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Foreign Investment Chills

Prepared by: Lee Hudson Teslik
February 13, 2007

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The United States is preparing to make the first revisions to its procedures for reviewing foreign investments since last year’s Dubai Ports World controversy stoked hot debate on the issue. The legislation (PDF), which was marked up by the House Financial Services Committee on February 13, aims to establish a 12-agency panel to oversee the Committee on Foreign Investments in the United States (CFIUS), the body charged with reviewing foreign investments in U.S. firms. The bill has received bipartisan support (AP) within the committee, though some business groups fear that a more complicated review process could scare off potential investors.

Political pressure to revise CFIUS’ review process mounted after the February 2006 Dubai Ports World controversy. Dubai Ports World, a multi-industry conglomerate owned by the United Arab Emirates, sparked U.S. fears when it purchased a British shipping company, P&O, which operated terminals at several major U.S. ports. CFIUS approved the deal, but media exposure aroused congressional concern that the United States was leasing out sensitive infrastructure to an Arab state. The controversy wasn’t quelled until Dubai Ports World agreed to divest P&O’s American holdings, when the Senate dropped sweeping legislation proposing to block the purchase and broaden CFIUS’s review procedures.

The most significant effect of the episode thus far has been a substantial increase in the review panel’s workload. According to a January 2007 report (PDF) by the National Foundation for American Policy, CFIUS reviewed 73 percent more filings in 2006 than it did in 2005. During this time, the committee drew criticism for increases in the restrictions it placed on major corporations from ally states. The most prominent case was that of France’s Alcatel, which purchased Lucent Technologies late last year. CFIUS approved the purchase but demanded a provision allowing for the deal to be undone, later on, should the U.S. government see fit. Business groups complained that the uncertainty inherent in this condition could set a bad precedent and strike fear (WSJ) in potential future investors.

The primary opponents of Congress’ new legislation fear a stricter review process will deepen this chilling effect. Despite key endorsements from the U.S. Chamber of Commerce and Business Roundtable, a number of other business groups have expressed concerns about the bill (MarketWatch). Treasury Department official Clay Lowery cited two chief concerns in recent congressional testimony (PDF): the bill’s provision that only the two senior-most officials at CFIUS can certify the completion of a review, and the requirement of an additional 45-day investigation in any review involving businesses owned by a foreign government. In a July 2006 op-ed in the Wall Street Journal, Douglas Holtz-Eakin, the former director of CFR’s Greenberg Center for Geoeconomic Studies, argues that U.S. regulators must take utmost care to preserve an open investment climate: “While global investors watch nervously, the Senate has raised the specter of wholesale politicization of investment approvals,” writes Holtz-Eakin. “The potential for damage to the U.S. investment climate is quite real.” In a Council Special Report from the same month, Alan P. Larson and David M. Marchick make the case that CFIUS has worked more effectively than most people assume and caution that proposed cures could be far worse than the disease.

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