Q  What was the thinking behind the Open Economies initiative and the reasons for making investment promotion a higher priority at the federal level?

A  We talk a lot about trade. And we should: trade is quite important. However, investment flows are significantly larger than trade flows and I think that we have to be vigilant about investment as well as trade, as one pursues open economies at home and abroad.

My view is that one of the most pernicious current trends in the world economy is rising investment protectionism. And yet, much more of the dialogue is about trade protectionism. We have to approach protectionism in many fora but we need to make clear that a global economy based on free trade, flexible exchange rates and the free flow of capital across borders is the one that is most likely to be successful. One is only going to have that free flow of capital across borders if one has open investment policies and the fewest possible barriers to investment, both in the US and abroad.

Q  Do you feel that there has been a rise in protectionist sentiment in the US and in Congress?

A  We have seen some signs of increased protectionist sentiment. However, particularly in the investment area, sometimes your readers and others might read too much into the attention given to the controversy over investment cases and miss the fact that the vast majority of cases in the US, that is cross-border investment cases, are approved quickly and quietly, and without controversy. In 2006, for example, there were, I believe, 1730 cross-border mergers and acquisitions (M&A) transactions of foreign companies acquiring US companies. Of those, only 113, 6%, came before the Committee on Foreign Investment in the United States (CFIUS) for a security review, and none of those was disapproved.

The impression that was created by cases like Dubai Ports World and China National Offshore Oil Corporation (CNOOC) is that the US is becoming more resistant to investment. In fact, the figures for 2006, which also resulted in an increase in FDI of more than $160bn (the highest figure since 2000), make it clear that we are still quite open to investment. Having said that, we know that perception is important.

That was one of the reasons why the president put out his open investment statement in May and why we have worked very hard at Congress to come up with a new CFIUS bill that will strike that very important balance between maintaining open investment and protecting national security.

Q  What is different about this new CFIUS legislation?

A  The old bill was written in 1988, not only pre-9/11 but pre-fall of the Berlin Wall. The new legislation updates the process for the new security realities that we face in the world of today. I would also like to think that it captures the improvements that we have made in the process since CNOOC and Dubai Ports World.

It also puts into statute many things that we already have instituted in regulation or in practice, for example, that the secretary of homeland security is made a member of the committee. We had done that by executive order, but it was good to do it by legislation. The Clinton administration had begun a practice of having potential investments reviewed by the intelligence community, as well as by the policy community. That requirement is now in the legislation.

The new law does make clear that state-owned and controlled investments are presumed to require a two-stage investigation, although it gives waiver authority to the secretary of the Treasury and me as deputy secretary to allow even state-owned and controlled cases to be cleared within the first 30 days. The new law also requires a particularly close look at critical infrastructure and sensitive technology. This requirement is not stated in a mandatory fashion that would require extended review, but it just makes it clear that Congress believes that these are areas that need to be looked at quite closely – in any case notified to the committee.

Lastly, the new legislation makes it clear what kind of reporting requirements to Congress there are – importantly, reporting to Congress once the case is closed, because when the case is pending it is quite important to protect the sensitive business information that we get from the companies.

Q  To what extent did the Dubai Ports World controversy damage the US reputation in terms of openness for investment? Was it handled properly?

A  Those are two questions. Certainly the perception out of Dubai Ports World was that we were becoming more resistant to investment. I think the reality and the perception were a little misaligned.

The people who did the review on Dubai Ports World did a very thorough security review. The mistake that was made was that the group did not inform their political superiors of the results of their security review in a fashion that would have allowed broader political dimensions to be brought into play, including consultation with Congress. Now our practice, which is also enshrined in the legislation, is that all cases, even those that are signed off in the initial 30-day period, require the signature of six political appointees, that is Senate confirmed officials from the Treasury, State, Defense, Justice, Homeland Security and Commerce. In the Dubai Ports World case, there were some, but not all, of those senior people involved.

Second, it is the responsibility of those people when they sign the approval on behalf of their department that they have briefed their upward chain of command, up to and including their secretary. We also have six White House officers who sit on the committee. They also have to be involved in the approval process, more by information than by voting because they would be the ones to take a case forward to the president, if required. Typically, they do not vote, but they play a very active role in the process. Therefore, there is voting by the six departmental members and engagement by the six White House officers at more senior levels.

I would like to make it clear that the CFIUS review will remain a security review, as made clear by the law. At the same time, though, we know that all investment takes place in a broader political context. In the Dubai Ports World case, the security review was done well; there could have been a better job done in the broader political context.

Q  Is there a role for the federal government to play in convincing Americans of the benefits of foreign investment?

A  Yes there is. I would also say that the US business and labour communities need to help promote the important fact that investment creates US jobs. There are now over five million FDI sponsored jobs in the US. Although that is only approximately 4% of our workforce, those five million jobs account for 10% of our capital investment, 15% of our annual research and development investment and 20% of our exports – and a full 30% of those jobs are in manufacturing, whereas less than 10% of the overall commerce is in manufacturing. These jobs also pay higher on average than comparable jobs by US-headquartered companies. These are very important jobs, and we think that openness to investment does have the benefit of producing jobs.

We also need to see foreign companies reaching out more to bring legislators to their facilities and to visit Washington a couple of times a year. This could perhaps be with their overseas leadership, together with US managers and workers, so that we draw that connection between direct investment and US jobs.

Q  What do you see as the biggest threats to the US’s FDI competitiveness?

A  I remain concerned over the mismatch between perception and reality. We need to do a thorough job of making sure that people understand exactly how our system operates.

It is also necessary to let countries abroad know that we hope they will join us in keeping barriers low. And we hope that they will join us in providing level playing fields for reciprocal opportunities for our companies in their countries, just as they would like us to provide opportunities for their companies in our economy.

Reciprocity is not an issue that CFIUS looks at as a security matter but in that broader political context, in which these decisions take place and that was discussed earlier, reciprocity is clearly an important factor. This is particularly so if it is a state-owned and controlled company looking to invest in the US. The broader political context would be influenced by whether the country owning the asset that was looking to make investment in the US would permit investments in those sectors in their home country. We have to keep our barriers low and put the message out to encourage others to keep theirs low.

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