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The Challenge of Investment Protectionism [Rush Transcript; Federal News Service]

Speaker: Robert M. Kimmitt, Deputy Secretary, The Department of Treasury
Moderator: Charles O. Prince III, Chairman and Chief Executive Officer, CITI
September 11, 2007
Council on Foreign Relations

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CHARLES O. PRINCE:  I'd like to welcome you to the Council on Foreign Relations and this meeting.  We're very pleased to have Deputy Secretary of the Treasury Robert Kimmitt with us tonight.  Secretary Kimmitt will be talking on the challenge of investment protectionism.  I've been cautioned by the CFR staff repeatedly not to read Bob's bio.  All of you were supposed to have studied that before you got here.  If you didn't, you should leave now, because you're not following the rules.

Some housekeeping:  this meeting is part of the C. Peter McColough Series on International Economics.  And the series is presented by the Council's corporate program as well as the Maurice R. Greenberg Center for Geoeconomic Studies.  And our next McColough lecture will be with Peter Mandelson, the EU trade commissioner, on Monday, September 17th.

We're very pleased to have Secretary Kimmitt here.  Obviously, the issue of investment protectionism is very timely, including something out of Russia just in the last day or so.  And this is something which I think we should all have a very keen interest in in terms of not only going forward but the state of political discussion here in the states.

I would like to remind the audience that this meeting is on the record.  There are people from the press in the room.  You are all on your guard.  (Laughter.)  And please remember to turn off your cell phones, BlackBerrys and other wireless devices.  I promise to personally embarrass you if your phone goes off while Secretary Kimmitt is speaking.

Bob, over to you.  (Applause.)

ROBERT M. KIMMITT:  I've lost my wire, so I'm assuming that these mikes are working.  And I'll put the wire back on for the Q&A.

Let me start, if I could, with three words of thanks.  First, to the council for organizing this event this evening; second, Chuck, to you for moderating; and third, to all of you for attending, especially on a day that carries so many memories, especially for those of us who were in New York City on that fateful morning six years ago.

When I was getting ready to go to Germany as ambassador, my predecessor gave me only one bit of advice.  He said never forget how important speeches are to the Germans.  He said they love to give speeches, listen to speeches and analyze speeches far more than is the case in the United States.  Dick Walters stood up one time before a distinguished group like this, gave 40 minutes of what he considered prime oratory in German, sat down rather pleased with himself only to have the Chuck Prince of that evening stand up and say Mr. Ambassador, thank you for those wonderful remarks.  We would welcome you back anytime you have a moment for a real speech.  Well, by that measure, you're barely getting remarks tonight, because the agreement with the council is I was going to start maybe with about 15 minutes of informal remarks and then we'll sit down and begin the dialogue.

There are three important elements of a successful and sound world economy -- free trade, flexible exchange rates and the free flow of capital across borders.  But there is considerably more attention that has been paid to the first two parts of that important triad, and that is free trade and flexible exchange rates.  And they are certainly important.  Progress on the Doha round -- quite interesting that you have Peter Mandelson here next week.  Progress on the four bilateral trade agreements we have negotiated is very important, both for the domestic and the world economy.  Certainly, exchange-rate issues are important, not least the Chinese currency. 

But I will say that finance ministries, policymakers, indeed policy-oriented organizations like the council, in my view, need to devote increased attention to the question of the free flow of capital across borders based on open investment policies because in the end, the free flow of capital is the lifeblood of the world economy. 

If you just take a look at foreign direct investment in the United States, it is responsible for over 5 million jobs.  While that's only 4 percent of our work force, those 5 million FDI-sponsored jobs comprise 10 percent of our capital investment, 15 percent of our annual research and development, 20 percent of our exports, and interestingly a full 30 percent of those jobs are in manufacturing whereas less than 10 percent of the overall American work force is in manufacturing.  But very often, the investment discussion, indeed perceptions, are based much more on the relatively few controversial investment decisions rather than on fact.

The controversy, I first recall, began back in the mid 1970s; indeed, when the Committee on Foreign Investment in the United States was set up by executive order by President Ford.  Then it was going to be Saudi recycled petrodollars that would be the ruin of the U.S. and the world economy.  It was Japanese investment in the 1980s that led to the Exxon-Florio Amendment which provided the statutory basis for the Committee on Foreign Investment in the U.S.  And obviously, more recently, we've had cases like the Chinese National Overseas Oil Company in 2005 and Dubai Ports World in 2006 that have very much seemed to define the public perception, both at home and abroad of U.S. investment policy. 

I think many people think that the U.S. reviews almost every cross-border acquisition and blocks many of them.  In fact, the facts are very different.  In calendar 2006 -- so the same year of the Dubai Ports controversy -- there were over 10,000 M&A transactions in the United States.  Of those, 1,730 were cross-border transactions for an acquiring who's taking ownership or control of a U.S. asset.  Of those 1,730 cross-border M&A transactions, only 113 came before the Committee on Foreign Investment in the U.S., so roughly 5 percent.  None of those was blocked by the committee.

I point that about because, again, I think the perception is that many more cases come before us, and many more cases have difficulty.  Some do have difficulty.  Some raise legitimate security concerns, and those need to be addressed.  But those are decidedly the exception rather than the rule.  This year, in 2007, there have been three significant, recent developments.  First, in May of this year, President Bush issued the first open investment policy statement in over 15 years.  Secondly, at the G8 summit in Heiligendamm in June, there was the first major statement by the G8 on the importance of investment flows to the world economy.  And third, in July of this year, a new bipartisan U.S. investment review law was passed by the Congress and signed by the president.  This bipartisan bill strikes the balance between encouraging investment that produces American jobs but also protecting national security.  It clears up many of the ambiguities in the previous law.  It gets the relationship right between the Congress and the administration.  It makes clear the criteria to identify those cases that require particular attention from the Committee on Foreign Investment in the U.S.

We think it's important to get this word out, not only because investment flows swamp trade flows in terms of volume and breadth but also because we are seeing a growing tendency toward investment protectionism around the world.  We think that we have struck the right balance between welcoming investment and protecting national security.  And we've done that by keeping our investment barriers low and, again, identifying just that small number of cases that raise security concerns.  Again, that's one of the reasons I'm here tonight talking to this important group and traveling elsewhere in the world.  As Chuck said, I think we may need a stop in Moscow, where Mr. Putin seems to think that the new law is tougher than the previous law.  I would say that it is a refinement of the previous law that picks up on the experience since 1988 and the rather dramatic world in which we live rather than changing dramatically the balance that we try to strike as we do investment reviews.

But as I say, the trend elsewhere is toward higher barriers, raising real concerns about the prospects for rising investment protection.  We have seen just in the past year either old investment laws updated or new investment laws passed or proposed in countries ranging from Russia to China to Japan, India, Canada, Germany and indeed quite a bit of discussion, Peter Mandelson being one of the key discussions on this, of what the European Union and commission itself should do.

In Germany explicitly and elsewhere implicitly, one of the reasons for concern and one of the bases for a call for new barriers is because of the emergence of sovereign wealth funds as a factor, both in the world economy and in the investment arena, in particular.

Let me say a few words about sovereign wealth, and we can pick this up a bit more during a question-and-answer period if you wish.  First, sovereign wealth is not a new phenomenon.  Sovereign wealth funds have been around for over four decades and have largely been a force for good because of their record of patient, long-term investing based on commercial factors.  However, the older sovereign wealth funds in places like the Persian Gulf, Singapore and Norway have now been joined by similar funds in China, Russia and elsewhere.  The estimates are that, currently, sovereign wealth held in the sovereign wealth funds could be as high as $2 trillion, and over the next seven to 10 years could grow to over $10 trillion.  Even though today and in the future, assuming comparable global growth, these funds are a relatively small proportion of global wealth.  They are now of the size and significance that attention and vigilance are appropriate.

Inside the U.S. government, the President's Working Group on Financial Markets, which Emil Henry used to play an important role in before he left us at Treasury, is taking a leading role to make sure that our regulatory structure and system is appropriate to the task of addressing sovereign wealth funds both now and in the future.  The president's working group includes Treasury, the Federal Reserve, SEC, the Commodities Futures Trading Corporation and the bank regulators.  Externally, discussion has begun; indeed, some discussions took place today in the G7.  It will also be on the G8 summit agenda and the G20, a relatively new financial grouping since the crises of the late '90s, and also APEC, Asia-Pacific Economic Cooperation has had discussions on this subject recently.

We have suggested that there's an important role for the IMF and the World Bank to play working with sovereign wealth funds on guidelines or best practices, including around issues like governance and transparency.  The IMF particularly has done good work through the years on reserve management.  We see this as an extension of the good work that's been done by the IMF.

We've also suggested that the OECD, the Organization for Economic Cooperation and Development, in Paris could play an important role working with nations receiving inbound investments in sovereign wealth funds, develop ways to review such investment consistent with open investment policies and the lowest-possible barriers.  I might note that the new U.S. law that passed in July of this year gives us some guidance on how to deal with investments from state owned and controlled organizations, including sovereign wealth funds.  It makes some adjustments to the previous law where there had been some questions about the length of the review that was required, the level of approval that was required.  But essentially now, any inbound investment from a foreign government-owned and controlled entity, including sovereign wealth funds, would have to be approved by the Committee on Foreign Investment in the U.S. and then has to have the personal sign-off either of the secretary of the Treasury or myself after an investigation.

But I will say that sovereign wealth fund investments, indeed foreign-owned and controlled investments, are not new to the Committee on Foreign Investment in the U.S.  Since it was statutorily authorized almost 20 years ago, we have had about 200 such cases come before the committee.  In recent years, those numbers have picked up.  There were actually 19 such cases that came before the Committee on Foreign Investment in 2006.  So we're seeing some uptick in what had been an average of about 10 per year to closer to 20 per year.  We know how to deal with these, again, from a security review perspective.  And we would encourage others, as they set up their review regimes, to perhaps draw from some of the experience that we've had.

I expect that there will be a significant discussion on this point at the IMF-World Bank meetings in October.  Again, the various organizations that I've mentioned, both the IMF and the World Bank, the G7 and 8 and other key finance ministers, central bank governors and indeed representatives of all the sovereign wealth funds as well as many representatives from the private sector will be there, I think a good time to take this discussion forward. 

Let me just summarize by saying that we in the United States are open to investment from abroad.  We are open to it because it is good for the U.S. economy, it's good for the world economy, it creates good, productive American jobs, and we want to send a clear signal that we're open to investment.  At the same time, every public servant has no higher responsibility than protecting the national security.  And in each case, we will look to make sure that the national security is protected, even as we review cases against this open investment policy.  We respect the rights of others, obviously, to set up their own investment review regimes.  What we would suggest is they can be done in a way that keeps barriers low and still protects national security.  We look forward to working both bilaterally within the OECD and other organizations as countries in Europe and elsewhere advance work on their review legislation.

And I would say that we recognize that sovereign wealth is a very important part of this debate.  As I said, it is an issue that requires vigilance on our part.  But I think it's also an issue that should be approached with calmness, collectively and collaboratively to find the way to move forward to a world economy that's even stronger.  And indeed, in the end, what are sovereign wealth funds trying to do but to improve their returns without generating political controversy.  That's got to be good for the world economy.  I think working collaboratively toward that goal should be the touchstone of what we do over the course of the next year.

I think I'll stop there and look forward to your questions.

(Applause.)

PRINCE:  I now have the great privilege of starting off the discussions with a couple of questions. 

Those were very -- I guess those meet the German definition of at least remarks and probably a speech based on -- two questions just to get started if I may.  I wonder if on the subject of sovereign wealth funds -- I wonder if there is some change in at least perception that -- in the past you mentioned sovereign wealth funds go back quite a ways -- whether some or most of those previous sovereign wealth funds were or were seen to be with governments more allied with the United States in a geopolitical sense.  And I wonder if there is at least the perception that some of the newer sovereign wealth funds, perhaps some of the rapidly growing ones, might represent a political alliance not so closely tied to U.S. interests or outlooks.

KIMMITT:  I think that's certainly a factor, Chuck.  There's no question about it.  I would say, however, that we would like to think that these sovereign wealth funds are going to be making the decisions, as I said, on commercial bases rather than for political reasons.  Also, while you mentioned some of the older sovereign wealth funds that perhaps were somewhat more aligned with the U.S., some of them have run into issues as the Dubai Ports people found, indeed as the Saudis found decades ago.  I think, however, pursuing investments and indeed pursuing management of the funds on a sound commercial basis should help obviate some of those political concerns so that these are seen as commercial, economic, financial vehicles rather than political vehicles.

PRINCE:  Perhaps on a related topic to your answer there, I wonder if part of the dialogue, at least in the states -- I see this rising protectionism on investments all around the world.  You listed a number of countries.  But I see it in almost every country around the world.  I wonder if in the states, part of the dialogue reflects the political season.  We are in an election season -- they seem to be longer and longer -- and I wonder if part of the discussion now reflects, at some level, a pandering to scare tactics -- let's scare people into this or that.  And if there is some of that, or perhaps some of that, what might we look to beyond the election cycle; that is, what within that larger spectrum of discussion is long-term U.S. interests?  And how should we think about the level of dialogue, whether it reflects accurately or in a puffed-up way, what people are truly thinking in Washington.

KIMMITT:  I'm with you.  I think we've seen the end of the end of election cycles.  (Scattered laughter.)  I think we're in a period of perpetual election cycles.  I personally have not seen partisan politics creep into this particular debate.  The concerns about investment have tended through the years to be bipartisan concerns.  Again, I think that we at the Treasury Department, other finance ministries, other departments and agencies as well as the private sector and indeed investors need to do a better job of telling the positive story about investments.  It's usually quite welcome at the state and local level and greeted with greater skepticism at the federal level.  And I think what that means is we've got to help tell the story, some facts which I tried to put out tonight.

I'll tell you a very personal view.  We talk about foreign direct investment.  I think one of the real problems is the word foreign.  When Americans hear the word foreign, they have a natural tendency to tense up ever since Washington's farewell speech warning us about foreign entanglements.  I'm old enough now to remember when we used to talk about foreign trade.  We don't talk about foreign trade anymore.  It's now just trade or international trade.  But that word foreign direct investment -- I think as soon as someone hears it or foreign investment, it's almost a negative that has to be disproved.  So one of the things we're trying to do at the Treasury Department is move away from the f word.

PRINCE:  One last question if I can.  That f word, yes.  One last question if I can and a complicated one.  Much of the political discussion these days is occupied by front-page kinds of issues, whether it's the war in Iraq or immigration or et cetera, et cetera.  And in that context, there is a perception, correct or not, that the administration is either a little weakened or is perhaps focused in ways necessarily perhaps in terms of these issues.  How much of that perception impacts the ability of the Treasury Department or you to effectively deal with foreign governments?  That is, outside of the U.S., outside of the current political dialogue, is there any sense of a lessening of attention or waiting for the political process to come to a resolution that would make this a more complicated or a more delayed kind of discussion?

KIMMITT:  This meaning the investment discussion?

PRINCE:  Yes, yeah.

KIMMITT:  I think I haven't seen that at all in the investment area, not least because we have investment decisions being made every day and review decisions being made every day.  Foreign direct investment in 2006 rose to $161 billion, the highest since 2006.  So investors still want to invest in this great economy; and therefore, I don't think they can wait until January of 2009.  And frankly, I think that their governments, when it comes to investment policy, recognizing the centrality of the U.S. markets, are always open to engagement with us.  This is not the first time that I've served in the last couple of years in the administration.  I was in the last two years of the second Reagan term, also at the Treasury Department in your former profession as a lawyer.  During that time, we did the -- (inaudible).  We got tax reform.  And we also passed the first major bilateral free trade agreement with Canada, negotiated in '87, passed in '88.  So I think particularly in the areas of foreign policy, including foreign economic policy, there's still a recognition overseas that the president and the administration are retaining considerable, inherent authority.  It has not been an inhibitor on what we've been trying to do at the Treasury Department.  But I'm not saying it's not a factor more broadly, including perhaps in my former place of employ at the State Department and so forth.  It requires creativity.  It requires initiative.  But at the end of the day, it's hard to think of any major development in the world, whether it be in the political, security or economic area, that it is not going to involve the United States in some fashion.

PRINCE:  All right.  Well, at this time, let me invite the members present to join in this dialogue.  And a couple of ground rules, please.  First, please wait for the microphone.  And it says speak directly into it.  If I have to tell you to speak into the microphone, you shouldn't be here.  Please stand, state your name and affiliation, and please, please, please limit yourself to one question and keep it concise so that as many people as possible can speak. 

Yes, sir. 

QUESTIONER:  Herbert Levin.  Could you please describe for us the operation of these funds?  Do they have the money abroad and they give it to Lehman Brothers to invest?  Do they open an office here and do it all themselves?  Is there any pattern?  How have they operated?  Do you see some methods of operation more problematic than others?

KIMMITT:  It varies from fund to fund.  I would say the majority of the funds right now use professional fund managers to do quite a bit of their investment.  Some, however, do direct investment themselves, either minority positions in companies or sometimes actually buying majority control of assets.  I think one of the reasons that I mentioned it would be good for the IMF to look at issues like transparency is that I believe as these funds grow in size and have a potential for greater affect on the global economy, some additional transparency would be helpful.  And I think if you look at the Norway fund, for example, it's a good example of a fund that has been successful but has set a very good standard, both on governance transparency and other issues.

PRINCE:  Over on the far side here.

QUESTIONER:  Yes, I'm Jim Zirin from Sidley Austin, your former place of employment.

KIMMITT:  One of many.  (Laughs.)

QUESTIONER:  I wonder, do you suppose the administration and/or CFIUS would handle a Dubai Ports deal or a deal like that any differently from the way that it was in fact handled?  And if so, in what respect?

KIMMITT:  Sure.  I would say that the security review done by the security professionals in the Committee on Foreign Investment in the U.S. was done on a very sound basis.  Six departments and agencies, six White House offices were involved in that review.  You had, you know, 12 people signing off that they did not see a security concern.  Under the new law and indeed in procedures that we've put in place since Dubai Ports, the decision would not have stopped there.  They would have had to bring that up to get a political-level signoff, at least at the assistant secretary level.  And because in that case it was a state owned and controlled entity, it would have required a signoff at a higher level, secretary of deputy secretarial level.  So we would have elevated the approval process inside the administration.  That would have given us the opportunity to engage the Congress earlier on the issue.  But I don't think we would have had to engage the Congress on our own.  You will find that one of the lessons out of Dubai Ports is the companies are very quick to bring in both local politicians and key legislators into the process early on.  The same Dubai investment entity that had the problem in Dubai Ports has made subsequent successful acquisitions recognizing now that they need to spend roughly commensurate amounts of time on both ends of Pennsylvania Avenue, working both with the Congress and with the administration.

One of the restrictions that we had in early 2006 that remains today for good reason is that there are very strict limits on what we can do with the sensitive, proprietary information that we get from companies.  I have found as a general matter in my years of government, we're very good at protecting sensitive, company-proprietary information.  I wish sometimes we could be as good on classified information.  But we're very good about protecting company information.  And as a result, there is a real limit on what we can share with the Congress but no limit on what the company can share with the Congress.  And especially for new entrants into the CFIUS process now, one of the first things we do is suggest to them and their advisors that they make sure that they have an engagement process both at the Congress and with state and local officials.

So again, we would elevate it inside the administration.  We would engage to the extent that we could with the Congress.  But I think one of the real lessons learned by the companies is that they, too, need to engage beyond the executive branch.

PRINCE:  Just a follow up to that question, was there anything in the CFIUS legislation that was finally passed and signed that you wished had gotten in that didn't get in, in terms of the effectiveness of the process going forward?

KIMMITT:  No, at the end, the bill that was passed under the leadership of Barney Frank in the House, Spencer Bachus, Chris Dodd and Richard Shelby in the Senate, I think was a collaborative bipartisan effort.  And this was an area that needed collaboration and bipartisanship.  We now are going through the process of putting out regulations and implementing procedures.  There'll be some back and forth on that.  But I think the legislation struck just the right balance.

PRINCE:  Good.

Let's see, right here, please.

QUESTIONER:  Charles (Antoine Waters ?) from -- (inaudible) -- law firm.

We hear a lot about sovereign wealth because of the huge amount they have to invest.  But we also see a move in the assets that they're targeting.  So are they moving into more strategic assets?  And also, what would be your definition of what a strategic asset should be requiring a review of the committee?

KIMMITT:  The strategic asset approach is one that has been used by the French and is the approach laid out in the legislation before the Russian Duma at this point.  It's not an approach that we take.  Again, what we have is a committee made up of members from six departments and agencies, White House offices, each of whom brings to the table a particular perspective on that part of the national security equation for which they have responsibility.  We have some guidelines laid down in the law -- a particularly close look at energy assets, critical infrastructure, state owned and controlled -- but really it's that collegial approach that helps strike the right national security balance for that time and moment.  I don't think we're going to see this legislation revised again for years to come.  So one of the things I think the legislators did quite well is lessen flexibility.  So you'll see that we don't designate those strategic sectors.

As to what the sovereign wealth funds are doing -- and again, going back to the first question -- there are some who never take majority ownership and control.  There are others for whom that is the preferred preference.  It really varies from fund to fund.  I will tell you, in my discussions in China in July, although I was sitting across from government officials who were heading what was then going to be called the State Foreign Exchange Investment Company -- I think they're now going to call it the China Investment Company -- although these were government officials, I felt as though I was talking to professional asset managers across the table.  They made very clear that their goal was to generate higher returns without generating political controversy.  And that therefore, they were not looking to move into ownership or control stakes.  And if you take a look at some of the decisions that they've made since that time, they've been true to that philosophy.  So again, I think it will be up to each sovereign wealth fund remembering that each sovereign to make their own investment decision.  My recollection of the Norway fund that I mentioned is that they take no more than 5 percent in any one hold in any one company.  Again, there's a variance across the spectrum.

PRINCE:  Yes.

QUESTIONER:  John Beattie from UBS. 

For several years, there's been a prohibition on foreign airlines acquiring a majority share in U.S. domestic airlines.  This is for national security concerns.  I can understand why this would make sense in the case of aircraft manufacturers say, for example, Boeing, because they have access to sensitive technologies.  However, for airlines which are solely transporting passengers to and across the U.S., is there really a justifiable national security consideration?  And if so, is this outweighed by the significant potential benefits that accrue, for example, significant capital infusions from such foreign airlines?

KIMMITT:  Really good question.  If I could, I'd start by saying that there are surprisingly few statutory restrictions on foreign direct investment in the United States.  I would challenge someone to point out any country that has fewer statutory restrictions than we.  Media, which Steve would know well; airlines, you've pointed out; and there are some things on barge operators, nuclear power operators, but they're really relatively small in number.  You've pointed out one of them -- airlines.  We in the administration have taken the position that we don't think that that cap on foreign ownership is good policy.  But again, it's not policy, it's law; and therefore, we've been working with the Congress to try to modify that law. 

There have been some recent agreements, particularly the EU-U.S. air transport agreement, that have gone as far as the law would require.  I think there were some pledges by the U.S. in that agreement, although I was not the negotiator, to try to continue to see what flexibility we could get.  But that is one of the statutory bars.  There are national security arguments made, but there are a range of other arguments made.  But the administration on that one has been clear.  We think that cap should be lifted.  If there are national security considerations, we can review those on a case-by-case basis.  We don't think the absolute statutory bar is in the best economic interest of the U.S.

PRINCE:  Richard.

QUESTIONER:  My name is Richard Haass, and I work at the Council on Foreign Relations.

Bob, what's your thinking about a WTO-like institution here that would set up a rules-based system governing investment and a mechanism for adjudicating areas where governments or companies and governments disagree?  And might it not be a useful safeguard, either against congressionally imposed protectionism that you don't want to see or against either behavior by sovereign funds you don't want to see or protectionism in other countries that would block U.S.-origin direct investment?

KIMMITT:  As you've been doing for 20 years, you're sort of one step ahead of my thinking.  I think it's a very interesting idea.  But before we get there, we have to face the fact that investment right now sort of belongs to every agency at the U.S. government.  It belongs to many directorates inside the commission.  And as with any important topic that belongs to everybody, you don't get that concerted effort that you need.  And I think both in the U.S. government and in the international community, we have to start looking at investment, not as a subset of the trade issue, which is how it's been looked at before both for WTO but also for bilateral and multilateral trade agreement investment purposes.  I think it has some distinctive characteristics on its own.  I think we need to decide how best in the U.S. government to coordinate the efforts of Treasury, of Commerce, USTR and State, all of whom have important responsibilities in this area.

I was very pleased to see the excellent statement that came out of the G8 summit in Heiligendamm on this.  I think it's an area where before I get to your WTO suggestion I'd really want to see how far we could run it inside the OECD, because I think they've done some very good work on the investment side.  But I'd be open to finding ways both inside the U.S. and internationally to look at this subject on a more concerted, coordinated basis.

PRINCE:  Just to follow up, so many of the national laws around the world are draped in national security.  How would a WTO or an independent organization review square with the at least notional -- national security focus?

KIMMITT:  Well, I think as it does on trade and other issues, including if you take a look at the procedures inside the European Union and commission, there is a carve-out for national security, but there is an effort to make sure that it's a true carve-out and not an umbrella.  And so I think that Richard's suggestion was not to suggest that any sovereign was going to give up its national security responsibilities but rather to make sure that national security reviews were indeed national security reviews rather than broader investment reviews.

I remember meeting with President Reagan in '86, '87 before the Exxon-Florio Amendment passed in '88.  And initially, the proposal was to do investment reviews based on the national interest.  President Reagan said no way.  And then the proposal was how about economic interests of the U.S.  And he said no, foreign investment's good for the U.S.  And then finally, it was said let's look at the national security implications.  President Reagan said I'm a national security guy, of course we have to protect the national security.  That's an appropriate, narrow look.  And that's the way I think these regimes should be set up.  So I think you could actually move the direction that Richard's doing and have carve-outs not unlike the national security carve-outs that exist today.  I mean, I think it's -- again, I think it's an interesting proposition.

And the other thing I'd say, going back to the good question over here, the new law, as did the old law for CFIUS review, makes clear that CFIUS is a committee of last resort rather than first resort.  I mean, it is a very powerful authority because if the president blocks a deal, that blocking a deal is not reviewable in the courts.  It also makes clear that if somebody doesn't come before the committee and they should have, he can reach out, even after the deal has closed, and unwind it or modify it.  It's a very powerful authority and like any powerful authority should be used very carefully.  So the law makes quite clear that if Defense or State or Commerce with, say, export-control policy, the Department of Homeland Security or the Justice Department has existing authorities that they could use, not just antitrust laws but more broadly, to make sure that the investment is shaped the right way.  They should use those, and this CFIUS authority should be exceptional.  I think that would be a good model for others to look at, too.

PRINCE:  On the right and then over on the left.

Yes, sir.

QUESTIONER:  Thanks, Mr. Prince.  I'm -- (inaudible).  Mr. Kimmitt, I live in Dubai at the moment, and Dubai's been mentioned tonight, as was China.

This week, as you may be aware, there was a Dubai delegation in China, which was warmly welcomed.  And Dubai committed itself to all kinds of investment and committed itself to all kinds of investment in India among other things.  Two related questions -- one, to what degree are you actively looking for Middle East funds?  As you know, there is a surplus of petrodollars there right now, something estimated to be about half a trillion dollars.  And secondly, how would you compete with other economies -- such as India, for example, where I was born and raised, China, of course, Thailand and so on, Pakistan even -- which are competing for the same funds?  So what is your message to them?  That beyond investing in American debt, for example, what are the sectors of the American economy where you would actually want foreign direct investment?  Thank you. 

KIMMITT:  Sure.  First, we want to make clear not just that we're open to foreign investment but we have to actively seek foreign investment.  There was an initiative started in the Commerce Department this spring called Invest in America.  And the Commerce Department is now putting senior officials with their Foreign Commercial Service into embassies for the specific purpose of helping foreign investors look for opportunities in the United States.  In the past, most FCS, Foreign Commercial Service, people were helping U.S. companies abroad, and they'll still do that.  That's very important.  But recognizing the tremendous job-producing potential of foreign investment, Commerce is now recognizing that it needs to get out there to Dubai, to Beijing, to Delhi or Mumbai to compete for that capital. 

What I would say is we're looking at opportunities.  That is, U.S. companies are also looking at opportunities in China and India.  I hope both those economies will continue to open their markets to investment.  We're going to keep our market as open as we can.  We've never shied away from competition for investment dollars or other currencies.  So I think the short answer is we need to get out there and market our openness, help companies look for particular opportunities.  But we would expect them to look elsewhere.  And again, the more open those other markets are, including in China and India, not only does that create opportunities for investment in those countries, it creates opportunities for their companies, that is Chinese and Indian companies, as they look to invest here in the United States.

I might just go back to the point we very much welcome investment from around the world, including the Gulf States.  I've been to the Emirates several times for a number of reasons.  We've had some very good discussions with them about investment opportunities here.  As I mentioned, there was an acquisition by the same sovereign wealth fund involved in Dubai Ports just after Dubai Ports -- that is, within six months -- in which they bought a British company that had manufacturing facilities in the United States, including some who had sole-source contracts with the U.S. Defense Department.  That case went through, in large measure, because of what we had learned from Dubai Ports and the good work being done by the company both at the state level and at the federal level.

PRINCE:  Yes, sir.

QUESTIONER:  Thank you.  Sergio Galvis, Sullivan & Cromwell.

Bob, first of all, you were rightly noting the great work of Congress in getting the law right.  But I think it should also be recognized that you and the administration and Treasury under your leadership did a great job in making sure that the law didn't get written up in the wrong way.  It was a very good, collaborative effort, because it was in an environment where there could have been tendency to go too far, and that didn't happen.  So congratulations on that.

My question really relates to the positive collateral impact of foreign investment.  When we did the Argentine debt restructuring, one of the things that was most frustrating to bond holders was the fact that in a post-privatization world, the Argentines didn't have any assets in the United States.  To what extent do we measure the positive benefits, in terms of encouraging good, broader behavior by sovereigns, by virtue of the fact that they are exposed, if you will, through their investments in the U.S.?  And then secondly, to what extent does our open treatment of their investment discourage actions such as what we've seen recently in Bolivia and Venezuela of aggressive moves against our companies and after withdrawal from international dispute settlement arrangements like ICSID as a way of resolving those disputes?

KIMMITT:  Well, I think on that latter point, I think those countries are pursuing policies that run so counter to the economic rules of the road that have proved successful in all geographies, that they're very often hurting themselves in addition to, as you say, catching U.S. companies in the pinch.  There's a lot that we try to do to help the U.S. companies, directly and largely through our embassies and the multi-agency staffs who are there. 

But again, I think that, going back to the first part of your question, I think it's not just investment in the United States but it's investment throughout the world that sort of convinces sovereigns just as it would convince companies that it's important for them to adhere to rules that support principles as general but as important as free and fair trade, flexible exchange rates, free flow of capital across borders.  And although we in our national security review try to keep things fairly narrow, and therefore we've not considered, for example, a reciprocity a national security issue, every investment decision takes place in a broader political context. 

       And as the Chinese found out in the CNOOC case, Chinese National Overseas Oil Company which never came before CFIUS, you can run into troubles in the political sphere long before you come into the regulatory side.  So I think that even people who might pay some attention to the regulatory details have to remember that all of this takes place in a broader context.  I think people who run counter to that -- that is, try to seek great opportunity here, close down opportunity there or, as you say, have assets deployed around the world -- it would seem to me that teaches them the benefits of trying to play by these rules. 

Now, I may have missed the question a little bit, particularly on the debt restructuring side.  But again, I don't think any of the things you mention argue for us being more closed.  I think that open investment and investment flows have been a real trump card for us, and we should continue to try to encourage that.

PRINCE:  We have time for two or three more questions.  In the last row.

QUESTIONER:  David Braunschvig, Bear Stearns and Council on Foreign Relations.

You mentioned that reciprocity is not an issue to be considered when looking at investments from a security perspective.  But at the same time, when comparing negotiations on trade and investment, reciprocity is indeed a factor often in trade.  So particularly in the instance of sovereign wealth funds, wouldn't it be a consideration to examine a potential investment on the basis of the acceptability and relevance, the symmetrical, reciprocal investment in the country of origin?

KIMMITT:  Just to be clear, reciprocity is very important.  It's a major part of what we drive for in trade agreements generally, bilateral investments treaties in particular.  And it's a very, very important policy and political factor -- you are correct in saying.  My point only is that we have not brought reciprocity in to that sort of court of last resort -- that is, the CFIUS review process -- that looks at national security questions.  I might say that Europe is going a different direction.  In conversation that I had in Europe just last week, it's quite clear that reciprocity is going to be a major factor in the investment review legislation that is being considered there. 

So again, I think what I would say is we will continue to push for it.  We want a level playing field for you as companies.  But we do think the benefits of inbound investment are strong enough for the United States that even as we continue to push for reciprocity, if an investment makes sense here in the United States, we would probably view that positively and also as a way to give us leverage to try to open that sector in another country.

PRINCE:  Down here in front.

QUESTIONER:  Henny Sender from The Wall Street Journal.

I was in San Francisco on Friday at a San Francisco Federal Reserve conference.  And somebody from -- (inaudible) -- or what will become the China Investment Company was speaking.  And he said that -- he was very blunt, and he said the message from the U.S. Treasury was you are welcome to buy U.S. treasuries but not if it is as the expense of if you buy other things rather than U.S. treasuries.  I was also in Kuwait in July.  There is some concern there that their money is not welcome is they strayed from U.S. treasuries.  I wondered if you could comment on that disconnect.  Thank you.

KIMMITT:  Sure.  I think that shows why we need just to be at the Council on Foreign Relations in New York, but we need to be back in Beijing and in Kuwait City and elsewhere.  I certainly didn't get that message when I was in Beijing.  And also, it seems fairly inconsistent with the record of purchases that the Chinese have made here, like Lenovo buying the IBM personal computer business, other acquisitions the Chinese have made through the years, some of which have come through CFIUS, some of which have not.  Also, their Greenfield and other operations like Haier, their white goods manufacturer which has a good, very productive operation in South Carolina.  So again, certainly in the conversations that I had with the people, both directly involved in setting up the company and more broadly, I did get a sense from them, as I said, that they were looking for ways to generate returns without generating political controversy.  But certainly, we sent the message that investment from China was welcome.

Kuwait -- I find that a little bit unusual.  Kuwait's been an investor here.  It's been a sovereign fund holder for over four decades.  They have not done as many direct acquisitions as some of their neighboring countries.  They have tended to do it with partners or through private equity or otherwise.  But I've been with the head of both their sovereign wealth fund.  I've been with their Finance minister and others in the past six months.  It certainly wasn't, again, the impression that I got.  But to the extent you're hearing that, we take that seriously, and one of the reasons we hope people in this audience and elsewhere help us get the message out that we're quite open.  We have to make them understand that this new law will continue to provide, I think, very good opportunity for people to invest in the United States.  But at the same time, we'll never hesitate to protect our national security.

PRINCE:  Two more brief questions -- first, in front and then behind.

QUESTIONER:  Elizabeth Bramwell, Bramwell Capital.

I want to go back to national security and how the procedure actually works.  The reason for asking the question is that within the last year, a Russian company, Evraz, acquired Oregon Steel, roughly about a $2 billion deal.  And, you know, I really question having a Russian company buy an American steel company where there is proprietary technology -- in this case, large-scale diameter pipe -- and basically giving them access to trade shows and the overall community in which they exist.  And, you know, pipe of that kind is important for transporting oil from the oil sands in Canada.  So I guess I'd like to know, you know, how the public is really protected.  Because on the other hand, you have a company you're wanting to sell at a higher price, the shareholders wanting to sell.  You have the unions who are clamoring for jobs and, in this case, the Russians promised to rebuild a plant.  And then you get Congress involved, you get the executive branch involved.  How do you keep politics out of it?  And I guess, who really reviews these things objectively from a national security point of view?

KIMMITT:  Got it.  I can't go into particular details on cases beyond information, again, that the companies have put in the public domain.  But let me just say that the committee is made up of Treasury as the chair, the Defense Department, State Department, the Justice Department, the Commerce Department, the Department of Homeland Security and the National Security Council, the National Economic Council, the Office of Science and Technology Policy, the Council of Economic Advisers, Office of Management and Budget --

PRINCE:  That's all?

(Laughter.)

KIMMITT:  No, no, no, no, wait.  There's one more, and I'm going to get in trouble for forgetting them.  But that is sort of the statutory committee.  And then, depending on the matter, others -- Transportation on an airline issue, Energy can be brought in, Labor can be brought in on particular matters.  And essentially, the cases are notified by the parties as soon as we receive the notification, indeed often before if we've got enough detail.  It is sent immediately to the intelligence community.  The intelligence community by practice over the past seven years and now by law has to do an intelligence assessment on every acquisition to basically determine if there are any national security considerations that raise concern on the part of the intelligence community.  And that's the intelligence community as a group -- CIA but then all the other members of the intelligence community.  That information, together with the information from the companies, then goes to each of the representatives on the committee.  And then each of them does their internal agency work.  They meet, have discussions very often with the companies.  Companies are very often called in.  And if there are any issues that are identified, very often there is put together something called mitigation agreement.  So there might be some measures undertaken to have a U.S. subsidiary with an all-U.S. board, certain requirements on security clearances, things of this sort.

Again, I'm not going to any particular case.  But at the end of the day, each of the members of CFIUS is asked to put his or her name on the line that says we find no reason to believe that this case will adversely affect the national security.  I think it's a pretty thorough process that at the end asks someone to exercise the most important single responsibility they have as a government official, and that is to say that country will not be harmed by this going forward.  Again now, not only do we have the professional security people who have been doing this for decades, you have much closer involvement of the political appointees in the departments and agencies.  And then we notify the Congress immediately upon any decision that we have made.  And the companies usually have been in touch beforehand.

PRINCE:  One last question if it is very brief.  Brief? 

(Off mike commentary.)

Brief, yes.

QUESTIONER:  Brian O'Neill.

Mr. Secretary, in your opening remarks, you made reference to the four pending free trade agreements.  Could you give us an update and handicap the likelihood of passage of each?

KIMMITT:  Oh boy.

PRINCE:  Sorry.  You always take one too many questions. (Laughter.)

KIMMITT:  Yeah, I was going to say --

PRINCE:  Sorry.

KIMMITT:  I could keep my answer really brief.  We think all four trade agreements are important on the individual merits.  There are three from Latin America -- Panama, Colombia and Peru -- and then, of course, South Korea.  My recollection is that the process has begun on Peru.  Remember, these are still under the fast-track authority that expired but because they were concluded, it's moving according to a certain process.  I think the administration remains of the view that all four are in the economic interest of the United States.  We're going to pursue them.  And again, if history is any guide, even major trade agreements, like the U.S.-Canada trade agreement was -- the negotiations concluded actually this month 20 years ago, eventually went through the Congress.  It was a long battle.  There were many interests at play.  But I think we're committed to getting all four through as quickly as we can.  And I'll say that we've had very good working relationships with both the Trade subcommittees and then Finance and Ways and Means.  We've got some differences.  I think that good progress has been made.  I probably won't handicap it for you, but I'll say we're committed to getting all four through.

PRINCE:  Secretary Kimmitt, thank you very much for an illuminating -- it was very topical.

(Applause.)

And thank all of you for coming.  And again, I invite you to join us next Monday for Peter Mandelson.  (C) COPYRIGHT 2007, FEDERAL NEWS SERVICE, INC., 1000 VERMONT AVE.
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