[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
CFIUS REFORM: H.R. 5337, THE REFORM OF
NATIONAL SECURITY REVIEWS OF FOREIGN DIRECT
INVESTMENT ACT
HEARING
BEFORE THE
SUBCOMMITTEE ON COMMERCE, TRADE,
AND CONSUMER PROTECTION
OF THE
COMMITTEE ON ENERGY AND
COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
JULY 11, 2006
Serial No. 109-110
Printed for the use of the Committee on Energy and Commerce
Available via the World Wide Web: http://www.access.gpo.gov/congress/house
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COMMITTEE ON ENERGY AND COMMERCE
JOE BARTON, Texas, Chairman
RALPH M. HALL, Texas JOHN D. DINGELL, Michigan
MICHAEL BILIRAKIS, Florida Ranking Member
Vice Chairman HENRY A. WAXMAN, California
FRED UPTON, Michigan EDWARD J. MARKEY, Massachusetts
CLIFF STEARNS, Florida RICK BOUCHER, Virginia
PAUL E. GILLMOR, Ohio EDOLPHUS TOWNS, New York
NATHAN DEAL, Georgia FRANK PALLONE, JR., New Jersey
ED WHITFIELD, Kentucky SHERROD BROWN, Ohio
CHARLIE NORWOOD, Georgia BART GORDON, Tennessee
BARBARA CUBIN, Wyoming BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
HEATHER WILSON, New Mexico BART STUPAK, Michigan
JOHN B. SHADEGG, Arizona ELIOT L. ENGEL, New York
CHARLES W. "CHIP" PICKERING, Mississippi ALBERT R. WYNN, Maryland
Vice Chairman GENE GREEN, Texas
VITO FOSSELLA, New York TED STRICKLAND, Ohio
ROY BLUNT, Missouri DIANA DEGETTE, Colorado
STEVE BUYER, Indiana LOIS CAPPS, California
GEORGE RADANOVICH, California MIKE DOYLE, Pennsylvania
CHARLES F. BASS, New Hampshire TOM ALLEN, Maine
JOSEPH R. PITTS, Pennsylvania JIM DAVIS, Florida
MARY BONO, California JAN SCHAKOWSKY, Illinois
GREG WALDEN, Oregon HILDA L. SOLIS, California
LEE TERRY, Nebraska CHARLES A. GONZALEZ, Texas
MIKE FERGUSON, New Jersey JAY INSLEE, Washington
MIKE ROGERS, Michigan TAMMY BALDWIN, Wisconsin
C.L. "BUTCH" OTTER, Idaho MIKE ROSS, Arkansas
SUE MYRICK, North Carolina
JOHN SULLIVAN, Oklahoma
TIM MURPHY, Pennsylvania
MICHAEL C. BURGESS, Texas
MARSHA BLACKBURN, Tennessee
BUD ALBRIGHT, Staff Director
DAVID CAVICKE, General Counsel
REID P. F. STUNTZ, Minority Staff Director and Chief Counsel
SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION
CLIFF STEARNS, Florida, Chairman
FRED UPTON, Michigan JAN SCHAKOWSKY, Illinois
NATHAN DEAL, Georgia Ranking Member
BARBARA CUBIN, Wyoming MIKE ROSS, Arkansas
GEORGE RADANOVICH, California EDWARD J. MARKEY, Massachusetts
CHARLES F. BASS, New Hampshire EDOLPHUS TOWNS, New York
JOSEPH R. PITTS, Pennsylvania SHERROD BROWN, Ohio
MARY BONO, California BOBBY L. RUSH, Illinois
LEE TERRY, Nebraska GENE GREEN, Texas
MIKE FERGUSON, New Jersey TED STRICKLAND, Ohio
MIKE ROGERS, Michigan DIANA DEGETTE, Colorado
C.L. "BUTCH" OTTER, Idaho JIM DAVIS, Florida
SUE MYRICK, North Carolina CHARLES A. GONZALEZ, Texas
TIM MURPHY, Pennsylvania TAMMY BALDWIN, Wisconsin
MARSHA BLACKBURN, Tennessee JOHN D. DINGELL, Michigan
JOE BARTON, Texas (EX OFFICIO)
(EX OFFICIO)
CONTENTS
Page
Testimony of:
Castellani, John, President, Business Roundtable 13
Cohen, Calman J., President, Emergency Committee on
American Trade 19
Holtz-Eakin, Douglas, Director, Maurice R. Greenberg
Center for Geoeconomic Studies, Council on Foreign
Relations 26
Mulloy, Hon. Patrick A., Commissioner, United States-
China Economic and Security Review Commission 33
CFIUS REFORM: H.R. 5337, THE REFORM OF
NATIONAL SECURITY REVIEWS OF FOREIGN DIRECT
INVESTMENT ACT
TUESDAY, JULY 11, 2006
HOUSE OF REPRESENTATIVES,
COMMITTEE ON ENERGY AND COMMERCE,
SUBCOMMITTEE ON COMMERCE, TRADE,
AND CONSUMER PROTECTION,
Washington, DC.
The subcommittee met, pursuant to call, at 2:10 p.m., in Room
2123 of the Rayburn House Office Building, Hon Cliff Stearns
[Chairman] presiding.
Members present: Representatives Stearns, Terry, Rogers,
Murphy, Blackburn, Barton [ex officio], Schakowsky, and Brown.
Staff Present: David Cavicke, General Counsel; Chris Leahy,
Policy Coordinator; Will Carty, Professional Staff Member; Brian
McCullough, Professional Staff Member; William Harvard,
Legislative Clerk; Jonathan Cordone, Minority Counsel; Chris
Treanor, Minority Staff Assistant, and Jonathan Brater, Minority
Staff Assistant.
MR. STEARNS. Good afternoon. Our consideration of
H.R. 5737, the Reform of National Security Reviews of Foreign
Direct Investment Act, is an opportunity for the committee to
exercise its jurisdiction over a bill that has far reaching
implications for the economic health and vitality of the United
States' commerce, both domestic and international. Foreign direct
investment in the United States economy is an essential ingredient
in the fuel that powers America's economic engine. Such open
investment policy has made the United States a favorite destination
for foreign direct investment with over $115 billion dollars
invested in 2004 supporting over 5 million American jobs found in
every State of the Union. Car manufacturing plants in Ohio,
pharmaceutical research and development in New Jersey, or
aircraft components production in my home State of Florida.
The United States is and will hopefully remain the benchmark
for open, transparent investment policy that results in better
products for consumers, more technological innovation, and a
strong and vibrant job market. Moreover, the byproducts of this
free and open domestic treatment of foreign investment is that it
has tremendous reciprocal benefits in the foreign markets that
American companies invest, produce, and sell in. This openness
and transparency have enabled American companies to export
those principles to the rest of the world, increase prosperity abroad,
and in turn, encourage better acceptance and understanding of the
American way of life.
The Committee on Foreign Investment in the United States or
CFIUS, as it is commonly known, has operated for over 30 years
as an interagency mechanism designed to flag foreign investment
transactions in the United States that could affect our national
security. The possibility of a CFIUS review is always a
consideration with a foreign investment transaction and companies
generally apply for a review as a matter of good due intelligence.
Preserving a balanced and transparent process is vital to enjoying
this open cooperation in companies wishing to invest in the United
States. In practice, CFIUS has operated relatively well, not only
empowering the committee to scrutinize foreign investments that
could have security implications, but also by allowing it to be in a
position to counsel companies on how to improve the structure of
their transactions to better address national security concerns.
I do, however, believe that the balance that has been struck
under the current process is capable of being fine-tuned. So
accordingly I would like to better understand why the bill
designates a permanent chair and vice chair, and how that new
statutory element will help maintain a balanced and collaborative
review process. Codifying a leadership structure that includes
Homeland Security as vice chair clearly creates a broad security
component rather than providing a general organizational
leadership structure. That has worked well over the years. In
addition, a leadership structure with an extremely broad security
portfolio like the Department of Homeland Security could have the
unintended effect of intimidating legitimate investors from
investing their capital in the United States economy, thereby
harming our prosperity in the long run.
I would also like to see the chairmanship function become
more transparent and responsive, a proven and responsive way to
generate substantive, collaborative input from all the departments
and agencies that are involved. With this in mind, I would like to
hear the panel's thoughts about the ideas of periodically rotating or
changing the leadership structure to better reflect the commercial
nature of the transactions that are subject to scrutiny and review, as
well as to, better balance those issues with the national security
focus of the analysis. I think there may be a better way to keep the
interagency process balanced and as a result, further improve the
functioning of the body as envisioned by the bill.
In closing, I think H.R. 5337 is a good bill that would benefit
from some relatively minor improvements. I am a cosponsor. I
support the bill to facilitate better Congressional oversight over the
committee while preserving a balanced and transparent review
process that would prohibit politicizing these important issues,
principles which have served the United States economy and our
world-class financial markets extremely well over the years.
And with that, I yield to the Ranking Member, Ms.
Schakowsky.
[Prepared statement of Hon. Cliff Stearns follows:]
PREPARED STATEMENT OF THE HON. CLIFF STEARNS, CHAIRMAN,
SUBCOMMITTEE ON COMMERCE, TRADE, AND CONSUMER PROTECTION
Good afternoon. Our consideration today of HR 5337, the
"Reform of National Security Reviews of Foreign Direct
Investment Act" is an opportunity for the Committee to exercise its
jurisdiction over a bill that has far reaching implications for the
economic health and vitality of United States commerce, both
domestic and international. Foreign direct investment in the U.S.
economy is an essential ingredient in the fuel that powers
America's economic engine. Such open investment policy has
made the United States a favored destination for foreign direct
investment with over $115 billion invested in 2004, supporting
over 5 million American jobs found in every state of the union -
car manufacturing plants in Ohio, pharmaceutical R&D in New
Jersey, or aircraft component production in my home state of
Florida. The United States is and hopefully will remain the
world's benchmark for open, transparent investment policy that
results in better products for consumers, more technological
innovation, and a strong and vibrant job market. Moreover, the
byproduct of this free and open domestic treatment of foreign
investment is that it has tremendous reciprocal benefits in the
foreign markets that American companies invest, produce, and sell
in. This openness and transparency has enabled American
companies to export those principles to the rest of the world,
increase prosperity abroad, and in turn, encourage better
acceptance and understanding of the American way of life.
The Committee on Foreign Investment in the United States or
"CFIUS", as it is more commonly known, has operated for over
thirty years as an interagency mechanism designed to flag foreign
investment transactions in the United States that could affect our
national security. The possibility of a CFIUS review is always a
consideration with a foreign investment transaction, and companies
generally apply for a review as a matter of good due diligence.
Preserving a balanced and transparent CFIUS process is vital to
enjoying this open cooperation from companies wishing to invest
in the U.S. economy. In practice, CFIUS has operated relatively
well, not only empowering the CFIUS committee to scrutinize
foreign investment that could have security implications, but also
by allowing it to be in a position to counsel companies on how to
improve the structure of their transactions to better address
national security concerns.
I do, however, believe that the balance that has been struck
under the current CFIUS process is capable of being fine tuned.
Accordingly, I would like to better understand why the bill
designates a permanent CFIUS chair and vice chair and how that
new statutory element will help maintain a balanced and
collaborative review process. Codifying a leadership structure that
includes Homeland Security as Vice Chair clearly creates a very
strong and broad security component, rather providing a general
organizational leadership structure - a structure that has worked
well over the years. In addition, a leadership structure with an
extremely broad security portfolio like the Department of
Homeland Security COULD have the unintended effect of
intimidating legitimate investors from investing their capital in the
United States economy; thereby harming our prosperity in the long
run. I'd also like to see the chairmanship function become more
transparent and responsive - a proven and effective way to
generate substantive collaborative input from all the departments
and agencies involved. With this in mind, I'd like to hear panel's
thoughts about the idea of periodically rotating or changing the
leadership structure to better reflect the commercial nature of the
transactions subject to CFIUS scrutiny and review, as well as to
better balance those issues with the national security focus of the
analysis. I think there may be a better way to keep the interagency
process balanced, and as a result, further improve the functioning
of CFIUS as envisioned by the bill.
In closing, I think HR 5337 is a good bill that would benefit
from some relatively minor improvements. As a cosponsor, I
support the bill's general approach to facilitate better congressional
oversight of the CFIUS process while preserving a balance and
transparent review process that avoid politicizing these important
issues -- principles that have served the U.S. economy and our
world class financial markets extremely well over the years.
Thank you.
MS. SCHAKOWSKY. Thank you, Chairman Stearns, for holding
today's hearing on the Committee on Foreign Investment in the
United States, CFIUS, and H.R. 5337, the reform of national
security, the bill that we will be marking up tomorrow in the full
committee. I hope we can reach a bipartisan agreement on the bill.
I know that we both agree that it is time to reform the Exon-Florio
process, which determines what can be bought in the United States
by foreign entities.
Because this has direct implications for our national and
economic securities, I believe it is one of the most important issues
that fall under the jurisdiction of the subcommittee. For years,
CFIUS, the interagency committee that was formed to protect the
United States' economic well being and national security, has been
making decisions about what foreign companies can buy up in the
United States under a shroud of secrecy. Under the guise of
protecting the confidentiality of the potential investors, CFIUS has
decided to keep Congress, including us, the committees with
jurisdiction over it, in the dark about its decisions whether to
investigate, approve, deny foreign entities including foreign
governments purchasing within the United States. I think we need
to shift the focus of CFIUS back to the protection of America as it
is related to foreign investment.
Under current law, CFIUS is only obliged to report to Congress
every 4 years on the very narrow issue of whether any foreign
government has a coordinated strategy to acquire U.S. companies
that do research, development, or production of critical
technologies, but it has been shirking even that limited
responsibility since its first and only report in 1994.
Only because the press broke the story that CFIUS and the
President approved the purchase of operations at six major U.S.
ports by Dubai Ports World, owned by the United Arab Emirates,
did the foreign investment approval process and problems with its
reporting and transparency come to the forefront and center of our
attention.
Although the Dubai Ports World deal was effectively ended on
March 9th when the company said it would transfer its operation of
American ports to its U.S. entity, I believe it is a telling example of
why we need to insist upon a more open and informed process of
approving foreign investment in the United States.
My opposition to this deal is not about the idea of an Arab
country controlling American port operation. My opposition is
that President Bush would outsource the safety of American ports
to any foreign country. I believe that Americas' security is
America's business. The security of our ports is an inherent
function of the United States government. It is unacceptable, in
my view anyway, that 5 years after 9/11, only 6 percent of cargo
coming in to Americans ports is inspected and that we would
further put our ports at risk by outsourcing their offices or that of
any other critical infrastructure for that matter.
So I thank you again, Chairman Stearns, for holding this
hearing, and I look forward to hearing from our witnesses.
MR. STEARNS. The gentlelady from Tennessee, Mrs.
Blackburn.
MRS. BLACKBURN. Thank you, Mr. Chairman. I thank our
witnesses and I thank the Chairman for the hearing today, and I am
looking forward to this and to examining the legislation to reform
the committee.
You know, I think that many of our constituents are very
concerned about CFIUS and how it operates and many did not
know that the committee existed until the Dubai Ports deal. And
then once they learned that the committee existed, they really
didn't appreciate that many of the decisions, and much of the
committee's work, is done without the consent or participation of
Congress.
So the bill before us does take significant steps and takes those
steps towards transparency, accountability, and oversight of
foreign investments that may impact our national security by
codifying CFIUS into law, mandating investigative semiannual
reports to Congress. H.R. 5337 will keep Congress as an informed
participant in the process, and we are looking forward to that, and I
am looking forward to hearing from each of you today.
I thank you for your time, for your participation.
Mr. Chairman, I yield back.
MR. STEARNS. Thank the gentlelady. The gentleman from
Ohio.
MR. BROWN. Thank you for inviting Commissioner Mulloy to
testify. I want to thank him especially for his work of the U.S.-
China Security and Economic Review Commission and his work
in shaping CFIUS reform. Thank you for that.
If the objective of CFIUS reform is national security, this bill
as introduced falls well short of the mark. First, the bill maintains
the Treasury Secretary as the CFIUS Chairman, a job that so many
of us as critics of the current CFIUS process believe should be
filled by the Secretary of Commerce. Foreign investment can
provide good jobs for American workers and the Treasury
Department's traditional role as cheerleader for foreign investment
is entirely reasonable. But that role, in this case, creates an
unavoidable conflict of interest. The Commerce Secretary has no
such inherent conflict. His role as coordinator of imports, exports,
industrial security, and manufacturing gives the Commerce
Secretary a better vantage point from which to evaluate the
economic security issues raised by foreign acquisitions.
A related problem with the bill is its additions to the CFIUS
roster. Let us start with the U.S. Trade Rep and the National
Economic Council Director. Comparing those guys as security
watch dogs for international transaction to the fox guarding the hen
house is a sleight to the fox. They have no place as CFIUS
members. Neither does the OMB Director. In practice, his role
would simply be to give the White House a stronger hand in
CFIUS deliberations. Even worse is the bill's authorization for the
President to add practically anyone who works in the West Wing
to CFIUS.
IF the President wants these decisions made by a political
insider, he should scrap CFIUS and make them himself. If not, he
and we should let this agency work without the internal
Administration politics.
Mr. Chairman, in deference to my friend from Michigan and
the time, I will just enter the rest of my statement in the record.
Thank you for doing the hearing today.
[Prepared statement of Hon. Sherrod Brown follows:]
PREPARED STATEMENT OF THE HON. SHERROD BROWN, A
REPRESENTATIVE IN CONGRESS FROM THE STATE OF OHIO
Thank you, Mr. Chairman, for scheduling this important
hearing on reforming the Committee on Foreign Investment in the
United States. And thanks, as well, for inviting Commissioner Pat
Mulloy to testify.
To call Commissioner Mulloy a CFIUS expert is to sell him
short. Not only has he worked as a member of the United States-
China Economic and Security Review Commission to shape the
Commission's CFIUS reform recommendations. But he also
served as General Counsel to the Senate Banking Committee
during the 1980s and participated in the negotiations resulting in
the enactment of the 1988 Exon-Florio amendment that charged
CFIUS with its current mission.
Commissioner Mulloy, your unique perspective on CFIUS'
past and your keen insights into its future challenges make you an
exceptional witness. I am pleased to welcome you to today's
hearing.
Mr. Chairman, I wish I could offer such an enthusiastic
endorsement of HR 5337 - which is the subject of our hearing.
But if the objective of CFIUS reform is national security, HR 5337
as introduced falls well short of the mark.
First, the bill maintains the Treasury Secretary as CFIUS
Chairman - a job that I and other critics of the current CFIUS
process believe should be filled by the Secretary of Commerce.
Foreign investment can provide good jobs for American
workers - and the Treasury Department's traditional role as
cheerleader for foreign investment is entirely reasonable. But that
role creates an unavoidable conflict of interest.
The Commerce Secretary has no such conflict. And his role as
coordinator of import, export, industrial security, and
manufacturing give the Commerce Secretary a better vantage point
from which to evaluate the economic security issues raised by
foreign acquisitions.
A related problem with the bill is its additions to the CFIUS
roster. Let's start with the U.S. Trade Representative and the
National Economic Council Director. Comparing those guys as
security watchdogs for international transactions to the fox
guarding the henhouse is a sleight to the fox. They have no place
as CFIUS members.
Neither does the OMB Director. In practice, his role would
simply be to give the White House a stronger hand in CFIUS
deliberations. Even worse is the bill's authorization for the
President to add practically anyone who works in the West Wing
to CFIUS.
If the President wants these decisions made by political
insiders, he should just scrap CFIUS and make them himself. If
not, he - and we - should let the agencies work without the
internal Administration politics.
The bill also maintains current law's faith-based approach to
covered transaction notifications. Under the bill, CFIUS reviews,
National Intelligence Director analyses, and reports to Congress
are all in large part contingent on the parties to covered
transactions notifying CFIUS that those transactions are
happening. But nowhere does the bill require those parties to make
those notifications.
Sure, it allows for CFIUS reviews after the fact. But as anyone
who's ever tried to put a genie back in the bottle can tell you, it's
much easier not to let him out in the first place. We ought to
require that companies party to covered transactions notify CFIUS
before the deal is done.
And finally, the bill fails to expand the scope of CFIUS
reviews to take into account changes in the economic world since
1988. The 1994 North American Free Trade Agreement and the
trade deals that followed changed not only our economic policy,
but also our security policy.
These and similar trade deals have subjected our domestic laws
- including homeland security laws - to arbitration by international
tribunals whose mission is trade promotion, not security
enhancement.
China and the EU have already expressed concern about the
effects of US homeland security policies on trade. And the trade
agreements we've signed give our trading partners - and even
foreign companies - the right to sue us if homeland security rules
cut into their bottom line.
So unless we create a process for systematic security reviews
of trade agreements - in addition to individual transactions - we
may only be picking at the tip of the iceberg. This bill offers an
opportunity to create such a process, and I hope you will work with
me to do so.
I appreciate this beginning to a long-overdue effort to reform
CFIUS. And I look forward to working with you as the legislation
advances.
MR. STEARNS. I thank you. Mr. Rogers.
MR. ROGERS. Very quickly. To me it is very--
MR. STEARNS. We have 10 minutes.
MR. ROGERS. I understand. I am looking forward to the
testimony. It is incredibly important in that we respect the free and
fair trade of goods and services. It is good for Americans, it is
good for consumers, it is good for our economy, and we in
Congress need to carefully balance the need for proper security
actions and legitimate need for foreign investment in the United
States. What shocked me most about the most recent uproar was
not asking the right questions or stopping, asking questions at the
wrong time.
And I hope that we can get to the bottom of that. I look
forward to the testimony today, because this is incredibly
important as we move forward. The world has changed. We need
CFIUS to change with it, and I don't think it is quite there yet, but
I think hopefully as a result of this hearing and this testimony, we
can establish a dialogue to get where we need to get to when it
comes to protecting Americans and protecting a world-wide
investment, both from America to other countries and from other
countries to here as well.
Thank you, Mr. Chairman. I yield back.
MR. STEARNS. Thank you, gentlemen.
We have votes scheduled, and it turns out this vote's coming to
the end, and then we have a 10-minute debate and we have some
more votes. So I suspect it will be about 30 minutes that we will
temporarily adjourn the subcommittee, and then reconvene
probably about 30 minutes. So we will all return with that. So
with that, if you will be patient we will be back in about 30
minutes.
[Recess.]
MR. STEARNS. The committee will come to order. We
welcome on the witness list John Castellani, President of the
Business Roundtable; Mr. Calman J. Cohen, President, Emergency
Committee on American Trade; Mr. Douglas Holtz-Eakin,
Director, Maurice R. Greenberg Center for Geoeconomic Studies,
Council on Foreign Relations; and the Honorable Patrick Mulloy,
Commissioner, United States-China Economic and Security
Review Commission.
And so I welcome all of you. Joined with us is the Chairman
of the full committee.
CHAIRMAN BARTON. Is it still in order to give an opening
statement?
MR. STEARNS. You are in order. Yes, sir.
CHAIRMAN BARTON. I appreciate the courtesy of the other
members. I was, as they say, unavoidably detained on the floor in
the conversation dealing with some committee issues tomorrow.
I want to welcome our panelists here. The Committee on
Foreign Investment in the United States, which we know as
CFIUS, was operated largely out of the public eye until very
recently. It is an interagency committee established to review
transactions of foreign investment or purchases of an American
company and determine if the proposed transaction has any effect
on national security. CFIUS used to be nearly anonymous, but the
work performed by this group has attracted great attention in the
past year, primarily because of the proposed transaction involving
CNOOC, and more recently, involving the Dubai Ports World
acquisition of numerous American ports. These two different
transactions raised concerns in the public regarding both the
review process and the relevant disclosure of CFIUS decisions.
I want there to be more foreign investment in the United States,
not less, but I do not want the kind that would threaten our national
security. CFIUS exists to make that distinction, and we need to
know and the American people need to know that it is doing the
job it was intended to do.
We should not automatically fear foreign investment in the
United States. Many of our most promising companies are able to
pursue beneficial R&D precisely, because our country welcomes
foreign investment. Our high tech industries would not be world
leaders if we had barred investment from overseas. The venture
capital industry that funds many start-up companies all over the
United States could not thrive without a vibrant global economy
where our goods and services are sold. The money that is provided
to the United States creates jobs in the United States, creates
growth and opportunity in the United States. And we should want
more of it and not less. Again, if it doesn't affect national security,
we want to be sure that proposed investments will not harm our
Nation. If the highly publicized proposed transaction of CNOOC
and the Dubai Ports demonstrated anything, it was that the process
by which our Government has been sorting through these types of
investments from bad to murky, is to say the least, in itself, bad
and murky. Congress and this committee need to be aware of the
criteria used to evaluate the transactions. We need to know which
transaction should be subject to a more rigorous review. I
understand that there are differences in the interpretation to CFIUS
review process as it applies to foreign government-controlled
transactions. In this regard, I think legislation is warranted to
clarify any ambiguity under the current review process. We need
to ensure that some consistent criteria with appropriate discretion
will improve the process without impairing our ability to attract
significant and needed foreign investment.
H.R. 5337 would codify the creation and membership of
CFIUS as well as address the criteria for transaction reviews.
Whether it strikes the appropriate balance for mandatory review is
an issue that we should discuss in this hearing.
The United States has long standing ties to traditional allies and
trading partners. We also have new and evolving relationships
with other countries. It would seem logical to me that not every
foreign government-controlled transaction threatens national
security, and not every one requires the same level of scrutiny.
While the bill establishes some new reporting requirements to
Congress that I applaud, I am very troubled by the appointment of
the Secretary of Homeland Security as the permanent vice chair of
CFIUS. It is not clear to me why the newest member of the CFIUS
process is better suited to evaluate the nature of these transactions
than another agency, such as Commerce that has been involved
since the beginning of the process.
There may be an amendment on this issue in the markup that is
currently scheduled to begin tomorrow.
As we move to mark up the bill in committee, I look forward to
a discussion of these issues with the witnesses and with members
on both sides of the aisle.
With that, Mr. Chairman, thank you for allowing me to give
this opening statement. I yield back the balance of my time.
[Prepared statement of Hon. Joe Barton follows:]
PREPARED STATEMENT OF THE HON. JOE BARTON, CHAIRMAN,
COMMITTEE ON ENERGY AND COMMERCE
The Committee on Foreign Investment in the United States,
better known as CFIUS (see-fee-us), has operated largely unknown
to the American public until recently. It is an inter-agency
committee established to review transactions of foreign investment
or purchases of American companies, and determine if the
proposed transaction will affect national security.
CFIUS used to be nearly anonymous, but the work performed
by this once-obscure group has attracted great attention in the past
year. First, the proposed transaction involving CNOOC and more
recently the proposed Dubai Ports World acquisition of numerous
American ports has raised concerns regarding both the review
process and the relevant disclosure of CFIUS decisions.
I want more foreign investment in America, not less, but I do
not want the kind that threatens our security. CFIUS exists to
make the distinction, and we need to know that it's doing a good
job.
We don't automatically fear foreign investors here in America.
Many of our most promising companies are able to pursue
beneficial research and development precisely because our country
welcomes foreign investment. Our high tech industries would not
be world leaders if we had barred investment from abroad. The
venture capital industry that funds many start-up companies all
over the United States could not thrive without a vibrant global
marketplace where our goods and services are sold. The money
provided by foreign investors creates jobs, growth and opportunity
here at home, and I want more of it, not less.
I also want to be sure that proposed investments will not harm
our nation. If the highly publicized proposed transactions of
CNOOC and Dubai Ports demonstrated anything, it was that the
process by which our government sorts out good investment from
bad is murky, to say the least. Congress and this Committee need
to be aware of the criteria used to evaluate the transactions and
which transactions should be subject to more rigorous review.
I understand that there are differences in the interpretation of
the CFIUS review process as it applies to foreign government
controlled transactions. In this regard, I think legislation is
warranted to clarify any ambiguities under the current review
process. We need to ensure that some consistent criteria with
appropriate discretion will improve the process without impairing
our ability to attract significant and needed foreign investment.
H.R. 5337 codifies the creation and membership of CFIUS, as
well as addresses the criteria for transaction reviews. Whether it
strikes the appropriate balance for mandatory reviews is an issue I
look forward to discussing further.
The United States has longstanding ties to traditional allies and
trading partners, and we also have new and evolving relationships
with other countries. It seems logical to me that not every foreign
government controlled transaction threatens our national security,
and not every one requires the same level of scrutiny.
While the bill also establishes some new reporting
requirements to Congress that I applaud, I am troubled by the
appointment of the Secretary of Homeland Security as the
permanent Vice-Chair of CFIUS. It is not clear to me why the
newest member of the CFIUS process is better suited to evaluate
the nature of these transactions than an agency, such as Commerce,
that has been involved since the beginning.
As we move to mark up the bill in Committee, I look forward
to a discussion of these issues with the witnesses, and any
suggestions they may have to improve the bill.
Thank you, and I yield back.
MR. STEARNS. I thank the distinguished Chairman.
Mr. Terry? No opening statement? Mr. Murphy.
MR. MURPHY. I will waive, too. Thank you.
MR. STEARNS. Thank you. With that, we have introduced you
and Mr. Castellani, you are welcome to begin.
STATEMENTS OF JOHN CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE; CALMAN J.
COHEN, PRESIDENT, EMERGENCY COMMITTEE ON AMERICAN TRADE; DOUGLAS HOLTZ-EAKIN,
DIRECTOR, MAURICE R. GREENBERG CENTER FOR GEOECONOMIC STUDIES, COUNCIL ON
FOREIGN RELATIONS; AND THE HON. PATRICK MULLOY, COMMISSIONER, UNITED STATES-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION
MR. CASTELLANI. Thank you, Mr. Chairman. Thank you for
giving me the opportunity to testify before you today to discuss the
Committee on Foreign Investment in the United States, CFIUS,
and express our support for H.R. 5337, the National Security
Foreign Investment Reform and Strength and Transparency Act of
2006.
With your permission, I would like my written statement to be
included in the record.
MR. STEARNS. By unanimous consent so ordered.
MR. CASTELLANI. As chief security officers of major U.S.
companies, Business Roundtable members recognize the need to
protect national security; in fact, protection of national security is
paramount. But we also know firsthand the critical importance of
foreign investment. As your committee considers the CFIUS
legislation, we encourage you to recognize these are not
incompatible goals, and the proposal to reform the process needs to
be balanced and constructive so that they do not place unnecessary
damaging and counterproductive restrictions on foreign
investment.
I would like to focus my remarks today on three topics. First,
how important foreign investment is to the U.S. economy; second,
the three central principles we believe should guide your thinking
about the CFIUS process and the reform; and third, why we
support this legislation.
Foreign investment in the U.S. is essential to continued
viability of the American economy. In 2004, investors invested
more than $115 billion in the United States, providing U.S.
companies and workers with important capital for expansion of
U.S. production facilities, increased research and development
spending, and other investments to help grow the U.S. economy.
This data demonstrates that if foreign companies were to spend
less in America as a result of perceptions that the U.S. no longer
welcomes foreign investment, reduced investment would harm
U.S. economic growth, choke innovation, and undermine our
overall economic competitiveness in today's global economy, just
as significantly losing foreign investment to our overseas
competition would cost American workers good jobs.
Foreign companies with operations in the United States support
5.3 million American jobs spread out over all 50 States. Just like
the foreign competitors, U.S. companies make significant
investments in other countries in order to expand their markets and
establish worldwide production and distribution networks in the
ongoing struggle to maintain their international competitiveness.
U.S.-owned foreign assets total about $9 trillion, and while 90
percent of U.S. companies' investments on an annual basis are
made in the United States, the fact is we invest considerably more
in foreign companies than they do in ours.
It is, therefore, important to recognize that burdensome or
discriminatory barriers to foreign investors in the United States
will jeopardize U.S. investment overseas by inviting retaliatory
treatment against American investors. Given the importance of the
foreign investment to the U.S. economy, we believe the legislative
process to reform CFIUS should be guided by three central
principles. First, national security should continue to be the
principal focus of the foreign investment review process. Second,
the review process should continue to be objective, fair, and
nonpolitical. It should not create obstacles to investments that put
a damper on legitimate business activities; and third, maintaining
an open, fair, and nondiscriminatory environment for legitimate
foreign investment is important for national interests.
Looking ahead after 18 years of operations, we understand why
Congress sees a need to fine tune the CFIUS review process to
restore the confidence of Congress and the American public.
While we know the CFIUS process to be rigorous, there is room
for improvement and that is why Business Roundtable supports the
general consensus in Congress that the CFIUS process should be
refined through measures that increase transparency, establish
greater accountability, and above all, enhance national security, but
do not stifle legitimate foreign investment in economic growth.
The CFIUS process in the House hass proceeded in a deliberate
bipartisan manner that strikes an appropriate balance between
safeguarding our national security and protecting job creating
foreign investment. We believe, along with many in the business
community, that H.R. 5337 is generally consistent with the three
principles that I have highlighted.
It keeps national security as a principal focus of the foreign
investment review process and strengthens the national security
tools used in that process, all without putting a damper on foreign
investment that is critical to our economic growth and job creation.
H.R. 5337 also reforms the CFIUS process in an objective,
fair-minded, nonpolitical matter without adding nonregulatory
matters or delays that would curtail foreign investment that is
critical to the U.S. economy.
Mr. Chairman, let me close by reiterating the real threats to the
U.S. national security must be tackled with purpose and resolve.
No business deal is worth jeopardizing the safety of the
American people. But at the same time, challenges to U.S.
economic success must be met with a similar commitment to
global leadership in engaging in open markets that have
contributed to increasing national and global prosperity.
Thank you for the opportunity to appear before the committee,
and I look forward to your questions.
MR. STEARNS. Thank you.
[The prepared statement of John Castellani follows:]
PREPARED STATEMENT OF JOHN CASTELLANI, PRESIDENT, BUSINESS ROUNDTABLE
Thank you for giving me the opportunity to appear before you
today to discuss with you the Committee on Foreign Investment in
the United States (CFIUS) and express our support for HR 5337,
the "National Security Foreign Investment Reform and
Strengthened Transparency Act of 2006." I am here as President
of the Business Roundtable, an association of chief executive
officers of approximately 160 leading U.S. companies with over
$4.5 trillion in annual revenues and more than 10 million
employees.
As CEOs of major U.S. companies, Business Roundtable
members know firsthand the critical importance of foreign
investment, in particular foreign investment in the United States,
which supports over 5 million American jobs. The Business
Roundtable also recognizes that protecting national security is
paramount. If an acquisition of a U.S. company would impair
national security, the President should not hesitate to exercise his
authority to block any such deal or insist on conditions that will
adequately and effectively protect our national security.
As your Committee considers the CFIUS legislation, we urge
you to recognize that protecting national security and foreign
investment are not incompatible goals, and that proposals to reform
the CFIUS process need to be balanced and constructive so that
they do not place unnecessary, damaging and counterproductive
restrictions on foreign investment.
I would like to focus my remarks today on three topics: First,
how important foreign investment is to the U.S. economy; second,
the three central principles we believe should guide your thinking
about the CFIUS process and its reform; and, third, why the
Business Roundtable supports H.R. 5337.
FOREIGN INVESTMENT IN THE U.S. ECONOMY
First, foreign investment in the United States is essential to the
continued vitality of the American economy. In 2004, foreign
investors invested more than $115 billion in the United States,
providing U.S. companies and workers with important capital for
expansion of U.S. production facilities, increased R&D spending,
and other investments to help grow the U.S. economy. U.S.
subsidiaries of foreign companies spent about $30 billion in R&D
and accounted for 21 percent of total U.S. exports in 2003. Nearly
20 percent of U.S. manufacturing GDP is attributable to
subsidiaries of foreign firms. Indeed, the very presence of such
companies in the United States sets into motion a multiplier effect
that parcels out benefits-including tax revenue-throughout local
and national economies felt by all Americans, including small
businesses.
This data demonstrates that if foreign companies were to spend
less in America as a result of perceptions that the United States no
longer welcomes foreign investment, reduced investment would
harm U.S. economic growth, choke innovation, and undermine our
overall economic competitiveness in today's global economy.
Just as significantly, losing foreign investment to our overseas
competition would cost American workers good jobs. Foreign
companies with operations in the United States support nearly 5.3
million American jobs spread throughout all 50 states. Put
differently, almost 5 percent of Americans working in the private
sector are employed by foreign companies. These U.S. workers
receive compensation totaling $318 billion annually, with an
average annual compensation of over $60,000 (which is over 34
percent higher than compensation at all U.S. companies), and their
ranks are growing rapidly. Over 90 percent of these investments
come from friendly countries belonging to the Organization for
Economic Cooperation and Development and only 2 percent
involve firms that own assets that are owned or controlled by
foreign governments.
Besides putting good-paying American jobs at risk, restricting
foreign investment in the United States would harm U.S. investors'
stock portfolio. For example, cell phone manufacturer Nokia may
be headquartered in Helsinki, but 40 percent of its shares are
owned in America. Broad restrictions on ownership of U.S. assets
would harm U.S. pensions, mutual funds, and investors through
falling stock prices and lower investment returns.
Foreign investment is also vital to the success of our capital
markets, which provide the "seed corn" essential to the creation of
new businesses, innovations, and ideas. Our growing economy
and robust capital markets attract more foreign investment than
any other single country: from $185 billion in 1985 to more than
$1.5 trillion today. Shut off that spigot and our mighty economic
engine will sputter.
Just like foreign companies, numerous U.S. firms make
significant foreign investments in other countries in order to
expand their markets and establish worldwide production and
distribution networks in the ongoing struggle to maintain their
international competitiveness. U.S.-owned foreign assets total
about $9 trillion. While nearly 90 percent of U.S. company
investments on an annual basis are made in the United States, the
fact is we invest considerably more in foreign countries than they
do in ours. Given the U.S. business community's global reach and
increasing dependence on foreign markets and foreign earnings,
U.S. companies rightly fear the prospect of confronting an anti-
investment, anti-U.S. business backlash in important markets
outside the United States.
It is therefore important to recognize that burdensome or
discriminatory barriers to foreign investment in the United States
will jeopardize U.S. investments overseas by inviting retaliatory
treatment against American investors. Already, some of our
trading partners are now considering legislation to place new limits
on foreign investment. For example, Mexico is contemplating
restrictions on foreign investment related to infrastructure projects.
Other countries, including China, France, and India, have taken
similar types of steps to restrict investment in a number of
important sectors, and are prepared to use any restrictive U.S.
legislation as a ready excuse to implement protectionist measures.
In addition to causing harm to U.S. businesses and workers, as
well as the overall American economy, any retaliatory measures to
curtail U.S. ownership of "critical infrastructure" overseas would
undermine U.S. national security by limiting our access to energy
and critical mineral resources. For example, the United States
imports about 58 percent of its oil today (compared to 33 percent
in 1973). By 2020, that figure could jump to 70 percent. Yet, U.S.
proposals to restrict foreign ownership of "critical infrastructure"
unrelated to national security provide a pretext for countries with
strategic natural resources to impose their own restrictions on U.S.
companies investing overseas.
PRINCIPLES FOR CFIUS REFORM
Given the importance of foreign investment to the U.S.
economy, we believe the legislative process to reform CFIUS
should be guided by three central principles:
National security should continue to be the principal focus
of the foreign investment review process.
The CFIUS process should continue to be objective and
fair, and non-political; it should not create obstacles to
investment that put a damper on legitimate business
activities.
Maintaining an open, fair, and non-discriminatory
investment environment for legitimate foreign investment
is important to the U.S. national interest.
I will briefly talk about each of these main principles and then
conclude by discussing why HR 5337 is a tough, effective bill that
is consistent with these ideas.
First, national security should continue to be the principal
focus of the foreign investment review process.
At the outset, it is important to recognize there is no
inconsistency between our national security and investment in the
United States by overseas companies. Foreign investment is an
important contributor to a strong U.S. economy, which is vital to
our security. Our nation cannot be secure unless our economy
continues to be strong and vibrant. In many instances, foreign
investment helps modernize U.S. infrastructure needed to improve
the international competitiveness of U.S.-based companies and
their workers and to protect our national and homeland security.
The existing national security factors in the CFIUS process are
sufficiently broad enough to cover threats to American security
that have evolved in recent years, and to continue to do so as
technology and global politics change. One of the strengths of the
current law is its flexibility to adjust with the times: The Internet
was barely known in 1988 when the law was written, but CFIUS
now reviews most cross-border telecom transactions because the
Internet backbone is part of critical communications infrastructure.
Attempts to redefine national security by, for example,
identifying specific sectors or including economic factors would
only have the unintended adverse consequence of discouraging
legitimate foreign investment. Such efforts are often misguided
attempts at protectionism masquerading as national security policy.
Moreover, proposals that introduce political or economic
considerations unrelated to national security into the CFIUS
process would divert scarce government resources away from
keeping America safe, the principal focus of the CFIUS process.
Such measures would also provide competitors opportunities to
interfere with transactions for reasons that have nothing to do with
national security.
Second, the review process should continue to be objective and
fair, and non-political; it should not create obstacles to
investment that put a damper on legitimate business activities.
We understand that an improved relationship with the
Executive Branch is needed to ensure that the Congress can
effectively fulfill its responsibility to oversee the operation of the
CFIUS process.
We also believe that the CFIUS process should be rigorous,
thorough, and comprehensive in order to fully and properly protect
national security. However, if it is allowed to become unduly
political or burdensome, the CFIUS process will deter foreign
investors from making legitimate investments that are vital to the
U.S. economy. For example, establishing unprecedented
Congressional reporting requirements on a case-by-case basis
would be especially counterproductive because it invites
politicization of the CFIUS process. Such measures would
introduce regulatory uncertainty that would chill foreign
investment in the United States, diminish the value of U.S. assets,
and adversely effect U.S. economic growth.
At the same time, reform measures ought not to threaten the
confidentiality of sensitive business proprietary information.
Submission of all relevant information by companies to CFIUS
allows it to conduct complete and timely reviews and
investigations of transactions. A system that does not guarantee
confidential treatment of business proprietary information will
undermine the entire process and risks the unintended consequence
of discouraging companies from making investments in the United
States.
Third, maintaining an open, fair and non-discriminatory
environment for legitimate
foreign investment is important to the U.S. national interest.
As discussed above, foreign investors provide U.S. companies
and workers with millions of quality jobs at high wages, important
capital for expansion of U.S. production facilities, increased R&D
spending, and other investments to help grow the U.S. economy.
If the Congress were to adopt excessive changes to the CFIUS
process, there is a significant risk that such changes would
discourage legitimate foreign investment in the United States and
encourage other countries to discriminate against U.S. companies
investing overseas.
H.R. 5337, "NATIONAL SECURITY FOREIGN INVESTMENT REFORM AND STRENGTHENED
TRANSPARENCY ACT OF 2006"
Looking ahead, after eighteen years of operation, we
understand why Congress sees a need to fine-tune the CFIUS
review process to restore the confidence of Congress and the
American public. While we know the CFIUS process to be
extremely rigorous, there is room for improvement. That is why
the Business Roundtable supports the general consensus in
Congress that the CFIUS process should be refined through
measures that increase transparency, establish greater
accountability, and above all enhance national security, but do not
stifle legitimate foreign investment and U.S. economic growth.
The CFIUS reform process in the House has to date proceeded
in a deliberative and bipartisan manner that strikes an appropriate
balance between safeguarding our national security and protecting
job-creating foreign investment.
H.R. 5337 is generally consistent with the three general
principles I have discussed today. It keeps national security as the
principal focus of the foreign investment review process without
putting a damper on foreign investment that is critical to U.S.
economic growth and job creation. H.R. 5337 also reforms the
CFIUS process in an objective, fair-minded, and non-political
manner without adding unnecessary regulatory burdens that will
curtail foreign investment that is critical to the U.S. economy.
The bill takes a number of important steps to protect against
foreign acquisitions that could threaten national security:
It ensures that foreign government owned investors will be
required to go through an investigation.
It provides CFIUS with the ability to extend the
investigation period if security issues are not resolved,
while at the same time authorizing greater investigative
authority.
It strengthens transparency and achieves greater
accountability by requiring CFIUS to collect and share
more data, on an aggregate basis, through reports to the
Congress, without creating burdensome notice and
reporting requirements that would risk politicization of the
process or leakage of business proprietary data.
It retains needed flexibility by permitting CFIUS to
negotiate mitigation agreements, but also requires
improved monitoring of those agreements, and authorizes
CFIUS to reconsider previously approved transactions if
security agreements are materially breached.
It creates a clear statutory role for the Director of
National Intelligence to review proposed acquisitions and furnish
relevant information and analysis.
These measures represent significant substantive and procedural
enhancements to the existing national security review process.
Mr. Chairman, as the Committee participates in CFIUS reform,
let me close by reiterating that real threats to U.S. national security
must be tackled with purpose and resolve-no business deal is
worth jeopardizing the safety of the American people. But at the
same time, challenges to U.S. economic success must be met with
a similar commitment to global leadership and engagement in
opening markets that has contributed to increasing national and
global prosperity.
National security and open economic policies that promote
growth go hand-in-hand. Indeed, an important aspect of protecting
national security is open economic policies, including investment
policies, which can help generate wealth, ideas, and innovations to
meet our national security requirements. We look forward to
continuing our work with Congress to reform the CFIUS process in
ways that both strengthen national security and promote foreign
investment.
Thank you for the opportunity to appear before the Committee.
I look forward to your questions.
MR. STEARNS. Mr. Cohen.
MR. COHEN. Thank you, Mr. Chairman. I welcome the
opportunity to appear before you today to express support for
H.R. 5337 on behalf of the Emergency Committee for American
Trade, ECAT. ECAT is an association of chief executives of
major American companies with global operations who represent
all principal sectors of the U.S. economy.
All too often, the recent debate over the effort to reform CFIUS
foreign investment review process poses a false choice, the choice
between preserving national security and welcoming foreign
investment. In fact, the United States national security is
strengthened, as the Chairman has pointed out, by promoting a
vibrant economy, and economic growth here at home and abroad,
which, in turn, is fostered by foreign investment into the United
States as well as U.S. investment abroad.
Foreign investment inflows into the United States are a major
source of U.S. economic growth as is U.S. investment abroad.
Continued foreign investment in the United States and its corollary
U.S. investment abroad require policies that support and protect
foreign investment. CFIUS plays an important role in ensuring
that the United States continues to welcome investment and its
reform makes sense to ensure a credible objective and strong
process focused on national security.
ECAT and several other major business associations have laid
out a number of key principles that we believe need to be achieved
through the CFIUS reform process, ensuring that the security
review process is objective, focused on national security issues
promoting the full use of sensitive and classified information while
protecting confidentiality, operating on a case-by-case basis and
remaining sufficiently flexible to cover new national security
issues, operating in a timely manner and not serving as a substitute
for other more targeted and effective tools to protect national
security.
I would now like to turn to H.R. 5337. Overall, it would
establish a strong, firm framework for CFIUS to review, make
decisions, and notify Congress on the national security
implications of foreign investments in a way that emphasizes an
objective, timely, and fact-based process that promotes national
security objectives while promoting continuing support for
investment here in the United States.
It would enhance the credibility of the review process by
codifying and strengthening CFIUS, including intelligence
reviews. It would improve attracting insurance agreements and
withdrawn agreements. It would enhance the Congressional
notification process and it would maintain an objective and time-
limited process, and it would ensure the confidentiality of
proprietary information.
Improvements are possible in any piece of legislation, and
ECAT very much welcomes the work by the Committee on
Financial Services to improve several aspects of this legislation.
At the same time, it is critical to avoid proposals that would
undermine rather than enhance the national security review
process.
In particular, efforts should continue to avoid proposals that
would overwhelm the process by expanding its scope beyond
national security, effectively downgrade the use of sensitive,
classified, and business confidential information to per se
judgments on mandatory tests, politicize the process, or chill
foreign investment.
Congressman Stearns, Mr. Chairman, you had asked one
question about the possibility of rotation of the chairmanship of
CFIUS, and I did want to respond to that in my opening statement
in the time remaining.
And it is to point out as we look at it, the chair of the CFIUS
process serves basically a secretariat function. And it is designed
to allow each of the agencies that serves on the CFIUS committee
to make individual contributions to the review process. Indeed,
one of the areas where perhaps we can go to what you were
emphasizing, that is the role of particular agencies, is with
assurance agreements and mitigation agreements, which are often
entered into by the chair or the vice chair. However, it is
structured and can point to a particular member of the committee
to follow a particular transaction making particular use of the
expertise of that agency in the sense that that agency may best be
able to follow a particular transaction.
We are basically agnostic with regards to the chairmanship.
We think the chairmanship with Treasury has worked just fine.
But again, I point out as we read it, it is basically a secretariat
function as opposed to a function that actually decides the outcome
of the review process.
With that comment, let me conclude my opening comments
and say that I very much appreciate the opportunity to appear
before the committee, and I look forward to your questions. Thank
you.
MR. STEARNS. Thank you.
[The prepared statement of Calman J. Cohen follows:]
PREPARED STATEMENT OF CALMAN J. COHEN, PRESIDENT,
EMERGENCY COMMITTEE O AMERICAN TRADE
The United States' national security is strengthened by
promoting a vibrant economy and economic growth here at
home and abroad, which in turn are fostered by foreign
investment into the United States, as well as U.S.
investment abroad. Foreign investment inflows into the
United States are a major source of U.S. economic growth,
as is U.S. investment abroad. Continued foreign
investment in the United States and its corollary, U.S.
investment abroad, require policies that support and protect
foreign investment.
CFIUS plays an important role in ensuring that the United
States continues to welcome investment and its reform
makes sense to ensure a credible, objective and strong
process focused on national security. ECAT and several
other major business associations have laid out a number of
key principles that need to be achieved through the CFIUS
reform process.
In particular, reform must ensure that limited CFIUS
resources are directed at potential transactions that raise
national security issues, rather than diverting resources to
mandatory investigations, regardless of any national
security nexus. It must also consider potential changes to
the U.S. national security review process in light of how
such an altered process would impact U.S. investors abroad
if similar changes were adopted by foreign governments.
Overall, H.R. 5337 would establish a strong framework for
CFIUS to review, make decisions and notify Congress on
the national security implications of foreign investments in
a way that emphasizes an objective, timely and fact-based
process that promotes national security objectives, while
promoting continued support for investment here in the
United States.
Improvements are possible in a few areas, but efforts must
be made to avoid proposals that would overwhelm the
CFIUS process; effectively downgrade the use of sensitive,
classified and business confidential through per se
judgments, politicize the process or chill foreign
investment.
Mr. Chairman, Congresswoman Schakowsky, Members of the
Committee, I welcome the opportunity to appear before you today
to express support for H.R. 5337, the Reform of National Security
Reviews of Foreign Direct Investments Act, of 2006, on behalf of
the Emergency Committee for American Trade (ECAT). ECAT is
an association of the chief executives of major American
companies with global operations who represent all principal
sectors of the U.S. economy. ECAT was founded more than three
decades ago to promote economic growth through expansionary
trade and investment policies. Today, the annual sales of ECAT
companies total nearly $2.4 trillion, and the companies employ
approximately five and a half million persons.
Global Investment and U.S. National Security
All too often, the recent debate over the effort to reform the
foreign investment review process of the Committee on Foreign
Investment in the United States (CFIUS) poses a false choice - the
choice between preserving national security and welcoming
foreign investment. In fact, the United States' national security is
strengthened by promoting a vibrant economy and economic
growth here at home and abroad, which in turn are fostered by
foreign investment into the United States, as well as U.S.
investment abroad.
Foreign investment inflows into the United States are a major
source of U.S. economic growth. Foreign investment in the United
States promotes U.S. exports, economic and employment
opportunities and productivity. Based on the most recent data
from the Bureau of Economic Analysis, majority-owned U.S.
affiliates of foreign companies with operations in the United States
employed 5.4 million U.S. workers, accounting for nearly five
percent of total U.S. employment in private industries.
U.S. foreign investment outflows are also critically important to
supporting growth in the U.S. and global economies. Over the past
20 years, U.S. companies that invest abroad have:
exported more (accounting for one-half to three-quarters of
all U.S. exports)
expended more on U.S. research and development and
physical capital investments, and
paid their U.S. workers more
than companies not engaged globally. Foreign affiliate sales of
U.S. companies invested abroad amount to approximately $2
trillion, which help to support jobs and business activities in the
United States. More than 70 percent of the profits earned by such
affiliates are returned to the United States. Moreover, U.S.
investment abroad is essential to supporting access to natural
resources, as well as the economic growth in foreign countries that
is very important, albeit not sufficient, to support stability
overseas. In short, U.S. foreign investment is critical for
supporting U.S. economic growth and a higher standard of living
here in the United States and abroad.
Continued foreign investment in the United States and its
corollary, U.S. investment abroad, require policies that support and
protect foreign investment.
Importance of a Strong, Credible, Objective and National-
Security-Focused Review Process
CFIUS plays an important role in ensuring that the United
States continues to welcome investment, and its reform makes
sense to ensure a credible, objective and strong process focused on
national security. As enunciated by ECAT and several other
leading business organizations in March 2006, there are a number
of key principles to maintain in reforming and improving the
CFIUS process, including ensuring that the national security
review process is:
Objective, fact-based and analytically rigorous.
Focused on national security issues.
Promoting the full use of sensitive and classified
information, while protecting the confidential information
of the parties from public disclosure.
Operating on a case-by-case basis and remaining
sufficiently flexible to cover new national security issues as
they arise.
Operating in a timely manner.
Not a substitute for other more targeted and effective tools
to protect U.S. national security.
I would like to highlight two key issues. The first is the need
to ensure that limited CFIUS resources are directed at potential
transactions that raise national security issues. To do otherwise,
could overwhelm the CFIUS process, diverting resources from the
transactions that require the most attention. Requiring mandatory
investigations of certain types of transactions, regardless of any
potential national security issues raised, simply does not guarantee
greater protection for national security; in fact it may lead to the
opposite result.
The second is to consider potential changes to the U.S. national
security review process in light of how such an altered process
would impact U.S. investors abroad if similar changes were
adopted by foreign governments. Indeed, foreign governments are
very closely monitoring Congressional action on CFIUS. Changes
that would politicize the process or move beyond a national-
security-focused review may encourage other countries to adopt
similar provisions and deny U.S. companies access to key
investment areas that are important for our economy, from
resources to infrastructure to key service sectors.
The full set of principles is appended to my testimony.
H.R. 5337 Makes Important Reforms to Improve the CFIUS
Process
ECAT believes that H.R. 5337 makes important improvements
to the CFIUS process in ways that reflect the principles described
above. In particular, H.R. 5337 would:
Strengthen the CFIUS process and enhance its credibility
by providing greater clarity to its role and operation.
Improve the integrity of the process by ensuring
intelligence and other information is fully considered.
Enhance the role of the Director of National Intelligence
and the ability of CFIUS to review intelligence reports.
Improve CFIUS' oversight by requiring reviews and
monitoring of mitigation and assurance agreements, as well
as of transactions for which notice has been withdrawn, and
reconsideration of transactions where there has been a
breach of the mitigation agreement.
Ensure time-limited, fact-based and objective reviews of
notified transactions.
Improve the protection of confidential and proprietary
information.
Enhance the Congressional notification system.
Overall, H.R. 5337 would establish a strong framework for
CFIUS to review, make decisions and notify Congress on the
national security implications of foreign investments. ECAT
welcomes the work of all of the bill's sponsors in carefully crafting
this legislation in a way that emphasizes an objective, timely and
fact-based process that promotes national security objectives, while
promoting continued support for investment here in the United
States. In so doing, H.R. 5337 would support the open investment
climate that the United States has long fostered and set a positive
example for foreign governments that have or may institute their
own investment reviews, which is important for U.S. companies
that invest abroad to the benefit of the United States.
Improvements are always possible in any piece of legislation.
To that end, ECAT welcomes the work done by the Committee on
Financial Services to improve several aspects of this legislation
and looks forward to working with you and your colleagues in the
House and the Senate in support of the strongest possible
legislation. Areas where additional work could be beneficial
include:
Enhancing the case-by-case analysis, rather than requiring
mandatory investigations for certain types of acquisitions.
Alternatively, where investigations are mandated, it should
be clarified that the investigation should begin immediately
and not wait for a distinct review process.
Avoiding transaction-by-transaction notifications that could
lead to the potential politicization and undermining of the
process.
As Congress' review continues, ECAT is concerned by a
variety of other CFIUS reform proposals that would set back,
rather than advance, the reform effort represented by H.R. 5337.
Therefore, ECAT urges that potential modifications to this
legislation maintain the key improvements incorporated by the
bill's sponsors and avoid proposals that would:
Overwhelm the CFIUS process. In particular, proposals
that would drastically alter or expand the scope of
mandatory CFIUS investigations, regardless of a national
security nexus, should be avoided. Subjecting significant
numbers of transactions to review and investigation would
not only waste valuable government resources, it would
take away the valuable time of government agencies to
focus on the actual transactions that have potential national
security implications.
Effectively downgrade the use of sensitive, classified and
business confidential information in the review process
through per se judgments based, for example, on
nationality or the views of persons without sufficient access
or ability to review such information.
Politicize the process, which potentially would subject U.S.
investors overseas to subjective, politicized investment
review processes, resulting in the denial of U.S.
investments that promote stability, economic growth and
access to critical resources and infrastructure - harming
thereby U.S. national security.
Chill foreign investment in the United States and deny, as a
result, significant economic opportunities to Americans
who benefit substantially from foreign investment in the
United States.
Conclusion
I welcome the opportunity to present the views of ECAT today
with regard to the national security investment review process and,
in particular, the reforms made by H.R. 5337. I look forward to
your questions.
BUSINESS ROUNDTABLE
COALITION OF SERVICE INDUSTRIES
EMERGENCY COMMITTEE FOR AMERICAN TRADE
NATIONAL ASSOCIATION OF MANUFACTURERS
NATIONAL FOREIGN TRADE COUNCIL
ORGANIZATION FOR INTERNATIONAL INVESTMENT
U.S. CHAMBER OF COMMERCE
UNITED STATES COUNCIL FOR INTERNATIONAL
BUSINESS
PRINCIPLES TO GUIDE NATIONAL SECURITY
REVIEWS OF FOREIGN INVESTMENT
March 13, 2006
Presidential authority to review foreign acquisitions in the
United States, authorized by section 721 of the Defense Production
Act (the so-called Exon-Florio amendment), represents an
extremely important tool to protect U.S. national security. It
provides wide authority to the President to investigate foreign
acquisitions, authority delegated to the Committee on Foreign
Investment in the United States (CFIUS), and to suspend or
prohibit foreign acquisitions of U.S. companies where the foreign
entity might take action that threatens U.S. national security.
Numerous proposals have been made to modify the U.S.
national security investment review process. We recognize the
desire of many in Congress to improve the process. It is critical,
however, that the strengths of the current process and other U.S.
national security priorities not be undermined through hasty and
ill-conceived reform efforts. As the Administration and Congress
consider proposals to reform the Exon-Florio structure, we urge
that the following principles be used as a guidepost to evaluate all
proposals.
Principle 1: It is appropriate for foreign investment in the
United States that might affect U.S. national security to be
subject to special review by the President and Executive Branch
government agencies that are designated. The current Executive
Branch national security review process, chaired by Treasury,
represents an appropriate mix of security, diplomatic, trade and
investment agencies, which is critical to ensure that governmental
officials with needed expertise can examine the potential
implications of proposed acquisitions and require appropriate
special conditions as needed.
Principle 2: The national security investment review process
must be objective, fact-based and analytically rigorous. These
attributes are critical to ensure that national security interests are
fully and properly protected - the ultimate purpose of the review
process. The review process must include advice of government
agency experts in the relevant fields. Confidence in the national
security investment review process will not be strengthened by
proposals that undermine the objectivity of the current process.
Furthermore, altering the basic objective process will encourage
other countries to impose unjustified and unreasonable barriers to
U.S. investments abroad - investments that support economic
growth and access to resources and, in turn, U.S. national security.
Such a result would harm U.S. economic and job growth and
national security interests.
Principle 3: The national security investment review process
must be focused on national security issues. "National security"
is a broad and flexible term that places no limits on the
examination of relevant transactions. It may be counterproductive
to redefine the scope of the investment review process, which
actually could limit the issues that the U.S. government can
review. It may also encourage other countries to adopt similar
provisions and deny U.S. companies access to key investment
areas that are important for our economy, from resources to
infrastructure to key service sectors.
Principle 4: The national security investment review process
must promote the full use of sensitive and classified information,
including protecting the confidential information of the parties
from public disclosure. The ability of the U.S. government to
review fully and make accurate assessments of the national
security implications of foreign acquisitions requires in many, if
not all, cases, reliance on sensitive, classified and confidential
business information. The ability of the U.S. government to
continue to make the most effective use of such information must
not be undermined by requiring public disclosure of sensitive,
classified or confidential business information.
Principle 5: The national security investment review process
must operate on a case-by-case basis and be sufficiently flexible
to cover new national security issues as they arise. Given the
complexity and changing nature of national security issues, it
would be counterproductive to establish a process to promote
uniform outcomes in all investigations and reviews. Analyses
should be focused on the facts of a particular transaction and not be
focused on fitting transactions in a particular box with a pre-
determined outcome. In the same way, it is also important for the
President to maintain sufficient flexibility to deal with changing
national security concerns.
Principle 6: The national security investment review process
must operate in a timely manner. The United States is a major
destination for foreign investment that is vital to promoting
productivity, employment and growth in the United States. Given
that most foreign investments do not affect in any way U.S.
national security interests, it is very strongly in the U.S. interest to
continue to maintain a time-limited process whereby initial
decisions can be made with further review available where
warranted.
Principle 7: The national security investment review process
must not become a substitute for other more targeted and
effective tools to protect U.S. national security. While an
important tool, the national security investment review process is
by no means the only, or even primary, tool of the U.S.
government in ensuring national security. For example, the
Department of Defense administers an extensive industrial security
program designed specifically to protect assets critical to the U.S.
defense infrastructure. There are also specific programs already in
place to protect the security of our ports. The Coast Guard, U.S.
Customs and Border Protection and other units of the U.S.
Department of Homeland Security run security at our nation's
ports and already require all companies, domestic or foreign, to
abide by security and other regulations. The U.S. Government
should use the most effective tool to address specific national
security concerns.
MR. STEARNS. Mr. Holtz-Eakin.
MR. HOLTZ-EAKIN. Thank you, Mr. Chairman, Ranking
Member. I appreciate the chance to be here to talk about the
CFIUS process and reform in H.R. 5337. In doing so, I do have a
written statement I would like to submit for the record.
MR. STEARNS. So ordered.
MR. HOLTZ-EAKIN. I want to make clear these views are my
own. The Council does not take a position on pending legislation.
I really want to make just a couple of main points about H.R. 5337,
which is a good bill, and certainly the best under consideration in
Congress, in my view.
The first is to emphasize that the bill is consistent with the
notion that national security and economic progress go hand in
hand and are not at odds with one another. Certainly business
transactions require a secure environment in order to take place,
and there are vivid examples of the contrary around the globe.
And also, it is essential to have well functioning capital markets to
do the kinds of investment risk sharing and otherwise promote
economic growth that the United States has experienced.
The U.S. stands out among developed countries for its prowess
in choosing economic investments that is the route to our superior
productivity growth that as the result is a foundation of our ability
to meet all of the national security needs in the future, the large
military demands on our economy, as well as the private-sector
and peacetime demands. So those go hand in hand.
As a result, the second main point is that there are pitfalls in
reforming the CFIUS process. Among them would be an overly
broad scope using definitions which were imprecise; economic
security stands out, and automatic homeland security definition
which includes critical infrastructure which are wasteful or overly
intrusive. These would have both brought security consequences.
There would be time spent on reviews that were unnecessary. And
the possibility would increase that a genuine security chance would
be missed, and it would appear to the other countries that the
United States had invoked a procedure of investment screening,
something that we have a long history of opposing in international
transactions and that would open the door to retaliation by other
countries with direct impacts on U.S. interests and damage to our
overall economic performance.
Another pitfall that stands out would be politicalization of the
reviews. Keeping politics out, doing it in an open and fact-based
fashion, focused on national security, I think, is imperative.
Those two points, notwithstanding, we do need something like
CFIUS, and reform of CFIUS is necessary.
There will be those transactions, which, while financially
advantageous, are not desirable from a security point of view. It is
important to have a process that identifies and carves those out in a
targeted fashion and certainly the track record of CFIUS, while it
might be superb on the substance, fails miserably on transparency
on communication with the Congress, and as a result, the ability of
Congress to properly exercise its oversight responsibilities.
I think it is also desirable to improve the continuity in the
CFIUS process, in particular the expertise in tracking of mitigation
agreements which might have been agreed to in the past. So there
is certainly an opening here for improvements on the part of the
Congress in the CFIUS process.
I think this committee is to be commended for taking up the
issue. And I think the bill, as it stands, has much improved
reporting and monitoring of the security agreements. It has a clear
designation of CFIUS, which I understand is an area of concern,
but which does, in fact, make this more transparent to investors
around the globe, which I think is desirable. I think it also retains
some desirable aspects to the process. The voluntary nature of
filings is important in keeping the workload appropriately
balanced, and also the timelines remain tight and will not interfere
with commercial transactions.
I also want to close in responding to the specific questions that
were raised about the chairmanship and Homeland Security as the
vice chair. I would concur with Mr. Cohen in being relatively
agnostic about the importance of the chairman designation, given
that it is largely convening power in the way it actually functions,
with the single caveat that the bill itself now requires sign-off by
the chair and vice chair and that elevates the importance of who is
the chair, and I think that is important to recognize.
Regarding Homeland Security, I think the bill has it right when
it talks about Homeland Security and critical infrastructure when it
emphasizes the national security implications of any transactions
involving those. National security should be the focus, not
Homeland Security per se, and in designation of Homeland
Security as the vice chair changes the focus, then I think that
would be an undesirable move. And I want to close with that.
Thank you for the opportunity for being here today.
[The prepared statement of Douglas Holtz-Eakin follows:]
PREPARED STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR,
MAURICE R. GREENBERG CENTER FOR GEOECONOMIC STUDIES,
COUNCIL ON FOREIGN RELATIONS
Chairman Sterns, Ranking Member Schakowsky, thank you for
the opportunity to participate in this hearing on H.R. 5337, the
"Reform of National Security Reviews of Foreign Direct
Investments Act." H.R. 5337 would establish in statute the
Committee on Foreign Investment in the United States and
establish procedures "to ensure national security while promoting
foreign investment." In my remarks, I want to make clear that I
am speaking for myself; the Council on Foreign Relations is a non-
partisan think tank that does not take positions on issues.
The Economic and Global Power of the United States
Among developed economies, the United States has performed
uniquely well in the past decade. The key characteristic of this
outstanding growth has been a post-1995 acceleration in U.S.
productivity - that summary measure indicates the ability of an
economy to produce the same goods more cheaply, generate a
greater standard of living than in the past from the same people,
factories, and equipment, and to use innovation to produce
different and higher-quality goods than in the past. In short,
productivity is the single-best summary measure of the overall
long-term performance of an economy and the United States stands
out in recent years.
One ingredient in this recipe for success has been openness to
global trade in goods, services, and capital. There is a growing
body of economic research that documents the beneficial dynamics
of open trade. For example, those firms that are engaged in global
markets are more productive than their domestically-oriented
counterparts.
An example of the dynamic benefits of open trade is in
information technology hardware. As noted, the United States
experienced a surge in productivity growth after 1995 (and perhaps
again recently). A substantial factor was the increasing
sophistication of IT hardware. One version of this story credits
clever engineers in the selfless pursuit of Moore's law. But it is
also the case that IT hardware is among the most global and
competitive industries, and global markets reward entrepreneurial
zeal as much as engineering skills. Moreover, policy supported
these dynamics. The Declaration on Trade in Information
Technology Products (ITA) from the 1996 Singapore Ministerial
Conference was the foundation for reduced barriers to trade in IT
hardware.
A related strength of the United States is its sophisticated,
deep, and specialized financial markets. Financial markets are the
central nervous system of a market economy, serving to collect and
transmit important information, guide capital to its most productive
use, and enhance the overall coordination of firms, households, and
governments.
One particular aspect of executing these functions is financing
mergers and acquisitions (M&A). These transactions generate
economic value. The bids by new owners raise the overall return
to existing shareholders, generating additional capital market
funds. At the same time, new ownership can bid more as a result
of replacing ineffective management, taking advantage of
beneficial complementarities ("synergies") with their existing
business model, or otherwise raising the productivity of the
purchased firms' capital, technologies, and labor skills. In short,
the new firm is more productive than the old - in this way, mergers
and acquisitions are one manifestation of the role of competitive
financial markets in efficiently allocating national capital.
As capital markets have become global in scope, so has M&A
(along with "greenfield" investments by U.S. firms abroad and
overseas investors in the United States). Currently, U.S.
subsidiaries of companies based outside the United States have
over 5 million employees and pay compensation of over $300
billion each year, or about $60,000 per employee. The vast bulk of
these investments have come from countries belonging to the
Organization for Economic Cooperation and Development
(OECD, over 90 percent) and a small minority is undertaken by
firms with government control (2 percent).
In short, a strong economy is part of national security and
open, global capital markets are a cornerstone of our strong
economic future. Nevertheless, despite the fact that few cross-
border transactions show risk of affecting security directly and few
are undertaken by firms with government control, those situations
do arise (and have arisen) in which security considerations
overwhelm the financial desirability of a particular transaction.
Thus, to meet overall objectives, it is essential to pair policies that
support well-functioning, open capital markets with specific carve-
outs for transactions that pose a security threat.
Reform of CFIUS
The topic of today's hearing is reform of the Committee on
Foreign Investment in the United States (CFIUS) and the process
by which it accomplishes these needed carve-outs. As the
Congress considers revisions to the CFIUS process, it is important
to recognize that the current system has served the United States
very well. To date, CFIUS has to a great extent simultaneously
supported national security and economic growth. Thus, there
would appear to be little merit in a wholesale rethinking of the
CFIUS process. Nevertheless, some improvements are possible;
by what criteria should proposed changes be judged?
A Targeted Process. First, CFIUS should be a targeted process
to identify those transactions that generate a legitimate national
security concern without excessive and wasteful scrutiny of routine
transactions.
An important aspect of achieving this objective is preserving
the voluntary nature of CFIUS filings. At present, participants to
transactions have excellent incentives to seek CFIUS clearance: a
safe harbor from future security scrutiny, mitigation or divestiture.
This system avoids wasteful reviews of routine transactions and
targets CFIUS efforts on achieving satisfactory reviews and
investigations of problematic transactions. H.R. 5337 preserves
this system.
Predictability. Second, the CFIUS process should be
predictable. That is, it would be transparent to market participants
which transactions would merit scrutiny and review and how the
security impact of the transaction would be evaluated.
H.R. 5337 makes some improvements to the CFIUS process in
this regard. It clarifies the "rules of the road" by making clear that
if a transaction involves a foreign-government controlled firm, the
transaction must be subjected to the investigation process. In
addition, an investigation period may be extended by two-thirds
vote of CFIUS, requires the signature of the Chair and Vice-Chair
on decisions, and provides support for CFIUS by other agencies.
The transparency of the process is improved by designating in
statute CFIUS member agencies and improving the nature and
regularity of reporting to Congress. One issue that arises in this
regard is the organization of CFIUS in H.R. 5337, particularly the
designation of Treasury as the Chair and Homeland Security as the
Vice-Chair.
With regard to the former, the contention is sometimes made
that a "security" agency should lead CFIUS; a reciprocal concern
being that with Treasury as the Chair the process may have a
commercial bias at the expense of national security. This concern
strikes me as misplaced. Treasury is a member of the National
Security Council, takes a lead role in the battle against terrorism,
and otherwise has functions that mirror those of traditional security
agencies. Moreover, in practice the role of the CFIUS Chair has
largely been organizational and not operational. To the extent that
Congress chose not to designate Treasury as Chair, it may be
desirable to rotate the convening power among selected agencies.
This strikes me as having a small cost in transparency, but one that
Congress may deem to be acceptable.
H.R. 5337 also designates Homeland Security to be the Vice-
Chair of CFIUS, which raises the larger issue of the role of
homeland security in national security reviews. A danger is setting
a standard for national security that is either overly broad or
indistinct. For example, drawing into the standard "critical
infrastructure" as embodied in homeland security objectives could
potentially include all transactions in the food supply chain.
Similarly, definitions that include "economic security" are too
broad and likely to generate uncertainty regarding investments.
H.R. 5337 requires CFIUS to consider whether a transaction has a
security-related impact on critical infrastructure, a specification
that retains the correct focus - a security-related impact, not
critical infrastructure per se.
Put differently, I believe that homeland security should be seen
as an integral part of the traditional focus on national security and
not as a separate, new, or elevated consideration. From this
perspective, the Department of Homeland Security has operational
roles that contribute to national security. The Congress may wish
to consider whether those roles are sufficiently broad and
important to designate Homeland Security as the standing Vice-
Chair of CFIUS.
Confidentiality. A third criterion is that process would provide
a high degree of confidentiality to secure proprietary business
information and national security considerations. H.R. 5337 seeks
an appropriate balance between the duty for congressional
oversight and the importance of confidentiality and streamlined
transactions.
Flexibility. Fourth, the process should be flexible, providing
arrangements that permit means to augment security or otherwise
satisfy these criteria as part of the transaction itself. H.R. 5337
retains such flexibility by permitting CFIUS to negotiate mitigation
agreements flexibly with firms involved in a covered transaction.
The bill also makes improvements that may serve to build
expertise and continuity of staff in this important area, by
establishing tracking compliance with mitigation agreements that
will accumulate knowledge of successful and unsuccessful
approaches and by directing $10 million to CFIUS in the next few
years. This may prove crucial as press reports indicate that the
fraction of Treasury time and personnel devoted to the CFIUS
process has risen dramatically recently.
Timeliness. The final criterion is that the CFIUS process should
be as timely as possible. Many observers have expressed support
for the current timetables, particularly the ability to coordinate with
(Hart-Scott-Rodino) anti-trust reviews. H.R. 5337 retains the 30-
day review period, but also properly draws into the CFIUS process
information from the Director of National Intelligence. It also
mandates a 45-day investigation for all foreign-government
controlled transactions, regardless of whether a genuine security
risk is present. These features may require more time, but it is
desirable to keep mandated extensions to the existing timetables a
limited as possible.
Larger Issues
Looking past narrow evaluation of H.R. 5337, the topic of
CFIUS reform legislation raises the potential for concern. Over
time, administrations of both political parties have helped to
establish a global rules-based system for open investment and free
trade. This approach has supported U.S. economic success. This
success is put at risk if new procedures are unclear, viewed as
overly politicized or unnecessarily discriminate against foreign
investment. Procedures of this sort would in themselves worsen
the favorable investment climate. An even more problematic
outcome would occur if other countries chose policies that
provided reciprocal discriminatory treatment against U.S. firms.
In this regard, three areas merit attention. First, it is useful to
retain a targeted and clear definition of those transactions covered
by CFIUS, and to focus on operational control of new technologies
or sensitive locations. As noted earlier, definitions that include
more vague references to "economic security" or those that include
an overly-inclusive concept of "critical infrastructure" would likely
be detrimental.
Second, it is useful to keep review and investigation times to
the minimum necessary to determine the evidence of a genuine
national security threat.
Third, it is important to avoid introducing overt political
considerations into the process. Indeed, a threshold consideration
is the degree to which it is desirable to legislate aspects of the
policy at all. CFIUS has been successful in part because it was
appropriately an administrative procedure. The greater the extent
of legislated review, report, or decision-making, the greater the
possibility of detrimental consequences. H.R. 5337 contains
detailed reporting requirements on both specific covered
transactions and CFIUS reviews in general. While not troubling, a
further extension of these provisions raises concerns over
politicization and confidentiality.
Any lingering perception of politically-driven reviews raises
the danger that other countries will use recent events in the United
States as pretext for protectionist rules draped in the guise of
national security. For example, press reports indicate that China
will tighten screening of deals and impose new curbs on foreign
acquisitions - setting up a ministry-level committee to review
controlling stakes in strategic industries including steel and the
manufacturing of equipment for shipbuilding and power
generation. Any broader, global trend of this type would directly
hurt U.S. investments abroad.
Conclusion
Mr. Chairman, as CFIUS reform is considered by Congress, it
is important to recognize that it is possible to provide open global
markets, strong economic growth, and national security. For the
most part, these go hand in hand. For example, the Congressional
Budget Office projects that over the next decade and one-half,
current defense plans will require spending an average of $500
billion (adjusted for inflation), a peak increase of roughly 20
percent over current levels (adjusted for inflation) and above the
peak of Cold War spending. Despite this rise, these plans would
result in defense spending constituting less than 2.5 percent of
Gross Domestic Product, well below the postwar peak of 9.5
percent in 1968. A key aspect of national security is an economy
that grows strongly enough to continue to meet the resource
demands in the private sector, social objectives, and our military
and other national security needs.
In those narrow areas where potential tradeoffs between
economic growth and national security arise, a transparent,
targeted, disciplined, and confidential process to augment
economic transactions with security dimensions will serve the
United States well.
Thank you for the opportunity to appear before the
Subcommittee. I look forward to your questions.
MR. STEARNS. Mr. Mulloy. Welcome.
MR. MULLOY. Mr. Chairman--
MR. STEARNS. You just need to turn your mic on.
MR. MULLOY. Chairman Stearns, Ranking Member
Schakowsky, I appreciate being invited here to testify.
My name is Patrick Mulloy, and I am a member of the U.S.-
China Economic and Security Review Commission, and have been
since the Commission was created by the Congress in the year
2000.
I also teach international trade law and public international law
as an adjunct professor at George Mason Law School and at
Catholic University Law School, and I also serve as the
Washington representative of the Alfred P. Sloan Foundation.
During the period of 1987 and 1988, when the Congress was
considering the Exon-Florio law, I served as General Counsel of
the Senate Banking Committee that was involved in every step of
the process in which we put that provision into the law. I also was
very much involved in crafting the 1992 changes that were put into
the law in 1992 requiring mandatory investigations when there is a
government-owned foreign corporation, making the purchase and
also putting the intelligence requirement that you have to have
these intelligence studies done as to who is buying what and what
patterns of acquisitions are being made in this country by foreign
governments.
I want to note, Mr. Chairman, that while a member of the
U.S.-China Economic and Security Review Commission, I am not
testifying on behalf of the Commission. I have put into my
testimony recommendations that the Commission has made
unanimously in its 2004 report, and by a vote of 11-1, in its 2005
report about how we should reform the CFIUS.
Let me make some general points right off the bat.
The Founding Fathers, in Article 1, section 8 of the
Constitution, gave the Congress the power to regulate foreign
commerce and foreign investment. Not the executive branch. In
Exon-Florio, the Congress gave the executive branch some of its
authority and then wanted to be able to do oversight of how that
authority was being carried out. The Treasury Department, in my
view, and the way it has chaired the CFIUS, has not provided any
criteria as to how this grant of authority from the Congress is being
used.
Secondly, foreign acquisitions are the other side of your current
account deficit. When we are running massive trade deficits, and
this year our trade deficit current account will be about $900
billion, when you have that happening, foreigners have a lot of
dollars. They can buy your goods which you are not doing or they
can buy our assets. They are coming and they are buying our
assets. That is some part of the foreign investment issue. Warren
Buffett has said we are like the rich family living on the hill selling
off parts of our estate to support a lifestyle we are no longer
earning.
That is part of the foreign investment. We are selling off assets
to support a lifestyle we are no longer earning.
Now, the issue is what do you favor in foreign investment. I
don't think that is the real issue. The real issue is everything in the
country is up for sale. I think Congress, when it passed
Exon-Florio, said no, everything in the country is not up for sale,
and they established a process by which you could review who is
buying what in this country. What we have to understand, too, is
that other governments, particularly Asian governments, the
Chinese government, the Japanese government, Korean
governments, they are much more involved with their companies
in directing as to what are important technologies for their
companies to build for their future prosperity. Dr. Allan Bromley,
President Bush's first Science Adviser, warned policymakers in
1991, quote, "Our technology base can be nibbled from us through
a coherent plan of purchasing entrepreneurial countries." In 1992,
we in the Banking Committee, under Senators Sarbanes and
Connie Mack of Florida, did some hearings to oversee how
Treasury was handling the Exon-Florio responsibilities. The head
of SemiTech, which was the joint government industry consortium,
made sure that we had some leadership ability in semiconductors
because they are so important to the national security.
Mr. Peter Mills of SemiTech, said "Foreign interests have
targeted key U.S. technologies and the present CFIUS process or
its implementation is ineffective in preventing such transaction."
Mr. Mills also said you have to be aware of the "cumulative effect
of multiple foreign purchases of U.S. companies." That is exactly
why we put into the law in 1992 the idea that the intelligence
communities should be getting information to understand patterns
of acquisitions in this country.
The Treasury Department did one such report and despite
mandating the law to do these every 4 years, they were never done
it again, leaving you and leaving policymakers blind as to these
patterns of acquisitions.
In my testimony, I explain how the Treasury Department has
mismanaged the CFIUS process. First, Treasury opposed the
enactment of Exon-Florio in 1988. They were going to veto the
whole trade bill over it, and we worked out a compromise. They
did not want the Commerce Department chairing the CFIUS as this
committee originally reported it. You guys and the Senate
Commerce Committee both had commerce chairing the CFIUS
process. The Treasury Department opposed that and got the
Congress to be neutral in the law it passed. And then they got the
executive order putting the chairmanship in the Treasury
Department.
They have also ignored specific statutory mandates that the
Congress put into law in 1992. And they were caught clear in the
Dubai Ports deal. That should have been--it was a
government-owned corporation. It should have been reviewed and
it wasn't. And that revealed, and I think Chairman Barton spoke
about the CNOOC. This committee, I think, passed legislation to
prevent CNOOC from taking over Unocal. I think that suggested
that you guys had no confidence in how the executive branch was
carrying out its CFIUS responsibilities.
Now, very specific recommendations on H.R. 5337, but if I
could just take the time now, Mr. Chairman, to make one point. I
point out that CFIUS reviews are effectively completed before the
parties to the transaction even file for the review. This is, let me
quote, there has been a practice that has developed whereby in the
words of one knowledgeable private-sector lawyer, and this was in
a George Mason University Law School publication, this lawyer
had laid out how this process really works. She said "in the vast
majority of cases, the parties reach an agreement with the
interested agency before notice is filed with the CFIUS committee.
Before you even start the 30-day clock, they have already worked
this out, and that is just a cover." So what that means is that the
Congress doesn't get any reporting on the criteria and the
judgments that are being made as to how our national security is
being protected.
I want to note, Mr. Chairman, that I have no claims on any of
this. I am speaking only from my experience, and as a matter of
public interest, and I think this needs a thorough scrubbing. I have
made very specific recommendations in my full testimony. I ask
that be included.
MR. STEARNS. By unanimous consent. So ordered.
[The prepared statement of Hon. Patrick A. Mulloy follows:]
PREPARED STATEMENT OF THE HON. PATRICK A. MULLOY,
COMMISSIONER, UNITED STATES-CHINA ECONOMICS AND
SECURITY REVIEW COMMISSION
Introduction
Mr. Chairman, Ranking Member Schakowsky, and Members
of the Committee, thank you for providing me with this
opportunity to speak before you today on this crucial issue.
My name is Patrick Mulloy and I have been a member of the
twelve member bipartisan, bicameral United States-China
Economic and Security Review Commission since it was
established by the Congress in the year 2000. The Commission's
charge from the Congress is, among other things, to examine the
"national security implications of the bilateral trade and economic
relationship between the United States and the People's Republic
of China". I also teach International Trade Law and Public
International Law as an Adjunct Professor at the Law Schools of
Catholic University and George Mason University and serve as the
Washington representative of the Alfred P. Sloan Foundation.
During the period of 1987-1988, when the Exon-Florio
Provision was being considered by the Congress, I served as the
Senate Banking Committee's General Counsel and was directly
involved in the negotiations which led to its enactment.
I should note that, while a member of the U.S. China Economic
and Security Review Commission, I am not testifying on its behalf
and the views I present will be my own. I will, however, set forth
the two recommendations the Commission adopted unanimously in
its 2004 Report on the Exon-Florio/CFIUS matter which is the
subject of today's hearing, and the four recommendations it
adopted in its 2005 report by a vote of eleven to one.
CFIUS Established in 1975
The Committee on Foreign Investment in the United States
(CFIUS) was not established by the Exon-Florio Provision in the
Omnibus Trade Bill of 1988. The CFIUS, rather, was established
some years earlier on May, 1975 by President Ford in Executive
Order 11858. That order, which created CFIUS and made the
Secretary of the Treasury its Chairman, charged the Committee to
"have the primary continuing responsibility within the Executive
Branch for monitoring the impact of foreign investment in the
United States, both direct and portfolio, and for coordinating the
implementation of United States policy in such investment."
While the Treasury Secretary was given the Chairmanship of
CFIUS, the Executive Order also gave the Department of
Commerce a key role, charging it, among other things, to submit
"appropriate reports, analyses, data and recommendations relating
to foreign investment in the United States, including
recommendations as to how information on foreign investment can
be kept current."
In 1975, there were concerns about the fact that, because of the
establishment of OPEC and the spike in oil prices in the 1972-1975
period, many oil producing countries suddenly had substantial
amounts of money to buy assets in this country and CFIUS was
established to help monitor such acquisitions. I had occasion,
when I served as an attorney in the Antitrust Division of the Justice
Department, to attend some meetings of CFIUS in the 1981-1982
period. One matter in particular I remember is when the Kuwait
Petroleum Company wanted to buy the Santa Fe International
Company. This raised concerns within the Executive Branch
because apparently Santa Fe had some technologies that U.S.
authorities did not want transferred in such a merger. Since the
President then lacked the authority given to him by the Exon-
Florio Provision in 1988, the Antitrust Division was asked to hold
up the merger on antitrust grounds. This was done and I believe an
acceptable solution was negotiated by which the Santa Fe
Company sold off to a third party some technologies which our
government did not want transferred to the Kuwait Petroleum
Company.
Enactment of the Exon-Florio Provision
In 1987 the leadership of the Congress, troubled by our
nation's rising trade deficit, decided to craft an Omnibus Trade Bill
and charged each relevant Committee in the House and Senate to
craft different portions of such a bill. Senator Proxmire, then
Chairman of the Banking Committee, asked the International
Finance Subcommittee, led by Senators Sarbanes and Heinz, to
develop the Banking Committee portions of such a bill. Chairman
Proxmire asked me as his General Counsel to work closely on the
process and to keep him informed of developments. I thus worked
closely with Senator Sarbanes and was personally involved in the
development of all facets of the Banking Committee's
contributions to the Omnibus Bill.
The Banking Committee on May 19, 1987 marked up and
ordered to be reported S.1409, the United States Trade
Enhancement Act of 1987, which dealt with export controls, trade
promotion, exchange rates, third world debt, the Foreign Corrupt
Practices Act and better access for U.S. financial institutions to
foreign markets. The Committee Report stated:
"The cumulative trade deficits of over $500 billion, built up by
the U.S. since 1982, have made this country the world's largest
debtor nation and underscore the need of our economy to
compete internationally."
The bill reported by the Banking Committee did not have any
provision giving the President the authority to block certain
takeovers of U.S. companies by foreign purchasers. The so-called
Exon-Florio provision, which contained that authority, appeared in
the bills reported by the Commerce Committee in the Senate, on
which Senator Exon served, and the Energy and Commerce
Committee in the House, where Congressman Florio served. After
the Senate Commerce Committee reported the provision, the
Banking Committee appealed to the Parliamentarian that the
investment matters covered by its provisions were properly within
Banking Committee jurisdiction. The Parliamentarian ruled in
favor of the Banking Committee and thus the Banking Committee
took the lead on the provision. It worked very closely with Senator
Exon and his staff in doing so.
The various portions of the Omnibus Trade Bill, reported by
each Senate Committee, were merged into one bill, each Title of
which was considered sequentially on the Senate floor during the
summer of 1987. The House followed a similar procedure and in
fact passed its bill, H.R. 3, first. This was because the trade bill
was considered a revenue measure on which the House had to act
first. The Senate at the conclusion of its work took up H.R. 3,
substituted the text of the Senate bill, and asked for a conference
with the House. Senate conferees, appointed to deal with the
Exon-Florio Provision were Senators Sarbanes, Dixon and Heinz
of the Banking Committee, along with Senators Exon and Danforth
of the Commerce Committee.
Section 905 of the House bill provided that the Secretary of
Commerce should "determine the effects on national security,
essential commerce, and economic welfare of mergers,
acquisitions, joint ventures, licensing and takeovers by or with
foreign companies which involve U.S. companies engaged in
interstate commerce." It also charged the Secretary of Commerce
(not the Treasury Secretary) to determine whether such takeovers
would "threaten to impair national security and essential
commerce." If such a determination were made by the Secretary
of Commerce the President would block the transaction unless the
President determined there was no threat to "national security and
essential Commerce." The Senate provision was quite similar and
said the criterion to block a takeover was "national security or
essential commerce that relates to national security".
The Department of the Treasury, then headed by Secretary
Baker, led the Executive Branch opposition to enactment of the
Exon-Florio merger review authority. Some contend that both
protection of its jurisdiction over investment policy and
championing an open investment policy led to Treasury's
opposition. Regardless of the reason, the Administration put the
item on its "veto list" and threatened to veto the whole Omnibus
Trade bill if the provision stayed in the bill. At that point I was
directly involved in negotiations with Treasury officials with the
objective of making the provision acceptable to the
Administration. I advised the Senators for whom I worked what I
had seen regarding the Kuwait Petroleum Company/Santa Fe
merger and said it was my belief that the President needed the
authority given to him by the Exon-Florio Provision. Our Senators
charged us in our staff negotiations to keep the provision but to try
to get an agreement acceptable to the Administration.
The Treasury was adamant that the term "essential commerce"
had to come out of the bill because it was not clear what that
entailed. Conferees agreed to delete those words but added
language to the statute and the Conference Report stating that the
term "national security" was not to be narrowly interpreted. To
make this absolutely clear the statute itself was revised to read:
"The President or the President's designee may, taking into
account the requirements of national security, consider among
other factors
(1) domestic production needed for projected national
defense requirements;
(2) the capability and capacity of domestic industries to
meet national defense requirements, including the
availability of human resources, products, technology,
materials and other supplies and services; and
(3) the control of domestic industries and commercial
activities by foreign citizens as it affects the capability
and capacity of the United States to meet the
requirements of national security"
A decision also was made to put the provision into law under Title
VII of the Defense Production Act. This was done to indicate that
the Exon-Florio Provision should be interpreted as dealing with the
broad industrial base issues addressed by that statute rather than
the narrower national security controls associated with export
control matters. The Conference Report on the provision states:
"The standard of review in the section is "national security".
The Conferees recognize that the term "national security" is
not a defined term in the Defense Production Act. The term
"national security" is intended to be interpreted broadly
without limitation to particular industries."
On August 23, 1988 the Exon-Florio Provision, as modified in the
Conference, became law as Title VII of the Defense Production
Act.
Treasury Charged to Lead New Merger-Review Authority
On December 27, 1988 President Reagan issued Executive
Order 12661. That order amended Executive Order 11858 which
established the Committee on Foreign Investment in the United
States and effectively put the President's new authority to review
and block mergers for national security reasons into the hands of
the Treasury-chaired CFIUS. So the Executive Department that
most strongly opposed the blocking authority ended up chairing
the Committee charged to implement its provisions. I think that has
led to the concerns in Congress and elsewhere about the provision
not being implemented as Congress intended.
Because it now had the lead for implementing the statute, the
Treasury Department also took the lead in the notice and comment
rule-making that developed the regulations under which it would
be administered. It took the Treasury Department
almost three years until November 21, 1991 to promulgate the final
regulations. (56 F.R. 58774-01 (1991)). Those regulations, not the
Exon-Florio Provision, established the voluntary system of merger
and acquisition notification that has been criticized as inadequate
by many.
1992 Oversight Hearing by Banking Committee
On June 4, 1992 the Senate Banking Committee's
Subcommittee on International Finance and Monetary Policy,
under the leadership of its Chairman, Senator Sarbanes, and
Ranking Member Mack, held an oversight hearing on the
implementation of the Exon-Florio Provision. In opening that
hearing Senator Sarbanes stated:
"Of particular interest this morning are the criteria for review
of Exon-Florio cases that have been developed by the
Interagency Committee on Foreign Investment in the United
States, which has been charged by the President with
responsibility for implementing the statutory provision."
In his opening statement Senator Mack, who also served on the
Armed Services Committee, stated:
"My interest this morning is to better understand how the
Administration determines the U.S. national security interest
through the CFIUS process".
He then referred to a matter that was then of public concern: the
acquisition of the Missile Division of the LTV Aerospace and
Defense Company by Thomson-CSF, a French firm controlled by
the French Government. Senator Mack said, "We don't want any
foreign government to own major U.S. defense contractors."
In his opening statement, Senator Riegle, the Chairman of the
full Banking Committee, in his opening statement said:
"The Administration examines takeovers on an isolated basis
and is missing the cumulative impact such takeovers are
having on our technology base. The President's science
advisor, Dr. Alan Bromley, has voiced concerns about this
matter. He warned policymakers that 'our technology base can
be nibbled from under us through a coherent plan of
purchasing entrepreneurial companies'."
Mr. Peter Mills, the first Chief Administrative Officer of
SEMATECH, also testified at that June 1992 hearing.
SEMATECH was a joint DOD/Industry consortium that was
established in the 1980's to ensure our nation maintained the
ability to make advanced semiconductor products deemed essential
to our national defense needs. In that hearing Mr. Mills voiced his
concerns and frustration about the failure of CFIUS to prevent
foreign interests from buying U.S. semiconductor equipment and
materials suppliers. He told the Committee:
".foreign interests have targeted key U.S. technologies and
the present CFIUS law or its implementation is ineffective in
preventing these transactions". [Emphasis added]
He also voiced concerns that CFIUS was not considering the
cumulative effect of multiple foreign purchases of U.S. companies
and urged that the Chairmanship of CFIUS be moved from the
Treasury Department to the Commerce Department.
1992 Amendments to Exon-Florio
Subsequent to that hearing the Congress in 1992 enacted two
key changes to Section 721 of the Defense Production Act. First, it
put into the law a new provision requiring CFIUS to move beyond
the basic 30-day review period and conduct a 45-day investigation
in any instance in which an entity controlled by or acting on behalf
of a foreign government is seeking to acquire of a U.S. entity. It
also inserted a provision requiring the President and such agencies
as the President designates to report to Congress in 1993 and each
four years thereafter whether any foreign government has a
coordinated strategy to acquire U.S. companies involved in
research development or production of critical technologies.
Congress also to the statute added additional criteria that it for
consideration during reviews of foreign takeovers.
The Treasury Department Has Failed To Implement
Congressional Mandates
In 1994 the Administration submitted to the Congress its first
report under the required quadrennial report statutory provision of
the DPA. It has never submitted another. The 1994 Report stated
on page 13:
"Despite examples of government involvement, the working
groups did not find credible evidence demonstrating a
coordinated strategy on the part of foreign governments to
acquire U.S. companies with critical technologies. The
absence of credible evidence demonstrating a coordinated
strategy, nevertheless, should not be viewed as conclusive
proof that a coordinated strategy does not exist."
The Report then went on to say:
"In some cases, however, foreign governments give indirect
assistance and guidance to domestic firms acquiring U.S.
companies. The main methods of government involvement
include:
extending tax credits to promote foreign M & A activity
exercising controlling government interest in major firms
to influence foreign M & A activity, and
identifying technologies that are critical to national
economic development, and thus prime targets for
acquisition through M & A's."
After submitting this one report, the Treasury Department,
which is charged by Executive Order to implement the
requirements of Section 721 of the DPA in which the quadrennial
report mandate is placed, has ignored this requirement of law, and
no more reports on this most important matter have been submitted
to the Congress as required by law. This means neither the CFIUS
nor the Congress has the background information Congress wanted
both of them to have concerning patterns in takeovers and their
cumulative effect.
The Government Accountability Office (GAO) in its
September 2005 report on the implementation of Exon-Florio,
notes that the statutorily-required 45-day investigation of foreign
government purchases of U.S. firms has been stymied by the
Treasury's insistence that any such investigations can be conducted
only if, during the 30-day initial review, there is "credible
evidence" that the foreign controlling interest may take action to
threaten our national security (page 3). This means the Treasury
has effectively read the 45-day mandated investigation of foreign
government acquisitions of U.S. companies right out of the statute.
This is exactly the point on which the Treasury's ineffective
implementation of Exon-Florio was made so absolutely clear
earlier this year in the Dubai Ports transaction.
In addition, GAO on page 3 of its September 2005 Report to
this Committee points out that the Treasury Department as Chair of
CFIUS has "narrowly defined what constitutes a threat to national
security." The GAO tells us Treasury has "limited the definition to
export controlled technologies or items, classified contracts, or
specific derogatory intelligence on the foreign company." This
does not reflect the statutory criteria Congress mandated. On page
13 of its report, GAO told us that the Treasury insists that Defense
Department concerns about foreign acquisitions of integrated
circuits essential to national defense is an industrial policy concern
and not a "national security" concern. This flies in the face of the
statute and legislative history of the Exon-Florio provision of law
that was deliberately placed in the Defense Production Act to
indicate Congress did want defense industrial base issues
considered in Exon-Florio reviews.
The CFIUS Process Needs to be Reformed
I believe a review of the record demonstrates that the Treasury
Department opposed the enactment of the Exon-Florio Provision
and has sought to stymie its effectiveness ever since it was enacted.
It is in a position to do this as it chairs and staffs the Interagency
Committee that the President charged to implement the statute. The
agency is so wedded to its open investment policy that it leans over
backwards to protect that interest over legitimate national security
concerns. Awareness of this fact is one reason many Members of
Congress had no confidence that the Executive Branch would
adequately review the 2005 proposed purchase of Unocal the
Chinese National Overseas Oil Company (CNOOC). The Dubai
Ports fiasco made the need for reform of the CFIUS process even
clearer to all informed observers.
The China Commission, on which I serve, in its 2004 Report to
Congress unanimously recommended:
(1) that Congress explicitly provide in statute that the term
"national security" in the Exon-Florio provision
includes "national economic security"
(2) that the chairmanship of CFIUS be transferred from
the Treasury Department to the Commerce Department.
In its 2005 Report the Commission by an eleven to one vote
recommended:
(1) the Exon-Florio provision be amended to require
CFIUS to provide Congress notice of each proposed
transaction CFIUS is requested to approve. In addition,
CFIUS should be required to report to Congress on the
disposition of each case it considered.
(2) the Exon-Florio provision should be amended to
specifically require CFIUS to consider economic
security as well as national security in making
decisions.
(3) Congress urge the President to transfer the
chairmanship of CFIUS from the Treasury department
to another of its member agencies.
(4) Congress should amend the Exon-Florio provision to
require post-transaction reviews of CFIUS filings that
have received full investigations, and that the results of
these reviews be provided to Congress.
Under the Constitution, the Congress has the authority to
regulate Interstate and Foreign Commerce. Our nation is facing
new challenges as we find ourselves in a globalized economy
where other countries have clear national strategies on how to
compete and raise the standard of living of their people and their
national power. We must take such matters into account when
administering our open investment policy and ensure we not
sacrifice technologies and industries important to our national
defense by taking an ideological approach on open investment.
China over the last ten years has run massive and ever increasing
trade surpluses with this country. This year alone our bi-lateral
deficit with China will be well over $200 billion. Its Government
has acquired almost one trillion dollars by forcing companies
earning dollars to turn them in for yuan. Since China does not buy
very many U.S. made goods in comparison with what we buy from
China, it can use these dollars earned through trade surpluses to
buy important U. S. assets and it is now starting to do so.
Part of the reason we have run these massive trade deficits with
China is because that country has for a number of years been
engaged in currency manipulation to keep the yuan undervalued
against the dollar. This subsidizes Chinese exports here, makes our
goods more expensive there, and gives our companies incentives to
move operations to China. The 1988 trade bill gave the Treasury
Secretary major responsibilities in the exchange rate area. The
Treasury is charged to identify currency manipulators and to
persuade them, by bilateral negotiations and efforts in the IMF, to
halt such practices that are deleterious to the international trading
system and unfair to American companies and workers. As this
Committee is well aware the Treasury has failed to carry out its
responsibilities in that area as well. Its failure there has contributed
to Chinese trade surpluses and has helped China accumulate vast
amounts of U.S. dollars. We will thus soon see a lot more
proposed takeovers of American companies by Chinese
companies. We need a serious, functioning, CFIUS process that
takes account of our national security interests.
My Views on H.R. 5337
Let me now offer some specific comments on H.R. 5337, the
bill to reform the CFIUS/Exon-Florio process that was
unanimously reported out of the Financial Services Committee on
June 22, 2006. The bill, while it does not remove the Treasury
from chairing the CFIUS process as I and the China Commission
had previously recommended, does make major improvements in
the present law and process. I will not focus my testimony on all
the good things this bill does to ensure greater transparency and
Congressional oversight to the process, but rather will focus on
some matters where I believe improvements to the bill can be
made.
First - While H.R. 5337 in its definition of "covered
transactions" does apply its provisions to all foreign purchases of
U.S. companies, it does not require that the Government receive
notice of all such purchases. I believe the Government should
have some means of gathering information on every purchase by a
foreign person of a U.S. company even if that transaction is not
filed for review by CFIUS. I make this point to ensure that our
intelligence agencies get information on all purchases of U.S.
companies so they can analyze the cumulative impact of various
acquisitions of key technologies and examine patterns of foreign
acquisitions. Having such analyses from the intelligence agencies
can help ensure that our technology base will not, as Dr. Alan
Bromley, the first President Bush's science advisor, warned, "be
nibbled from under us through a coherent plan of purchasing
entrepreneurial companies." Section 4(b) of H.R. 5337, which is
entitled "Analysis by Director of National Intelligence," assumes
that information on every transaction is available to the
intelligence communities. That provision charges the Director to
"expeditiously carry out a thorough analysis of any covered
transaction" - not just transactions that are filed for review. The
Director of National Intelligence cannot carry out this mandate
unless information on all foreign purchases of U.S. companies is
made available to the intelligence agencies.
Second - I believe the test for moving from a 30-day
investigation to 45-day national security investigation is too strict.
The bill provides that CFIUS should move from a 30-day review to
a 45-day investigation if the review "results in a determination that
the transaction threatens to impair the national security and that
threat has not been mitigated during or prior to the review of a
covered transaction." I believe the provision should be modified
by substituting "could threaten" for "threatens." Otherwise the test
for commencing an investigation the same test for blocking a
transaction after the conclusion of an investigation.
Third - I am concerned that many times CFIUS reviews are
effectively completed before the parties to a transaction even start
the CFIUS process by filing a written notice of the transaction to
the Chairperson of the CFIUS Committee. This is because a
practice has developed whereby, in the words of one
knowledgeable private sector lawyer, "in the vast majority of cases
the parties reach an agreement with the interested agencies before
notice is filed with the CFIUS Committee." This has the effect of
making the statutory time frame almost meaningless. It also makes
the CFIUS process totally non-transparent and makes it very
difficult for Congress to conduct effective oversight of the process.
Substantive discussions between the CFIUS agencies and the
parties to a proposed transaction should not take place until after
the written notice is filed that formally initiates the review process.
Fourth - I support the idea of putting the membership of
CFIUS into law. I would not however, as H.R. 5337, section 3,
does, include the "Chairman of the Council of Economic
Advisors," the "Director of the Office of Management and
Budget," or "any other designee of the President" in the CFIUS
membership. I do not believe the Council or OMB bring much
national security expertise to the process. They do bring, in my
experience, an ideological commitment to not interfering with
market transactions. I also think you do not need the open-ended
"any other designee" as that could pave the way for political
operatives rather than professional appointees to gain a role in
making judgments on important national security matters.
Conclusion
Thank you very much for inviting me to this hearing. I have no
clients other than the public interest on this issue and have never
been paid by any company or any other party to advise it on
CFIUS matters. I am happy to answer any questions.
MR. STEARNS. I will start the questions of my colleagues.
Mr. Mulloy, would you say CFIUS, the bill we have now, will
improve over existing law?
MR. MULLOY. Yes. In my testimony, I noted that while the
bill does not remove Treasury from chairing the process, I do think
it makes many improvements in existing law.
MR. STEARNS. And you still would want the Department of
Commerce to chair it rather than Treasury?
MR. MULLOY. I think it should be in Congress.
MR. STEARNS. Okay. As you pointed out that the history of
this, basically I guess under Gerald Ford, by Executive order, was
done in 1975, and then in 1988, or you said 1989 the Senator Exon
and Florio passed this. But what I hear from you is that Congress
has acceded its responsibility to the executive branch, and that is
not good. And so this bill would be a step forward of us going
back and under the Constitution doing our responsibility.
MR. MULLOY. I agree. I think this is a vast improvement over
present law. There are four changes in the present law that I have
recommended in my testimony, Mr. Chairman.
MR. STEARNS. Mr. Cohen, I think a lot of us who believe in
free trade also have some concern about foreign companies owning
not just sectors in the aerospace industry or semiconductor
industry, but in areas that systematically could undermine our
national security.
Do you think the way foreign companies apply today under the
CFIUS review, isn't it voluntary?
MR. COHEN. It is indeed.
MR. STEARNS. So what happens if they don't apply? Does the
deal automatically not go through or can it go through even if they
don't apply.
MR. COHEN. It is a very important question that you ask. It
could go through.
MR. STEARNS. Without even them volunteering to?
MR. COHEN. But the important point to make is that the
Government has the power to overturn a transaction.
MR. STEARNS. And who is that government?
MR. COHEN. The United States Government,
MR. STEARNS. The executive branch catches it.
MR. COHEN. Indeed. And again it also applies to a transaction
that is reviewed and is not blocked by the Government and then the
Government subsequently learns that information that was
provided was false. In a material way, it can overturn --
MR. STEARNS. Okay.
MR. COHEN. --a transaction.
MR. STEARNS. Do you think when you go to review a
consideration of a foreign investment, that it is true that we should
take into account Mr. Mallory's comment about this, it is an
economic issue that could affect national security rather than just
national security issues? In other words, is there some tie-in that
we could lose our economic advantage and they could take over?
It is not just national security we are talking about here. We are
talking about economic advantage. Is that a component or not?
MR. COHEN. I would have to say national security is the
broadest concept that we possibly could use as the test for review
of investment in the United States. It includes virtually every
argument and economic security, homeland security, energy
security, and I think there is a real danger if the legislation moves
in the direction away from the pure focus on national security.
Because every time we emphasize one particular area, we send the
message that other areas are not equally important.
And I believe that restricts rather than expands the scope of
CFIUS. And therefore, I would say that there is no need to begin
to specify subsets of areas of national security that need attention.
I believe all is included. The other thing I would say with regard
to this broader issue of economic security, we are beginning, in
part, from different approaches. I would say that my friend,
Mr. Mulloy, that we believe that economic security is, in part,
promoted by foreign investment in the United States and foreign
investment abroad. Nothing should be approved in the United
States that is a threat to U.S. national security. However, we are a
stronger country with a stronger economy, better able to defend
ourselves and of the resources to defend ourselves because we
have such a strong economy, which is, in part, generated by
foreign investment in the United States.
MR. STEARNS. Mr. Mulloy, have you ever had an incident
related to national security involving a foreign-owned company
operating in the U.S. since this was passed under Gerald Ford and
then when it passed under the Florio-Exon, was there ever an
incident related to national security involving a foreign-owned
company operating in the U.S.? Yes or no.
MR. MULLOY. Yes.
MR. STEARNS. Yes, there was.
MR. MULLOY. Let me just tell you how many of us knew that
all of these foreign governments were owning Dubai-type port
facilities in the United States before the Dubai transaction.
MR. STEARNS. No one knew.
MR. MULLOY. No one knew, right. And these were
government-owned corporations. No one knew. I think if people
had known at the time the transactions were going through we
might have said hold it, is this a good idea?
MR. STEARNS. In fact, after Dubai came out, we found out
Dubai was already in the United States, right?
MR. MULLOY. May I make one more point, Chairman Stearns?
Section 4(b) of the bill before you charges the Director of National
Intelligence to, quote, "expeditiously carry out a thorough analysis
of any covered transaction." The bill defines covered transaction
as "any purchase of an American company by a foreign company."
But the problem is, you only find out about it if it is noticed. There
are probably 6,000 transactions that have taken place since
Exon-Florio had passed. You have notice of about 1,800, so there
are about 4,200 you have no idea who purchased what. There has
been no reporting on it.
MR. STEARNS. Do you think some national security has been
breached because of those 4,200? You personally.
MR. MULLOY. I personally think, Mr. Chairman, in these days
with global economic competition directed by foreign governments
we ought to have information whether--
MR. STEARNS. You can't substantively say today because
these 4,200 were never scrutinized that we have a problem. Do
you personally think we have a problem?
MR. MULLOY. I personally think that some of these port deals
which were never reviewed--
MR. STEARNS. You think they affect our national security?
MR. MULLOY. I have concerns, yes, Mr. Chairman.
MR. STEARNS. Do you think this bill would correct this?
MR. MULLOY. I think this bill goes a long way to correcting
some of the points, but I have some clear recommendations in my
testimony for improving the bill.
MR. STEARNS. Okay. We will do a second round here, but my
time has expired.
Ms. Schakowsky.
MS. SCHAKOWSKY. Thank you, Mr. Chairman. I would like to
continue with you, Mr. Mulloy, and I appreciate your knowledge
and your history with this issue, which I think is very enlightening
in our discussion right now. In your testimony that you made to
the Senate Banking Committee, and you state your agreement with
Senator Shelby, who said that not everything in America is for
sale, and Senator Sarbanes, who said that the foreign investment
screening, quote, "process was broken, leaving the country
vulnerable to foreign threats," unquote.
You have certainly talked about the ports, but can you give us
examples of what you think should not be put on the auction block,
other things that you think should not be for sale?
MR. MULLOY. Well, let me just pause at one, for example.
Say that the technology to make Google or that Google has, what if
some foreign company, foreign country saw the technology like
that when it was being developed by guys that didn't have a lot of
money and decided that would be a good one for someone to come
in here and buy. Would that be good or bad, do you think, for our
own long-term economic strength and national security?
I think that is the kind of thing that is going on in this country.
I think key technologies that are important to our industrial
strength are being picked off by foreign governments. That 1994
study that was done, the one that was supposed to be done every 4
years and was only done once, that pointed out that the other
governments do have strategies to buy up key technologies in this
country and that the governments help their companies target what
technologies they want to buy. I didn't say that. That is in the
1994 report.
So this is not just a market game that is being played out there
by private companies. A lot of these other governments are much
more involved in this process than our Government is.
MS. SCHAKOWSKY. Now, I would like to give you an
opportunity. You mentioned actually two I think through the
Q&A. You mentioned the issue of covered transactions, I think,
and then the other recommendation that you met, the idea that
these reviews are effectively completed before the parties. Did
you want to put on the record? You had four, so there were two
others.
MR. MULLOY. I have in my prepared testimony--
MS. SCHAKOWSKY. Do you want to say what those are briefly?
MR. MULLOY. I would be happy to do that if you want at this
point.
MS. SCHAKOWSKY. You only had four in particular, right?
MR. MULLOY. I only had four in particular. I don't think
Treasury should be chairing this process. That is a key one.
H.R. 5337, in its definition of covered transaction, does apply its
provision to all foreign purchases.
MS. SCHAKOWSKY. I think you kind of went over that one.
MR. MULLOY. Yeah. So you don't know what you don't
know.
Second, the bill provides that in order to move from the 30-day
to the 45-day national security investigation, that you have to have
a determination that the transaction to be investigated threatens to
impair the national security. That is the test that you use at the end
of the 45-day investigation to decide whether to block it. It seems
to me that should be "could threaten" rather than "threatens,"
otherwise you have to prove your point before you even begin the
investigation.
The third, I say that the CFIUS reviews are all being done
through this process before they even file, and that you ought to
find a way to correct that.
MS. SCHAKOWSKY. Right. You mentioned that one.
MR. MULLOY. Finally, the members of the CFIUS, I point out
that I didn't think--and I have been in these when I was an
Assistant Secretary, International Trade in the Commerce
Department during the last 3 years of the Clinton Administration. I
have been in these interagency meetings. My judgment is the
Council of Economic Advisors and the Office of Management and
Budget don't necessarily bring a lot of national security expertise.
They do bring kind of an ideological commitment to let markets
work and that isn't--there are other people in the process who can
make those points. Otherwise you load up too many people in the
White House.
Secondly, in the bill it provides that the President can name any
other designee that he wants. I am not so sure that that is a good
idea. I am not so sure you need political people from the White
House in either party.
MS. SCHAKOWSKY. The point that Mr. Brown made in his
opening remarks.
MR. MULLOY. Yes. I think that is a good point. You
shouldn't allow that to happen. You ought to list the people you
want involved. This is your authority. You should list it and tell
the executive branch how you want it conducted.
MS. SCHAKOWSKY. Thank you.
MR. MULLOY. Thank you.
MR. STEARNS. Mr. Terry.
MR. TERRY. Thank you, Mr. Chairman. I am almost
embarrassed to ask some of my questions because they are going
to be fairly simplistic. To start off with, I am having a hard time
grasping the term used here, the term "national security." And I
think just a discussion between Mr. Mulloy or the answers by
Mr. Mulloy and Mr. Cohen demonstrate that it seems to be a term
of art, in essence, and maybe it has special meanings or meaning to
CFIUS, but to me it is so broad that it can encompass anything.
Is there a specific definition of "national security" that already
exists and/or does this Blunt bill in any way change or alter that
definition of "national security"? And I will throw that out to
anybody.
MR. COHEN. Mr. Terry, I will take the first stab at it. I don't,
as I argued before, think you would want to see, I would argue, a
definition of "national security." That is the strength of the term.
It is all encompassing. It gives government the ability in this
particular legislation to block an investment that they believe needs
to be blocked. And if you start defining it, I think it makes the
concept and your ability to take action more limited, and therefore,
it is not in our best interest, and many pieces of legislation, many
international agreements provide governments with what is called
a "national security exception," and it is used in statecraft and I
think it is appropriate that it remain in this bill, and I think it is a
good idea to keep it.
MR. TERRY. Mr. Mulloy, would you agree that the definition
needs to be flexible and broad?
MR. MULLOY. I agree with that, but I do think you should
know that the Congress, when it passed Exon-Florio and it
amended it in 1992, put down some criteria for the executive
branch to use in judgment of what national security is. And the
law states, domestic production needed for projected national
defense requirement, the capability and capacity of domestic
industry to meet national defense requirements, the control of
domestic industries and commercial activities by foreign citizens
that affects the capacity of the United States to meet its national
defense requirements, and then it talked about the potential effects
on international technological leadership of the United States.
So the Congress put these criteria into the law. And in the
report that Congress put it into the law in 1988, here is what the
Congress said in the conference report. The standard of the
review in this section is national security. The conferees recognize
that the term "national security" is not a defined term in the
Defense Production Act, where this law resides. The term
"national security" is intended to be interpreted broadly without
limitation to particular industries. This was the guidance that
Congress gave to the executive branch.
Now, you read what the GAO says, and you will see the GAO
criticizes the executive branch for narrowing the definition to
almost things that you would put export controls on. In other
words, if there were some high-tech item that you want to put an
export control on, that is the way the executive branch is
interpreting these charges by the Congress, and I think they are
misreading the law and not carrying out the duties that the
Congress gave to them. And then they go through all these
processes of working out the whole deal before it is even filed.
Now, why did they do that? Because once it goes under the
national security review, the 45-day investigation, they do all these
in the first 30 days. There is no reporting them to the Congress.
Once you get into the 45-day investigation, then they have to
report what they are doing and how they decided it. So they don't
want to do that. So they work out all these deals in the first part, in
the 30-day review. That is what is going on here.
MR. TERRY. Well, I want to follow up on that question, and
Mr. Castellani?
MR. CASTELLANI. Castellani.
MR. TERRY. Appreciate that. If we continue to broaden this
definition of "national security," especially under what Mr. Mulloy
is suggesting, it seems like we can incorporate just about
everything that may be owned by a Middle Eastern country or
China or--I mean, name off any country. Can we broaden this to
the point where it becomes counterproductive to encourage foreign
investment in this country?
MR. CASTELLANI. Indeed we can. I do not believe, and I may
be mistaken, I do not believe H.R. 5337 changes the definition in
the criteria of national security that currently applies. I think you
have to think of it from two perspectives. One is having enough
flexibility, as Mr. Cohen said, to be able to broadly apply it to
protect the national interest but, secondly, to have it remain broad
so as to be able to be flexible for new technologies.
For example, 30 years ago, one would not have said that
Internet technologies were critical to national security. Now they
are absolutely critical to national security. They did not exist.
Now they do exist. On the other extreme, we have to be careful
that we don't waste both the national focus, national assets as well
as de-erode an environment for investment that we are requiring
national security reviews of the acquisitions of Ben & Jerry's ice
cream because it happened to have been acquired by a
foreign-owned country or company.
MR. TERRY. But they could still poison the ice cream. I am
serious. If a country is inherently dangerous, I think anything they
purchase could risk our national security.
MR. CASTELLANI. Well, I think the flexibility of the definition
allows the members of CFIUS to make that determination and that
is what that process is intended for, and the process will serve we
believe under this law, will serve the country and the national
security well.
MR. TERRY. Your discussion there in my clip I think goes to
part of my confusion about the term "national security" here. Does
it evolve around a particular country and their history or does it
focus on the business that is being purchased?
MR. CASTELLANI. Well, I think the answer is yes.
MR. TERRY. Okay.
MR. CASTELLANI. It involves around all of the circumstances
that may affect the inherent safety of the American people and to
the inherent national security. Whether it is the technology or
interest that is being acquired, whether it is the nature of the
domicile of the inquirer or whether it is any aspect this could
provide the flexibility for the committee to be able to take into
account all aspects to determine whether or not national security--
MR. TERRY. Okay, Mr. Cohen. And Mr. Holtz-Eakin after
that.
MR. COHEN. I just wanted to add that I think your question
points out the importance of the reviews being done on a
case-by-case basis rather than trying to make a decision on a
particular transaction by fitting it into some kind of category, a
particular nation, for example, or a particular concern with a
particular sector. For example, some are suggesting we want a
provision that specifically applies to energy security. Well, if we
are going to do that, we are going to be giving some of our trading
partners a roadmap to preventing the very investments we were
making in energy facilities overseas, energy resources overseas
that are important for our national security.
So I would not argue that we would want to see these types of
specific references, such as to energy security, in legislation
because we are basically going to see something then applied to us
overseas that is not going to be in our interest.
MR. TERRY. Mr. Holtz.
MR. HOLTZ-EAKIN. I guess we would all agree you do not
want to enhance the ability of our enemies to harm us, nor hinder
our ability to harm our enemies, and that is the heart of looking at
these things. It is not ownership per se, and your example is a
sufficiently motivating evil foreign entity could poison Ben &
Jerry's ice cream now. The question is how is the transaction--
MR. TERRY. This side isn't particularly worried about the
outcome of that.
MR. HOLTZ-EAKIN. The question is how does a transaction
change that and that is why I think a case-by-case review of the
transactions is so important. How does the transaction change the
exposure that we face. That is the key issue, not ownership or by
whom, but what happens with the transaction. And it is not black
and white. There is often a discussion of these as if it is all or
nothing. In fact, the transactions are reviewed and often involve a
mitigation agreement, a security agreement that says, yeah, this is
fine except--and we make sure that, for example, wiretaps are
handled by American citizens and we put in place additional
safeguards to make sure that the economic transaction can proceed
without impairing the national security. It is not an either/or.
MR. STEARNS. I thank the gentleman. Mr. Murphy.
MR. MURPHY. Thank you, Mr. Chairman. I thank the panel.
An issue that most Americans had no idea existed, the CFIUS,
until the things came about with the Dubai ports deal which
certainly brings some important issues to light. Many of you have
talked about the issue of foreign investments being a vital part of
our economy. I know in the Pittsburgh economy we have a
number of companies that wouldn't be there without foreign
investments. Links, it's a German chemical company; Nova
Chemical, Canadian company; Bayer, German company; Sony
Corporation makes flat screen TVs, not the ones in this room
unfortunately but makes them; and GlaxoSmithKline, a British
company, and Westinghouse Electric recently was purchased by
Toshiba. And things like the purchase of Westinghouse were ones
under review. But I want to ask this in terms of--we do not want to
upset those investments which help create a lot of jobs in America,
but this is all part of this balance that when we have the conditions
that exist in this country and other countries, their businesses feel
they can invest in our Nation. I understand the balance that we all
must take, that we are not going to somehow turn off these foreign
investments and then in turn hurt a lot of American jobs and a lot
of those great investments, but it comes down to this then, what
lesson have we learned from the Dubai ports deal that is going to
help us to protect that national security in the first place. Then I
feel compelled to follow up on Mr. Terry's questions because I
looked through this, I am still not sure how we define "national
security" in this whole process where CFIUS or any other
organization can look carefully at this, or is this under the category
I don't know what this is but I know it when I see it? Whoever
wants to answer that.
MR. CASTELLANI. Let me take a stab at it. In fact, the
definition of "national security" is implicit in how CFIUS is
constructed, because it does include those elements of Defense, of
Commerce, of Treasury, of all of the elements of Homeland
Security, all of the elements and the jurisdictions that are brought
to bear. Those are the pods, if you will, of concern, that are
brought to bear on the specific transaction, and whether or not with
the perspective of all of those expertise, all of that perspective the
transaction violates national security and the definition of "national
security" by any of those perspectives. And so by constructing the
committee in and of itself you are indeed in part defining "national
security."
Second aspect and the second part of the question you asked is
have we learned anything, and the answer is clearly yes. One of
the things we have learned, if nothing else, from the Dubai Ports
World potential acquisition is that the appropriate amount of
transparency and notification is absolutely essential to these
processes because I would say that the surprise in and of itself was
as damaging to this process as the underlying facts because we
took a long time to get back to the facts about who actually is
responsible for security at our ports. But I think the biggest lesson
we learned is transparency and operating in a process and proper
notification, which this bill does bring forward.
MR. MULLOY. Congressman Murphy.
MR. MURPHY. Yes, Mr. Mulloy.
MR. MULLOY. In the bill passed by Congress itself, Congress
tells the President some of the factors that they want taken into
account. In other words, this wasn't just nebulous. They said, and
they list them, and they are listed in the factors under (f) of the
current law, which is not changed by the bill. So these factors
remain in the law. And why do you put those factors in? Because
if the Congress is going to be able to do effective oversight, it has
to understand the charge it gave to the executive branch, and then
it has to get reporting from the executive branch how these duties
are being carried out, and one of the key problems that was
revealed by the Dubai ports was the executive branch was not
following the law. Secondly, there was not the reporting that is
needed for the Congress to be able to do effective oversight. I
think the current bill that is before the committee makes some
good improvements in the reporting by the executive branch.
MR. COHEN. On the factors, if I could just add, Congressman
Murphy, if you look at the factors that were included, I think one
of the most important factors is what is called the "A" factor,
which is such other factors as the President or the President's
designee may determine to be appropriate generally or in
connection with a specific review of investigation. And that is
what I think all of us or many of us were trying to refer to, that you
don't want a limited list that cannot cover, as Mr. Castellani has
pointed out, new developments that were not included as factors
from one through seven and as a matter of fact, if you take a look
at this bill, the committee has expanded the number of factors from
current law.
MR. MURPHY. Given that, was that what was in there before--
let me see whose testimony this was. This was in Mr. Holtz's
testimony with regard to the current 30-day review period and the
45-day investigation period, is that sufficient time then? I am
interested in the panel's thoughts in that. You seem to think that
H.R. 5337 retains those periods. Do we need to expand that if we
are really fulfilling the communication, the security issues we
have?
MR. COHEN. I think one of the things the bill successfully
does, Congressman, is ensures that early on information is
provided by the Intelligence Community, and that is one of the
emphases of this particular bill that the information be provided to
the entire membership of CFIUS with regard to a potential
transaction, and they have up to 30 days to provide that
information. I would say that a right balance is struck. You have
the 30-day review period because that is where most of the cases
will go before that is reviewed, and you really don't want to have a
chilling effect on foreign investment in the United States. The
only ones that should be moved to the investigatory stage are ones
where there is a threat to U.S. national security. So we think the
right balance is struck with the 30 and the 45 days with a potential
for an expansion of the investigatory period if more information
needs to be put together.
MR. MURPHY. Mr. Holtz, do you agree with that?
MR. HOLTZ-EAKIN. It has an additional advantage in that it
coincides pretty closely with the timelines for the antitrust
investigations so that coordination I think that is an advantage on
the whole.
I think the other comment which the whole Dubai Ports
episode brought out was the general lack of transparency in
reporting. What has to be recognized is this is not a one-shot
operation but, by having better reporting and better transparency,
Congress can see in action what constitutes national security, see
in action those things which progress from review to investigation
and, by doing its oversight, tailor the process going forward. So
the bill makes great improvements in the ability of the process to
be fine-tuned by the Congress going forward.
MR. MURPHY. I think that is the key word here, that we get the
information here when we need it.
MR. HOLTZ-EAKIN. You couldn't possibly have guessed
before. So I think that is pretty important. And then to close this
issue of the timelines, I disagree with Mr. Mulloy in what is going
on in the 30-day. I think the fact that there is a heads up about
potential transactions that companies--and remember, either party
to the transaction can notify CFIUS, so if the company being
acquired feels that they are doing something that has a genuine
national security component, they can alert the committee, giving
an early heads up, and taking more time than the statutory 30 days
can't be a bad thing, and so I would disagree with the way that is
playing out.
MR. MURPHY. Mr. Mulloy, do you want to close the
comment?
MR. MULLOY. I do want to point out that the bill crafted by
Chairman Shelby does extend the initial period from 30, I think, to
say 60 days or it combines it all into a larger 75-day period
because of the fact that they found out that so many of these
transactions are being resolved before you even start the 30-day
clock. So the deals are all being done before they even file.
Mr. Kimmitt testified before the Senate Banking Committee
last March and he said this, this is after the Dubai Ports deals. He
says, "in some cases CFIUS members negotiate security
agreements before the filing is made." In other words, they
even do the security agreement and then there is no reporting to
you guys what is being done and I think that is wrong. I think they
could give the heads up that we are coming in with a transaction,
get clarifications about the dates and what information is needed,
but you start the time clock when you file and then you start your
subsequent negotiations so that there is a clear record of the
decisions being made that can be reported to the Congress and the
criteria that were used.
MR. MURPHY. Thank you, Mr. Mulloy. Mr. Chairman, I
would hope these are issues that we can get in our committee
report of this to find out not only how the timing works but to
make sure of the transparency in what information we do get so we
can conduct the proper reviews for national security.
MR. STEARNS. I thank my colleague. I think we will go
another round if the gentlemen want to stay. I am going to have a
couple of questions. After listening to you folks, I just realize,
obviously under the Constitution, Congress has a responsibility for
oversight, but whether Congress will do that or not I don't know,
and whether we have an interest and whether we have the ability to
do it, I don't know. So my question is to Mr. Holtz-Eakin.
Shouldn't we take all of these countries and try to bring some
quantitative measure to this, have somebody separate from
Congress or the executive branch, rate all of these companies in
terms of the threat to the United States' national security? So once
we quantify it, then CFIUS would have the ability to use some
quantitative information to rank these and to scrutinize these deals
involving these governments and these companies because I hear
Members of Congress ask, "What is this definition of national
security?" I mean if we are asking this question, it just seems like
we need to somehow bring some measure of mathematics here,
and that is my question for you.
MR. HOLTZ-EAKIN. Well, I guess I have three responses.
Response number one is that artificial precision by putting things
in a numerical scale doesn't buy you anything. In the end, what
you need is to evaluate whether the transaction enhances or
impairs.
MR. STEARNS. So if a country like China, a communist
country, is going to own the port in Long Beach and we rank it as
possible high security risk, that wouldn't mean anything because
we have maybe a port in Shanghai or something like that; is that
what you are saying?
MR. HOLTZ-EAKIN. No. Giving it a five versus a three versus
a two when we know what China is I think brings nothing to the
process.
MR. STEARNS. No relevancy.
MR. HOLTZ-EAKIN. Publishing it, making it public and
codifying it I think would be a bad idea. The information belongs
in the process certainly.
MR. STEARNS. Why would publicizing it be a bad idea?
MR. HOLTZ-EAKIN. It would be an invitation for retaliation.
The United States is an open democracy with reliance on private
markets that is not uniformly admired so we could have people
say, well, that is bad stuff, we will just close off our markets to
American companies. That is the kind of thing that I think--
MR. STEARNS. So you want to keep those actions under
wraps?
MR. HOLTZ-EAKIN. Certainly.
MR. STEARNS. So that there is no retaliation by other
countries.
MR. HOLTZ-EAKIN. I think the focus should be on the security
implications to the transactions. And again it is not ownership per
se. It is not the piece of the geography on the globe from which
their economic sources flowed. It is how does this merger and
acquisition affect our safety.
MR. STEARNS. You said there were three points. Did you get
all three in?
MR. HOLTZ-EAKIN. I think so.
MR. STEARNS. Mr. Castellani, how many ports in Hong Kong
does the United States operate? Do you know?
MR. CASTELLANI. I don't believe it operates any.
MR. STEARNS. Okay. And as I understand it here in the United
States my staff has told me one-third of the ports are operated by
foreign countries. Is that true?
MR. CASTELLANI. Oh, I would say if that is the number, it is
probably a number on the basis of the number of ports but not on
the total tonnage. If it was total tonnage, it would be a higher
percentage.
MR. STEARNS. So one-third of the ports in the United States
are already owned by foreign companies. In your opinion, is that
good or bad? Does it matter whether that is 50 percent or whether
it is 100 percent? Let's say that I said to you, is there anything
wrong with foreign governments operating our ports?
MR. CASTELLANI. I think from our perspective the answer is
there is nothing inherently wrong with foreign companies owning
anything in the United States unless it is a threat to national
security. And this is one--
MR. STEARNS. You wouldn't even make the argument, as
some people on the panel said, sometimes they work it
incrementally so they can harbor economic advantage by doing it
systemically and things like that?
MR. CASTELLANI. Well, I think there are two issues with that.
One is there is an implication that we wouldn't recognize that as a
threat to national security, and in fact part of this process is to
evaluate that. The second is an implication that from U.S.
industries' prospective, U.S. businesses' perspective, we are just
helpless victims in a world where the rest of the world is buying
our assets. We purchase more of the world's assets than the world
purchases of our assets. And in fact, we are as U.S. businesses,
U.S. concerns, we are out around the world buying technologies,
buying capabilities, buying services that enhance our economic
strength and our economic competitiveness and we want to
continue to do that.
MR. STEARNS. So in your mind you are thinking it is really not
relevant who owns what port, who operates in what port, if it is a
foreign country or not?
MR. CASTELLANI. Provided national security is protected.
MR. STEARNS. And that is the prime reason in your
estimation?
MR. CASTELLANI. Absolutely.
MR. STEARNS. Okay. My time has expired.
MS. SCHAKOWSKY. Mr. Mulloy, you wanted to respond?
MR. MULLOY. I just wanted to say this to the Chairman. I
agree with the point you are at. The Senate bill does say that you
should make some distinctions between the countries who are
coming to make the purchases. Particularly when they are
government-owned corporations that are doing the purchasing.
And let me make the point. Remember last year this committee
got very concerned about CNOOC buying Unocal, and I think you
passed legislation to prevent that, and you were criticized and
everybody was saying this was just a normal commercial
transaction.
There was an article in the Washington Post last July 20.
Listen to this. William Blair & Company was the largest
American investor in CNOOC, and they announced in this article
July 20, 2005, they said they were selling their CNOOC stock.
They said CNOOC had made decisions in the best interest of
shareholders in the past, but the effort to buy Unocal appeared to
be based on government policy, not business reasons.
You have to understand that other governments are much more
intertwined with their business community. There are certain
critical technologies that people understand are important for your
economic strength going forward, and everybody wants to have the
leadership in those technologies. And we ought to know, our
intelligence communities ought to be able to help identify those
and then identify the cumulative effect of patterns of acquisitions
of those activities by foreign--particularly if they are foreign
government-controlled corporations. I think that is very much
needed in this whole process.
MR. COHEN. Mr. Chairman, may I just comment, or
Congresswoman? I apologize.
MS. SCHAKOWSKY. Yes.
MR. COHEN. I would say there is a real danger in trying to do
too many investigations and then missing the objective that the
legislation has, and that is if we start expanding the investigatory
period of the review, the review process and the investigatory
process, we are not going to focus on those transactions that are a
real threat to U.S. national security, and my fear is that if we have--
MS. SCHAKOWSKY. Not be some screen through which
everything has to go?
MR. COHEN. I would argue the other way, Congresswoman,
that the best way to have a successful CFIUS process is to do the
reviews on a case-by-case basis and get the information from the
intelligence community, get the information from the State
Department that goes to the issue of a threat to the United States
and have that taken into account with a transaction. My fear
otherwise is you are going to be using resources that should be
focused on the few transactions, and hopefully they are a few, that
are a real threat, and moving away from that, trying to do too
much.
MS. SCHAKOWSKY. Mr. Castellani, you said in your statement
that the United States may experience a backlash if we limit
foreign investment in critical infrastructure unrelated to national
security. So what critical infrastructure is okay to put up for sale
or, to put it the other way, what would not be? Is there anything
that would not be?
MR. CASTELLANI. As I said before, the things that this process
is designed to define are those things that should not be.
MS. SCHAKOWSKY. It sounded from what you said before that
the Dubai Ports deal would not have necessarily met your criteria.
MR. CASTELLANI. And in fact I want to make sure I didn't
mis-answer the Chairman's question because you said owned the
ports.
MR. STEARNS. Yeah. I meant operated.
MR. CASTELLANI. Ports are in fact actually owned by U.S.
entities such as port authorities or our cities. Again the issue from
our perspective isn't where the ownership lies. The issue is
whether or not national security is jeopardized by that ownership,
by that particular company, its origin, its operations, its history,
that asset. It is the only blanket statement I can make.
MS. SCHAKOWSKY. What about Dubai? There certainly are
those that have argued articulately that the Dubai deal should have
been fine.
MR. CASTELLANI. The thing that bothered me just personally
about the Dubai Ports deal, which was mishandled by just about--
MS. SCHAKOWSKY. Aside from the mishandling.
MR. CASTELLANI. Okay. Other than the mishandling is we
lost focus on who is actually responsible for security at our ports?
And the people who are responsible for security at our ports are
customs officials, the Coast Guard and the border security, and that
is the issue, the paramount issue in terms of port security, which is
very important to the members of the Business Roundtable as
opposed to who operates those ports and who owns those operating
companies. And so I think many Members of Congress, including
yourself in your opening statement, focused on the fact that the real
issue is how secure are our ports, not who owns, the people who
operate--
MS. SCHAKOWSKY. Right. I am concerned that in light of the
fact that only 6 percent of the cargo right now is inspected that in
fact who operates the port could be of great concern to the United
States.
Let me ask you another thing. You stated that the CFIUS
process should include a Congressional--you do not think that it
should include a Congressional reporting requirement on a
case-to-case basis, but you support the sharing of aggregated
information that is not associated with any one investment. But
what it seems to me is that what you are saying is that you support
sharing with Congress only information that is not particularly
useful or helpful to us to determine if a foreign investment is in the
best interest of our country.
MR. CASTELLANI. Again, I respectfully disagree. Our position
is that you should share enough information to ensure for Congress
to be able to ensure that the process is working as Congress had
intended in enacting the law, but not so much so as to discourage
the kind of investment that our economy benefits from. And this is
proprietary information related to a specific deal, a specific
circumstance that may, in fact, give an advantage or may cause
something desirable not to occur, give an advantage to a
competitor or another suitor, or cause something not to occur
should it be released.
MS. SCHAKOWSKY. How can we do oversight if it is only on
an aggregated basis?
MR. CASTELLANI. Well, I think the data--
MS. SCHAKOWSKY. We have just figured out whether you
agree with our conclusions or not on the whole Dubai issue.
MR. CASTELLANI. We think the data, the way the bill has laid
it out, would provide that, information that would be sufficient.
MS. SCHAKOWSKY. Thank you.
MR. STEARNS. I thank my colleague and also I want to thank
the panel for waiting while we went to vote. We are concluding
the hearing. I think I hear from all of you, you support for the bill,
and as you all know, we are going to mark up this bill in the full
committee tomorrow, and we will take some of your comments to
heart here. And I would feel that after the discussion we have had,
the Congress has responsibility and we must exercise it and
hopefully we will do that tomorrow in the markup of this bill.
So with that, the subcommittee is adjourned.
[Whereupon, at 4:40 p.m., the subcommittee was adjourned.]
See The Long-Term Implications of Current Defense Plans and Alternatives: Summary Update for
Fiscal Year 2006, Congressional Budget Office, 2005.
Committee on Foreign Investment: The Critical Infrastructure Protection Program. Published by
the George Mason University Law School on February 2006. See page 26.