February 27, 2008
HP-842

Deputy Secretary Robert M. Kimmitt
Remarks Before the U.S. Israel Executive Summit

New York - Thank you, Professor Neeman, for that kind introduction. I would like to thank The Marker and the other sponsors for inviting me to this summit, and all of you for joining us today.

My actual invitation came from Yossi Vardi, with whom I have been friends for almost 7 years, from when we were both affiliated with AOL. When I visited Israel in December of last year, Yossi kindly invited my traveling team and me to dinner in Tel Aviv. Those of you who know Yossi are probably thinking the evening went quite late, filled with good food and good humor. Well, we had plenty of good food and humor, but Yossi was uncharacteristically rushed. Only with prodding did he admit that he remembered after inviting us that we were dining on the evening of his wedding anniversary, and he hoped we would understand if he had to leave dinner a bit early! How could I have possibly turned down a subsequent invitation from such a mensch?

The word mensch reminds me of advice I received from my predecessor, Ambassador Vernon Walters, as I left to be American Ambassador to Germany in 1991. He told me: "Don't ever forget how important speeches are to the Germans. They like to give speeches, listen to speeches, and analyze speeches far more than is the case in the United States." He recounted a story of speaking once to a distinguished group like the one assembled here today. He spoke in his excellent German for 40 minutes and sat down, rather pleased with himself, only to have the host of the event stand and say, "Mr. Ambassador, thank you so much for your remarks. If you ever have time for a real speech, please come back to see us again." Well, if 40 minutes is when a "real speech" starts, my allotted 25 minutes only leaves me time today for "remarks," followed by a few questions.

I have been working on issues related to Israel's economy and security much of my professional life, and when I visited Israel in December, I had the opportunity to meet with senior policymakers and business leaders. It had been years since I had been in Israel, and I was struck by the vibrancy of the economy and the commitment of both government officials and private sector leaders to making the economy even stronger. I commended policymakers for their adherence to fiscal discipline and economic reform, which are two key factors behind the prosperity Israel enjoys today.

As all of you are very much aware, 2007 was a banner year for the Israeli economy and for U.S.-Israel economic cooperation. Israel's economy maintained its robust expansion of the past four years, during which it achieved annual growth rates over five percent. Unemployment was at its lowest level in a decade and the government deficit has not been lower since the mid-80s. Trade between our countries increased by 12 percent and U.S. tourism in Israel reached the highest level ever.

The Israeli economy is well-positioned to weather the ongoing turmoil in the global financial markets and, by all accounts, growth is expected to remain strong in the coming year. An important contributor to Israel's solid economic performance--and one that I think is essential to ensuring continued growth--has been the economy's rapid integration with the rest of the world. Flows of nonresident investment into Israel and resident investment abroad together reached a record 40 percent of GDP in 2006.

During my December visit, with the help of the Israel-American Chamber of Commerce and the hospitality of Professor Neeman's law firm, I was able to spend considerable time with a number of Israel's leading firms. I discussed with them many of the concepts I would like to share with you today. Principally, I made the case that investment flows are one of the most important ways our economies benefit from globalization.

It is a common misperception that our expanding interdependence with other countries is based principally on growing levels of trade in goods and services. In fact, even though trade is clearly important, the value of trade in goods and services is only a small fraction of the value of cross-border investment transactions. In 2006, for example, cross-border transactions in long-term securities involving U.S. and foreign residents totaled $52 trillion, compared to $3.6 trillion in U.S. exports and imports of goods and services. Likewise, in Israel, while imports and exports of goods and services increased nearly nine percent in 2006, cross-border investment flows doubled. And bilateral investment between our countries is growing very rapidly. From 2000 to 2006 the stock of U.S. direct investment in Israel nearly tripled, rising from $3.7 billion to $10 billion. The stock of Israeli investment in the United States more than quadrupled over the same period, rising from $3 billion to more than $12 billion.

These investment flows – both inward and outward – bring substantial benefits to both countries. Cross-border investment in the United States and Israel fuels economic prosperity by creating well-paid jobs, bringing new technology and business methods, and providing healthy competition that fosters innovation, productivity gains, lower prices, and greater variety for consumers.

In 2006, foreign-owned firms contributed almost six percent of U.S. output, 14 percent of U.S. R&D spending, and 20 percent of U.S. exports. These firms re-invested over half of their U.S. income – $71 billion – back into the U.S. economy, and they accounted for 13 percent of U.S. corporate tax payments. Furthermore, U.S. affiliates of foreign firms employ over five million Americans directly and generate approximately five million more jobs indirectly, together accounting for almost one in 10 U.S. private sector jobs. It is worth emphasizing that these companies also pay on average 25 percent higher wages than comparable American-owned companies.

Israel has also benefited significantly from capital inflows. In 2006 Israel's booming high-tech sector was buoyed by almost $1 billion in venture capital funds from international firms. If the Israeli economy were less open to international investment, this important sector, which accounted for nearly half of non-diamond exports, would receive up to 60 percent less capital investment.

The originating country also realizes significant benefits from international investment. For example, when Israeli companies invest money in the United States to establish a U.S. base of operations, it dramatically increases the reach of these companies into the U.S. market and can be expected to boost Israeli exports. The same holds for U.S. investment abroad.

It is the significant benefits of international investment that have led countries around the world, including countries that not so long ago had closed economies, to lower investment barriers significantly over the past twenty years. According to the World Bank, global private capital flows increased by 500 percent between 1991 and 2005. Daily foreign exchange transactions have increased from $880 billion in 1992 to $3.2 trillion today.

With this growing global trade and financial interdependence, of course, comes a degree of vulnerability. The long-term fundamentals of the global economy remain solid. However, recent global economic and financial developments – including high energy prices, tight credit conditions, and the related volatility in the financial markets – have prompted growing protectionist sentiments around the world.

But raising barriers to international investment would do little to relieve the pressure and would, instead, generate economic disruptions. Countries that adopt restrictions on international investment would lose out to other nations in the competition for cross-border capital and the benefits that I have described. These restrictions would present countries with painful choices regarding taxes, government programs, and personal savings and consumption. They would also be faced with the prospect of backlash against their investors abroad.

In his May 2007 Statement on Open Economies, President Bush reiterated the longstanding U.S. commitment to open investment and noted that "a free and open international investment regime is vital for a stable and growing economy, both here at home and throughout the world." Reaffirming the gains made by lowering investment barriers will inspire confidence in the financial markets, while raising such barriers would do just the opposite. Navigating the current economic conditions will require focused and grounded policies, not short-sighted retrenchment.

We in the United States have taken a balanced approach that reinforces the benefits of investment while managing potential risks in two particular areas that I would like to discuss briefly today – addressing the rising concern over sovereign wealth funds and assessing the national security implications of foreign investments.

The halls of government and the financial community are consumed with talk about sovereign wealth funds – large pools of capital managed separately from official reserves. These funds are estimated at $2.5 trillion today, growing to $12.5 trillion over the next 5 years.

All of us in the global economy have a stake in ensuring that the attention sovereign wealth funds are generating today does not feed protectionist pressures and result in ill-considered policy that undermines the global open investment environment more broadly. The Treasury Department is actively engaged on this issue.

First, the Department has taken a number of steps internally and has worked within the U.S. government to build a solid understanding of sovereign wealth funds, to form the foundation for reasoned policy-making. Within Treasury, a working group of experts from across the offices of the Department is focused on real-time monitoring, understanding, and analysis of issues related to sovereign wealth funds. The President's Working Group on Financial Markets, chaired by Secretary Paulson, brings together key U.S. policymakers to discuss the implications of the growth of these funds. Treasury has also actively reached out to governments of countries with significant sovereign wealth funds and to managers of the funds, establishing ongoing and candid dialogues. And we provide semi-annual updates to Congress on our sovereign wealth fund-related work in our Report on International Financial and Exchange Rate Policies.

Second, we are engaged on a multilateral basis to address the concerns of countries that have sovereign wealth funds and the countries in which the funds invest. For example, last May Treasury hosted a G-20 workshop on commodity cycles and financial stability that included a session on sovereign wealth funds. At last October's World Bank/IMF meetings in Washington, Secretary Paulson hosted a G-7 outreach dinner with finance ministers and heads of sovereign wealth funds from eight countries – China, Korea, Kuwait, Norway, Russia, Saudi Arabia, Singapore, and the United Arab Emirates – to discuss the benefits of a comprehensive approach to this issue that could culminate in the establishment of best practices for sovereign wealth funds.

The IMF is currently working to develop best practices for sovereign wealth funds that build on its existing guidelines for foreign exchange reserve management. We envision that such a framework would include the following areas: investing commercially, not politically; competing fairly with the private sector; promoting international financial stability; and respecting host country rules.

Finally, it is not enough that a set of best practices exists for sovereign wealth funds alone. Equally important is ensuring that recipients of sovereign wealth fund investments – and foreign government-controlled investments more broadly – have a set of practices that can help guide their investment policies and reviews. The Organization for Economic Cooperation and Development (OECD) is best positioned to identify such practices and is actively engaged in this effort. Investment best practices should focus on avoiding protectionism and should adhere to well-established principles of proportionality, predictability, and accountability embraced by the OECD and its members for the treatment of foreign investment. We are hopeful that this effort will lead to the release of guidance later this year.

A commitment to open investment is not at odds with protecting national security, which must always remain a nation's top priority. To the contrary, our experience has shown that it is possible to safeguard national security while continuing to welcome foreign investment.

The United States is committed to taking all steps necessary to protect the national security of the country. At the same time, national security is well served by a vibrant economy and must not be used as an excuse for the pursuit of protectionist policies, industrial policy, or the creation of national champions. Investment reviews must focus on genuine national security concerns, not broader economic or other national interests. Furthermore, investment review regimes should be fundamentally based on predictability, and, when a particular transaction may pose a risk to national security, the policy response should be fair and proportional to the incremental risk.

One important mechanism in this regard is the Committee on Foreign Investment in the United States, known as CFIUS. The CFIUS process, which Treasury chairs, allows the United States to review foreign direct investment that results in foreign control of U.S. businesses and that may raise national security considerations.

Recent reforms have strengthened the CFIUS process and reinforced the longstanding U.S. commitment to open investment. The Foreign Investment and National Security Act, passed by Congress last year, is expressly based on this commitment to maintaining open investment while ensuring we continue to protect our national security. President Bush also reiterated the U.S. open investment policy through the Executive Order he issued last month to strengthen the CFIUS process. In his statement accompanying the Executive Order, he concluded with this important point: "…our openness is vital to our prosperity and security."

We will strive to ensure that the CFIUS process focuses only on investments that may raise genuine national security concerns; avoids unnecessary delay in investment transactions; and introduces predictability into the system. We are preparing revised regulations to further implement the new law, which will become effective in the spring after a period of public comment. As required by Congress, Treasury is also working on additional guidance that we plan to release this spring on the types of transactions that have raised national security concerns in the past. Such guidance should provide greater transparency to investors.

And I would note that CFIUS affects only a small portion of all international investment into the United States. In 2007, CFIUS reviewed fewer than eight percent of M&A transactions in the United States involving a foreign acquirer and a domestic firm. The reviews of over 80 percent of the transactions notified to CFIUS were completed within 30 days, and only a small minority of these transactions required a second phase investigation or mitigation measures. Ultimately, consistent with its statutory mandate and our open investment policy, CFIUS seeks to resolve any concerns rather than prohibit transactions.

In large measure due to the growth in the size and number of the sovereign wealth funds discussed earlier, investment review processes appear to be proliferating globally. A number of countries, including Australia, China, Canada, Germany, Korea, and Russia, have recently instituted new reviews or appear to be moving toward doing so. Our experience with CFIUS, and especially our recent and ongoing reforms, has positioned us well to encourage other countries to avoid using investment review processes for protectionist purposes and instead focus narrowly on genuine national security concerns.

Ladies and gentlemen, I have touched in my remarks on our government's view of the importance of open investment; the need to avoid ill-informed and protectionist responses to turbulence in the markets; and how the United States has sought to deal with the challenges of international investment in connection with sovereign wealth funds and national security concerns.

For many, if not most of you, these are not academic or theoretical issues. How our government and other governments address the challenges that I have discussed today could significantly affect the welfare of your companies. You know first hand the benefits of an open investment environment and understand, perhaps better than anyone else, the harm that would come if we or others turn inward and protectionist. I encourage you to share this understanding and your support of open investment with policymakers in Washington, in Israel, and in all countries crucial to your global success.

We look forward to being your partner in this important initiative, and I welcome you to visit the Treasury Department on your next trip to Washington. Don't expect free samples from the U.S. Mint or the Bureau of Engraving and Printing – but do expect to find a Treasury team committed to open investment and very open to helping Israeli investors identify good opportunities in the United States, even as we help American investors identify similar opportunities in Israel.

Thank you again for your invitation and your kind attention. Very best wishes for the success of this important conference, and I now welcome your questions.