Both the stock market and the U.S. dollar fluctuated as usual Monday in response to hopes and fears about the U.S. budget and trade deficits.
But the government has run a budget deficit since 1969--almost 20 years--and U.S. imports have been greater than exports for about a decade. Why are the markets so nervous now?
One reason is growing anxiety about the United States becoming a debtor nation, which is seen by many as solely a process of piling up future obligations for the foreign capital coming in today.
But anxious debtor-nation talk often mixes short-term borrowings with long-term foreign investments--apples and oranges--and almost always obscures the fact that U.S. companies still own more overseas than foreigners own here and, furthermore, that U.S. holdings overseas are increasing faster than foreign assets here.
Of course, U.S. ownership abroad no longer makes headlines, while foreign investors over here have the attraction of new money and rapid growth. There were headlines last week, for example, when Eiji Toyoda, the 74-year-old chairman of Toyota Motor Co., announced that his company will build a $300-million engine plant in Georgetown, Ky.
The engine plant joins the $800-million manufacturing complex that Toyota is already building in Kentucky and brings to about $3 billion the total of foreign investment in the state. Meanwhile, Nissan has brought $1.3 billion in investment to neighboring Tennessee. In Ohio to the north, Honda and more than 70 other Japanese companies have poured $2.2 billion into the economy.
The story is the same elsewhere--foreign investment running close to $500 million a year in Pennsylvania, totaling $4 billion in Minnesota. Nor is Japan--now up to $25 billion--the largest investor. Britain is, with more than $50 billion invested, almost a fourth of the total foreign long-term investment.
So overseas money is big--and welcome for the jobs it creates in big states and small, 40,000 jobs in Connecticut, 300,000 in California.
But it also causes misunderstanding and misgivings. There are fears that foreigners are buying up America, or that the money could be pulled out and the jobs disappear overnight, neither of which is justified.
Even those who are favorably disposed say things that are not quite accurate--making easy comparisons to the 19th Century, when foreign money helped build the American railroads.
But what is really going on is a long-term internationalization of industry, with foreign producers getting closer to their U.S. market while American companies continue to invest overseas as they have for almost a century.
U.S. assets abroad are about $260 billion at present, and increased $30 billion last year because of new investment or reinvested overseas profits. That compares to long-term foreign assets in the United States of $209 billion, which increased $24.7 billion in 1986. Foreign investment is a two-lane highway.
Then what's all the debtor-nation fuss about? About a great deal of short-term foreign money in bank accounts and Treasury bills, resulting ultimately from the U.S. trade and budget deficits. When those deficits correct themselves, as they now show signs of doing, the short-term investments will shrink.
But the long-term funds in factories and businesses are here to stay.
Take Toyota. Two years ago, when the exchange rate was still about 230 Japanese yen to $1, the company sold about 1 million cars in the U.S. market--almost all shipped from Japan. But as the yen rose 40% against the dollar, Toyota's costs rose at home and so did its prices in America. Its sales fell 9% as a result. So the company decided the time had come to produce here, which means that in the future the U.S. trade deficit with Japan will shrink but the number of Japanese cars in the U.S. market will not.
Toyota's U.S. profits, however, could be sizable--perhaps $176 million a year once the $1.1-billion Kentucky complex is completed. Will those profits flow back to Tokyo? They could, but they probably won't.
Eiji Toyoda, a cautious businessman whose company has no debt, knows that it wouldn't make sense to convert profits from a market in which he's making and selling cars, into the currency of a market where he now makes fewer cars. As U.S. firms have done overseas, Toyoda in all likelihood will reinvest his profits and expand operations in the market he wants to be in.
And that's what makes the current wave of foreign investment different from the British investments of the 1860s and '70s that built the U.S. railroads. At that time the newly industrializing United States welcomed British money but stopped imports of British steel rails and train equipment to give America a chance to build its own steel industry.
Today we do not stop a foreign car maker from competing with General Motors, Ford and Chrysler on their home ground. But we do demand the right of U.S. companies to invest and compete in foreign markets--including Japan.
In short, what internationalization of industry means is that the world is getting smaller, but not easier.