The Future of Investment Controls
James K. Weeks *
Since 1965 when President Johnson announced his “Voluntary
Cooperation Program for Business” and the “Voluntary Foreign
Credit Restraint Program” through January 1, 1968, when the bulk
of these programs became mandatory, I the United States has fought
what was up to the week of November 11th, 1968 a losing battle with
our balance-of-payments. In the two decades since the close of
World War II, the United States has been thrust into the role of
the advocate of free trade; liberalizer of tariff and non-tariff barriers;
the prime mover behind GATT; the reconstructor of Europe and
the developer of emerging countries. Such awesome responsibilities
were not without their cost and adverse effects, particularly where
our balance-of-payments was concerned. During this period of time,
our payments were in deficit almost every year. This chronic problem
became acute in 1966-1967, when it became apparent that the rapid
increase of United States business expansion abroad, coupled with
increased consumer demand for imported goods at home and a greater
and more expensive military involvement overseas, were producing
an ever increasing number of red ink entries in our payments ledger.
Hastily, the United States government moved toward greater involve-
ment in international business affairs by applying what Repre-
sentative Wilbur Mills, in another context, has referred to as “a
Bandaid for a hand cancer.” 2
It quickly became apparent that something more in the nature of
a tourniquet was required, and the problem was attacked on several
fronts, none of which to date has really been instrumental
in
alleviating the chronic problem. The difficulty in accurately evalu-
ating the current effectiveness of investment controls lies in the
ingrained habit of both the press and certain government officials
to use different guidelines when reporting the current state of affairs
in this area –
for example, Business Week in its November 2, 1968
issue reported:
* Associate Professor, College of Law, Syracuse University.
‘Executive Order 11387, Jan. 1, 1968 and Foreign Direct Investment Regula-
tions, CCH Bal. of Pay. Rep. (1968), # 515, p. 508. U.S. Dep’t of Comm. Regs.
1000.101 –
1000.804.
2 The New York Times, Nov. 16, 1968, p. 16, col. 1.
NO. 2]
THE FUTURE OF INVESTMENT CONTROLS
The U.S. trade balance looks a bit better, but the improvement won’t prevent
another heavy deficit this year in the balance-of-payments. Exports topped
imports by $282-million in September on a seasonally adjusted basis… The
September bulge pushed the trade surplus for the first nine months to
$834-million. If the gain continues.., the year’s surplus will hit $1.5-billion.3
However, further down on the same page the magazine points out
on the rather pessimistic note:
It’s a good bet that the payments deficit for the year will be more than
$1.5-billion… But these figures are calculated on a ‘liquidity’ basis, and
they are dressed up by special transactions, mainly purchases of medium-
term Treasury bonds by Germany and other foreign governments.
If you exclude special transactions, the improvement over 1967 isn’t
so great as it looks. These special inflows totaled about $1.4-billion in the
first nine months of this year, compared with only about $600-million in
all of 1967. Leaving them out of account, as some experts do, probably
would push the deficit this year to $3-billion or more, compared with
$4.1-billion in 1067.4
The New York Times of November 16, 1968 in a somewhat guarded
text reaches about the same conclusion but couples the payment
surplus with a Commerce Department announcement of slight liberal-
izations in Foreign Direct Investments Control. 5 The initial impact
of this article provides a soft glow of optimism. During the interval
The Wall Street Journal, in reporting statements made by Mr. Nixon’s
advisor on balance-of-payments policy, Gottfried Haberler, states
that “Ending curbs on business spending abroad wouldn’t hurt the
economy.”6 Meanwhile, incumbent government officials and spokes-
men for the current Administration run the gamut from predicting
vast improvements, which they attribute to the effectiveness of the
investment curbs, to dire forecasts that if the controls are removed
the nation’s economy will suffer a severe recession and sizable
unemployment. They concede that certain liberalizations may be
granted in light of some improvement in our trade balance but that
the situation is far from corrected.
It is no surprise that general agreement on solving the payments
problem is virtually impossible –
tied as it is to numerous complex
components, which individually can be a large-scale problem. Trade
balances (about which much enthusiasm is currently shown since
they show a current surplus) are but a small part of the total. The
same is true of foreign investment in the United States, which in
this last quarter amounted to $990 million. This is two-thirds greater
than the amount of net purchases of foreign securities by Americans
3 Business Week, Nov. 2, 1968, p. 111.
4Id.
5 The New York Times, Nov. 16, 1068, p. 1, col. 2.
6 The Wall Street Journal, Nov. 15, 1968, p. 2, col. 3.
McGILL LAW JOURNAL
[Vol. 15
during the same period. In the area of investment controls, their
purported effectiveness must be weighed in the light of the higher
earnings on foreign investments which United States business have
been earning. A consideration of all these factors perhaps leaves
less room for the current optimism than is justified. For example,
in the area of trade balances the performance of the United States,
allowing for its greater amount of foreign trade, is not really signifi-
cantly better than that of Canada, whose favorable trade balance
continues. Canada’s trade balance increased almost $90 million in
September, even though imports increased 20% during the same
period. For that portion of 1968 ending in September, Canada’s trade
surplus was increased by some $700 million over the previous year.7
This is apparently further evidence of the symbiotic relationship
between our two countries, since Canadian officials attribute this
rise to the “exceptional buoyancy of the United States economy”. 8
Considering that about 30 % of the total capital investment in Canada
is from the United States and that capital in-flows into Canada during
the past ten years has averaged $1 billion, 9 this is not too surprising.
What this actually means is that the United States controls 60% of
Canada’s productive capacity, and in terms of capital stock, 59% of
manufacturing industries, and 79% and 77% of the petroleum and
natural gas industries, respectively.10 But since Canada is specifically
exempted from United States Foreign Direct Investment Controls,
any changes in these regulations will have little impact upon Cana-
da, solely from the change itself. However, any change that elimi-
nation, liberalization or tightening of our Foreign Direct Investment
Controls would have could not but be felt in Canada. This is particu-
larly so if Mr. Nixon carries into effect his campaign statement that
he intends to eliminate these curbs. It is difficult to foresee any
other result than that such elimination would of necessity require
a reduction in domestic spending to curb inflation. This, in turn,
would result in a slowdown of the United States economy which
would reduce the attractiveness of United States investments to
foreign investors. However desirable domestic restraints upon the
economy might seem to some, the solution to our economic troubles
does not rest upon one or two problem areas. Instead, it is depend-
ent upon numerous variables, including but not limited to: increased
exports, reduction of non-tariff barriers in the United States and
7 CCH Bal. of Pay. Rep., Report Letter No. 25, Nov. 8, 1968.
8id.
9 Private Enterprise in a Changing World, XXIst Congress of the International
Chamber of Commerce, (Paris, 1967), 32, at p. 33.
10 Id., at p. 32.
No. 2]
THE FUTURE OF INVESTMENT CONTROLS
elsewhere, the gold policy to be pursued by the new Administration,
control of the wage-price spiral, early implementation of Special
Drawing Rights, and solution of various internal labor problems
which have international overtones. It should be pointed out that
one factor which has contributed to the current surplus in the
United States trade balance has been the impetus to exports given
by the threatened longshoremen’s strike, scheduled for early De-
cember, when the current Taft-Hartley injunction expires. Many
exporters rushed their shipments to avoid the expected long tie-up,
thus providing a temporary but not sustained boost to the United
States export picture. Predictably, this will level off and probably
drop after the first of the coming year.
Further complicating the economic picture and the United States’
world position is the fear that the new Administration may become
increasingly protectionistic and may move for import quotas in steel,
textiles and chemicals. Currently, trends in this direction are appar-
ent even without the change in Administration, and the United States
may find itself taking the defensive on charges of violation of the
General Agreements on Trade and Tariffs. Recently
foreign
cheese exporters have experienced a sizable decline in their exports
to the United States as a result of exercise of waiver privileges by
the United States to protect its cheese producers who have a con-
siderable surplus on hand. Any of these moves, although ostensibly
within established GATT provisions, may be condemned as violative
of its actual terms. Such allegations, even if baseless, are often the
basis for retaliation by foreign governments which would have a
deleterious effect upon United States exporters.
Again outside the area of investment controls has been the
development within the past year in Europe of changes in the tax
structure on imports from outside the Common Market countries,
particularly the new German Added-Value Tax, which is adding
to the burden of American exporters. One obvious way around this
problem is to establish a foreign-based operation, but moves in that
direction are seriously curtailed by the present FDI regulations. The
new proposed liberalizations, particularly the optional investment
quota, should be useful to a business commencing its maiden foray
into the foreign-based operation.
The essential fact in any discussion of foreign investment, foreign
trade, foreign exchange, economic development and balance-of-pay-
ments is that each of these is but a part of the over-all international
economic picture, and consequently improvement or deterioration in
any one or two of these will not necessarily result in a favorable
or unfavorable economic position. Therefore the world’s economy is,
McGILL LAW JOURNAL
[Vol. 15
like the law, a seamless web. Granted, variations of some magnitude
as between countries will always be present, and, on a short-term
basis, improvement in any of the respective components will register
as a favorable indicator in the over-all situation. Unfortunately, gov-
ernments tend to suffer a degree of myopia when they assiduously
apply their efforts to one or two of the components in the mistaken
belief that these are actually the total problem instead of symptoms.
Like symptoms of disease, they too must be treated if total recovery
of the patient is to be achieved.
Economic difficulties (if the medical analogy may be pursued)
are often easy of diagnosis but do not lend themselves to simple
treatment. Like heart disease, they are better prevented than trea-
ted. Economic transplants, like anatomical ones, are often not suc-
cessful. As conflicting diagnosis and prescribed or accepted modes of
treatment vary between practitioners of the healing arts, so it is
with the economists. Nor does the analogy end there –
it was Walter
Bagehot, who in describing the intricacies of international finance,
entered the caveat that “we must not let in daylight upon magic,”
a dictum not unknown to the medical arts. The time is long overdue
to cease regarding international economic policy and international
finance with wonderment and awe. Shrouding a nation’s fiscal and
trade policies in a cloak of mysticism, the understanding of which
is denied all but the initiated, is at worst suicidal and at best fool-
hardy. It is not promotive of international understanding, and it
most certainly is not conducive to the establishment of workable
procedures which will insure the stability and prosperity of the
world economy. Ignorance, as much as self-interest, has dictated
much of the United States’ economic policies in the past several
decades. Often it has been a case of policies adopted too late or in
too little quantity or worse the right policy at the wrong time or
extremes which sate but do not correct. Much of this type of ra-
tionale permeated the current Administration’s balance-of-payments
program, and it can be hoped, but probably not expected, that after
January 20, 1969 that a more reflective solution will be forthcoming.
Currently, the United States is astride a rapidly expanding economic
crevasse, which The New York Times has described in the following
terms:
The President’s new balance of payments program, in fact exposes the
central dilemma of American financial policy like a raw nerve.
On the one hand, the United States is in the position of a successful
but badly overextended banker. The nation has a wealth of productive and
highly profitable
long-term investments abroad, but its stock of cash
to meet withdrawals of international deposits on demand has dwindled
alarmingly.
No. 2]
THE FUTURE OF INVESTMENT CONTROLS
… On the other hand, a prime source of strength in America’s dealings
with the rest of the world has been the great productivity of its foreign
investments. Not only is there a very large return flow of earnings …
but also the expansion of United States companies abroad tends to build
American exports.
and hence, too, its role as a world financial leader –
Thus, to protect the position of the United States as an ‘international
Bank’ –
the President
has been forced to impose restrictions that could well undercut the foundation
of its international economic strength.’1
Again, it is pointed out that investment controls are but a part
of a much larger problem.
If economic development is to continue toward the point where
in the year 2000 many of today’s highly industrialized nations will
have passed into the new era of being post-industrial, where studies
by the Hudson Institute and the American Academy of Arts and
Sciences have shown the society to be characterized as:
1. Possessed of a per capita income about fifty times the preindustrial.
2. Having most ‘economic’ activities as tertiary and quaternary (service-
oriented) rather than primary or secondary (production-oriented).
3. As a society where business firms are no longer the major source of
innovation.
4. Having more consentives as against marketives.
5. Having established an effective floor on income and welfare.
6. A society in which efficiency is no longer of primary concern.
7. Having an increased role for the public sector and a diminished role
for the market.
8. Having widespread ‘cybernation.’
9. Finally achieving in fact the ‘small world.’
10.
11. A learning society, where by far the greatest emphasis
‘Doubling time’ between three and thirty years.
is upon
education.
12. Possessing rapidly improved educational
institutions and techniques.
13. Experiencing erosion in the middle class of work-oriented, achievement-
oriented, and advancement-oriented values.
14. Also experiencing erosion of ‘national interest’ values, and
15. Witnessing the ascendency of a central position of sensate, secular,
humanist, and perhaps self-indulgent criteria. 12
Such developments require, among many others elements, the
intelligent utilization of capital. It is to this factor that this seg-
ment of this two-day program on International Resources is devoted.
After all, the problem of investment controls has but one goal –
11 Heinemann, “Monetary Storm is Gathering Force”, The New York Times,
Jan. 7, 1968, See. 3, F1, col. 7.
12H. Kahn & Wiener, The Year 2000, (New York, 1967), p. 25.
McGILL LAW JOURNAL
(Vol. 15
the regulation of the flow of capital, and proper flow is essential to
the intelligent utilization of that commodity.
All private foreign investment begins and hopefully ends with
money. It is private foreign investment which is the catalyst of
economic development, and the sensible creation and deployment of
capital will determine whether the investment will succeed. No one
really need be told the importance which money plays in the success
of any venture, but perhaps a few figures will be instructive. In
just the area of foreign investment in developing countries from
1957 to 1967, a total of $80 billion flowed into those countries, $30
billion of which was the result of United States private investment.
Naturally, both private aid and governmental aid are necessary in
economic development, but the capital flow from private sources,
direct investment and commercial banks spells the difference be-
tween economic success and only moderately thriving economies. In
Latin America, for example, 40% of its total exports are from
industries created by United States investments. The crucial need
for further foreign direct investment to aid economic development
was not lost sight of when the present mandatory curbs were enact-
ed, as witness the Schedule A countries which permit inflows of
capital from the United States to be added to reinvested earnings
provided it does not exceed 110% of the company’s average invest-
ments in those countries during the base period 1965-1966.
At this point it may be useful to outline the priorities with which
foreign trade and investment should be concerned. First, strength-
ening of the domestic economy of the investor’s own country through
the returns on the invested capital. Second, working to increase the
individual investor’s wealth. Third, promoting the economic develop-
ment of the country and countries in which the investment is made.
Fourth, developing a healthy and stable international economic situa-
tion, kept so through sound monetary policies and an extremely high
degree of international cooperation.
It was to the first of these that the FDI regulations were
principally directed, but the priority was subjected to a Procrustean
treatment which can be best be described as shortsighted. The eager-
ness with which the United States Government sought to immedi-
ately recapture private return on investments was voracious but
hardly sensible. The FDI regulations, though billed as being the
major step toward correcting the major source of capital outflows
which were jeopardizing the United States monetary reserves, cast
the United States in the role as slayer of the proverbial gold-laying
goose. It is not a course of wisdom to curtail the activities of busi-
nesses which have been returning capital to the United States at an
No. 2]
THE FUTURE OF INVESTMENT CONTROLS
annual rate of $8 billion since the end of World War II. Furthermore,
governmental myopia was again evidenced by the misrepresenta-
tions which served as justifications for imposing mandatory curbs.
Overlooked was the basic fact that, just because certain gaps in our
international trade position existed, this did not give per se the
United States a totally unfavorable trade balance. Nor was it pointed
out that the entire system of international trade consists of inter-
locking surpluses and gaps among trading partners. As Irwin Robin-
son, editor and publisher of Travel Weekly (a trade journal for the
travel industry) pointed out:
in specific commodities and services are
The fact is that imbalances
international trade. If each country didn’t
and essential to –
inherent in –
have specialties in which it excelled, there wouldn’t be any international
trade.’ 3
If the United States’ trade balance has recently been in deficit,
that is usually only a short-term problem and within the last quarter
has been converted into a surplus. However, our balance-of-payments
problem is still with us and there is no evidence to prove conclusively
that the FDI regulations were any more or less responsible for the
lesser deficit. This in essence is the crux of the entire subject of
international trade and finance –
no one can agree on the best
specific methods of assuring continued improvement. In fact, about
the only absolute source of agreement is that the proper balance
between inflows and outflows of capital is essential for a properly
functioning international as well as domestic economy. The goal
but not the means seems, then, to be the only item which is clearly
defined.
Assuming that curbs on foreign investment are one way to
accomplish the asserted goal, let us examine the basic pattern of
these regulations in the attempt ultimately to be in the position of
assessing their effectiveness.
The regulations governing Foreign Direct Investment derive from
Executive Order 11387 and the January 1, 1968 statement of Presi-
dent Johnson. Basically, the FDI regulations contain four major ele-
ments. One, new direct investment to continental Europe and certain
developed countries (Schedule C) were barred in 1968, but some
discretion is permitted in applying the regulations as regards exist-
ing and proposed investments. Two, new net investment in other
developed countries (Schedule B) is limited to 65% of the 1965-
1966 average. Three, new net investment in the developing countries
(Schedule A) is limited to 110% of the 1965-1966 average, and four,
United States investors were required to repatriate earnings in line
13 The New York Timres, Feb. 19, 1-968, p. 27.
MCGILL LAW JOURNAL
[Vol. 15
with their 1964-1966 practices. Positive foreign direct investment
on a worldwide basis was limited to a minimum authorization level
of $200,000 –
in the original regulations this was $100,000. This
was intended to reduce the number of companies which under the
original authorization were required to obtain specific approval of
the Office of Foreign Direct Investment (OFDI). This has been the
only substantive change in the regulations since they were announced
in January of 1968. These extremely complex regulations have been
subject to a welter of change during the past eleven months, but,
with the above exception, all were procedural in nature and were
designed for clarification. Obviously, where the changes were in-
tended to clarify, certain substantive changes did occur as a by-
product. As of today, five significant departures from the original
regulations are apparent: (1) the increased minimum authorization;
(2) a changed repatriation of earnings test which no longer, with
the exception of Schedule C countries, requires basing repatriation
upon a company’s practice during the base period 1964-1966, but
actually the old test may have been retained through the broader
definition accorded to Positive and Negative Direct Investment; (3)
Canada was exempted from most of the limitations and restrictions,
which if applied might, it was felt, cause increased borrowings by
Canadian entities in the United States capital market; (4) unused
authorizations under certain circumstances could be carried over
into a subsequent year or, in the case of Schedule C countries, sub-
sequent years, or it is possible to carry over as between different
Schedule areas in a “downstream shift”; and (5) foreign borrowing
proceeds generally are required to be expended before other invest-
ment authorizations may be made. As to (5), since the regulations
permit investments from foreign borrowings to be made, it is of
interest to note that in the first half of 1968 American companies
borrowed abroad through bond issues $1.1 billion, but as of Septem-
ber 20, 1968 $900 million of this has not been used to finance foreign
direct investment. 13a
13a Since the writing of this article several substantive changes of some
magnitude in the Foreign Direct Investment Regulations have occurred. These
changes, it is felt, will ease the previous inequities caused by the controls and
will result in a substantial decrease in the U.S. balance of payments defecit.
These changes which were of effective January 1, 1969 raise the minimum
quota from $200,000 to $1,000,000, and fix at 30%lo the optional earnings allowable
based on 19,68 earnings of foreign affiliates. Additionally, the new changes permit
small and medium-size investors to file only one report in 1069 in contrast
to the previously required quaterly ones, and extend to the extractive industries
fairer treatment in respect to exploration and development costs. Finally, in an
attempt to minimize disruptions in the air transportation industry caused by
No. 2]
THE FUTURE OF INVESTMENT CONTROLS
As late as September of this year there was uncertainty as to
whether the announced objective of the FDI regulations –
reduction
by $1 billion of the United States payments deficit could be accom-
plished. Since the restrictions are tied to the balance-of-payments
statistics as evolved by the International Monetary Fund, it will be
well into 1969 before any effectiveness of these curbs can be meas-
ured. Here it should be noted that since a specific statistical result
is sought, the rules as to accounting and to prohibited transactions
are not always seemingly logical, and this tends to explain the com-
plexity of the regulations.
In all probability additional restraints will be sought in what
may be a futile attempt to come to terms with the elusive payments
problem. If William Chartener, Assistant Secretary of Commerce for
Economic Affairs, is to be believed, it will be exceedingly difficult
for any Administration to avoid this if the United States is to hold
its overall balance-of-payments deficit to a figure well under $2
billion.14
The regulations are now totally self-contained and cannot be
overridden by Executive Order, a fact which certain recent cam-
paign oratory failed to convey. Section 201(b) of the regulations
provides that all transactions prohibited by Executive Order 11387
which are not prohibited by Section 201 are authorized. The current
structure completely prohibits: (A) positive direct investment by a
direct investor in affiliated foreign nationals (AFNs) of such direct
foreign investor in Schedule A or B countries; (B) positive net
transfer of capital in Schedule C countries; and (C) reinvestment
by a direct investor of any portion of its earnings of incorporated
affiliated foreign nationals in Schedule C countries unless excepted
by Section 503 ($200,000 de minimis) or Section 504 (authorizations
or exemptions) or by the Secretary of Commerce.
The regulations consist of eleven subparts and seventy-four
sections, only four of which are operational or substantive,
the remainder are either definitional, procedural or designed for
implementation of Sections 201 (Prohibitions), 203 (Liquid Foreign
Balances), 503 (Positive Direct Investment not exceeding $200,000),
and 504 (Authorized Positive Direct Investment in scheduled areas).
the introduction of jumbo jets, the Regulations now permit the 30% earnings
quota to be used on a global basis without regard to the three geographical
schedules.
These liberalizations are considered as consistent with President Nixon’s
announced desire ultimately to dismantle the present system of direct controls.
See CCH Bal. of Pay. Rep., Report Letter No. 39, April 7, 1969.
14 CCH Bal. of Pay. Rep., Report Letter No. 22, Oct. 4, 1968.
McGILL LAW JOURNAL
[Vol. 15
From the standpoint of implementing these regulations, the
problems confronting the Office of Foreign Direct Investment and
those facing the United States businessman who was required “to
learn to live with them” have been formidable. William Chartener,
in addressing the 1968 Meeting of the Business Council on October
18, 1968, stated:
To be sure, there have been some major problems in setting up and
administering the program. From OFDI’s standpoint these would include:
–
Changing from a voluntary program to one of mandatory legal restraint;
–
Operating under a concept that provides different treatment for three
different categories of countries;
– Writing regulations to cover a great variety of direct investors with
–
–
respect to both size and type;
Formulating policy for industries with peculiar problems –
oil and other minerals, construction, shipping, and airlines; and
Trying to adjust the program as to achieve the target and at the
same time permit companies to fulfill prior committments.
such as
From the companies’ standpoint, the primary problems have been:
–
–
–
Lack of time to adjust to a new program;
Shifting from domestic to foreign financing;
Operating under a base period allowable which leaves little leeway
for those who had no investments in 1965 or 1966;
The handicap assumed by companies that held down their investment
activities or borrowed heavily abroad under the voluntary program
in 1965 and 1966 relative to the position of competitors who may
not have followed the same patriotic instinct;
The strict repatriation requirements in Schedule C countries; and
Adjusting to admittedly complicated regulations. 15
–
–
–
The general tenor of Mr. Chartener’s address was one of assurance
that the controls would be temporary, although their termination
does not seem likely in 1969, but that business should steer itself
in the national interest for continued compliance in the foreseeable
future. Whatever the final outcome, it is certain that United States
business must continue to plan investment decisions around the regu-
lations. They can, it seems, expect to find the government willing
whenever possible to make the task easier for them. Nonetheless,
the question of the total effectiveness of controls remains unan-
swered, as does the more fundamental question as to whether in-
vestment controls are even a sensible approach to the economic
problems faced by the United States. Critics of investment curbs
generally denounce them on the basis that: (1) the position of the
United States relative to the rest of world requires ever greater
participation by United States private interests abroad; (2) balance-
15 CCH Bal. of Pay. Rep., e+ .9079.
No. 2]
THE FUTURE OF INVESTMENT CONTROLS
of-payment deficits are only minimally comprised of direct foreign
investments that the problem lies elsewhere; (3) present research
indicates that pay-back in balance-of-payments terms are too long-
range (61 years for manufacturing investments in Europe) to have
any inUnediate corrective influence; (4) restrictions on business in-
vestment could dangerously slow down the domestic economy by
precluding local industries who face a saturated domestic market
from seeking new foreign markets, except through export, which
may not be feasible or economical; and (5) investment curbs can
result in economic starvation or malnutrition of existing direct for-
eign investments by not permitting sufficient flexibility to the direct
foreign investor or by virtually coercing him to seek investment in,
from his standpoint, a less favorable country.
Putting aside the major lines of dissent to investment curbs for
a moment, let us review certain basic facts over the past year in
the attempt to see if the payments deficit is actually the result of
uncontrolled and excessive foreign investment, and, if possible, to
determine the road ahead. Bear in mind the suggestion made pre-
viously that direct foreign investments are but a part, and small
at that, of a total economic picture. There are numerous variables
waiting in the wings to exercise their influence. As the following
enumeration presents a potpourri of events since March, 1968, it
is difficult to place them in orderly categories for ease of deter-
mining (1)
their relationship, if any, to deficits resulting from
foreign direct investment; and (2) their greater or lesser, as the
case may be, influence upon the total balance-of-payments problem.
Therefore, the listener (reader) must, to an extent, make his own
evaluation of their role.
March, 1968 saw the enactment of a two-tier price system for
gold; the removal of the 25% Gold Cover by the United States; and
completion by the United States of its Gold Pool Settlements and
replenishment of working balances for the Exchange Stabilization
Fund; a 25% cut in overseas travel for members of the United
States defense establishment; as well as familiarization tours of
the United States by foreign travel agents to promote foreign travel
to the United States, sponsored by the United States Department
of Commerce.
During April moves to increase outstanding loans by the Export-
Import Bank from $9 billion to $13.5 billion were made. April also
saw the Securities and Exchange Commission adoption of the rule
exempting foreign financial subsidiaries of United States-based in-
ternational corporations from the usual registration requirements
of the Investment Company Act of 1940. Foreign tourists were pro-
McGILL LAW JOURNAL
[Vol. 15
vided with a discount card allowing discounts of up to 50% on fares
and lodging. The end of the month witnessed the increase of the
discount rate by the Federal Reserve system to 5 1/2%.
May brought the announcement that American troop strength
in Germany was to be reduced by some 33,000 plus some 13,000 de-
pendents. Civilian employees (5,500), mostly foreign nationals, were
removed from the defense department payroll in Germany. Canada
moved in the direction of even greater cooperation with the United
States with the issuance by the Canadian Ministry of Finance of
guidelines to be used by Canadian banks to insure against frusta-
tion of the United States payments program by using such banks
as part of a “pass through” arrangement. Meanwhile in Washington
the Administration pressed for Special Drawing Rights, and by early
June had adopted “Paper Gold” officially. June also saw $52 million
worth of commodity procurements purchased outside the United
States and the monetary reserves of the major industrial countries
down about $2 billion in the first quarter of 1968. It was made public
that the balance-of-payments were in ,deficit for the first quarter of
1968 by about $600 million and that peace in Vietnam would only
reduce the deficit by $1.5 billion, according to the Assista.nt Secretary
of the Treasury. Attempts to block further drains on our gold reserves
received a setback with the disclosure that gold sales for the first
quarter of 1968 exceeded $1 billion. Meanwhile, Administration pres-
sure for imposition of a travel expenditures tax was renewed.
While in July, 1968 a lower trade surplus was forecast, Kennedy
Round cuts commenced, interest equalization tax collections were up,
Canada narrowed its payments deficit and removed the ban on
“swapped deposits” imposed in March to defend the value of its
dollar, and it was announced that for the second time this year
United States imports exceed exports.
By August a lower trade surplus was forecast. The United States
Travel Service Program showed an increase of 16.4%
in foreign
visitors to the United States. The defense department cut back on
foreign research spending, and the first evaluation of the OFDI
program was announced. This status report did little but to indicate
that firms were complying –
over three thousand firms had filed
FDI-101’s, the basic reporting form, and that 950 applications for
specific authorizations had been received, of which 800 had been
acted upon, contributing $1.5 billion of investment outflow. While
the Department of Commerce was announcing a second quarter
deficit of some $150 million, the Treasury Department was stating
that the United States was making substantial improvement toward
achieving equilibrium.
No. 2]
THE FUTURE OF INVESTMENT CONTROLS
By September, foreign borrowings by direct investors were up
but largely unspent, our trade surplus was deteriorating and tourist
travel abroad was still large. Internal Revenue proposed a scheme
for withholding on the Interest Equalization Tax. It was announced
that OFDI controls will likely remain in effect, though prudent
individuals rarely thought otherwise, and several compliance actions
were contemplated.
October started rather bleakly and few events of that month
were viewed as signs of early elimination of the controls or any
really effective improvement of the payments problem. A certain
air of desperation could be gleaned from the announcements that
two new General Bulletins were issued by OFDI as interpretative
guidelines and that additional restraints might be required over the
short-term, but for long-range improvement, a five-point program
for trade improvement was released by the United States Depart-
ment of Commerce. It was designed to reduce domestic economic
growth to or below $15 billion a quarter; make the economy more
efficient by emphasizing productivity, apart from a slight anti-labor
union coloration to this item; how it was to be accomplished was not
detailed –
apparently, by exhorting the American businessman and
labor with the “Quotations of Chairmen Chartener and Fiero”; a
continued effort to reduce foreign barriers to United States exports;
admonishments against Congressional attempts to pass protection-
istic legislation, though conceding that in certain isolated cases (not
specified) they may be appropriate; and finally, an aggressive ex-
port promotion program. On the credit side, foreign capital inflows
continued high. Under Secretary of the Treasury, Joseph Barr,
attributes this promising development to five factors:
the
United States is one of the few physically secure places in the
world, which suggests that these investments may just as well re-
present “fright capital” inflows as evidence of foreign confidence in
the American dollar or international goodwill; (2) that the countries
of North America live in peace and understanding with each other,
although investment in other highly industrialized nations, i.e., Japan,
has certainly shown little evidence of slackening; (3) the American
democratic institutions seem viable and strong; this basis for the
encouraging increase in foreign investment in the United States
hardly seems much in point; (4) only in the United States has the
investment market the breadth and depth to permit foreign capital
to take a position and to liquidate the same without seriously af-
fecting the price level; and (5) congressional passage of the 10%
surcharge on personal incomes, but this has not had the real effect
hoped. Since the beginning of this month and running back to the
last week of October, the Department of Commerce has been warn-
(1)
McGILL LAW JOURNAL
[Vol. 15
ing, regarding hopes of removal of investment controls in light of
somewhat improved conditions, that “We do not want to be misled
by our own predictions. There will be little change in 1968, and
1969 will depend upon the situation as it develops during the year.”
However, this week some easing of the controls was foreseen in the
announced liberalization accomplished by allowing a direct foreign in-
vestor to select an optional investment quota, which will be equal
to 20% of the earnings of a company’s AFN’s in each of the
Schedule areas. This presents an alternative to the current base
year guidelines and permits more flexibility to a small or medium-
size company with little prior foreign direct investment experience.
A loosening of control slightly in one area is a far step from
removal of the curbs, and caution is urged. Since most of this cau-
tion emanates from sources within the current Administration, they
are perhaps designed to cause the President-elect to go slowly on
his on-again, off-again promise to remove the curbs at once. The
results of such could cause a $6 million deficit in the balance-of-pay-
ments almost immediately if American business rushed to pay off
foreign borrowing with money from United States banks to avoid
the higher foreign interest rates. It is also doubtful if investment
curbs could be removed without an attendant slowdown of the
domestic economy, which, even if possible, would surely result in
a much higher unemployment rate. This is not desirable in light
of the serious domestic problems facing the United States, which
only greater expenditures of domestic capital can begin to solve.
On the first anniversary of the devaluation of the British pound,
the event was marked by vigorous attacks on the French franc, the
West German mark and to a lesser extent the pound, 1968 saw de-
valuations of a number of currencies and threatened devaluations
of others. It has been a period of sustained monetary crisis, which
has contributed to worldwide balance-of-payments problems or trade
imbalances. It
is clear that devaluation of the British pound has
not had the expected effect of improving the British economy –
it
did, however, set off an unprecedented spree of consumer buying,
and now almost a year to the day, the British government is con-
sidering further tightening of their domestic economy. The United
States is far from correcting its now chronic deficits, and American
business is becoming restive and eager to cast investment controls
to the wind. A change of Administration promises a less “heavy
hand” of government upon the private sector, but the distinctions
between the public and private sector in the international area are
so blurred as to be lost. No one knows which direction to take.
Economic advisors of the new Administration voice the hoary dic-
No. 2]
THE FUTURE OF INVESTMENT CONTROLS
turns of proponents of an earlier era, but the popularity of Keynes
is far from exhausting itself.
In the final analysis, as Assistant Secretary of Commerce Char-
tener has pointed out, the important unanswered questions facing
the United States as it embarks upon its second year of “learning
to live with Foreign Direct Investment Controls” and its first year
of a new Administration are:
Whether it
is in our national interest, as distinct from the individual
corporation’s interest, that we should encourage the rapid transfer of our
new technology and managerial skill abroad, especially to economies that
enjoy a considerable advantage in labor costs; and whether the United
States is going to be able to maintain open access to our markets for
imports, many of them from United States controlled sources.16
The final problem I should like to leave you with, and the one
currently being studied and discussed in the United States Treasury
Department, is what should be done to aid American business in
light of the tax harmonization to be achieved by the member states
of the European Economic Community on January 1, 1970. European
border taxes and its most modern manifestation, the added-value
tax, places the American exporter in an uncompetitive position,
since direct taxes, rather than indirect ones, are the largest sources
of revenue in this country, and a system of rebates for American
exporters would have to be developed. Such moves, of course, bring
in questions of violations of GATT, which would prohibit rebate of
direct taxes as an aid to exports. Already, a Working Party on
Border Tax Adjustments within GATT has started work on this
problem in an attempt to arrive at some solution which will not see
United States trade balances with the EEC become unfavorable when
tax harmonization is achieved. Several suggested policy changes have
been proposed which envisaged negotiated changes of GATT rules
to justify border tax adjustments for indirect taxes only; or changing
GATT rules so as to permit border tax adjustments for direct
taxes. Other proposed changes suggest American adoption of turn-
over taxes and retreat from our current heavy reliance upon direct
taxes. The mildest proposal is for the United States to rebate various
indirect taxes not presently rebated.17
Taxes are now added as yet another variable in the increasingly
complicated balance-of-payments picture. The circle is now com-
plete – we began with money; we end with money.
10 CCH Bal. of Pay. Rep., # 9080.
17 See, “Tax Harmonization in Europe and U.S. Business,” Tax Foundation,
Inc. Research Pub. 16, at p. 22 (1968).
