Congress and the Administration Should Not Overreact to Limit Foreign Direct Investment in the U.S.

July 25, 2006—Responding to recently proposed Congressional legislation in the wake of the Dubai Ports World (DPW) controversy, a new Council Special Report argues that the “Committee on Foreign Investment in the United States (CFIUS) has proved to be—and continues to be—an effective tool for vetting the national security concerns associated with foreign investment. If Congress fails to achieve the right balance, U.S. companies and workers could feel the repercussions for years to come.”

Recent public attention on CFIUS’s approval of the DPW acquisition of several U.S. port operations has motivated Congress to reform the CFIUS review process. The report urges that when considering changes, Congress should balance the “twin objectives of maintaining openness to foreign investment and protecting national security.” However, this must be done without creating “restrictive foreign investment climate marked by unnecessarily cumbersome regulatory reviews,” that may motivate other countries to follow suit, adversely affecting U.S. investments abroad.

“The critical issue for policymakers debating CFIUS reform is as follows: How do you design an investment review mechanism that is rigorous enough to identify—and if necessary block—those transactions that truly threaten U.S. national security interests while not impeding those investments that do not?” says the report.

Foreign Investment and National Security: Getting the Balance Right, authored by economists Alan P. Larson and David M. Marchick of Covington & Burling, is part of the Bernard and Irene Schwartz Series on American Competitiveness and produced by the Council’s Maurice R. Greenberg Center for Geoeconomic Studies.

The report identifies three main problems with the current CFIUS process and three new security and economic challenges that “have combined to create a volatile mix of politics surrounding some CFIUS cases” and made reform necessary. The problems identified are lack of transparency and accountability to Congress; the unclear role of the president in a process grounded in national security; and the unlevel playing field CFIUS creates for foreign investors. The challenges identified are the post 9/11 security environment; changing public perceptions toward foreign investment; and concerns over energy security.

Larson and Marchick make recommendations for CFIUS reform legislation and how the administration can reassure foreign investors of U.S. openness and address growing anxieties in other countries.

Legislation reforming CFIUS should:

• Improve transparency and clarify the oversight role of Congress.

“CFIUS agencies should issue regular reports to Congress” and “should spend more time on the Hill briefing members of the relevant committees on their activities, processes, and trends in filings.”

• Retain the existing timetables for review and investigation.

“CFIUS should have the discretion to focus intensively on those transactions that raise real national security issues while expeditiously processing transactions that do not.”

Legislation reforming CFIUS should NOT:

• Incorporate “economic security” criteria.

“There is good reason to believe that an ‘economic security’ test would simply become a vehicle for domestic industries seeking to block foreign competition.”

• Allow Congress to force an investigation or to override a presidential approval of a particular transaction.

“Congress has a legitimate and important oversight role...but Congress should not itself become a regulatory agency.”

• Create a presumption that foreign investments in critical infrastructure create a national security risk.

“The administration and Congress should work together to determine how best to protect critical infrastructure, regardless of who owns a particular company.”

• Remove Treasury from the chairmanship of CFIUS.

“A change of chairmanship (i.e., to the NSC) would result in a period of disruption and disorganization that would be as likely to weaken as to strengthen national security.”

“The administration and Congress also need to recognize and explain to the American public that, in many instances, greater homeland security depends on greater cooperation with foreign firms, not less.” Continued significant investment of both U.S. and foreign companies in the United States and abroad helps to foster multilateral cooperation on issues important to U.S. national security, such as international air travel, port security, and energy consumption, the report concludes.

Contact: CFR Communications, [email protected]; 212-434-9888