Paulson Fears Erosion Of US Competitiveness

by Mike Godfrey, Tax-News.com, Washington

14 May 2007

While acknowledging America's historic position as perhaps the best place in the world to do business, US Treasury Secretary Henry Paulson has expressed concern that the country's longstanding consensus of support for an open economy is eroding.

Addressing a Forum on International Investment in St Louis last week, Paulson warned that the US is starting to lose its edge in terms of tax competitiveness as emerging economies compete fiercely for foreign investment. He also urged Americans to keep faith in an open economy, where foreign investment was welcome, and not to allow security concerns in a post 9/11 world to dictate the economic agenda and lead to the positioning of barriers to investment and trade.

According to the US Treasury, in the last few years, the United States has not received as high a share of total worldwide FDI as it did before 2000. Paulson said that this trend could be due to the growth of opportunities in emerging markets, burdensome US legal, regulatory and corporate tax regimes, or the misperception that the United States is no longer open to foreign direct investments. In any event, the Treasury Secretary said that such statistics were "cause for some concern".

In 2000, foreign firms directly employed 5.7 million people in the US (5.1% of the private sector workforce) and indirectly supported 6.5 million more jobs. In 2005, those figures had fallen to 5.1 million (4.7% of the private sector workforce) and 4.6 million, respectively. Foreign firms' R&D spending as a share of total R&D spending in the US has also slightly declined since 2000.

"This trend reinforces the need for the United States to renew its commitment to open investment, and to policies that make the US attractive for FDI," Paulson said.

He went on to tell the Forum that:

"The United States has historically been the best place in the world to do business and is a magnet for foreign investment, so it's important to reaffirm both our openness to foreign direct investment and the benefits investment brings to the US economy. And as we seek to attract foreign capital, we must realize that we have a constantly changing world where there are an increasing number of attractive economies across the globe competing for investment dollars. Against this backdrop, we must assess the cost versus the benefits of our regulatory structure and certain aspects of our legal system that may discourage foreign investment."

Paulson said that tax competitiveness was an integral part of maintaining foreign interest in the US economy, perhaps hinting that the administration's goal of substantial tax reform is no longer the lost cause that supporters of tax code simplifcation had begun to fear.

"Our corporate tax system is also increasingly putting us at a competitive disadvantage with some – with a few other nations which tax companies or capital at lower rates than does the US," he stated. "The President's policy statement makes clear that the administration will not retreat. We welcome foreign investment and the benefits it brings to communities across America."

Paulson said that he expects the administration will undertake a number of additional initiatives in support of open investment in the months ahead. "Some are already underway," he added.

Paulson's speech was delivered on the same day that President George Bush reaffirmed the administration's continuing commitment to advancing open economies at home and abroad, with the President stating that: "The United States has a longstanding commitment to open economies that empower individuals, generate economic opportunity and prosperity for all, and provide the foundation for a free society...A free and open international investment regime is vital for a stable and growing economy, both here at home and throughout the world."

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