INTELLIGENCE MEMORANDUM BELGIUM'S AGGRESSIVE BID FOR FOREIGN CAPITAL

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500220010-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 16
• Document Creation Date: December 16, 2016
• Document Release Date: December 28, 2004
• Sequence Number: 10
• Publication Date: January 1, 1968
• Content Type: IM

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Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Belgium's Aggressive Bid for Foreign Capital
Confidential
Copy No. 43
ER IM 68-8
January 1968
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP 1
EXCLUDED FIIOM AUTOMATIC
DOWNOIIADINO AND
O 'LA"IFICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
19 January 1968
Belgium's Aggressive Bid for Foreign Capital
Summary
Prior to the announcement of the' US balance of
payments restrictions, the resolution of a contro-
versy between Belgium and the governing Commission
of the European Communities (EC)* over appropriate
incentives for foreign investors promised to have
far-reaching effects on the flow of American capital
to the Community countries. In July 1966, Belgium
passed an extremely liberal investment incentives
law in the hope of attracting larger amounts of
foreign capital, particularly from the United States,
to stimulate its sluggish economy. The Commission
challenged the law on the grounds that a dispropor-
tionate flow of foreign capital to Belgian industry
would give Belgium an unfair advantage in intra-
Community trade, and implementation of the law was
delayed until 1967. The fundamental questions
raised by the controversy concern: (1) how receptive
a-policy toward US investment the EC ultimately
will adopt, and (2) how influential the Commission
will be in opposing national development programs
which diverge from that policy. On the first
question, neither the Commission nor the six member
Note: This memorandum was produced by CIA. It was
prepared by the Office of Economic Research and has
been coordinated with the Office of Current InteZZi-
gence.
* In JuZy 1967 the executives of the European
Economic Community (EEC), the European Coal and Steel
Community (ECSC), and EURATOM were merged into a
single Commission of the European Communities. The
new Commission will continue to administer the terms
of the three separate Community treaties until these
themselves are merged.
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nations have been able to define a common policy.
Because of this indecision and Belgium's perse-
verance in the face of the Commission's objections,
the second question has been settled in Belgium's
favor, at least temporarily.
The recently announced US balance of payments
restrictions are likely to adversely affect Belgian
economic growth and development. If the Belgians,
who are basically sympathetic to the objectives and
techniques of the payments program, judge that it
will be relatively short-term in nature, they will
probably continue to rely on US capital flows in
their development planning, choosing to accept the
heavy short-run losses resulting from the US program.
On the other hand, if they judge that the program
will persist for a longer period, they will almost
certainly reorient their development planning away
from reliance on transatlantic capital flows. If
this occurs, American investors will have lost their
foremost advocate in the EEC.
A small, industrialized country situated on the
ancient crossroads of Europe, Belgium has found
rapid economic progress in the EEC an elusive goal.
Since the creation of the Common Market in 1958,
the Belgian rate of economic growth has been the
slowest in the EEC, despite a spurt in 1960-64
aided by an expansion of exports to Belgium's
Common Market trading partners. Since- 1964, growth
has slowed down markedly. Belgium's continental
neighbors have moved more aggressively to diversify
their industries, modernize economic institutions,
and improve their capital markets. The present
Belgian Government is now using extremely generous
inducements to foreign capital as a key element in
development policy, designed to speed up the growth
of modern, efficient industries and permit the
diversion of manpower and government resources away
from those which are high cost and, like coal mining,
require subsidy.
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Background
1. The Belgian Government in 1966-67 embarked
on a new policy of seeking foreign investment funds
to stimulate domestic economic expansion. Recently
passed, extremely liberal investment legislation,
providing for direct government grants and subsidies
to investors, has made Belgium an especially
attractive location for foreign capital. Most
industry investment attracted to Belgium has been
coming from the United States; the American share
in recent years has been running between 50 and 90
percent.
2. Recognizing the important implications of
the new Belgian policy, the governing Commission
of the European Communities acted on a complaint by
the Netherlands to test its control over members'
national legislation, thus delaying approval of the
Belgian statutes and challenging some of their
provisions. Articles 92 and 93 of the Treaty of
Rome, which established the EEC, require that the
Commission continuously examine national policies
for evidence of distortion of intra-Community
trade and decide whether such distortion, if found,
is permissible under the discretionary clauses of
Article 92. Article 93 gives the Commission power
to review any new or modified system of investment
incentives before it can be put into effect. The
Treaty bans national practices which distort com-
petition within the Common Market.
3. The Commission has had difficulty in
defining an EEC "common interest" in foreign
investment because the members themselves do not
have a consistent attitude toward foreign investment.
At present no EEC member, except France, shows
open hostility to investors from outside the Com-
munity, even from across the Atlantic. Nevertheless,
there is considerable divergence in national policy
approaches. Because of such diversity, the Commission
probably would have refrained from intervention if
the new Belgian policy had not presented such an
exceptionally attractive welcome to foreign
investors.
4. A basic issue has now developed between the
Belgians' view of what is needed to secure the
benefits of modern technology for their economy and
the Commission's view, still unclear, of the EEC's
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"common interest." Even more fundamental are the
questions now being raised of a common policy for
the EEC toward US investment and the role of the
Commission in carrying out that policy, even at
the expense of the development program of a member
nation. These basic issues will receive increased
discussion throughout the FEC, as the US balance
of payments program of 1968 takes effect.
Foreign Investment Policies of EEC Members
5. Differing attitudes in the EEC toward US
capital are indicated in the table below. From 1963
Net US Direct Capital Investment in EEC Countries
1963-66
a/
Million US $
.
Percentage Share
of EEC Total
Country
1963
1964
1965
1966 b/
1963
1964
1965
1966
EEC total
588
807
857
1,140
100
100
100
100
Belgium-
Luxembourg
35
75
117
122
6
9
14
11
France
164
139
152
9B
28
17
18
8
West
Germany
216
276
359
614
37
34
42
54
Italy
120
207
158
150
20
26
18
13
Netherlands
53
110
71
161
9
14
8
14
a. Data show net direct capita investment flows (balance of
payments basis) from the US to EEC countries in each year, not
cumulative US investment. Reinvented earnings of US firms and
portfolio investments of US nationals in EEC countries are not
included. Source: US Department of Commerce, S'+rvey of Current
Business.
b. Preliminary data.
through 1966, Belgium-Luxembourg and the Netherlar}ds
substantially increased their shares in US direct,
investment going to the EEC, although West Germany
remained the principal recipient. At the same
time the French share of total US investment in
the EEC declined in both absolute and relative
terms. US firms establishing production facilities
in the Common Market area are increasingly favoring
countries that have positive investment incentives,
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such as Belgium, or that have strong internal
markets, such as West Germany. These firms are
becoming less attracted to France, where the
official attitude toward American investment
often hostile.
6. The Belgian share of total US capital in
the EEC has grown rapidly since 1962, but it is still
small relative to the share of West Germany. Passage
of an earlier investment incentive law in 1959
helped to stimulate growth in the Belgian economy.
In 1964, facing inflationary pressures and a
tightening labor market, the government restricted
its investment incentive programs by placing
priorities on specific regions and on those projects
promising to introduce new technological processes.
During 1965 the economy was generally sluggish,
although foreign investment continued to be a
principal expansionary force. The government feared
a tapering off of foreign investment in 1966, as the
economy continued to slow down.
7. Past inflows of capital to Belgium have
settled mainly in the economic triangle formed by
Antwerp, Ghent, and Brussels. The investment
incentives under consideration in 1966, on the other
hand, were aimed primarily at the areas where
investment rates were low (Liege, Mons, Charleroi,
and other areas of Wallonia) and labor was more
available. The Government wanted to grant priority
to Wallonia and to research projects which would
directly improve Belgian technology. However,
political pressures and economic needs ruled out a
selective investment policy, and the government
passed the more liberal, nonselective Investment
Incentives Law of 1966.
8. Because the new law did not become effective
until February 1967, some investors postponed new
outlays which otherwise would have been made in
1966. This is reflected in preliminary 1966 data
in the table, which show that Belgium's share of
the capital flow declined from 14 to 11 percent.
Foreign investors generally, and particularly those
in the United States, have reacted very favorably
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to the new Belgian investment policy, and the flow
of investment funds to Belgium is expected to
increase substantially.
9. The Netherlands also depends heavily on
foreign capital investment and sees the new Belgian
investment law as a threat to its competitive
position. The Dutch, however, have not been willing
to back their general friendliness to foreign
investors with compre"hensive'investmentVuarantees,
tax relief, or cash incentives to match the Belgian
competition. In 1966, they chose rather to ask
the Commission, as interpreter of Articles 92 and 93
of the Treaty of Rome, to look into the possibility
that Belgian law discriminates in favor of foreign
investors far more than do the investment incentives
of any other EEC member. The inconclusiveness of
the ensuing controversy between Belgium and the
Commission -- resulting in at least a temporary
victory for the Belgians -- may induce the Nether-
lands to seek foreign investment funds more aggres-
sively in the future. In that event, the challenge
to the Belgian laws within the EEC could disappear.
10. West Germany, with the largest and strongest
economy in the EEC, has enough other advantages to
attract large amounts of foreign capital without
giving special investment incentives on the federal
government level. The nationalistic argument
against foreign control of German industry that
arises from time to time in West Germany has been
overcome by a pragmatic business-.community which
recognizes the importance of foreign capital to the
growth and prosperity of the German economy. For
the foreign investo::, the investor incentives, pro-
pagated mostly by the laender (states) and municipal-
ities, are heavily reinforced by the existence in
Germany of the EEC's largest market, a trained and
disciplined labor force, and. an efficient distribution
system.
11. Italy has a favorable attitude toward US and
other foreign investors. US investors control no
major sector of Italian industry, and a large portion
of Italian industry is itself controlled by powerful
governmental and quasi-governmental holding companies
(for example, ENI and IRI). The south of Italy is
the most economically backward area in the EEC, and
US investors are warmly received there with tax
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relief and incentives in the form of loan capital
on very favorable terms. By and large, however,
US firms have preferred to invest in the industrial
north, where skilled labor, transportation, and
power are more readily available. Because investment
incentives are limited to the underdeveloped area --
a limitation consistent with the Treaty of Rome --
the Italian investment law has not been questioned
by the Commission.
12. The French Government has repeatedly voiced
fears of American control of important sectors of
French industry, especially electronics and food,
processing. A basic policy change became apparent
when Giscard d'Estaing was replaced by Michel Debre as
Finance Minister in 1965. Since then, France has
at least been willing to allow US investors to
enter, subject to the registration and administrative
scrutiny of all new investment projects. Although
few new projects have been disallowed since 1965,
France has been much more explicit than any other
EEC country in making plain to foreign investors
that it wishes to retain its options for control.
Investment in France by US firms fell sharply in
1966, largely because of the generally cool attitude
of President De Gaulle toward the United States and
US investment. A restrictive policy on the part of
France diverts foreign investment to other EEC
countries -- notably West Germany and Belgium.
From those countries the products of foreign-owned
firms can enter the French market unhindered via
the EEC, while the French economy receives none of
the benefits of increased employment and greater
productive capacity.
The Belgian Economy and Its Special Problems
13. Because Belgium is limited in size and
natural resources, it depends heavily upon foreign
commerce to provide raw materials for its industry
and markets for its products. Total trade turnover
(exports plus imports) annually equals three-fourths
of the Belgian GNP, which reached. US $18.1 billion
in 1966. About 70 percent of Belgium's industrial
output is exported. This outward orientation of
the economy -- traditional since medieval times --
has made Belgium a strong and consistent supporter
of free trade and payments. Belgium has always
promoted European movements for integration. This
small country, however, whose capital has become
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the center of a great experiment in economic union,
is the Common Market's principal underachiever.
The nation's average annual rate of economic growth
in real terms during 1958-66 was only 3.9 percent --
not only the EEC's lowest but also little better
than the average annuai rate of 3.4 percent posted
in the pre-EEC period, 1951-57.
14. Belgium's disappointing economic performance
has many roots. Although industrial output accounts
for about one-third of GNP annually, it is concen-
trated in heavy industries such as steel and basic
chemicals, which currently suffer from excess
capacity and slack demand throughout Europe. The
steel industry, especially, has been a marginal
producer, and neither EEC membership nor the even
longer relationship with the ECSC has produced a
hoped-for structural change. Production in the
coal industry has been declining and further cuts
are forecast, at least through 1970, since the
prospects for viability are dim. Throughout the
economy, low productivity and low profit margins
have inhibited adequate development of domestic
capital markets and diversification of domestic
industry.
15. Within Belgium, there are divergent rates
and levels of economic development between French
Wallonia and Flemish Flanders. Flanders, in the
north, is Belgium's developing industrial region.
With an average annual real growth of 4.2 percent
during 1955-64, this flourishing area accounts
for two-thirds of all foreign investment in
Belgium. Wallonia, in the south, is the center
of the traditional industries and antiquated
coal mines. During 1955-64 it managed to achieve
a real growth of only 2.6 percent in GNP and
to attract only one-third of the total foreign
investment.
16. Because of the diverging growth patterns
between Wallonia and Flanders, the central govern-
ment has assumed an increased role in national
economic affairs. Although favoring balanced
budgets, the authorities have run deficits in order
to finance higher levels of spending for both
public welfare and investment projects. Many of
these ventures have been financed by borrowing in
the narrow domestic capital market, thus reducing
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funds available for private investment. At the
same time, th6 demands of public finance have
forced the monetary authorities into an excessive
expansion of the money supply. To avoid inflation,
the government has periodically resorted to tight
money and deflationary measures.
New Policy Response
17. Having failed to achieve satisfactory
economic growth, Belgium has turned abroad to find
investors who will bring the advanced technology,
managerial skills, and capital needed to forge a
strong competitive position in the EEC and world
markets. The government anticipates that foreign
investment will effect structural changes in
Belgian industry to accommodate changing patterns
of world demand, will stimulate domestic investment,
and will increase economic activity in depressed
areas. In part, the government's policy is based
on concern that the deepening economic depression
in French-speaking Wallonia will strengthen
separatist movements. The government believes that
several large foreign plants in Wallonia could do
more to promote rapid development and continued
political unity than a public program to modernize
the infrastructure.
18. Belgium's commitment to free enterprise,
its stable political and economic institutions, its
excellent port facilities on the North Sea, and its
posi Lio:' as the capital of the Common Market, combine
to give the country an appeal to foreign investors.
An additional attraction is the new Investment
Incentives Law of 14 July 1966, which contains
extremely liberal provisions for both foreign and
domestic investors, including cheap credit, capital
grants, and tax concessions. Its chief provisions
are:
a. Interest subsidies of 5-percent
maximum for a 5-year period, with coverage
of total interest charges for the first
two years in special cases.
b. Government guaranties for
repayment of up to 75 percent of a
loan from private sources.
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c. Reduced tax rates on capital
gains reinvested in specified regions.
d. A double depreciation rate
for three years.
e. Exemption from taxes on real
estate and improvements for up to
10 years.
f. Nonrepayable capital subsidies
from the government to cover part of
new investment in buildings and
equipment.
19. Even before the basic investment incentives
became effective in February 1967, new legislation
was deemed necessary to spur economic revival,
accelerate regional development, and stabilize the
budget. Thus in January 1967 the government was
given special emergency powers to accomplish these
ends. The initia]. task was to employ more
efficiently the existing incentives program. A
new ministerial committees was created to coordinate
the activity of all ministries in the field of
investment and to consider all applications for
incentive benefits. The committee organized a
Permanent Office for Locating Foreign Investors to
spearhead the search for potential investors in the
United States, follow up government missions seeking
investment, and organize private missions. In order
to channel investment into areas of greatest need,
the government decreed that only investments identified
as being in the national interest and located in
priority regions could benefit from interest subsidies
greater than 4 percent, interest subsidies for
longer than three years, exemption of the company
withholding tax for more than five years, and fast
depreciation for tax purposes. However, some new
incentives were added -- rules on company mergers
were eased, revenue earned from new investment
capital was exempted from corporate income taxes
for the first five fiscal periods, and opportunities
were provided for companies created between 1 January
1967 and 31 December 1969 to write off, over an
unlimited period of time, the losses sustained in
their first five fiscal periods. In addition, an
expansion fund to finance investment incentives
was set up.
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Conflict from an Unexpected Quarter -- the EEC
20. Belgium, one of the EEC's strongest pro-
ponents, has come under fire from the Commission
for being too outward looking and too generous
in its economic incentives for both domestic
investors and foreigners. Throughout the latter
half of 2.966 the Commission delayed approval of
the Belgian Investment Incentives Law, claiming
that the law, although principally addressed to
the redevelopment of coal mining areas in Belgium,
was not confined to such areas. The Commission
emphasized the importance of concentrating assistance
ir, the coal mining areas of Wallonia and Limburg
rather than in the whole economy, as planned by th.-:
Belgian Government. The Commission claimed that
because of Belgium's small size, too wide an
application of the law would cause unnecessary
discrimination between regions and give blanket help
to new industries throughout the country. The Com-
mission said that the law would violate Article 93,
dealing with government subsidies.
21. Commission approval of the new Belgian law
was finally granted in January 1967. However, the
Commission felt that special-tax concessions
offered by member governments could distort com-
petition in the Common Market, and it required
Belgium to report to the Commission every six
months all capital subsidies of 25 million Belgian
francs and above and all investments of more than
150 million francs involving interest subsidies.
22. With this compromise decision, the Com-
mission hoped to avoid a situation similar to one
in 1964 when the Belgian Government provided a
very generous preferential loan to the Ford Motor
Company to induce Ford to convert an Antwerp auto
plant into a tractor plant. Antwerp was not a
depressed area, and other EEC tractor manufacturers
were not doing well at that time. Reviewing these
facts, the Commission ordered the Belgian Govern-
ment to withdraw its ai.d even though Ford had begun
the conversion, based on the Belgian commitment.
Belgium's settlement with Ford in this case was
never made public, but it is likely that the
Commission finally approved some of the aid to
Ford.
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23. Although the new Belgian law has been more
or less approved by the Commission, the underlying
issue that is still unresolved concerns the criteria
that the Commission will use in reviewing government
aid and subsidies granted by member states. Articles
92 and 93 of the Treaty permit distortion of
intermember trade only within depressed areas, or
in projects of common European interest, or where
the aid does not affect trading conditions to a
degree that would be contrary to the common EEC
interest. The problem consists of defining a
"common interest" consistent with each member's
notion of its own development needs. It continues
to be one of the great unsettled questions of
European economic union.
Impact of the US Balance of Payments Program on
Belgian Policy
24. Because Belgium has keyed much of its develop-
ment policy to anticipated flows of investment funds
from the United States, the recently announced balance
of payments program will have considerable impact on
Belgian economic planning and development. If all
new US investment ceases, Belgian economic growth
in 1968 probably will be slower than anticipated
before the ann'uncement of the US restrictions. If
the restrictions remain in effect for several years,
major development goals such as the diversification
of industry, improvement of technology and development
of backward regions will be seriously affected.
According to one estimate, 75 percent of the firms
moving into the eastern part of the country are
American-owned, and 20 percent of the new capital
scheduled to bc: invested in the area was to have come
from the United States. Some of the effects of the
cessation of US investment may be offset by means
of expansionary fiscal and monetary measures, includ-
ing government-sponsored development projects
financed domestically. But as Belgium's recent
history has shown, the effectiveness of such policies
is limited: Due to institutional rigidities and the
poor development of Belgian capital markets, such
policies in the past have usually resulted in infla-
tion without real growth rather than real growth
without inflation.
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25. Given Belgium's long history of economic
cooperation with the United States, it is likely
that the Belgians will be sympathetic to the US
balance of payments program, notwithstanding its
impact upon their own country. The Belgians
probably will continue to be receptive to US invest-
ments, but they may be forced to reconsider the role
of US investments in national development policy.
The Belgian government's decision in this regard
will depend, in large part, on estimates of the
probable duration of Ourbs on US overseas investment.
If the government judges that the program is essen-
tially short-term in nature (that it will last only
about a year), then it may decide to absorb the
losses of foregone investment, relying on the pros-
pect of larger capital inflows in the future. On
the other hand, if a judgment is made that Belgium
cannot count on US capital for some years to come,
a major reorientation of Belgian development policy
away from reliance on the United States is likely
to be made.
26. In the latter case, American investors will
have lost their foremost advocate in the EEC.
Belgium's hitherto friendly policy towards US invest-
ment no longer will be available as a counterweight
to less liberal policies -- such as the French
policy -- that prevail within the Community.
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