A looming financial disaster for the Federal Givernment.

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.

Maybe in 15-20 years it will conclude that it can deal an effective blow to (what's left of) the U.S. economy by seizing assets

We'll have to keep a step or two ahead of them, in terms of R&D and management, to prevent that from happening, because otherwise they'll never attain true independence from our corporations. Increasingly what they lack is not hardware but software and intellectual capital. Fortunately, it's very difficult for them to improve in those areas without at least some increase in openness and transparency. On the other hand, it's alarming that they're producing ever-greater numbers of skilled technical workers, even as the technical proficiency of our own future workforce may be questionable thanks to the high-tech downturn.

They wouldn't be able to foreclose on the loans unless our military gets crippled to the point they can overrun the continent, and then "we the people" would have to negotiate with them.

If they do nationalize plant, equipment, and patents, then we could threaten to default on all our outstanding debt to them. This, of course, would require a whole new slate of elected officials to replace those in both parties who are already owned and operated by the Chinese.

If the offshore companies start collecting on OPIC money to cover their losses in China, it will lend much stronger credence to the claims that the S&L/FDIC debacle of the 1980's was a well-planned ripoff of the American taxpayers. This one will be much larger though.

Well the reason it could not be privatized or sold to the insurance companies is the rates for doing that would be prohibitive and it would not be a hand out. To sell a book of business to anothe rinsurance company it must be discounted so that they can make a profit at it. to get rid of OPIC's book of business wouldprobaly mean the government that is we taxpayers would have to pay a company to pick up teh book of business and that company would have to be rock solid for its guatrntees of indemification to be considered a subsitute for teh Full faith and crdit ofthe US government.

Now with theimpending nationalization of some assetts by China that book of business has become even less valuable and will be ever less valuable as the date of nationalization approaches.

Given these conditions and the fact it may need the insured consent to tranfer the policy to a private company can you suggest a solution to the problem? I am actively soliciting solutions.

There was an article a few months ago concerning China buying up large amounts of US government and consumer debt (including blocks of mortgage notes). It might be a good idea to dig up some of this info and factor it in with possible scenarios.Agreed on the utility of this action. I am already up to my eyeballs in trying to find hard data s o a little more work never hurt anyone.

They wouldn't be able to foreclose on the loans unless our military gets crippled to the point they can overrun the continent, and then "we the people" would have to negotiate with them.

Might I suggest rule .308 as an initial negotiating principle. But I would not look forward to this.

I would also suggest sequestration of any assetts we could get to. As to the need of a whole new slate of politicians maybe we would not have to replace everyone is some showed some b*lls.

True.

While I support free trade, the Federal government should not be involved in insuring against the risks of political turmoil in foreign countries (especially if it costs the Feds money in the net, which really makes it into a subsidy).

I am glad you got at leats one of my points clearly. What we have in the current trade envirornment is clearly not Free Trade based on teh example in the linked thread alone. I note the comment by LS to that effect in that linked thread. (LS tou are flagged because i mentioned you).

...otherwise they'll never attain true independence from our corporations.
Interesting - first time I've read this idea.

Increasingly what they lack is not hardware but software and intellectual capital. Fortunately, it's very difficult for them to improve in those areas without at least some increase in openness and transparency.
I was thinking about this. The move from manufacturing goods designed elsewhere to designing and selling stuff on your own (especially for cultures way different from yours) will be difficult, imho. It'll be informative to see the first chinese-made car.

Now you stated there is no good reason thatOPIC can not be privatized. The Companies that ourchased this coverage got acontrcat that the full faith and credit of the Federal government wa sbehing their possible indemnification. By simply selling the operation to hwhomever demanded the least federal money to take it on the companies who paid their premium ight still have a claimon theFederal government if the private company the insurance policy book was transfered to went out of business. this could well have very negative implictaions for every other full faith and credit guarantee form teh FEderal government.

I would pull a Reagan: put any items on the "Do Not Sell" list that are relevant to national security. Reagan did this with computers, and virtually broke the USSR.

I'll say again: we OWN the world computer industry---that part of it which is truly cutting edge and of value (yah, Japan makes processors, but only after we develop the stuff that goes on them!). Computers are our biggest wedge against China. If computer sales are tagged as "national security," then before the Chinese get any, they have to prove themselves "open" to American goods and trade. Even then, I wouldn't be fool enough to sell them advanced target acquisition computers.

It's now increasingly difficult to deny the Chinese advanced hardware, specifically chip-making equipment, which they're getting from Japan and Taiwan, even though our own government has tried to stick to the Wassemer Agreement as best as possible. During the Cold War we aimed to keep our major competitors two generations behind in semiconductor technology, but China's already closed the gap to less than a decade.

We dominate commercial software, no doubt. However, there's only a handful of companies - Microsoft, Oracle, Sun, etc. - that command the bulk of the market. All of them want access to China, the world's fastest-growing IT hardware market. Even though 90% of the stuff sold in China is pirated, that doesn't dampen their determination to not get shut out of the market. Microsft is particularly unwilling to offend China - to the point of putting R&D centers there - for fear the Chinese government will throw its weight behind Windows rivals like Linux.

We don't really lead Japan in supercomputers, it's a fairly close race there, but our areas of expertise are vastly different. They use their supercomputers for climate modeling while we use ours for weapons-system design, so while it's true that they can't come up with their own AEGIS system, it's equally true that our meteorologists are increasingly dependent on their Japanese (and European) counterparts.

Chip making is not irrelevant, but it is hardly cutting edge. George Gilder argues, rightly I think, that the hardware is increasingly less important and the software, particularly the net, increasingly more important.

It's not just the Microsoft-type companies. That's a straw dog---it's the thousands of small software firms in Boise, Phoenix, Austin, Minneapolis, etc. that are YEARS beyond the Japanese and decades beyond the CHinese.

Supercomputers are obsolete. In the 1970s, there was a test where 100 PCs beat a Cray in a game of chess, and while they still have their place, the message is that PCs linked are more powerful---the net again.

The Chinese/Japanese in no way scare me in this regard.

The Chinese can already market their own cars - of course they have to follow the foreign blueprints. Actually we shouldn't sneer at their R&D capabilities either, judging from the advances they've made in fields from genetics to artificial intelligence in just a few years. They have plenty of capable people and trail only a few countries in basic science research. Their problem, as it was in the Soviet Union, is how to translate knowledge into profit, and that's something that'll require fundamental changes in the way they do business.

Our advantage still rests mainly with the large and mid-size companies, not the little guys. You can actually find hundreds of small software firms in cities throughout India and China. The problem for them is they can't develop a sufficient economy of scale, the markets are extremely disorganized and few if any of them can grow into a globe-trotter. In this day and age, with consolidation being pursued by many big players in the IT industry, the reason we maintain a huge lead over other countries is that they don't have their own Microsofts, not because they have a low number of software firms.

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