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.

If there are Federal guarantees in OPIC contracts, it is true those would have to be honored. Obviously the Federal guarantees would need to be included in any sale or privatization. However, any new contracts would not include a Federal guarantee and would be like any other insurance contract. Eventually (after all current contracts expire) the company could be totally private.

Now my prefered solution is to just stop writing any new Contracts period not one none zero zip nada. If a private company wishes to fill the void and such a void is economically feasable there are a large number of insurannce companies out there. IMHO absolutely none of them will jump in. Now the problem is those existing pledges of the full faith and credit might have to be honored. he damage this can do to the Federal budget is enormous or maybe they will just mentraixe it so we can have an inflationary depression.

My statement was intended to mean that there is no reason a private business could not handle the job OPIC currently does.

I have been saying that for months.

It does make sense for there to be a company that preforms this function (since it is a valuable risk-mamagement tool for companies),

But what will the premiums from a sound private insurer be? Remember the guarantee that is insurance is only as sound as the company issuing the guarantee and a sound company will charge an actuarially sonde premium.

but there shouldn't be any government subsidies involved. The chance of political turmoil should be one of the risks companies face when they invest in unstable countries.

The political stability of teh USA is one of the great economic advantages the USA has by pledging the full faith and credit of the US government politically unstable countries were equalized in risk with the USA. Clearly imports that result from this US subsidized investment are an abomination but I will not go into all that now. I am looking for ideas about how to handle theproblem soon to be coming of the liabilities caused by teh existsing contracts with teh full faith and credit of the US government included in thsoe guarantees. Do you have an ideas to contribute I am not trying for a discussion of subsidies as we both disagree with subsidies completely. Our area of disagreement is on traiffs. Let that be in this thread please as my goal is to solicit ideas to help deal with this issue.

Free trade and free markets say that no business (except clear national security cases) should ever have claim on the Treasury,

I agree to the point that no businees except in a clear case of national security or a business that has sold a good or service to the US government has a claim on the national treasury.

ESPECIALLY Harley-Davidson!

I really have absolutely no idea why you put this in this thread.

Be that as it may you have stated you are an economic historian. I am seeking ideas as to what can be done to mitigate a potential problem which is "Existing contracts have been signed by the Federal government to provide a guarantee of indemnification to companies that have invested overseas. It appears from events that unless a plan is formulated those companies which have provided consideration to the Federal government for the consideration of the guarantee will be in a position to have earned the indemnoficatiopn of loss." I am trying to get a total rat risk number but have not yet found the number but we are talking in the billions anyway maybe the hundred billions for an order of magnitude. We disagree on tariffs. Tariffs have nothing to do with solving or causing this particular problem.

Any ideas as to how to approach the conundrum of the existing full faith and credit guarantees without the raid on the treaury (or inflation by simply printing the money). Yes it was horrible that OPIC did this you know I know it and most everyone else jnows it or if they read the two of us agreeing on this point should know it.

I am asking for a narrow focus on what government policies can be implemented so the damge from these existing commitments can be mitigated. I am asking for ideas. I have been writing against OPIC for months now. I have for months asked the question "If OPIC is such a good idea why haven't provate insurers sought this business?"

Once more got any ideas that can be helpful in coming up with a proposed federal policy on this so we do not incur the full damage. Ending OPIC has beenone of my points for fixing probems in teheconomy for quite a while now. I feal safe to say from your above statement you agree such a policy shuld be immediately instituted so that no further Federal guarnatee is issued. Not one, none etc.

That has been onbe of the things I have been calling for for months.

Now Iam at aloss for mitigation of teh damage and am asking for people to think about this subject and come up with ideas.

I will be happy to discuss other trade issues on other threads. if you wish to argue fine. If you wish to exchange name calling fine lets do it on other threads. i am asking for thoughts on this subject from someone who has some educqation in this subject. yes I also have some education in thsi subject and I was hoping by attracting as many Freepers as possible someone could come up with the germ of an idea to address this problem of outstanding contracts.

"The problem for them is they can't develop a sufficient economy of scale, the markets are extremely disorganized"

That is exactly right, and there is a reason for this. Annalee Saxenian has analyzed high-growth areas, such as Silicon Valley, and slower-growth tech areas, such as Route 128 in Boston, and found that the ENVIRONMENT determines everything---that high growth tech areas have low taxes, access to good universities, but most important communities in which people move back and forth between companies cross pollinating. Saxenian did not study India, but based on what she did look at, I'm sure she would place it far below 128---in other words, not that great an environment.

Now, when it comes to India, they simply lack the "freedom" infrastructure that would allow them to ever grow too much, because their quasi-socialistic government will step in to tax their wealth away if they get too successful.

Did you know that among the fastest tech growth centers in the U.S. are places like Yuma Arizona, Minneapolis, Iowa City, (obviously) Austin, Boise, and some two dozen towns that you wouldn't think were "tech centers?" The point is, while some capital is necessary, tech feeds off ideas and people more than any other industry in history, and people are mobile. The industry is not attached to large-scale natural resources, so it will go where the freedom is. Indian "tech" will survive only until it gets somewhat successful. Then Gandhi's socialist stepchildren will steal the wealth and "poof," it's gone.

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