October 27, 2006
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Treasury Deputy Secretary Robert M. Kimmitt
Remarks at the European Institute Luncheon
CFIUS Reform and International Investments:
Balancing Security and Investment

Washington, D.C. - International economic and financial cooperation - especially trans-Atlantic cooperation - is more important than ever. A strong trans-Atlantic partnership is critical to facing global economic challenges and seizing opportunities to enhance our collective prosperity and security. Our combined weight in the global economy and our convergent interests make the United States and the EU natural partners in leading global economic development based on three fundamental principles: openness to investment and free flow of capital; free and fair trade; and flexible exchange rates. These principles provide a strong foundation for broad-based, sustainable economic growth not only in America and Europe, but in all regions of the world.

At the same time, we must be mindful of the fact that no responsibility of government is more important than protecting the national security. Today, I want to highlight the interrelationship of national security and an open investment policy. These ideals are cornerstones of a dynamic global economy, and the Treasury Department is center-stage in the ongoing discussion on how to maximize both.

Before turning to how foreign investment is treated in the context of national security, I thought it would be appropriate to provide some background on the Treasury's views on open investment, its benefits to the United States and the European Union, and how it contributes to our shared mission of global economic growth.

The free flow of capital in open and competitive markets contributes directly to higher productivity growth and efficiency. When capital is free to flow in response to market demand, it is channeled into its most efficient uses.

The United States and the European Union are the two largest beneficiaries of foreign direct investment (FDI), not only because of our large markets and stable economies, but also our open investment policies. In 2005, FDI flows into the United States totaled almost $100 billion, double the average from the early 1990s. By comparison, the EU received over $87 billion in FDI from non-EU members during 2005. Total foreign investment in the United States reached almost $1.9 trillion at the end of 2005. But the United States is also the largest foreign investor, with U.S. investment overseas measuring nearly $2.5 trillion at the end of 2005.

Our open investment policy is instrumental to continued economic growth and job creation. In 2004, affiliates of foreign companies employed over 5 million U.S. workers; almost a third worked in the manufacturing sector, whereas only 10% of the overall U.S. workforce is in manufacturing jobs. Foreign investment also brings in new research, technology, and skills. Affiliates of foreign companies spent nearly $30 billion on research and development in 2004, and over $100 billion on plants and equipment. The new technology, capital investment, and trade brought by international investors contribute to higher productivity and higher compensation. Americans working for foreign owned firms earned an average annual compensation of over $60,000 - roughly 35 percent more than the real median household income in 2005. Finally, foreign investment also contributes to U.S. tax revenues. In 2003, foreign affiliates paid over $19 billion in taxes, which represented 11 percent of U.S. corporate tax revenues. Let me emphasize those statistics: while FDI-supported jobs account for less than 5% of our work force, they provide over 10% of our capital investment and corporate tax revenues; 15% of our private-sector R&D; and 20% of our exports.

The European Union is our most important economic partner. Forty-six percent of U.S. direct investment abroad at the end of 2005 went to the EU and over 60 percent of FDI in the United States came from the EU. In 2004, European majority-owned companies employed 3.5 million Americans, nearly 70% of the well-paying jobs I just mentioned, and U.S. majority-owned companies in the EU employed an equal number of Europeans.

In short, the United States and the EU have generated major gains by welcoming investment from abroad. Foreign-owned companies that have invested their capital and know-how are making our economies and our labor forces stronger, more competitive, and more prosperous. These gains, however, are not automatic.

This Administration has worked hard to maintain an economic environment that is welcoming to investment, both domestic and international. Foreign investor confidence in the U.S. economy is the product of a bipartisan pro-investment commitment this country has held over the long-term, even when short-term pressures may have made it expedient to embrace investment protectionism.

This has been a demanding time for our nation as we seek to provide for the security of our country in the post-9/11 environment. The last year has seen headlines on both sides of the Atlantic about restrictions on foreign investment. Some countries attempted to thwart takeovers of perceived "national champions," while other countries raised concerns about the free movement of labor and capital. In the United States, a small number of high-profile transactions sparked a debate in Washington about foreign investment in the United States.

As we endeavor to protect our people, we must recognize the positive benefits of foreign investment to our country and therefore seek to maintain the traditional U.S. open investment policy. Our policy of openness at home allows other nations to lower their barriers and enhances our national security by advancing prosperity and economic freedom in the rest of the world. Economic growth creates new jobs and higher incomes, spurs economic and legal reform, promotes democratic political systems, and helps lift large numbers of people out of poverty.

Our open investment policy has always recognized the need to protect the national security, a need that is internationally recognized as a defensible exception to an open investment regime. The United States has numerous laws and regulations that provide this critical protection. One group at its forefront is the Committee on Foreign Investment in the United States (CFIUS). CFIUS is an interagency group, chaired by the Secretary of the Treasury, comprised of six departments and six White House offices, and advised by the Director of National Intelligence. This committee has played an increasingly important role at the nexus of investment and national security policy and has adapted its membership and procedures as the security situation evolves - for example, by adding to the Committee the Department of Homeland Security after its creation.

While cases like CNOOC and Dubai Ports World may have attracted most of the attention, over the past 18 years, over 1,600 other foreign acquisitions with national security implications have been reviewed by CFIUS without controversy. And these transactions have helped produce the highly desirable gains I just described for the U.S. economy and labor force.

As background, largely due to concerns about recycled petrodollars, CFIUS was established in 1975 by Presidential Executive Order with the Secretary of the Treasury as its chair. Its main responsibility at that time was "monitoring the impact of foreign investment in the United States and coordinating the implementation of United States policy on such investment." It analyzed foreign investment trends and developments in the United States and provided guidance to the President on significant transactions. However, it had no authority to take action with regard to specific foreign investments.

Largely due to concerns about high-profile Japanese investments, the Omnibus Trade and Competitiveness Act of 1988 added section 721 to the Defense Production Act of 1950 to provide authority to the President to suspend or prohibit any foreign acquisition, merger, or takeover of a U.S. company that the President determines threatens to impair the national security of the United States. Section 721 is widely known as the Exon-Florio amendment, after its original congressional co-sponsors. In response to concerns about French government-owned companies purchasing U.S. defense electronics firms, the Act was amended in 1992 to require special attention in cases involving state-owned or -controlled acquirors.

Exon-Florio notices to CFIUS are voluntary. Many acquisitions by foreign investors do not implicate the national security, and parties to those transactions choose not to notify. However, companies know that failure to notify leaves their transaction subject to Presidential action indefinitely. Companies also know that any CFIUS member may notify a transaction to the Committee.

CFIUS works through consensus in which each of the 12 members has the opportunity to investigate a transaction and bring its own expertise on national security questions to the table. The Committee members analyze sensitive proprietary information provided by the companies, as well as information from public and Administration sources, including an assessment by the Office of National Intelligence. If any member has unresolved concerns or questions during the 30-day first stage investigation of a transaction, it may request that CFIUS conduct a 45-day second stage investigation to resolve those concerns and questions. In many cases when CFIUS identifies concerns, it attempts to work with the companies to mitigate the risk.

An important aspect of the Exon-Florio process is the requirement that governmental action be concluded within specified time limits. Those limits -- for instance, the 30-day first stage investigation -- necessitate that the government act efficiently to assess all factors relating to the case.

The attention that was focused on the CFIUS process during the Dubai Ports World controversy triggered a legislative debate over how the Administration should review foreign acquisitions for national security concerns while continuing to welcome foreign investment. While it is unclear whether Congress will pass CFIUS legislation this year, the Administration is committed to improving CFIUS in a manner that protects national security, respects Congress's important oversight responsibility, and ensures a strong U.S. economy and an open environment for U.S. investment abroad. However, while we seek changes that ensure greater political accountability and improved communication with Congress, we are mindful not to create barriers to foreign investment in the United States.

CFIUS must investigate each transaction thoroughly, but timeframes must not be unnecessarily long or overly rigid. Any reform must allow routine transactions to be reviewed quickly. But national security is and must remain the Administration's first priority, so CFIUS will not hesitate to initiate a second-stage investigation when the circumstances merit.

As governments debate how to deal with the legitimate national security concerns raised by globalization, we must avoid the trap of creeping protectionism. If we fail, a source of dynamism and growth in our economies will be at risk. The United States intends to lead by example. We must preserve the careful balance between open investment and national security. We know that if we do not preserve this balance, we can expect reciprocal actions from our partners. Already, we can see troubling signs of other nations moving toward protectionist intervention in foreign investment.

In August, China issued draft regulations governing M&A of domestic Chinese enterprises, reviewing foreign investments in terms of their impact on "economic security." This spring, Russia justified a proposal to protect 39 industries from foreign control based on what it viewed as U.S. actions in the CFIUS process. Mexico's Senate has passed a restrictive investment bill, and India is considering its own system of investment controls that may cause high hurdles to investment.

Closing

In sum, an open investment policy and open capital markets are important, not only to our nation's economic development, but to the growth and productivity of the global marketplace.  Treasury is working with counterparts in the Administration as well as the Congress to ensure that we remain the global leader for open investment even as we discharge with care our primary national security responsibilities.  We believe that countries that promote open investment policies, together with free and fair trade and flexible exchange rates, will secure the greatest economic benefits for their people. 

The select, but high-profile, instances of publicly-debated investments have raised questions about whether the doors to foreign investment remain open in both in Europe and in the United States.  The answer to that question in the United States is clear: "Yes, we are open for investment."  We hope and anticipate that answer is the same in Europe.