from Follow the Money

Read Dan Gross on Globalization a la carte

March 12, 2006

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As usual, Gross has a lot of smart things to say about limits on cross border investment in a no-longer-quite-so-flat world -- or what he calls globalization a la carte. 

Limits on cross-border investment are hardly new.   The Canadians, for example, have long protected their media industry from control by non-Canadians (Read Americans).  They are hardly alone. Most countries protect parts of their media industry.  Rupert Murdoch had to become an American citizen to own a US TV network.    

Such restrictions have not precluded a very high level of US-Canadian (And US-Australian) economic integration in other areas.

I am not an absolutist on these questions.  I suspect a certain degree of "globalization a la carte" goes with living in a world of nation-states.  

If France doesn't want American firms to own, say, its cheese industry, the world will adapt.   And it is now pretty clear that the US will have its own peculiarities as well.  It wants US firms to be able to purchase their choice of foreign assets abroad, but to restrict at least some foreign purchases of US assets.

To me the most interesting question is precisely the one Dan Gross raises.  

How a la carte can a big debtor be?

The US obviously has an enormous current account deficit.  That had to be financed by selling debt -- or by selling equity -- to countries with current account surpluses.

And a large share of the world's current account surplus is found in the world's oil exporting countries and China.

Many oil-exporters are not exactly the United States' best friends (Venezuela, Iran).  Those who are allies with the US often are not exactly democracies (UAE).    Pick where you place Russia and Saudi Arabia on both the "allies" and the "democracy" scale.

China obviously is not a democracy; its strategic relationship with the US is complex.

And I would add, in both China and most oil exporting countries, the state plays a far bigger role in the economy that the US.   Big firms in these countries often are owned by the state - or by the family that runs the state.

The US has had no problem selling countries who neither close friends nor democracies tons of US debt.  But it is a bit more reluctant to sell equity - control - is rather different. 

Gross:

"Buying debt?   No problem.  Foreign investors own more than half of the United States government bonds.   The biggest portfolios reside on the ledges of China's central bank and of various Saudi Arabian and other Persian Gulf government-controlled entities.  But equity, which connotes ownership and control, in the same people's hands sparks off Selective Globalization Syndrome"

Personally, I suspect we in the US are a bit more scared of foreign equity ownership than we should be, are a bit too blasé about the long-term costs of rely so heavily on debt financing. 

No matter.  The US has made it pretty clear - as I argued back when the US rejected CNOOC's bid - that US debt is not fully convertible into US equity.

At least for many of those countries now financing the US.

The US has been willing (some might even say eager) to allow foreign governments to finance the US and to support the US treasury market.  Foreign purchases of US debt let the US have guns, prescription drugs, tax cuts and a booming housing market.

But the US is not willing to allow those holding US debt to trade that debt on major scale for equity control over US assets.   To use Dan Gross' analogy, the US gets to decide what US assets are on the menu that is offered to foreigners.

And that menu is a bit different than the menu of assets available to American investors.  Or for that matter, European and Japanese investors.

Up til now, the United States current creditors have been willing to buy off that limited menu.  They have accepted the United States' terms.   China did not stop financing the US after the US said no to CNOOC's bid for Unocal.   And, as I have argued previously, so long as so many countries with large current account surpluses peg to the dollar, there practical choices are limited.    If the US won't sell a particular asset, some have to buy other US assets.  

And those pegging to the dollar and attracting large capital inflows in a sense have it worse.   China has to buy those US assets that the US is willing to sell not just with its own funds, but with the funds that Dubai now likely will want to invest in China.

The question - as always - is whether or not this arrangement is sustainable.

Politically.

So far, no Gulf or Chinese Charles de Gaulle has rejected the limited menu that the US has offered its creditors.  That has allowed the US to avoid making some uncomfortable choices.  

Yet like Gross (and Roubini) I suspect that if the US relies heavily on foreign savings to finance US investment and runs sustained current account deficits of $1 trillion over an extended period of time -something that is necessary for a "soft landing" - some loss of control is inevitable.  The entire external deficit won't be financed with debt forever.

One final note: comments went down yesterday.  It was a technical glitch, not a reaction to anything anyone has said.  Sorry.

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