The Japan-U.S. Investment MOU: Centrally Planned Foreign Investment?

In the last post, Mona set out the basics of the Japan-U.S. MOU on "Strategic Investments" in the U.S. – or at least, a version of the MOU that was posted by the Japanese government online, although we don't know for sure if this is the final one – and asked some good questions about it. I'm going to build on her post to talk about some broader economic policy aspects, focusing on (1) how well implementation of the policy might go in practice and (2) how to characterize the policy.

But first, let's talk a bit about the details of how this is all supposed to work, focusing on the institutions in charge. The MOU describes a range of new institutions that will run the investment decision-making. There is an Investment Committee, chaired by the Secretary of Commerce and including "other members selected by the Investment Committee from time to time," whose role is "to recommend and oversee Investments"; there is a Consultation Committee comprising designees from both nations; and there is also the U.S. Investment Accelerator.

In addition to those new institutions, you have a key role for President Trump. The MOU says: "The President of the United States of America selects Investments that have been recommended by the Investment Committee."

I can imagine the Japanese government will have its own internal institutional structures as well.

That alone is a lot to digest. How difficult will it be for this group of institutions and one key individual to be able to agree on new investments?

That leads me to the first point I mentioned in the intro: Assuming both sides can agree on investments, how will implementation of these investments work out? As a general matter, I think it's a challenge to do this sort of planning effectively, and I think the Trump administration is likely to face some difficulties here in making this policy a success.

For one thing, the process that has been laid out has never been used before. There will be a learning curve in figuring this all out, for both countries. You have government decision-makers in the U.S. and Japan, along with private actors as well. It could be difficult to get everyone on the same page.

It's also worth noting that the investments made under this initiative are going to be under a great deal of scrutiny. I suspect the media will be very interested, and will be asking lots of questions from start to finish. With these projects being looked at under a microscope, any hint of corruption, or incompetence, or that things are just not going well generally will be highlighted.

At some point, these investments will have to result in profitable operations. Otherwise they will end up going out of business or requiring government subsidies. Since companies are always on the lookout for profitable investment opportunities, I have doubts that there are lots of profitable investments that haven't been made and can now quickly be taken up. Maybe a few here and there, but it's probably a limited number. I'll be interested to see what people come up with.

Moving to my second point, how do we characterize the policy underlying this MOU? My view is that it offers a vision for federal government planning of foreign investment that is very extensive, and is more than anything I could have imagined until recently.

State and local governments have been quite active in soliciting and subsidizing, and then placing conditions on, specific foreign investments in recent decades, but this initiative appears to go much further. Rather than ad hoc attempts by governments to compete for foreign investment, it creates an institutional structure under which President Trump and his administration can direct the investments. I would say this can fairly be characterized as "central planning" in relation to foreign investments, but if people think this terminology goes too far, I think it can at least be called "industrial policy and planning."

Whatever kind of policy and planning this is, it is surprising to see it coming from the Republican party, which traditionally has believed in free markets but is now shifting towards support for more government intervention in the economy. I have no sense at this point whether this is a permanent shift or an aberration.