FROM THE OFFICE OF PUBLIC AFFAIRS

Introduction

 Thank you for inviting me to be here today.  I appreciate the opportunity to review with you the current climate for foreign direct investment, the commitment of the Administration to the traditional open investment policy of the United States, and the optimism that can be gleaned from the hopeful signs of a rebound in U.S. economic activity.

 Unfortunately, the last couple of years have been colored by a pessimism that was difficult to avoid in the midst of what were dramatic shocks to our nation and its economy, including terrorist attacks, global conflict, corporate scandals, and a recession.  All these factors combined to create uncertainty about the present and apprehension about the future prospects for the U.S. economy.  At the same time, sluggish activity in the other major economies of the world meant that there was no significant stimulus to spur global economic growth, and no cause for foreign investors to feel confident that future prospects for corporate revenues and profits would be improving.

 As Secretary Snow continues to stress in his discussions with international financial leaders -- most recently at the G-20 Finance Ministers Meeting in Mexico in October -- the United States cannot be the sole engine of global economic growth.  Other industrial nations need to take appropriate steps -- including fundamental structural reforms where necessary -- to move their economies forward, increasing economic activity, creating jobs, and generally contributing to global prosperity.

 While much remains to be done, the policies of the Administration designed to foster a pickup in U.S. economic activity are beginning to be felt.  Last month the economy exceeded expectations and added new jobs.  Inflation is low.  After-tax incomes are rising.  Productivity is high.  Industrial production is on the rise.  Housing starts remain strong.  Confidence among large-company CEOs reached its highest level in eleven years according to the Conference Board.  Corporate earnings are showing a nice upturn, with many exceeding expectations. 

 In short, it appears to be an excellent time for foreign investors to reevaluate postponed decisions about investing in the United States and to consider new opportunities.  

 It will come as no surprise to OFII members that foreign direct investment in the United States was much slower during this period of pessimism than it had been in recent years.  In fact, in 2002 total foreign direct investment in the United States actually decreased for the first time since at least 1946, when data were first complied by the Department of Commerce.  Though the decrease was only a slight 1%, it followed an 8% increase in 2001.  At least part of the slowdown was inevitable given the robust pace of the 1998-2000 period.  Foreign direct investment in the United States increased 14% in 1998, 23% in 1999, and 32% in 2000.  It stands to reason, however, that some of the decline in foreign direct investment is the result of uncertainty about when the U.S. economy would recover, and about whether the future path of economic activity would be unduly curtailed because of the necessary adjustments that have to be made to bolster our security protections.

 In that regard, some foreign investors have expressed concern that in the aftermath of 9/11 and the follow-up emphasis on protecting national security that the United States would alter its traditional policy toward foreign investment.

U.S. Investment Policy

 U.S. investment policy is based on a two-pronged approach:

 First, the United States is open to foreign direct investment; and

 Second, the United States seeks to promote similar open investment regimes    in other nations around the world.

 As a nation we have traditionally held to this open investment policy because it is in our interest to do so.  The United States is the host for more foreign direct investment than another other country in the world.  This investment brings new technologies and management techniques, which increase productivity, create jobs, and increase economic growth -- all factors that contribute to a rising standard of living for all Americans.  It also increases consumer choice and welfare. 

 This is a challenging time for the United States as it seeks to shore up and improve security and, at the same time, preserve the welcoming climate for foreign direct investment that has been an important contributor to the strength and vitality of the U.S. economy -- recognizing that the strength of our economy is itself an important element in maintaining our overall security.  This tension between security and openness is nowhere more evident than in the implementation of the so-called Exon-Florio provision by the Committee on Foreign Investment in the United States (CFIUS).

CFIUS and the Implementation of Exon-Florio

 Treasury chairs the interagency CFIUS that was established by Executive Order of the President in 1975 and which in 1988 was given certain responsibilities to act on behalf of the President in implementing the Exon-Florio provision (section 721 of the Defense Production Act of 1950).  Exon-Florio provides authority to the President to investigate foreign acquisitions of U.S. companies from a national security perspective and to take action, if necessary, to prohibit a transaction that, in his judgment, threatens the national security when existing laws are not adequate to ameliorate the threat.  CFIUS has twelve member agencies with the addition of the Department of Homeland Security this past February and includes Defense, State, Justice, and Commerce.

 In implementing Exon-Florio, CFIUS seeks to balance national security concerns with the open investment policy.  The CFIUS membership includes some agencies with a policy focus more closely attuned to national security concerns as traditionally conceived and others focused more on maintaining the open investment climate.  As the chair, Treasury’s goal is to bring these views together into a coherent policy approach, so that CFIUS can implement Exon-Florio to meet the national security objectives of the statute and do so in a manner that does not compromise our open investment policy.

 We believe we have been successful in achieving this goal.  The implementation of Exon-Florio by CFIUS has not chilled the overall climate for foreign investors by imposing arbitrary and unjustified bureaucratic performance requirements.  The existence of Exon-Florio raises the awareness of foreign investors contemplating acquisitions of U.S. companies to the importance of national security considerations and it helps to ensure that foreign investments are structured in ways to avoid national security problems. 

 While the confidentiality provided under Exon-Florio precludes a discussion of the details of any particular CFIUS review, enough information has filtered to the press for most of you to know that in recent months there have been a couple of contentious reviews that have strained the balance between national security and open investment.  In an era where the attention of the government has been drawn to efforts to secure our homeland, it is inevitable that there will be a consideration of what constitutes our “critical infrastructure” and how best to protect this infrastructure.  The debate is on-going.  While it is essential in the current environment to reemphasize a continued commitment to protecting the national security, it is also essential that the fundamental principle of U.S. policy be kept in clear focus -- foreign investment is enormously beneficial to the U.S. economy and our economic strength is one of the most important bulwarks of our security itself.  Foreign investment is an important auxiliary to domestic investment, providing an added spur to economic growth, job creation and a higher standard of living.  In the competitive global economy, the enviable position of the United States as the leader in attracting and retaining foreign investment is best maintained by an open investment policy.

International Investment Initiatives

This openness to foreign investment at home also provides the United States with the necessary credibility in the international community to encourage other countries to adopt more liberal investment regimes.  Congressional approval of Trade Promotion Authority (TPA) legislation in 2002 has given the Administration greater opportunities to conclude market-opening trade and investment agreements. 

The Administration has taken advantage of these opportunities by pursuing several initiatives designed to increase investment opportunities for U.S. companies overseas, which is the largest group of investors abroad.  For example, the U.S. recently concluded negotiations on bilateral free trade agreements (FTAs) with Chile and Singapore.  These FTAs provide U.S. investors with access to the Chilean and Singaporean markets, as well as important protections for their investments.

The U.S. is currently negotiating FTAs with thirty-four western hemisphere countries (the Free Trade Area of the Americas or FTAA), Australia, five Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua), Morocco, and the Southern African Customs Union (Botswana, Lesotho, Namibia, South Africa, Swaziland).  The U.S. is pressing for high standard investment chapters in these agreements.  Also, the U.S. has announced its intention to pursue an FTA with Bahrain and the Dominican Republic and is considering FTA negotiations with other countries.

In addition, Trade Ministers met in Cancun in September to consider launching investment negotiations under the auspices of the WTO as part of the Doha Round of multilateral trade negotiations.  While the United States was prepared to establish the institutional framework within the WTO to establish rules on investment, and to begin negotiating rules governing transparency affecting international investment, WTO Members were unable to reach a consensus to start the negotiations.  As appropriate, the U.S. will continue to work toward the negotiation of WTO rules on investment that maintain high levels of protection for U.S. investors and help facilitate investment flows globally.

Furthermore, the U.S. has reinvigorated the Bilateral Investment Treaty (BIT) program, which was initiated in 1982 as a way to encourage investment liberalization and economic development overseas.  The U.S. is working diligently to complete a new prototype BIT, which incorporates the TPA investment policy objectives.  The U.S. Government looks forward to putting this new prototype into practice by negotiating high standards BITs with appropriate candidates.  

Conclusion

 While this is a demanding time for our nation as we seek to ensure security protections, we also have to be mindful that these safeguards do not impose undue barriers to foreign direct investment.  This is also a time of opportunity -- a time for the United States to reaffirm its commitment to an open investment policy at home, securing the liberalization of investment regimes overseas, and to reestablish its conviction that this policy can coexist with strong national security laws and regulations.  In particular, we believe that the Exon-Florio provision and the CFIUS process are sufficiently flexible to meet the requirements of protecting national security without discouraging foreign investment.  Proposals that seek to advance security protections by tipping the balance away from open investment are counterproductive because foreign investment is essential to the continued growth and prosperity of our economy and a healthy economy is a vital component of our security as a nation.

Thank you.