US Still a Big Debtor, But Does it Matter?

IT was fashionable in the late 1980s for analysts to sound dire warnings about the United States becoming the largest debtor nation in the world.

The US still is deep in the red. The latest Commerce Department estimates, for 1993, show that foreigners own $555.7 billion more in assets in the US than Americans own abroad. That's more than five times the external long-term debt of Brazil.

The debt issue pops up occasionally, particularly at election time when the ``outs'' hammer the ``ins'' for mismanaging the economy. Foreigners are buying up America, they charge. But for several reasons, most economists aren't alarmed:

* A 1991 change in accounting has produced a more-accurate picture of the international investment position of the US.

The Commerce Department used to measure assets, particularly direct investment in plant and equipment, on the basis of historical costs - what the investment cost at the time it was made. This was criticized as unrealistic. Whereas most foreign investment in the US was recent (say, 1980s), much of US investment abroad was made in the 1960s and 1970s. A plant that cost $1 million to build in 1960 might be worth $50 million today.

Commerce economists remedied this problem by estimating the current cost of investment (including that made in the past), and, alternatively, the market value. In 1987, for example, instead of being a $378 billion debtor by historical costs, the new measures put the US net position at minus $22.8 billion by the current cost method of accounting and a positive $58 billion by market value.

The US, however, has continuously suffered deficits in its current account balance - the annual income and outgo from trade and investment. Foreigners use their surplus income from this balance to buy assets in the US. So by the end of last year, foreign assets in the US reached $2.92 trillion by the current cost method and $3.15 trillion by market value. These assets exceeded US assets abroad of $2.37 billion (current cost) by $557.8 billion. Or using the market value of $2.64 trillion, the US was $507.7 in the red.

* Despite its debt position, the US earns more on its investment abroad than foreigners do in the US. The US made income payments of $109.9 billion on all foreign assets in the US last year, while it earned $113.8 billion abroad. For direct investments alone, the balance in favor of the US was $57 billion to $5 billion. ``It seems counterintuitive,'' notes Christopher Gohrband, an economist in the balance of payments division at Commerce.

Indeed, the Internal Revenue Service wonders if foreign companies aren't stacking their books through ``transfer pricing'' to show profits at home and thus avoiding US taxes. And various US industries, facing competition, ask if goods aren't being dumped at prices below costs of production.

Alternatively, foreign investment in the US is genuinely less profitable because much of it is newer and the competition stiff.

Whatever the case, some foreign investors have lost a bundle. Foreign real estate investors' net income in the US in 1992 was a negative $5 billion; foreign movie industry investors lost $1 billion; and hotel investors $1.6 billion. Many Japanese bought US properties during the ``bubble'' in the Japanese stock market and have been selling at much lower prices.

* Foreign investors in plant and equipment, after a surge of activity in the late 1980s, slowed down. They put a peak $73 billion into acquisitions and new plants in 1988. That declined to $15 billion in 1992 and $23 billion last year.

In manufacturing, the foreign share of output rose from 10.56 percent in 1987 to 14 percent in 1992 (the latest figure). In industry overall, foreign investors held 4.5 percent in 1987, 6 percent in 1991, and 5.8 percent in 1992. And the US has about $200 billion (current cost) or $247.5 billion (market value) more of direct investment abroad than foreigners own in the US.

So the US isn't being bought out by foreign money. Indeed, most foreign money goes into paper assets. Foreign governments use their surpluses to buy US Treasuries. The US had a negative asset balance of $271 billion in this area in 1993. Private foreign investors held $468.8 billion more in securities in the US than vice versa. That balance jumps around with stock prices in major markets. Lately, US investors have bought foreign stocks heavily.