Roads to follow: regulating direct foreign investment

Abstract

The United States faces a formidable and growing economic challenge from Japan. Over the last decade, the American state has characteristically responded to the loss of domestic market dominance in the manufacturing sector to foreign firms by invoking the principles of free and fair trade in order to delegitimate this foreign competition and legitimate the imposition of trade barriers designed to encourage the investment of multinational corporations (MNCs) in the United States. These tactics have largely succeeded in attracting investment and thus aided domestic employment and the balance of trade. The short-term benefits, however, have been achieved at long-term, unforeseen, undesirable economic and political costs in terms of both the balance of payments and state autonomy. Alternative state responses to the threat posed by Japanese MNCs, while consistent with principles of free trade, challenge the traditional liberal conception of the scope and domain of state behavior and provide more effective policies in achieving both short- and long-term objectives. This article draws on data relating to the treatment of subsidiaries of American automobile manufacturers by European governments with competing indigenous producers in specifying two variables critical to identifying policy alternatives: first, the degree of access granted by the state to foreign firms (limited or unlimited access) and, second, the type of support provided by the state to domestic firms (discriminatory or nondiscriminatory intervention). The analysis suggests that there are four possible policy combinations, which generally reflect the four different postwar state policies pursued by West Germany, France, Britain, and the United States. Of these four, the combination employed by West Germany has proved most effective in pursuing policies consistent with liberal trade principles while reconciling short-term employment and fiscal goals with the broader long-term objectives of sustaining state autonomy and balance-of-payments surpluses in the face of foreign competition. British policies, which have consistently proved the most ineffective, have sacrificed long-term objectives for short-term ones. As a result of structural changes during the 1970s, the American state's chosen policy combination was altered and now replicates the traditional British formula. The United States therefore risks comparable economic and political consequences.