Would Kerry cut foreign investment?

Robert Got­tlieb­sen, The Aus­tralian’s busi­ness colum­nist, is ring­ing alarm bells over Sen­a­tor Ker­ry’s threat to attack US tax incen­tives for for­eign direct invest­ment and ‘off­shoring’. But the incen­tives are only a small frac­tion of the US income from for­eign direct invest­ment; their with­draw­al would be unlike­ly to impact Chi­na and India at all. Got­tlieb­sen quotes Ker­ry’s nom­i­na­tion speech at the Demo­c­ra­t­ic Con­ven­tion on his plan to elim­i­nate tax incen­tives for so-called ‘off-shoring’—that is, the relo­ca­tion out­side the USA of US-owned man­u­fac­tur­ing pro­duc­tion and jobs (this is_not_ the same thing as ‘out-sourcing’—the use of con­tract­ed sup­ply of goods or ser­vices from for­eign pro­duc­ers) He con­cludes bq. If Ker­ry is elect­ed US pres­i­dent, he is firm­ly com­mit­ted to turn­ing the glob­al out­sourc­ing mar­ket upside down with pro­found effects on Chi­na and India as well as the cur­rent dynam­ic dri­ving the US econ­o­my …
Ker­ry … pro­pos­es to change the basic busi­ness mod­el that under­pins cur­rent world trading(“The Australian”:http://www.theaustralian.news.com.au/common/story_page/0,5744,10839619%5E16946,00.html) Well… not real­ly. Ham­per­ing the relo­ca­tion of pro­du­tion or even of sup­ply out­side the US is bad for the US econ­o­my, as Alan Greenspan, among many oth­ers, has “point­ed out”:http://news.com.com/Greenspan+Offshoring+laws+could+harm+U.S./2100–1022_3-5172975.html?tag=nl.  It has the effect of rais­ing US prices and shrink­ing the US econ­o­my and the num­ber of US ‘onshore’ jobs. But Ker­ry’s plan to change for­eign invest­ment tax incen­tives com­plies with the Unit­ed States’ inter­na­tion­al oblig­a­tions: under WTO, for exam­ple. Cur­rent US tax laws allow com­pa­nies to defer US tax­es on income earned by their for­eign sub­sidiaries. A US com­pa­ny that is try­ing to decide between locat­ing pro­duc­tion or ser­vices in the Unit­ed States or in a for­eign low-tax haven is actu­al­ly giv­en a tax incen­tive to re-invest sub­sidiary prof­its abroad rather than to repa­tri­ate them. Note that this means that the Ker­ry tax plan would have no effect on ‘out­sourc­ing’ where no for­eign direct invest­ment is involved. If US con­sumers are will­ing to pay a suf­fi­cient­ly high price for goods made in the USA rather than abroad, the Chi­nese or Indi­ans like­ly will ‘off­shore’ their own pro­duc­tion as the Japan­ese learned to do in the 1980s in response to US trade bar­ri­ers on auto­mo­biles and con­sumer elec­tron­ics. If the Ker­ry plan is enact­ed, the pro­ject­ed $12bn loss of tax incen­tives for ‘off­shoring’ investors would equal only 7 per­cent of the annu­al income from US FDI ($164bn last year, see the Table below). At this lev­el, the loss of the incen­tives could cer­tain­ly have some impact on total out­flows. But Got­tlieb­sen is exag­ger­at­ing to say that it would “turn the mar­ket upside down”. Ker­ry says that he’ll apply the $12bn in sav­ings to reduc­ing the total cor­po­rate tax bur­den. So the com­pa­nies that lose the ‘off­shoring’ incen­tive will get some of it back in low­er tax­es on their US-earned income. It’s pos­si­ble that a seri­ous attack on offshoring/outsourcing by a Ker­ry admin­is­tra­tion could impact demand for Aus­trali­a’s prod­ucts, for exam­ple our raw mate­ri­als sup­ply to Chi­na, as Got­tlieb­sen alleges. But I think this is unlike­ly. Chi­na is not a favoured des­ti­na­tion for US off­shoring, so prob­a­bly does­n’t have much to lose. In fact, a lot of US ‘off­shoring’ goes not to Chi­na and India but to Mexico—the Unit­ed States’ NAFTA partner—and to Cen­tral Amer­i­ca (par­tic­u­lar­ly gar­ments) and to Europe. As the dis­tri­b­u­tion of US for­eign direct invest­ment shows (see the table below that I pulled togeth­er from “US Trea­sury data”:http://www.bea.doc.gov/bea/di/usdctry/longctry.htm), there are a large num­ber of des­ti­na­tions for US for­eign invest­ment that far out­weigh Chi­na and India: ‘off­shoring’ lim­its would have a big­ger impact in Ire­land. “Here’s”:http://releases.usnewswire.com/GetRelease.asp?id=28000 the Ker­ry cam­paign media kit about the invest­ment incen­tive sto­ry. Also, you might want to skim through the con­ser­v­a­tive Cato Insti­tute’s dis­sec­tion of “Ker­ry’s trade record”:http://www.cato.org/dailys/08–23-04.html. On the whole, his record is not near­ly as bad as it might seem from this idea.

US stocks of for­eign direct investment
$US mil­lions, 2003
Des­ti­na­tion Stock at his­tor­i­cal value Income
Cana­da 192,409 17,354
Europe 963,087 81,751
Of which
France 47,914 4,339
Ger­many 80,163 4,062
Ire­land 55,463 8,281
Lux­em­bourg 66,919 7,780
Nether­lands 178,933 15,791
Switzer­land 86,435 10,738
Unit­ed Kingdom 272,640 13,756
South Amer­i­ca 69,942 4,541
Cen­tral America 71,507 6,766
Of which
Mex­i­co 61,526 5,750
Oth­er West­ern Hemisphere 162,574 13,245
Africa 18,960 2,864
Mid­dle East 16,942 2,645
Asia Pacif­ic 293,490 35,546
Of which
Aus­tralia 40,985 3,707
Chi­na 11,877 2,371
Hong Kong 44,323 5,071
India 3,609 391
Japan 73,435 9,167
57,589 6,974
All coun­tries 1,788,911 164,712

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