A looming financial disaster for the Federal Givernment.

harpseal | August 17, 2003 | harpseal

[harpseal]

I could have used the word government instead of my creative typo as the title but this is about a giveaway program to foreign nations that may just bite us even worse than the Savings and Loan disaster of a few years ago.  For quite a few years now companies have been investing in China.  This should not be news to anyone who shops or reads any economic news.  The exact size of the American investments in China I do not have an accurate measurement on yet but I did not wish to delay a first thread until I finished my research.  Accurate numbers for the size of American Companies investments in China are not that easy to come by at least for me on a weekend.  Yet a recent thread on Free Republic “ China plans to grab imported technology” brought up an aspect to this issue which could IMHO result in a doubling of the Federal budget or more just in meeting the obligations under US government political risk insurance. 

 

OPIC is an agency of the US government that provides political risk insurance to companies that invest overseas.  Thus if their investment is nationalized by the nation the have invested in the US government guarantees to indemnify their loss.  Now china has issued a draft of a new policy for automobile manufacturers.

 

If enacted, executives said here last week, the provision could force foreign manufacturers to turn their technology and patents over to their local partners as a condition for remaining in business.

"If you're a joint venture, then you pretty much have to transfer your technology to your Chinese partner," said one foreign executive who declined to be named.

The transferred technology then could be used against the foreign partner, as the draft policy also states that China intends for its local carmakers to be capable of competing in world markets…

China has long made it clear that technology transfer is one reason for allowing foreign joint ventures in the first place. Companies that already have automotive joint ventures in China, such as General Motors and Volkswagen AG, have built plants that tapped into their worldwide technological expertise…

Another provision of the draft policy specifies that any foreign company taking a 10 percent stake or larger in a Chinese company must share r&d [sic] and production and sales know-how with the partner.

Another provision upholds the regulation that any automotive venture must be at least 50 percent owned by a local partner, effectively ruling out the possibility of a wholly owned foreign auto manufacturing venture in China. “

Now if one considers the implications of this draft from China this is effective nationalization of the investment in China.  OPIC could well be on the hook for the losses from this.   If Companies transfer ownership of their technology to Chinese companies they will face write offs that could make them insolvent.  Hence if they have OPIC insurance they will be there exercising the full faith and credit guarantee given them by the US government that they would be indemnified.  If it is $1 it is too much but how do we as a nation deal with billions or trillions of federal expenditure to meet our obligations under this program?  If we repudiate the obligation what are the affects of reneging on a full faith and credit guarantee?  Can you trust the FDIC after that?  It too relies on a full faith and credit guarantee. 

There is also a problem with those American companies that have invested in China.  If they have to write off their China investments what happens to their balance sheets?  It is certain that the need to write off substantial investments hurts a company and causes its market price to fall.  Remember some of the Companies that are invested in China Motorola, Intel, HP, Microsoft, Boeing, General Motors, GE, and just about every Fortune 1000 company one can name.  

Now many Free traders have long pointed out that the paper dollars flowing to China will eventually be devalued if China keeps up its current trade policies.  What they do not mention is those devalued dollars will be quite useful for purchasing companies in the USA that have technology they want.  In 1995 the company that has the most important patents for making rare earth magnets an essential technology for our smart bombs was allowed to be sold to investors from China by the Clinton administration who described China as our “Strategic Partner.”  Within the past two weeks it has come to light the last manufacturing facilities of this company Magnaquench that were in the USA are being moved out of the USA to China. 

So what we are facing is some combination of the following the Federal Government having to increase spending to pay companies for their China investments alongside a lowering of value of those companies that are not getting full reimbursement,  all of this as a result of Chinese nationalization of assets.  I have probably missed several aspects to the problem we as a nation will be facing from this.

I wish I could offer a good solution.  I know that a complete end of any future OPIC political risk insurance will not solve the problem but it is necessary and will prevent the problem from getting worse than it already is.  My question for Freepers and anyone else is “How do we, as a nation, address these issues?”  I have a real problem of repudiation of the guarantees as it will affect the perception of what the full faith and credit of the USA is worth both in the USA and in the rest of the world.  I do not know what specific terms have been given on the in force OPIC insurance and if we can raise premiums to reflect the actual potential risk of loss under these policies.  Clearly if we can do that we should do that.  Price the insurance out of the market so that companies will face the consequences of their decisions without the subsidy of the US government.  In short in this case make the government a government not a giverment.

Now we come to the case of the uninsured investment in China and its implications for the US economy.  Here I must go to a solution I really hate so I am asking for ideas.  The best I can come up with is the seizure of Chinese assets in the USA.  I have several problems with this not the least of which it may be too little too late and I do not like the government seizing property, even the property of a nation engaging in a form of asymmetrical warfare against the USA.  Of course should the warfare become open then this would happen anyway.

I am seeing a potential problem and Free Republic is one of the great think tanks in the world IMO.  I am presenting this early before my research is complete and asking for more information from anyone who has it.  I am asking for ideas for solutions.

Thank you all.

[harpseal]

ping

On or off this list let me know

[the gillman@blacklagoon.com]

Since the beginning of this mad rush to China I have argued that when they had what they needed, they would simply nationalize the industries and come after us.

Without removing pretty much our entire beauracracy from power immediately, and starting over, there doesn't seem like much can be done. The present structure is made up almost entirely of traitors and/or idiots.

Siezing the foreign companies within China is a great boost for them. Siezing those companies at the same time as bankrupting their number one enemy is just wonderful - for them.

[dennisw]

OPIC is the gun to the head of the Feds to play kissy face with POS foreign nations. Such as China. (I have nothing against the Ch. people in the abstract). OPIC is a part of the reason we played footsie with ChiComs when they forced down our intel gathering airplane 2 years ago.

No one knows about OPIC and the Feds and transnational corporate traitors love it this way. No one will ever want to rock the boat with China and Mexico and make large, outrageous, embarrassing OPIC payouts necessary. The American public would be very angry that their job losses are subsidized by the supping_at__the_public_trough crowd in DC.

[ezo4]

remove from list

[A. Pole]

So what we are facing is some combination of the following the Federal Government having to increase spending to pay companies for their China investments alongside a lowering of value of those companies that are not getting full reimbursement, all of this as a result of Chinese nationalization of assets.

"Free trade" bump.

[harpseal]

You are not on my list under this id.

[hedgetrimmer]

You can bet that Diane Feinstein will be the first to appoligize to the Chinese, if the automakers don't sign over their patents and technology. She will also be the first to apply for tax payer restitution of her investments if they come after her assets.

[harpseal]

Let us not forget the effects of a devalued currency, the ability of the Chinese government to pick up any remaining technology by purchasing the now low proced American companies that have anything they want.

Now if after this the Chinses wish to place opbtacles to anyone from outside teh USA by denying access to their markets and technology gooten from the USA there is no one to stop them.

What they are doing would land tehm in jail if they were not a sovereibn nation outside US jurisdiction.

[harpseal]

OPIC is the gun to the head of the Feds to play kissy face with POS foreign nations. Such as China. (I have nothing against the Ch. people in the abstract). OPIC is a part of the reason we played footsie with ChiComs when they forced down our intel gathering airplane 2 years ago.

Agreed.

No one knows about OPIC and the Feds and transnational corporate traitors love it this way. No one will ever want to rock the boat with China and Mexico and make large, outrageous, embarrassing OPIC payouts necessary. The American public would be very angry that their job losses are subsidized by the supping_at__the_public_trough crowd in DC.

Thank Jim Robinson for Free Republic.

[harpseal]

Now since Diane Fienstein may well be merely an American representative of the PRC she may be personally immune from having her assetts nationalized but she will probably still seek money from teh taxpayer.

[harpseal]

Please think about these problems and post any ideas you have for solutions.

[harpseal]

We disagree on many trade issues but on this you have posted you do not consider the Chuinese actions Free Trade. I would appreciate any input on how the US government should deal with any part of this problem.

[harpseal]

While it may feel good and improve morale among shareholders and taxpayers lynching teh CEO's who made these decisions will not be a solution to the problem and I do not approve or encourage such action.

[searchandrecovery]

Good article, harpseal.

Well, opic should be abolished. If it isn't, though, what would happen if China seized the assets of foreign factories there - would opic run out of money? Is there a cap on the amounts they pay to individual companies? Curious about the worst-case scenario.

[FreePaul]

With reference to your headline, the Federal Government is a financial disaster.

[joanil]

It is indeed a problem.
Pretty soon all we will have here is McDonalds and the support industry to supply it.
So, looks like we may all become butchers, bakers, sliced cheese makers!

And to think we used to worry so much about Japan encroaching on our turf and buying up all our factories and real estate.

The big problem with China began...IMO.... when we started dismantling our defunct foundries and shipped much of our heavy tooling and dies and machinery to the Far East.....at pennies on the dollar they purchased our good old production machinery.
Then they took our machines and used them to produce a heavy industry that now seems to rival the USA in its heyday.
And they have two great resources:
A massive intelligent personnel workpool.
And a abundance of coal reserves which they are not afraid to use (no 'green machine' there to squack and complain).

Looks like the next 'superpower' is arising. A generation or two and they may now surpass us in productivity and technology.

Oh well, we will still have McRib's for supper!

[harpseal]

If it isn't, though, what would happen if China seized the assets of foreign factories there - would opic run out of money?

When China seizes the assets, as they have publicly floated this proposal already, there is insufficient documentation to determine the magnitude of the payout.

Is there a cap on the amounts they pay to individual companies?

There is no documentation on any cap in the amount of payouts except teh total ammount of investment at risk.

Curious about the worst-case scenario.

That is what I am trying to get some hard numbers on.

[harpseal]

I agree on the nature of the problem now lets se if we can come up with a proposed solution.

[harpseal]

would opic run out of money?

Since OPIC is a part of the Federal Government and its insurance policies are backed by teh full faith and credit of the US government in that sense they can just print more money but then the uSA runs the risk of hyper inflation similar to Germany in the 1920's. of course we will not be printing money to satisfy reparations imposed by athe treaty of Versailles we will be doing it to pay off Chinese seizure of assets to tehpeople who decided to place assetts at risk in the first place. Oh yes we could alternatively raise taxes to pay off this obligation How would you feel about a 99.9% income tax rate with no deductions? At least we would have a flat tax.