of individual foreign\ninvestors.\nGEBRADA\nFORD\nGERALD\nLIBRARY\n2. The Effects of Elimination\nWhile it is not possible to project an exact dollar\nfigure for the increase in investment in the U.S. which would\nresult from removal of the taxes, it could well be several bil-\nlions of dollars over time. As you know, foreigners already\nhave a strong appetite for U.S. equities. Their net purchases\nof U.S. common stocks were $697 million in 1970, $836 million\nin 1971 and $2.268 billion in 1972. However, these stocks have\ngenerally been bought for their growth potential. There is no\nU.S. capital gains tax applicable to foreigners. Removal of the\nwithholding tax on dividends would greatly increase flows into\nU.S. equities as substantial numbers of foreigners are also yield\noriented. In particular, it would open several important new\nmarkets for foreign purchasers including utility common and\npreferred stocks and real estate investment trust shares, two\nindustries which are in dire need of new sources of funds, if\ntheir ever increasing capital expenditures are to be financed at\nreasonable costs.\nInvestments by foreigners in interest-bearing debt secu-\nrities have been minimal. While accurate statistics which would\nmeasure these flows are not available, the closest approximation\nindicates that net foreign purchases of U.S. bonds were $347 million\nin 1970 and $233 million in 1971. In 1972 net sales of $81 million\nwere made.\n1\nThese purchases are so low to a considerable degree\n1 These figures are from line 67, Table 6, U.S. balance of payments\narticle, Survey of Current Business, June 1973, U.S. Commerce Depart-\nment. Both the Treasury and Federal Reserve monthly bulletins give\nstatistics which seem to show substantially higher foreign bond\npurchases. It is important to note that these latter statistics\ninclude purchases of Euro-bonds issued by U.S. companies and U.S.\nbonds acquired by international organizations, neither of which\nare subject to U.S. withholding tax and, therefore, must be exclu-\nded for this purpose.\nMr. Henry B. Gonzalez\nPage Four\nAugust 15, 1973\nbecause of the U.S. withholding tax, since foreigners inter-\nested in fixed income dollar investments can buy Euro-dollar\nbonds which carry no withholding tax. Dollar denominated Euro-\nbond sales in the past five years have averaged $2.4 billion\nand were $3.9 billion in 1972. Removal of the tax on interest,\nwould for the first time permit substantial purchases of U.S.\ndebt securities including corporate straight and convertible\nbonds as well as mortgages and government bonds. This will\noccur even if interest rates in the U.S. are somewhat lower\nthan abroad because there is a shortage of first-class, liquid\ninvestments outside the United States.\n3. Implications for U.S. Tax Policy\nThe effect on U.S. Treasury revenues of the removal of\nthe taxes would be slight. Total income from these taxes was\nless than $200 million in 1969, the latest year for which data\nis available. Of this amount only about $20 million was attri-\nbutable to the tax on interest payments, an indicator of the\nsmall size of foreign investment in interest bearing U.S. sec-\nurities. Of the remainder, a significant portion was due to inter-\ncorporate dividends paid by subsidiaries to their foreign parent\ncompanies, a tax which would not need to be removed to meet the\nobjectives outlined herein. In addition, revenue losses from\nremoval of the taxes, should be more than offset through the\nincome tax as greater income is generated in the U.S. economy\nfrom additional investment here.\nSome have argued that removal of these taxes would dis-\ncriminate against American citizens who would, of course, continue\nto be subject to U.S. income tax on their debt. and equity investments.\nHowever, it is a principle of international taxation that individuals\nshould be subject to tax in their country of residence and/or nat-\nionality. In any event, the benefits to be derived for the United\nStates in this time of monetary crisis and high interest rates far\noutweigh any such discrimination. Moreover, removal of the with-\nholding tax would not be unprecedented since our tax treaties\nalready reduce or eliminate the taxes for foreign residents in\nseveral countries. In a sense, this move would eliminate existing\nGERALD FORD LIBRARY\nMr. Henry B. Gonzamez\nPage Five\nAugust 15, 1973\ndiscrimination as between foreigners from different countries.\nIn addition, it is important to note that the U.S. capital gains\ntax does not apply to foreigners. Finally, the United States\nwould join a significant group of industrialized countries,\nwith which we must compete for funds, which do not tax interest\npaid to non-residents.\nOthers have argued that removal of the withholding tax\nwould tend to stimulate tax evasion by Americans who would send\ntheir money abroad and reinvest it in the United States. It\nis highly doubtful that a 15 to 30% withholding tax can be much\nof an obstacle to tax evasion when compared with U.S. income\ntax rates ranging as high as 70%. Moreover, the real incentive\nalready exists in that there is no capital gains tax on foreign\ninvestment in the United States. The way to prevent tax evasion,\nof course, is through continued and enhanced enforcement of the\nlaw in the United States, improved reporting requirements by\nU.S. citizens and through the exchange of information with tax\nauthorities of other countries which is built into U.S. tax treaties.\nIn addition, it should be possible to draft the withholding tax\nelimination legislation in such a way as to have the taxes reapply\nat the discretion of the President after a reasonable period of\ntime to countries which are unwilling to exchange tax information\nwith the United States.\nIt is also argued that the United States would reduce its\nability to negotiate future double taxation treaties because if\nit unilaterally relinquished the right to withhold tax on interest\nand dividends it would reduce its leverage to exact similar con-\ncessions from other countries. The United States already has\ntreaties with most industrialized countries. Developing countries,\nwith whom the U.S. generally does not have treaties, are unwilling\nfor economic and political reasons to diminish their ability to\ntax dividends and interest paid to investors abroad, because this\nwould lead to additional profits remitted abroad. In the face of\nthis, the willingness of the United States to reduce taxes withheld\nfrom citizens of less developed countries does not seem to provide\nmuch leverage in any case.\n*\n*\n*\nGERALD FORD LIBRARY\nMr. Henry B. Gonzalez\nPage Six\nAugust 15, 1973\nWe very much hope that the above information will be\nof interest to you. If you have any further questions or if\nwe can be of further assistance to you on this important matter\nplease let us know.\nVery truly yours,\nNicholas Nicholas A. Rey Rey\nVice President\nNAR/1r\nAttachment\nLIBRARY GERALD ? FORD\nTable of Tax Treaties\nTax Treaties In Effect Between the\nUnited States and Foreign Countries\nRate of U.S. Tax\nEstate\nGift\nWithholding at Source\nTax\nTax\nCountry\nDividends\nInterest\nTreaty\nTreaty\nAUSTRALIA\n15%\n30%\nYes\nYes\nAUSTRIA (Except\nMortgage Interest)\n15%\n-0-\n-\n-\nBARBADOS*\n15%\n30%\n-\n-\nBELGIUM\n15%\n15%\n-\n-\nCANADA\n15%\n15%\nYes\n-\nCONGO, REPUBLIC OF\n15%\n15%\n-\n-\nDENMARK\n15%\n-0-\n-\n-\nFINLAND\n15%\n-0-\nYes\n-\nFRANCE\n15%\n10%\nYes\n-\nGERMANY,\nFED. REPUBLIC OF\n15%\n-0-\n-\n-\nGREECE\n30%\n-0-\nYes\n-\nIRELAND\n15%\n-0-\nYes\n-\nITALY\n15%\n30%\nYes\n-\nJAMAICA*\n15%\n30%\n-\n-\nJAPAN\n15%\n10%\nYes\nYes\nLUXEMBOURG (A)\n15%\n-0-\n-\n-\nMALAWI*\n15%\n-0-\n-\n-\nNETHERLANDS\n15%\n-0-\n-\n-\nNETHERLANDS\nANTILLES (A)\n15%\n-0-\n-\n-\nNEW ZEALAND\n15%\n30%\n-\n-\nNIGERIA*\n15%\n30%\n-\n-\n*Former colony of United Kingdom, now independent. The U.K.\nNORWAY\n15%\n-0-\nYes\n-\nTreaty as it was extended to this colony continues to apply.\nPAKISTAN\n30%\n30%\n—\n-\n**Aden, Antigua, British Honduras, Dominica, Falkland\nRWANDA\n15%\n15%\n-\n-\nIslands, Gambia, Grenada, Montserrat, (St. Christopher,\nSIERRA LEONE*\n15%\n30%\nNevis & Anguilla Federation), St. Lucia, St. Vincent, Sey-\n-\n-\nchelles, U.K. Virgin Islands.\nSOUTH AFRICA,\n(A) Payments to corporations in Netherlands Antilles and Lux-\nUNION OF\n30%\n30%\nYes\n-\nembourg are subject to 30% tax unless special require-\nSWEDEN\n15%\n-0-\n-\n-\nments contained in the treaties are met. The Netherlands\nSWITZERLAND\n15%\n5%\nYes\nAntilles includes Aruba, Bonaire, Curaçao, Saba, St. Eus-\n-\nTRINIDAD and TOBAGO\n25%\n30%\ntatius and the Netherlands part of St. Martin.\n-\n-\nZAMBIA*\n15%\n-0-\n(B) United Kingdom includes only Great Britain (England, Scot-\n-\n-\nland and Wales) and Northern Ireland, but excludes the\nUNITED KINGDOM (B)\n15%\n-0-\nYes\n-\nChannel Islands and the Isle of Man.\nSO. RHODESIA\nWithholding at 30% is required on lump sum payments from\n(as U.K. colony)\n15%\n-0-\n-\n-\nqualified pension or annuity plans, except to residents of\nOTHER U.K.\nCanada, Germany, Sweden and United Kingdom. For these\nCOLONIES**\n15%\n30%\ncountries, the treaty and regulations should be referred to\n-\n-\nfor details.\nFORD\nGERALD\nLIBRARY\nALBERT W. JOHNSON, PA.\nHENRY B. GONZALEZ, TEX., CHAIRMAN\nJ. WILLIAM STANTON, OHIO\nHENRY S. REUSS, WIS.\nPHILIP M. CRANE, ILL.\nWILLIAM S. MOORHEAD, PA.\nBILL FRENZEL, MINN.\nTHOMAS M. REES, CALIF.\nJOHN B. CONLAN, ARIZ.\nRICHARD T. HANNA, CALIF.\nU.S. HOUSE OF REPRESENTATIVES\nCLAIR W. BURGENER, CALIF.\nWALTER E. FAUNTROY, D.C.\nANDREW YOUNG, GA.\nFORTNEY H. (PETE) STARK, JR., CALIF.\nSUBCOMMITTEE ON INTERNATIONAL FINANCE\nROBERT G. STEPHENS, JR., GA.\nOF THE\nCOMMITTEE ON BANKING AND CURRENCY\nNINETY-THIRD CONGRESS\nWASHINGTON, D.C. 20515\nAugust 3, 1973\nB4a\nMr. Harry Anderson\nChairman\nMerrill Lynch International\nOne Liberty Plaza\nNew York, New York 10006\nDear Mr. Anderson:\nThe Subcommittee on International Finance is\nconcerned about the foreign holdings of U.S. dollars\nand the resulting monetary instability. In a Forbes\nmagazine article, you suggested a method of bringing\nmany of these dollars back to the United States: get\nrid of the withholding tax on interest paid to foreigners\non domestic corporate bonds. You say that the U.S. levies\nthis tax, but 1t does not produce revenue for the Treasury\nbecause we don't sell bonds as a result of this tax.\nI would very much appreciate your providing us with\nadditional information on your idea, e.g., the pros and\ncons, the amount of corporate bonds which are being sold\nto foreigners now and the amount which might be sold if\nthe tax were removed, the cost to the Treasury of such a\nplan, and the possible reactions of the U.S. and foreign\nbond markets.\nThank you for your time and courtesy, and with best\nwishes, I remain\nSincerely yours,\nHenry B. Gonzalez\nMember of Congress\nChairman\nFORD\nGERALD\nLIBRARY\nTHE\nNew York Stock\nExchange\nJuly 30, 1973\nJames J. Needham\nThe Honorable Henry B. Gonzalez\nChairman and\nChief Executive Officer\nChairman\nSubcommittee on International Finance\nU.S. House of Representatives\nWashington, D. C. 20515\nDear Mr. Gonzalez:\nI am delighted to respond to your letter of July 19th\nasking for data on foreign purchases of stocks and\nbonds, as well as your request for ideas we may have\non attracting additional foreign investment into the\nUnited States securities markets.\nOne of my first official acts as the Chairman of the\nNew York Stock Exchange was to establish an Advisory\nCommittee on International Capital Markets. That\nCommittee's primary function is to propose policies\nwhich will strengthen the role of the United States\nas a world capital center. This Committee includes\nsome of the most distinguished and knowledgeable in-\ndividuals in the area of capital markets and inter-\nnational finance, as well as prominent men who have\nserved at the highest levels of government. A list\nof its members is attached.\nTo assist the Committee in its deliberations and ad-\nministrative work, an International Finance Division\nhas also been established at the New York Stock Ex-\nchange. The table below, which shows historical data\non foreign purchases and sales of domestic securities,\nwas prepared by this Division.\nGERALO FORD LIBRARY\nNew York Stock Exchange, Inc. Eleven Wall Street New York, New York 10005\n- 2 -\nForeign Purchases and Sales\nof Corporate and Other Securities\n(In Billions of Dollars)\nAll\nStocks\nBonds\nSecurities\nNet\nNet\nNet\nForeign\nForeign\nForeign\nYear\nPurchases\nSales\nPurchases\nPurchases\nSales\nPurchases\nPurchases\n1958\n$ 1.4\n$ 1.5\n$( .1)\n$ .4\n$ .3\n--\n--\n1959\n2.2\n1.9\n.4\n.4\n.3\n$ .1\n$ .4\n1960\n2.0\n1.8\n.2\n.4\n.4\n.1\n.3\n1961\n3.1\n2.7\n.3\n.3\n.4\n( .1)\n.2\n1962\n2.3\n2.1\n.1\n.3\n.4\n( .1)\n.1\n1963\n2.7\n2.5\n.2\n.3\n.2\n--\n.2\n1964\n3.1\n3.4\n( .3)\n.5\n.3\n.2\n( .2)\n1965\n3.7\n4.1\n( .4)\n.7\n.6\n--\n( .4)\n1966\n4.7\n5.1\n( .3)\n1.6\n.5\n1.0\n.7\n1967\n8.0\n7.3\n.8\n2.2\n1.9\n.3\n1.1\n1968\n13.1\n10.8\n2.3\n4.4\n2.5\n2.0\n4.2\n1969\n12.4\n10.9\n1.5\n3.1\n1.9\n1.2\n2.7\n1970\n8.9\n8.3\n.6\n2.5\n1.5\n1.0\n1.6\n1971\n11.6\n10.9\n.7\n2.9\n2.3\n.7\n1.4\n1972\n14.3\n12.1\n2.1\n4.7\n2.8\n1.8\n4.0\n1973\nJan.- -\nMay (p)\n5.5\n4.2\n1.3\n3.0\n1.2\n1.8\n3.1\nP = Preliminary\nNote: Numbers may not add up due to rounding.\nFORD is 07V830 LIBRARY\n-3-\nAs you can see, net foreign purchases of domestic\nsecurities have consistently had a favorable impact on\nour balance of payments since 1966. Moreover, since\nthe mid-sixties, foreign activity in U.S. securities\nhas mushroomed. The estimates of future foreign activity\nin the equity markets which the NYSE had prepared in\n1971 (see Perspectives on Planning enclosed) now appear\non the low side. The current uncertainties prevailing\nin the international money markets and the lack of confi-\ndence in the dollar make predictions about the level of\nfuture foreign interest extremely hazardous.\nThe starting point for attracting additional foreign\ninvestment has to be the pursuit of prudent fiscal and\nmonetary policies by our government. Foreign invest-\nment will not materialize to its fullest unless uncer-\ntainties surrounding the future strength of the U.S.\ndollar are laid to rest. To restore foreign confidence\nin the dollar, the United States must achieve a surplus\nin its international balance of payments, which in turn\nrequires a major reduction in our rate of inflation.\nThere is one major area where I believe our government\ncan take action to attract additional foreign invest-\nment into this nation's securities markets. This is the\nwithholding of taxes on interest and dividend income\nreceived by foreigners. While some progress has been made\nin recent years regarding tax treaties between the U.S.\nand other nations, there remain many countries for which\nno such treaties have been concluded. For example, tax\ntreaties have not been agreed upon with nations located\nin the Middle East. This can serve to restrict large\ninflows of capital from an area of the world where huge\nmonetary reserves will be accumulating into the 1980's.\nAt the present time, foreigners hold over $80 billion\nin U.S. dollars. We strongly believe that potential\ninflows of foreign-held dollars overwhelm any revenue\nloss from a unilateral repeal of withholding taxes\n(the U.S. obtained just over $190 million from the\nwithholding tax in 1969). Moreover, we feel that at-\ntempts by U.S. citizens to avoid taxes by this chan-\nnel can be resolved through appropriate administrative\nmachinery.\nGERALD FORD LIBRARY\n- 4 -\nThe effect that imposition of a tax on interest and\ndividends received by foreigners can have on discour-\naging portfolio investment by such parties is acknowl-\nedged by governments which have such taxes. In order\nto reduce foreign inflows, the German government levied\na withholding tax on foreign owned German bonds in\n1969. This attempt turned out to be successful. It\nstands to reason if withholding taxes have checked\nforeign inflows, their elimination should encourage\nsuch flows.\nIt is impossible to make an accurate prediction of the\nextent to which sales of U.S. securities to foreigners\nwould increase if withholding taxes were removed. How-\never, one of the leading brokerage firms took a survey\nof its international office managers on this issue.\nAlmost all the managers felt significant increases in\nsales of U.S. corporate stock to foreigners would re-\nsult. The estimated increases ranged from 10 to 30\npercent. Indications were that removal of the tax\nwould open a new market for foreign purchases -- U.S.\nutility common and preferred stocks.\nIn summary, I believe that the withholding tax is a\ndeterrent to foreign participation in the U.S. securi-\nties markets. Its repeal would assist both our bal-\nance of payments and securities markets significantly.\nIf I can be of any further assistance, please let me\nknow. Furthermore, the staff of our Research Depart-\nment, particularly Dr. William C. Freund, Vice Presi-\ndent and Chief Economist, would be delighted to re-\nspond to an invitation to meet with you or any members\nof your staff regarding programs to attract additional\nforeign investment into the U.S. capital markets.\nSincerely yours,\nEnclosures\nJains Jhudhan\nGERAALO FORD LEBRARY\nHENRY B. GONZALEZ, TEX., CHAIRMAN\nALBERT W. JOHNSON, PA.\nHENRY S. REUSS, WIS.\nJ. WILLIAM STANTON, OHIO\nWILLIAM S. MOORHEAD, PA.\nPHILIP M. CRANE, ILL.\nTHOMAS M. REES, CALIF.\nBILL FRENZEL, MINN.\nRICHARD T. HANNA, CALIF.\nWALTER E. FAUNTROY, D.C.\nU.S. HOUSE OF REPRESENTATIVES\nJOHN B. CONLAN, ARIZ.\nCLAIR W. BURGENER, CALIF.\nANDREW YOUNG, GA.\nFORTNEY H. (PETE) STARK, JR., CALIF.\nSUBCOMMITTEE ON INTERNATIONAL FINANCE\nROBERT G. STEPHENS, JR., GA.\nOF THE\nCOMMITTEE ON BANKING AND CURRENCY\nNINETY-THIRD CONGRESS\nWASHINGTON P.C 20515\nB4a\nMr. James J. Needham\nChairman of the Board\nNew York Stock Exchange\n11 Wall Street\nNew York, New York 10005\nDear Mr. Needham:\nThe Subcommittee on International Finance is\nvery concerned about the enormous foreign private\nholdings of U.S. dollars and the projected increases\nin these holdings. One significant means of attract-\ning many of these dollars back to the U.S., is the\npurchase of stocks and bonds in the securities markets\nhere by foreign investors.\nI would appreciate your providing me with data\non the historical and forecasted purchases of stocks\nand bonds by foreign investors. I would also like\nyour comments on methods of attracting more foreign-\nheld dollars into the U.S. securities markets,\nespecially if there is a role for the U.S. Government.\nThanking you for your assistance, I remain\nSincerely yours,\nHenry B. Gonzalez, M.C.\nChairman\nFORD\nGERALD\nLIBRARY\nDividend Withholding Tax on Foreign-Held Securities Stymies\nInflow of Capital\nBy Peter J. Tanous, Vice President of Smith Barney & Co.\n(The Money Manager: October 23, 1973)\nAt a time when free trade is a topical subject, the United\nStates still imposes restrictive measures on both the inflow and out-\nflow of capital.\nThe reasons for imposing limitations on the outflow of capi-\ntal are familiar: the U.S. has had a serious balance of payments\nproblem in recent years. As a result, the Interest Equalization\nTax was imposed in 1963 as a \"temporary measure\" and has been\nmaintained, in somewhat modified form, ever since.\nIn addition, in 1968, the Office of Foreign Direct Invest-\nments was established and administered provisions for a manda-\ntory system to restrict the dollar outflow for direct investment\nabroad.\nThe IET imposes a tax on American investments in securi-\nties of other countries - except for Canada and a number of less-\ndeveloped countries - to the effect of discouraging investment abroad.\nIt seems reasonable to assume, however, that if the U.S.\nwants to discourage an outflow of capital it ought to be interested\nin encouraging an inflow of capital. Yet, paradoxically, there is\na law that has just the opposite effect: the withholding tax on interest\nand dividends on U.S. securities held by foreigners.\nThe withholding tax has been in effect since 1913 when it\nwas made part of the Internal Revenue Code of 1913. One can sur-\nmise the many reasons that prompted its inclusion but the most likely\nderived from a sense of fairplay.\nAt that time, Americans were about to be subjected to a\ntrue income tax, a measure that was of obvious limited popularity.\nInterest and dividends on securities were included as taxable income.\nSo, the reasoning undoubtedly went, if Americans owning\nAmerican securities were obliged to pay a tax on their income from\nthose securities, then it would be unfair to allow foreigners owning\nAmerican securities to escape tax on them.\nFurthermore, since the U.S. would not have the authority\nto tax foreign nationals living in their own countries, the only way\nto achieve the same result would be to tax the interest or dividend\nbefore it left the country: hence, the withholding tax.\n&\nFORD\nGERALD\nLIBRARY\nOver the years, the original tax has been modified in sep-\narate tax treaties with different nations but by and large, the with-\nholding tax is either 15% or 30% on dividends and, in most cases,\n30% on interest.\nWhen the draftsmen of the original tax legislation included\nthe withholding tax, they probably could not have foreseen the effects\nthe tax would have on this country's balance of payments 60 years\nlater. Oddly enough, this effect is only beginning to be recognized now.\nAs capital markets developed in this century, Wall Street\nemerged as the financial center which provided essential ingredients\nof opportunity, information, and liquidity. The New York Stock\nExchange attracted a growing foreign interest and in the late 1960s,\nnet capital flows in U.S. stocks purchased by foreigners reached\nvery sizable proportions.\nIn the early part of that decade the net inflow on foreign\npurchases of U.S. stocks was generally in the $200 million to $400\nmillion range. In 1967 it exceeded $700 million and in 1968 hit a\nrecord $2.2 billion. The net capital inflow declined after 1968 to\n$1. 4 billion in 1969, $626 million in 1970, $731 million in 1971,\nand surged again to $2. 1 billion in 1972.\nWhile this dramatic rise in foreign interest was occuring,\nthe withholding tax was acting as a disincentive to foreign investors\nwho were primarily interested in income. If the United States was\ngoing to withhold 15% or 30% of the interest and dividends, then\nclearly the U.S. market was not the place to go for income.\nIn the meantime, as foreigners' interest in our equity mar-\nkets was growing, a parallel development was occurring abroad.\nThe Interest Equalization Tax reduced U.S. interest in foreign securi-\nties at a time when, in retrospect, investments abroad would have\nserved American investors well.\nOn the other hand, this measure provided a dramatic growth\nto the Eurobond market. This growth was fueled by the fact that\nEuropeans were penalized by the withholding tax when they bought\nU.S. securities; thus, high-yielding, dollar-denominated securi-\nties became quite attractive.\nThe Eurobond market (in dollars and other currencies) grew\nfrom less than $200 million in the early 1960s to more than $6 billion\nin 1972. There is now an estimated $25 billion in Eurodollar bonds\noutstanding.\nThe rapid growth of the Eurobond market created some new\nproblems, particularly because most of the Eurobond issues were\nrelatively small and there was little in the way of an aftermarket. A\nfew firms geared up to trade Eurobonds but the markets remained\nFORD & LIBRARY\nthin and bond orders in excess of 50 or 75 bonds often encountered\nresistance.\nMost of the Eurobonds were taken up by European banks\nand placed in clients' portfolios. A number of bond funds were\ncreated by major banks throughout Europe. Today, Eurobond funds\nalone count assets of about $3 billion, including those bond funds managed\nby the three largest Swiss banks.\nGeorge Dunesme, of the Banque de Bruxelles in Brussels,\nmanages one of the largest bond funds in Europe, the Renta Fund,\nwhich has $400 million in assets. His problem is typical of major\nbond buyers overseas - large amounts of funds invested and a limited\naftermarket in which to maneuver.\nHis dilemma and that of other European money managers\nis twofold: the Eurobond market offers little selectivity as com-\npared with the U.S. bond markets while the burgeoning size of their\nfunds forces them to make sizable commitments in a single issue.\nMoreover, the aftermarket liquidity problem, particularly\nin convertible bonds, appears to be getting worse. As Mr. Dunesme\nsays: \"How can you expect a bond trader to maintain an inventory\nof 4 3/4% convertible bonds when he must pay 12% short term in-\nterest to carry it? \"\nMr. Dunesme, and undoubtedly many other managers, are\neager to place money in the U.S. bond markets but, of course, the\nwithholding tax forestalls their participation. Because the U.S.\nbond market is by far the most liquid in the world and because this\nmarket also offers the greatest selectivity, most money managers\nare willing to enter the market at some sacrifice in yield.\nIt is true that the yields in the Eurobond market are often\nhigher than yields for comparable credits in the U.S., but the with-\nholding tax makes the sacrifice too great.\nClearly there is a firm desire on the part of foreign money\nmanagers to invest their yield-sensitive funds in the United States.\nAs our balance of payments begins to improve, we could well use\nthe support that would result from the repatriation of a substantial\namount of dollars to our bond markets.\nIt may be a worthwhile exercise to speculate on just how\nmuch money would come back to the United States if the withhold-\ning tax were eliminated. There are several ways to look at these\npossibilities.\nFor one, in 1972 foreigners had net purchases of U.S. corp-\nFORD\nGERALD\nLIBRARY\norate bonds of $1, 788 million despite the disincentive of the with-\nholding tax. We do not know, however, what percentage of these\npurchases were in convertible bonds, where the yield is of less\nimportance than the capital gains prospects.\nSecond, there is an estimated $25 billion in long term Euro-\ndollar bonds now outstanding. If the withholding tax were removed,\nand these bondholders were free to invest in the U.S. without penalty,\none can probably conservatively estimate that 10% to 20% of these\nbondholders would want to invest directly in the U.S. bond markets.\nThis alone would provide a $2.5 to $5 billion boost in our\nbalance of payments. This is but one source of potential new investors.\nIn the U.S. bond markets, $19.4 billion in new corporate\nbonds were issued in 1972. Again, if we assume conservatively that\n10% of this total could be placed abroad without the withholding tax,\nwe gain another $2 billion or so in inflow.\nIn 1972, there were $3.29 billion dollars in new long term\nissues floated in the Eurobond market. It can be assumed that a\nsizable number of Eurobond investors would opt for the U.S. bond\nmarket over the Eurodollar market if they could.\nIn other words, the very first year that the withholdin,\ntax is removed, we might expect an improvement in our balance\nof payments of perhaps $4 billion to $6 billion.\nSo far, it appears that no one can lose from the removal\nof the withholding tax. Foreign investors would gain the diversity\nand liquidity the seek, U.S. securities dealers would gain a signi-\nficant new clientele, and most importantly, our balance of pay-\nments would be served with a welcome gain. It appears indeed that\nthere is nothing to lose.\nHowever, the fact that the withholding tax does exist has\nresulted in some revenue to the United States. The amount of reve-\nnue received by the U.S. Government in 1970 through withholding\non interest and dividends of securities held by foreigners was\n$200, 133, 000 on income earned abroad of $1, 458, 985, 000.\nAlthough the statistics are not broken down, it is probably\nsafe to assume that the bulk of this revenue is derived from with-\nholding tax on dividends of stock purchased by foreigners essentially\nfor capital gains, not income. In any case, these revenues would\nbe lost if the withholding tax were eliminated.\nThere are some extenuating factors. According to the In-\nternal Revenue Service, an astounding 655, 893 documents were\nfiled by withholding agents in 1970 alone in order to administer the\ntax. The elimination of the withholding tax would also mean the\nGERALD FORD LIBRARY\nelimination of this imposing paperwork burden, and the expense\nassociated with it.\nIt may be fair to state that the net loss of revenue will be\na small price if it can secure a multi-billion dollar annual inflow\nto help our balance of payments. But compelling as the case for\nthe removal of the withholding tax may appear, it has attracted sur-\nprisingly little attention until recently. Now, at least the issue is\nbeing discussed.\nRep. Wilbur Mills, chairman of the House Ways and Means\nCommittee, is known to be considering the removal of the withhold-\ning tax. Rep. Henry S. Reuss, chairman of the Joint Economic Sub-\ncommittee on International Monetary Affairs, is aware of it.\nRecent testimony by securities industry officials before\nSen. Lloyd M. Bentsen, Jr. 's Subcommittee on Financial Markets\nsuggests that as much as 15% to 30% more U.S. common stock could\nbe sold abroad if the withholding tax were ended.\nBut although press reports have noted the possible effect on\nthe stock market, no mention has been made of the bond business,\nwhich would be the beneficiary of the end of the tax.\nIt is important that the issue is now being discussed, it\ndeserves the active support of the investment banking and brokerage\ncommunity, obviously from those firms who stand to gain import-\nantly from a significant foreign investment in our bond markets.\nFurthermore, it should be comforting to know that an effort\non the part of the industry to eliminate the withholding tax will have\nan effect that goes beyond the self-serving benefit, in that a substan-\ntial boost to our balance of payments is likely to ensue.\nThe effort can be carried even further in the spirit of the\ntrue liberalization of capital flows. The Interest Equalization Tax has\nnow been on the books for ten years. It has been renewed several\ntimes and is currently scheduled to expire on June 30, 1974.\nEarly this year, members of the Securities Industry Asso-\nciation's International Finance Committee appeared before the House\nWays and Means Committee which was then considering the question\nof the renewal of the IET.\nThe SIA committee did not, at that time, ask for the complete\nelimination of the IET in view of its possible value in upcoming trade\nand monetary talks, but it did propose some modifications.\nThe proposed changes were based on persuasive evidence pre-\nsented by the SIA committee that the IET was not an effective deterrent\nto capital outflows.\nis\nFORD\nGERALD\nLIBRARY\nIndeed, as Anthony M. O'Connor, a first vice president of\nSmith Barney and a member of the SIA committee, pointed out, when\na foreign security attracts investor attention in the U.S. the IET\ndoes not act to inhibit investment in it.\nAn extreme example is the fact that U.S. investors have\nbeen willing to purchase shares of Sony at a premium price of more\nthan 50% on the Japanese market price. The premium is due to\nJapanese restrictions on foreign ownership but nevertheless the\nexample illustrates the willingness of American investors to pay\nthat premium for a stock they believe in.\nAs the sophistication of the U.S. institutional investors\nin international investment grows, this trend can only accelerate.\nWe can assume, nevertheless, that the elimination of the\nIET would cause some outflow of dollars from the United States.\nThe outflow would, however, undoubtedly be dwarfed by the inflow\nwe can expect from the removal of the withholding tax on U.S. securi-\nties held by foreigners.\nThere is, accordingly, a practical case to be made for the\njoint removal of the IET and the withholding tax in the hopes it would\nyield the following results:\n-A substantial inflow of funds to the U.S. stock and bond\nmarkets.\n-A needed improvement in our balance of payments, thus\nenhancing the value of the dollar in overseas markets, and encourage\nyet further investment in U.S. securities.\n-Provide a vast new market for U.S. bonds and high-yield-\ning stocks and the revenues generated from the sale thereof.\n-Through the elimination of the IET, provide a truly inter-\nnational capital market with free access and movement in both direc-\ntions, and return the international financial markets center to the\nUnited States.\nAs was said earlier, it is fortunate that this subject is re-\nceiving some attention at the appropriate legislative levels. It now is\nincumbent on the securities industry to lend its full support to the\nefforts to end the withholding tax and the IET.\nThere is much to be gained by all parties affected by the taxes -\ninvestors, the securities industry and not least, the national interest.\nR.\nGERALD\nFORD\nLIBRARY\nAPR 13 1974\nThe Honorable\nPeter H. Flanigan\nAssistant to the President for\nInternational Economic Affairs\nThe White House\nWashington, D. C.\nDear Peter:\nI have no difficulty with the general thrust of your\npaper, \"U.S. Policy and Objectives on International Investment,\"\nbut I do have a for comments on some of the sections.\nUnder General Investment Objectives on page 2, where the\nterm \"established investore\" is used under II, I presume this\nis meant to refer to foreign investors. In III of that section\nit might be better to any \"foreign investors are not subjected\nto special inducements or constraints,\" rather than suggest\nthey be protected from politically notivated inducements in\ngeneral (since our interest is not directed against national\npolicies adopted to influence over-all investment activities,\nbut to insure that such policies are applied without discrimination).\nThe paragraphs at the top of page 3 concentrate on the\nimposition of exchange controls 80 a form of governmental inter-\nference with market forces. In many cases, including our own, the\nrestraints on the investments take the form of quotas rather than\nthe application of exchange controls per se, and I would suggest\nthat these paragraphs be broadened to take that fact into account.\nIn the second paragraph on that page, reference is made to actions\naffecting the competitiveness of outerprises controlled by foreign\ninvestors \"in their local business activities;\" I would strike\nthat last phrase since we would also be concerned with discrimina-\ntion against foreign-owned companies in the conduct of their\nforeign operations. An example would be restricting their\naccess to local capital markets for purposes of investing abroad.\nAt the bottom of page 3 and the top of page 4, some of\nthe concerns that governments have with foreign investments in\ntheir territory are identified. We might recognize more explicitly\nGERALD FORD LIBRARY\nMr. Flanigan\nPage 2\nhere that there 40 great concern in some countries about the extent\nto which key sectors of industry are controlled abroad, and that\nsome internationally agreed criteria might be developed as guide-\nlines in this area.\nThe question of fair and equitable treatment of the taxes\npaid in total and to various countries by the multi-national corpora-\ntions is attracting & great deal of attention these days and perhaps\ndeserves more than a passing note at the top of page 8.\nI trust these comments will be useful. Since I an interested\nin this issue, I hope you will keep me informed of further developments.\nSincerely yours,\n(signed) Arthur\nArthur F. Burns\nSPita\n4/11/74\nGERALD FORD LIBRARY\nBOARD OF GOVERNORS\nOF THE\nFEDERAL RESERVE SYSTEM\nOffice Correspondence\nDate July 17, 1975\nTo\nGovernor Wallich\nSubject: Committee on Foreign Investment\nFrom\nDonald B. Adams DBA\nin the United States\nThe cabinet-level Committee on Foreign Investment is scheduled\nto meet on Friday, July 18 to try to establish an Administration position\ntowards a recently announced deal involving the Rumanian government and\na U.S. coal company.\nAccording to my information from a member of the Committee's\nsupporting office at Commerce, the Rumanians and Island Creek Coal\nCompany (a subsidiary of Occidental Petroleum) have initialed a $15\nmillion agreement forming a joint venture to exploit some coal fields\nin the United States. The Rumanian government has not been receptive\nto Committee efforts to delay the deal pending a Committee review of\nits potential effects on U.S. national interests. Thus, this situation\nis the first test of the Committee's effectiveness in carrying out\nits mandate when the government with which it is supposed to negotiate\nis recalcitrant.\nIt is noteworthy that the Committee learned of the planned\ndeal only through the American Embassy in Bucharest. Thus it is\nevident that the Committee's intention to rely for information on\nestablished bilateral commissions (such as those with Iran and Saudi\nArabia) may prove inadequate.\ncc: Chairman Burns\nGovernor Holland\nFORD & GERALD LIBRARY\nBOARD OF GOVERNORS\nOF THE\nFEDERAL RESERVE SYSTEM\ninamissval\n1975 JUL 17 PM 2:52\nRECEIVED\nOFFICE OF THE CHAIRMAN\n.8\nbelubados at no settlement Invel-senidao adt\nas Halldases of YYY 03 81 yist no Jasm 03\nbas inemnisvos nalnamuR ods sulvIoval Insb becauonne B\n1000 .8.U B\n00131mm00 eda to reddew B VIII 03 gathroom\nIac0 boniel bas enalasm/S add 38 sollio goldroqque\n218 B belaighe) eved (musions issumbloo0 to a)\nabioil Inco smoa diolqxe 03 expense Injol A golmmol insumerge notilim\nneed 300 and insentevog edT belinD add at\nto welver n gothneq Insb add valeb 03 simolls 03\nnoldauils alds ,sunt Issolian .8.U до adosite Islinetog 831\n100 ni ed: 10 3883 add al\nedalsogen 03 besoqque 83 31 dakde dillw insentevog add cade atabnam ast\nal\nbennelq add 10 benisel add sads at 31\nsi 11 audT .jastadoud n} yasadañ prollemA add riguozda vIno lasb\nno TOR vier 03 001300301 odd 3883 doebive\n1bus2 bas DETI date close BB dous) badelidates\nSVOTQ your (aldaxA\n100\nbaslloH"
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