As Prepared for Delivery
Thank you very much for taking time out of your busy day to join this roundtable. The fact that you are here means that you understand the importance of the economic relationship between the United States and China. It is a many-faceted relationship with significant implications for the citizens of both our countries.
Yet we must not take this remarkable economic relationship for granted. Indeed, in the wake of the recent financial crisis – which brought the global economy to the brink of collapse – it is more important than ever that we work together to promote sustainable growth and prosperity for our mutual benefit. Together, we must ensure a continuation of support for the policies that have promoted cross border open trade and investment, which have been fundamental for growth and prosperity in both our countries.
I would like to focus my remarks today on the importance of open investment policies -- in both countries -- in promoting sustained growth and mutual prosperity.
II. U.S. Policy (In Theory, and in Fact)
The United States, for its part, has maintained the same open investment policy for decades: we encourage foreign investment no matter where it originates. As President Obama recently reiterated, the United States welcomes investment from abroad. This includes investment from China.
The United States has always been a leading advocate of promoting cross border trade and investment, from all countries, because we recognize that it is vital to economic growth, job creation, and productivity. For example, U.S. subsidiaries of foreign-owned firms employ 5.3 million U.S. workers, almost five percent of the U.S. private sector workforce. In 2008, these firms spent $40 billion on research and development in the United States, reinvested $43 billion in their U.S. operations, and produced almost 20 percent of U.S. exports. It is clear that foreign investment is an essential component of American prosperity.
And foreign investors continue to view the United States as an attractive investment destination. Foreign direct investment flow into the United States in 2010 was $228 billion, by far the highest investment inflow in the world. This was an increase of 49 percent over 2009. The United States consistently ranks among the top five countries in surveys regarding global investment confidence, competitiveness, and business environment. Most recently, the United States was ranked fourth in this year’s release of the World Bank's "Ease of Doing Business" index.
Surveys show that Chinese investors, too, see the United States as an attractive destination for their outward investment. The 2011 “Survey on Current Conditions and Intention of Outbound Investment by Chinese Enterprises” ranks the United States as the second most open economy to foreign investment, behind Hong Kong. Foreign investors have responded by making investments where they believe that they will be welcomed and prosper. Their investments in the United States reflect the long-term fundamental strengths of our economy, irrespective of the near-term challenges we face. And this includes Chinese businesses.
Chinese direct investment in the United States is growing quickly, increasing eight-fold between 2005 and 2010 – from $700 million to $5.8 billion. This investment spans a broad array of economic sectors, including: financial services, oil and gas, clean energy, industrial manufacturing, telecom, healthcare, and media. Chinese firms are making important contributions to U.S. output and employment, and are valued members of the communities in which they invest, while at the same time growing their own business to the benefit of their shareholders.
Our policy and our record are clear: the United States welcomes foreign investment from all countries, including China. That said, the United States and China have a broad and complex relationship. There remains mistrust, particularly on military questions. And, as we have seen occasionally in both countries, when business deals just do not work out for purely commercial reasons, opponents of greater economic engagement will see conspiracies lurking in the shadows. In the United States, you will hear many voices in our public, unfettered policy debates. But we should not confuse fiction for fact, exceptions for the rule, criticisms of policy arguments with the actual policies, or the occasional deals that fall through with the reality that many, many more succeed.
III. The CFIUS Process
I must confess that, while I understand the motives of opponents of economic engagement, it frustrates me that – despite the extensive data on rising Chinese investment in the United States – we continue to read and hear so much skepticism in China about the United States’ commitment to open investment. Much of this comes from misconceptions and mischaracterizations about a few old transactions and about the role of the Committee on Foreign Investment in the United States, or CFIUS. As you no doubt know, CFIUS is the U.S. body, chaired by the U.S. Treasury Department, that has the job of reviewing certain foreign investments for potential national security concerns.
I would like to try to clear up these misconceptions by describing in some detail the CFIUS process – both what it is and, as importantly, what it isn't. I'll be emphasizing four core characteristics of the CFIUS process that clearly define its role as both complementary to and supportive of the U.S.’s open investment policy. These CFIUS characteristics are: its limited scope, efficiency, non-discrimination and transparency.
1. Limited Scope
First, in the United States, reviews of foreign investments have a very limited scope. The United States – like any country – has an obligation to protect its national security. National security obligations and openness to foreign investment are not at odds.
But, I cannot emphasize this strongly enough: CFIUS is careful to focus exclusively on national security. Unless a transaction presents a threat to U.S. national security, we not only permit it, we welcome it. CFIUS does not consider broader economic or policy concerns when reviewing foreign investments. In this respect, the United States stands apart from many other countries, both developed and developing, that operate more intrusive and broader investment review processes.
Moreover, by law, CFIUS may review only mergers, acquisitions, and takeovers that could result in foreign control of a U.S. business. So, for example, wholly passive minority stakes, greenfield investments, and land sales are not subject to CFIUS review.
CFIUS's transaction-by-transaction approach allows for a precise evaluation of potential national security threats and vulnerabilities. In those cases in which a transaction poses national security risks, CFIUS frequently is able to allow the deal to go forward by applying targeted mitigation rather than blocking the entire deal.
Second, CFIUS is committed to being as efficient as possible, and to imposing as little burden as possible on prospective investors. We do not want to impede transactions that pose no national security risk.
CFIUS operates essentially on a voluntary basis. Foreign investors are not required to notify CFIUS of their transactions, but instead decide themselves whether to file if they believe national security considerations might arise.
The vast majority of foreign investments from all countries, including China, do not raise national security concerns. And the vast majority of transactions that are submitted to CFIUS are cleared without any mitigation or conditions. From 2008 - 2010, out of the 313 transactions that CFIUS reviewed, only 16 cases – or 5 percent – resulted in the use of mitigation measures.
Of course, investors should carefully consider whether their transaction raises any national security concerns before completing a deal. While the process is voluntary, CFIUS has the authority to initiate a review of any transaction that may raise national security concerns. And while each transaction is reviewed on its unique facts, where potential national security concerns are present, consummating an acquisition before CFIUS reviews it may exacerbate those potential national security concerns and create less favorable conditions for review. In such cases, CFIUS has the authority, if warranted, to recommend to the President that the transaction be unwound, in whole or in part.
These cases, however, are rare. Most transactions complete the CFIUS process within 30 days, without requiring any mitigation. Most of those that proceed to an additional investigative phase of 45 days, are also cleared without mitigation. On the relatively few occasions that a foreign investment raises national security concerns, CFIUS works to resolve such concerns expeditiously. Often, concerns are adequately addressed outside of the CFIUS process, for example, through export control regulations or authorities to protect access to classified information.
On the whole, the CFIUS process is both shorter and less cumbersome than the foreign investment review processes in many other countries.
Third – and I want to emphasize this point – CFIUS does not discriminate among the countries of companies seeking to invest in the United States, nor amongst the sectors in which they would like to invest.
CFIUS applies the same rules to each transaction that it reviews, without regard to the investor's country of origin, including China. And CFIUS does not maintain a "sector list" or apply differential treatment to investments in some sectors. The United States welcomes investment in our entire economy. As the annual reports posted on the CFIUS website (www.treasury.gov/resource-center/international/Pages/Committee-on-Foreign-Investment-in-US.aspx) demonstrate, investments from many countries have successfully completed the CFIUS process, and they cover a broad spectrum of business sectors – ranging from energy to biotech and from public transportation to defense and aerospace.
The principle of non-discrimination extends to CFIUS's review of foreign government-controlled (FGC) transactions. CFIUS has a clear process for reviewing investments by companies controlled by foreign governments. As with all transactions reviewed by CFIUS, all but a very few of these government controlled transactions complete the process successfully, including investments from Chinese state-owned enterprises (SOEs). In reviewing government-controlled transactions, CFIUS considers only the facts and circumstances relevant to national security – the same as in purely private transactions. While the law contains a presumption that transactions involving foreign government control will proceed to the second-stage, 45 day, investigation, CFIUS can overcome this presumption if it determines that the transaction will not impair U.S. national security – and this is not an uncommon occurrence, even for Chinese SOEs. Even when there is an additional 45 day investigation period, the standard for CFIUS to conclude action is the same as it is for a purely private transaction: there are no unresolved national security concerns.
Fourth, and finally, CFIUS is a transparent process. The statute, executive order, regulations, and guidance setting forth the CFIUS process are fully and publicly disclosed on the CFIUS website. We encourage and welcome parties to approach us if they have any questions about the CFIUS process, to ask for our review of draft filings, or otherwise to consult with us prior to filing a formal notice of their transaction. While the CFIUS process is transparent, we take seriously our obligation to adhere to legal requirements to protect information that businesses want and expect the government to keep confidential. U.S. legal limits on our ability to speak publicly about individual cases is consistent with the desire of many companies, including Chinese companies, to come to CFIUS without public announcement or the disclosure of business confidential information.
In short, CFIUS is a transparent, efficient, non-discriminatory, and precisely circumscribed process, that is designed to remain true to the United States' open investment commitment. These core characteristics – transparency, efficiency, non-discrimination, and focus on national security – are there for a specific reason: to continue to encourage the foreign investment that is vital to our economic health.
IV. Chinese Policy
While every country, including the United States, has some restrictions on certain kinds of investment, there are no countries in the G-20 that have such pervasive limits on foreign investment in so many sectors as China.
As U.S. Ambassador Gary Locke recently noted, foreign businesses face substantial restrictions in participating in a variety of industries in China, ranging from health care to energy to financial services, among others. And in industries like mining, power generation, and transportation, the Chinese government effectively shuts out foreign competition altogether. Lack of adequate protection of intellectual property also remains a major concern of foreign investors.
Moreover, there remain significant questions, in the United States and other countries, about the extent to which Chinese SOEs operate on commercial considerations. Chinese SOEs could address these concerns in part through much greater transparency about their corporate governance.
And based on initial impressions, the concerns of foreign businesses are rising as China begins to implement a new national security review process. We have found in our experience with CFIUS that an efficient, transparent, non-discriminatory review process, focused narrowly on national security concerns, is best suited to protect national security while allowing the foreign investment that all modern economies need to thrive. We strongly encourage China to adopt a similar approach.
It is clear that foreign investment brings significant benefits to each economy. An open investment environment is essential to secure these benefits, and continue the global growth and prosperity of the last half-century.
The importance of investment to both our economies continues to be a focus of our bilateral dialogues, including in particular the Strategic and Economic Dialogue (S&ED) and the U.S.-China Investment Forum. These gatherings give senior government officials from both countries the opportunity to engage in frank discussions of issues and concerns. And last year’s Investment Forum included, for the first time, the very constructive participation of both private investors and representatives from sub-national governments.
The United States remains fully committed to our open investment policy, and we look forward to China's continued openness. Together – through our ongoing dialogues and cooperation – we can make important progress toward achieving sustainable growth and mutual prosperity.