What Does Trump Think of Foreign Investment in the United States?

Over the course of the presidential campaign, and even more intensely after the election, Donald Trump has made it very clear that he does not like it when U.S. companies invest abroad rather than here at home (except for his companies, of course). His response has been a mixture of pushing state government tax incentives to keep them at home and general haranguing of the companies (as he did with Carrier), as well as threats of tariffs to convince companies not to leave (this sounds like one of those statements that should be taken “seriously but not literally,” but we’ll see).

With regard to the general policy issues here, my colleague Dan Ikenson has been taking on misguided concerns about outsourcing for a while now.

In terms of the legality of a company-specific tariff, we would need to see a specific proposal—is this going to be done via statute? by Presidential proclamation?—but there would certainly be some serious domestic and international legal hurdles if Trump actually tries to pursue this. I’m not sure what Trump’s economic policies will do for the economy as a whole, but the field of international trade law will be booming.

But there’s also a flip side to the issue of foreign investment that I want to raise here: What does Trump think about foreign companies who want to invest in the United States? This question may seem like a no-brainer: Who would object to new investment? But in recent years, the Obama administration has looked skeptically at some of the investment coming from China, on purported national security grounds. Here’s the latest, from the Wall Street Journal:

President Barack Obama on Friday took the rare step of forbidding a foreign company from buying a firm with U.S. assets, telling a Chinese investment fund that it cannot complete a deal for German technology company Aixtron SE.

Mr. Obama’s move, only his second outright ban on a foreign acquisition, shows the increasing suspicion the U.S. harbors toward Chinese acquisitions of certain U.S. firms, even before the arrival of President-elect Donald Trump, who made criticism of Beijing a cornerstone of his campaign.

In a statement released on Friday, the Treasury Department said Mr. Obama had issued an order barring Fujian Grand Chip Investment Fund LP, part-owned by the Chinese government, from buying Aixtron. The ban follows a recommendation from the Committee on Foreign Investment in the U.S., or CFIUS, which confidentially reviews foreign acquisitions solely on national-security grounds.

U.S. officials have also intervened in Chinese deals involving real estate near strategic military installations. In 2012, Mr. Obama barred Chinese-owned Ralls Corp. from purchasing wind farms in Oregon near a sensitive military facility, the only other recent example of a president forbidding a deal before Friday.

What are Trump’s views on Chinese foreign investment in the U.S.? The WSJ article notes:  

During the 2016 primary season Mr. Trump appeared to criticize a Chinese bid for a small U.S. stock exchange, but his transition team hasn’t publicly spelled out its attitude toward foreign investment.

Still, Mr. Trump, who has extensive foreign investments himself, has indicated he would use all available levers against harmful trade practices from China and other countries. CFIUS under Mr. Trump could also expand the definition of national security to include food security and oppose deals from countries that don’t allow comparable U.S. investments, according to a memo obtained by CNN.

In the background of this issue is a bilateral investment treaty that has been under negotiation between the United States and China for many years, and that until recently some people were suggesting could be completed this year. The basic idea is that, through this treaty, China would promise to open up its market to foreign investment in currently closed sectors, and also that there would be an international dispute mechanism under which foreign investors could sue the host country government if certain rights were violated.

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You Ought to Have a Look: Climate Fretting and Why It’s Unjustified

You Ought to Have a Look is a regular feature from the Center for the Study of Science. While this section will feature all of the areas of interest that we are emphasizing, the prominence of the climate issue is driving a tremendous amount of web traffic. Here we post a few of the best in recent days, along with our color commentary.

While “climate fretting” has become a pastime for some—even more so now with President-elect Trump’s plans to disassemble much of President Obama’s “I’ve Got a Pen and I’ve Got a Phone”-based Climate Action Plan—climate reality tells a much different story.

For example, a new analysis by Manhattan Institute’s (and YOTHAL favorite) Oren Cass looks into the comparative costs of climate changevs. climate action. His report, “Climate Costs in Context” is concise and to-the-point, and finds that while climate change will impart an economic cost, it is manageable and small in comparison to the price of actively trying to mitigate it. Here’s Oren’s abstract:

There is a consensus among climate scientists that human activity is contributing to climate change. However, claims that rising temperatures pose an existential threat to the human race or modern civilization are not well supported by climate science or economics; to the contrary, they are every bit as far from the mainstream as claims that climate change is not occurring or that it will be beneficial. Analyses consistently show that the costs of climate change are real but manageable. For instance, the prosperity that the world might achieve in 2100 without climate change may instead be delayed until 2102. [emphasis added]

In other words, the economic impacts of climate change aren’t something worth fretting over.

Venezuela: On the Simple Arithmetic of Inflation

As the Venezuelan bolivar collapses, the hype about Venezuela’s alleged hyperinflation becomes more intense. Most of the commentary is literally fantastic, suggesting that the authors are unfamiliar with the subject of hyperinflation and the arithmetic of inflation.

For example, DolarToday.com – which publishes reliable black-market exchange rate data, as well as the Johns Hopkins-Cato Institute annual inflation estimates – claims that the bolivar has depreciated by over 100 percent this month. This is wrong because DolarToday’s arithmetic is wrong. DolarToday’s mistake represents a common error. It fails to transform the bolivar-U.S. dollar exchange rate into dollars and cents. At the start of the month, the VEF/USD black market rate was 1,501.17, and as of November 29th, it was 3,744.52. The correct arithmetic to calculate the deprecation of the bolivar between those two dates is ((1/3,744.52) - (1/1,501.17)) / (1/1,501.17) = 59.9 percent  depreciation. 

The accompanying charts illustrate the correct arithmetic and the linkage between black market exchange rates and annual inflation rates. For Venezuela’s inflation to hit the International Monetary Fund’s (IMF) 720 percent inflation forecast for 2016, the bolivar would need to depreciate by 44 percent from today’s rate of 3,744 to 6,735 VEF/USD. Furthermore, for Venezuela to hit hyperinflation, which is an annual inflation rate of 12,875 percent, the bolivar would need to collapse by 97 percent from today’s rate to 106,565 VEF/USD. 

The Quality of China’s Yuan Deteriorates – In One Chart

During the past year, the Chinese yuan (CNY) has shed a bit more than 7 percent of its value against the greenback. That’s only one aspect of the CNY’s weakness. Another concerns the quality of the CNY.

As Jerry Jordan pointed out recently at the Cato Institute’s 34th Annual Monetary Conference, a central bank is a balance sheet. Among other things, the People’s Bank of China’s balance sheet contains information that indicates the quality of the CNY.

While the monetary liabilities (read: monetary base) of the bank have remained rather constant since late 2014, their composition has changed. The assets, which are the counterparts to the monetary liabilities, have changed dramatically. The net foreign assets have fallen and been replaced by net domestic assets. In consequence, the quality of the CNY has deteriorated. In this light, the recent tightening of China’s capital controls on outbound foreign investment is nothing more than an attempt to preserve foreign exchange and reverse the deterioration in the CNY’s quality.  

Trump’s $10 Trillion Infrastructure Plan

President-elect Donald Trump has promised large increases in infrastructure investment. He has not proposed a detailed plan yet, but $1 trillion in new investment is being discussed as a target.

Actually, Trump has already made a specific proposal that would increase investment by far more than $1 trillion: his tax cut plan. His proposed corporate tax rate cut from 35 percent to 15 percent would increase the net returns to a vast range of infrastructure, including pipelines, broadband, refineries, power stations, factories, cell towers, and other hard assets. With higher net returns, there would be more capital investment across many industries.

How much more? The Tax Foundation estimated that the overall Trump tax cut would expand the U.S. capital stock by 20 percent above what it would otherwise be within 10 years. TF economists tell me that private capital stock is about 189 percent of gross domestic product under the baseline, which would be about $35 trillion this year and more than $50 trillion in 2026. If the Trump tax cut was enacted and the capital stock grew as TF projects, the capital stock would be $10 trillion or more higher than otherwise by 2026.

The Carrier Approach Will Fail to Attract or Retain Investment and Production in the United States

Media and social media have been percolating – mostly with invective – over President-elect Trump’s “deal” to keep Carrier and its 1,000 jobs from moving to Mexico.  I am among the many critics of this ad hoc, interventionist approach to retaining or attracting companies to perform value-added, job-creating activities in the United States.
 
But there is a broader lesson in all of this, which seems to be getting overlooked: The United States (and the 50 states, individually) is competing with the rest of the world to attract and retain investment in value-added activities – factories, research centers, laboratories, etc. And, in that competition, public policies are on trial.
 
The revolutions in communications and transportation have made global capital mobile. The proliferation of transnational supply chains and cross-border investment means that businesses – entrepreneurs and other value-creators – have options like never before. Investment and production location decisions are determined by a variety of factors, including: the size of the market, access to transportation networks, wages and skills of the workforce, whether there is healthy respect for the rule of law, stability of the political and economic climates, perceptions of corruption, the magnitude and impact of regulations and taxes, trade policies, immigration policies, energy policies, and whether the general policy environment is conducive to running a successful business.
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Will Mattis Be a Voice of Caution at the Pentagon?

“We are going to appoint ‘Mad Dog’ Mattis as our secretary of defense,” President-elect Donald Trump told a crowd in Cincinnati last night. He added, “They say he’s the closest thing to Gen. George Patton that we have.”

To be successful, James Mattis will also have to be this generation’s George Marshall, and perhaps its Dwight Eisenhower and George Washington, too.