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Armstrong Testimony to Congress_1996 (1)

Armstrong Testimony to Congress_1996 (1)

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12/11/2013

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TheintroductiontothetestimonyofMartinA.ArmstrongbeforetheHouseWays
&
MeansCommitteeJuly1996
1
 
July
18,1996
Testimony
ot
Martin
A.
ArmstrongChairmanPrincetonEconomicInstitute214CarnegieCenterPrinceton,NJ08540Mr.Chai~an,m~mbersofthecommittee.IwouldliketothankyouforinvitingmeheretodaytoofferwhatInformationPElhasgatheredfromourexperienceindealing
\"lith
the
multinationalcorporateandinstitutionalsectoroftheglobaleconomy.Asabrief
background,PEI
maintainsoffices
in
the
US,
Tokyo,HongKong,SydneyandLondon.Wecurrenttyprovidecorporate
and
institutionaladviceundercontractonglobalassetsexceedingUS$2:5tri~ipn.anamountequaltoabouthalfoftheUSnationaldebt.InourqJpacityasanadvisorservingtheinternational.cornmunityinreallifedecisjonmakingratherthan~ry,PEl
may
beuniquetyqualifiedinprovidinginsightastohowaodwhybothinvestment
andbusiness
capital
flowsare
affectedbyanation'sdomesticpolicyobjectives.Ithasbeenourexperience.thatthereatefivekeyfactors
that
provide
theCOre
stimulus
behind
capital
<flows
internationally.
1)FonaignExchange2)Taxation
3)LaborCoati
4)Jnfl.tiona.InterestRates
5)5&cumy(geopoJitical
&.
financial)
let~begin
withforeign
exchange
asan
iIIustnition
ofhow
capital
is
being
affected
beforediscussingtaxation.ForeignExchange
fluctuations
havebecomethenumber
one
cause.ofcorporatelosses.Thepercentagemovementintheexchangevalue
of
currenc~ahllsbecome;ashighas40%ov.era
two
yearperiod.ExchangelOsseshaveimpactedeverysectorofbusinesineverynation
to
thepointiJlat~.verywaymultinationalsoperatetoday
is
drQlTlatic;allyshifting.fJom1h9t
of
only"10
yearsago.
Multinationals
havebeenforced
to
.changepJicingpolic)'a&~lIasthell:>cationof
manu~ct\Jre.n.anE!fforttoredu~extremefinanclalrisks.fortllei("sh$r$noJde($.Transactionssuch~sRocKefellerCenter.MCAetcresultedinsignificant
'0S8e8
tothe
Japanese
investors,moreso
by
the
40%
depreci<ltionofthe
dollarthanthea<;tLJaJdecli~
in
valueof.
the
underJtingassets.Japan.Airlineswas
forced
tolay-off25%of.itsworkforcelastyeardueto
the
factthattheircost
base.
wasJapaneseyenwhiletheirrevenuewas
largetyforeignQ,llTency
denominated.InGeamany,Mercedeshasbeenforcedtorestructuretheirpridngpolicyas
of
Julytst,1996due
to
fore;gnexchange_lnslaadofpricingtheproductinDMa~around
the
worki,which~
costth~m
market
share,productswillnowbepricedinlocalcurrencythereby
transferring
thecurrencynsk
bade
to
Germany..
I
ThesearebutafewexamplesofhowthemorerecentextremefhJCtuationsin
the
exchangevalueofcurrencieshasimpactedbusiness
and
investmentdecisionsonaglobal
scale.
V\lhile
it
may
bepoliticallypreferabletomanipulatecurrencyvaluesinanattempt
to
impacttradeflows,inreality,traoeaccountsfor
less
than
10%ofthetotalworldcapital
flow
movement.
Ourwarnings
deliveredinaletter
to
Congressand
the
WhiteHousebackin1985
cautioned
against:such
intentional
currencymanipulationasenactedinthe
G5
SeptemberPlazaAccord.
The
netresultofA069309
 
attempts
toinfluencetrade
through
currencymanipulationledtothe1987Stock
Market
Panic.
PEl'sresearchwasrequestedbytheBradyCommissionandwewouldlike
to
thinkthatwehadsomeimpactupon
its
findingssincetwoofourclientswereontheCommissionitselt.Mr.BradylaterstatedthathebelievedthatcurrencyfluctuationshadplayedaroleinthePanicof1987.Offeredhereisagraphicillustration(figure#1)ofthenetcapitalflowmovementforthatperiod.Theupperportionofthegraphplotstradeandthelowerportioncapitalmovementwhichincluded.stod<S,bondsandrealestateinvestment.Whatisimportanttonote
is
thateversinee1987.
the
fluctuationsinnetcapitalmovementhavebecomemorethan10timesasvol~tilewhencomparedto
the
pre-1987era.
JAPANNet.Ctlpiteil.
!Wvement
in
Bib
USf
~Doot&
11*10-
JIIo"r
l'iIMII
~Yl
T
IT\ll
T
Ij\;
f\
In
1\
Ifi
11"1.
e:!::1
M!l_1
ae:1
eT-.1
~1'111__
A:I....~
Figu,.....
Thesecondmostimportant
factor
infJuencinQnet.capital
flow
movement
is
noneotherthantaxation.
ti.owever.tax~tion
is.
morethan
8
pure
.incometax.
Taxation
<;or)tnl>ytions
impOsedon
business
ba$ed.
upons()cialobjectives.involvinglaborare
of.
greater·importancethanthemeresUpE!rficiallevel
of
corporate
income
tax
ratesalone.It
i8
wrong
to
assumethatmanufacturingjobs
flow
to
merelythe
.loweSt
pos$ible
(abor
cost
If
this
weretrue,thenallmanufactureshould
be
conductedin
Mexico.
South
.EastAsiat>r.better
still
-.Africa.
Inourcapacityasacorporateadvisorhelping
to
makesuchstrategicdecisio~astowherecompaniesshouldorshouldnottocate.thereare5primary
considerations
thatgoiotothefinaldecisionprocesson
this
level.1)Ruleof
Law
2)
Labor
Skill.vallabllity
3)TaxationContributionsRequiredonlabor
4)
Corponlt.TaxRate5)Regulation
R069310

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