June 13, 2006 | Lecture on National Security and Defense
Today, the United States is the world's dominant economy. Because of the promise of America's economic potential and the openness of its markets, the U.S. is a major destination for foreign investment. According to the Commerce Department's Bureau of Economic Analysis, net inflows of foreign direct investment (FDI) increased by almost 50 percent between 1996 and 2005, growing from $86 billion to $128 billion. Between 2004 and 2005 alone, the level of FDI in the U.S. increased by $21.8 billion, or 20 percent.
Foreign investment introduces new technologies and skills to America's economy, helping to promote U.S. competitiveness abroad. About 20 percent of all U.S. exports originate from U.S. affiliates of foreign-owned companies.
FDI supports about 5.3 million U.S. jobs from California to New York, and from Texas to Ohio. U.S. subsidiaries support an annual payroll of $317.9 billion with average compensation per employee worth almost $60,000-over one-third more than the average American salary.
Moreover, the benefits of FDI extend into the American economy as a whole. Increased investment and competition generate higher productivity and more efficient resource use. Ultimately, this culminates in greater economic growth, job creation, and higher living standards for all.
Any new rules that restrict, delay, or politicize foreign investment will result in the loss of FDI as greater uncertainty and delays in investment transactions add to the cost of foreign firms' doing business in the U.S. Consequently, America will pay for higher investment barriers with lower growth and fewer jobs. FDI restrictions would undermine America's chances of remaining an economic superpower in an increasingly competitive global economy.
Moreover, there may be secondary consequences of enacting new foreign investment barriers. America could face less market access and opportunity abroad as countries enact retaliatory policies that result in ever higher barriers to global investment. With over $2 trillion of direct investment abroad, the U.S. is the world's biggest investor: Foreign retaliation in reaction to new U.S. investment restrictions would be costly for many Americans.
The CFIUS Process Today
The United States generally welcomes foreign investors and provides them equitable and nondiscriminatory access to investment opportunities. While the bulk of foreign investment in America generates no threat to national security, the Exon- Florio provision was implemented in 1988 to ensure that FDI remains benign. The intent of Exon-Florio is to provide an objective, nonpartisan mechanism to review and, if the President finds necessary, to restrict or prohibit foreign investment that may threaten America's security.
The Exon-Florio provision is implemented by the Committee on Foreign Investment in the United States (CFIUS), an interagency committee chaired by the Secretary of the Treasury. The Departments of Defense, Justice, Commerce, and Homeland Security are four of the 12 agencies that participate in CFIUS. The committee's task is "to suspend or prohibit any foreign acquisition, merger or takeover of a U.S. corporation that is determined to threaten the national security of the United States." In 1992, Congress amended the statute through section 837(a) of the National Defense Authorization Act for Fiscal Year 1993, requiring CFIUS also to review transactions where the acquirer is controlled by or acting on behalf of a foreign government.
Once notified of a potential transaction, the CFIUS process begins with a 30-day review of the planned foreign acquisition, followed by an additional 45-day review for exceptional cases. At the end of an extended review, a report is provided to the President, who then has up to 15 days to announce whether the investment is approved. In total, the process cannot exceed 90 days.
The amending legislation, set in 1992, requires the President to report every four years to Congress on whether there is credible evidence of foreign efforts to acquire critical U.S. technologies or commercial secrets. Additionally, a report is to be made to Congress regarding any transaction that required presidential action.
Through the Exon-Florio provision, CFIUS is directed to consider the following factors in evaluating the security risk of a foreign acquisition or merger:
A transaction may be voluntarily notified to CFIUS by the companies involved in the acquisition or by CFIUS member agencies. The incentive for firms to notify the CFIUS process voluntarily is strong; firms that should, but do not, notify CFIUS of an acquisition remain subject indefinitely to divestment or other negative actions by the President. In order to protect proprietary commercial data, notifications to CFIUS are confidential.
With a few exceptions, the current CFIUS process minimizes the cost of such legislation on the U.S. economy while preserving the intent-protecting America from those that would cause the country harm. Favorably, the process:
While today's CFIUS process is generally effective in balancing an open investment climate with national security, it could be improved. The recent Dubai ports controversy is the latest example demonstrating that the investment approval process needs to be better defined and more transparent.
A strong economy, bolstered by free trade and investment, is a pillar of national defense. The Bush Administration's National Security Strategy correctly identifies "free markets" as the key to a secure America and a necessary component of our national security strategy.
The notion that merely precluding foreign ownership of U.S. assets offers a measure of security or saves American jobs is flawed. Erecting barriers to foreign investment would stifle innovation, reduce productivity, undermine economic growth, and cost jobs-without making America any safer. The government's role is not to decide how the marketplace operates, but to perform due diligence to ensure that vital national interests are looked after.
Thus, improving the transparency of the CFIUS process is appropriate; provoking a wave of anti-trade, anti-investment policy is not. Reform should address the heart of the CFIUS problem-appropriate reporting and consideration of investment by government-owned firms-without opening the door to protectionism and without chancing the economic and political consequences of politicizing foreign investment in the U.S.
Protectionism would endanger U.S. prosperity-the very cornerstone of security-as well as strain relationships with important allies in the war on terrorism and make it more difficult to use open markets to spread American values and bolster U.S. interests around the world. A successful strategy for improving national security must include an ongoing commitment to free trade and investment policies.
Markheim is Jay Van Andel Senior Trade Policy
Analyst in the Center for International Trade and Economics at The
Heritage Foundation. These remarks were delivered in testimony
presented at a hearing of the House Committee on Homeland Security
on May 24, 2006.
See Bureau of Economic Analysis, "U.S. International Transactions," at http://www.bea.gov/bea/newsrel/transnewsrelease.htm (May 21, 2006).
William J. Zeile, "U.S. Affiliates of Foreign Companies: Operations in 2003," Bureau of Economic Analysis, at http://www.bea.gov/bea/ARTICLES/2005/08August/0805_Foreign_WEB.pdf (May 21, 2006).
50 U.S.C. app 2170.
U.S. Government Accountability Office, Defense Trade: Implementation of Exon-Florio, GAO-06-135T, October 6, 2005.
 Ibid., p. 9.
 Ibid., p. 8.
James J. Carafano, Ph.D., Tim Kane, Ph.D., Daniel J. Mitchell, Ph.D., and Ha Nguyen, "Protectionism Compromises America's Homeland Security," Heritage Foundation Backgrounder No. 1777, July 9, 2004, at http://www.heritage.org/Research/HomelandDefense/bg1777.cfm.