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    "title": "Foreign Investment in the U.S. (2)",
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    "ocrText": "The original documents are located in Box B48, folder \"Foreign Investment in the U.S. (2)\"\nof the Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.\nCopyright Notice\nThe copyright law of the United States (Title 17, United States Code) governs the making of\nphotocopies or other reproductions of copyrighted material. Dr. Burns donated to the United States\nof America his copyrights in all of his unpublished writings in National Archives collections.\nWorks prepared by U.S. Government employees as part of their official duties are in the public\ndomain. The copyrights to materials written by other individuals or organizations are presumed to\nremain with them. If you think any of the information displayed in the PDF is subject to a valid\ncopyright claim, please contact the Gerald R. Ford Presidential Library.\nNATIONAL ARCHIVES AND RECORDS SERVICE\nWITHDRAWAL SHEET (PRESIDENTIAL LIBRARIES)\nFORM OF\nCORRESPONDENTS OR TITLE\nDATE\nRESTRICTION\nDOCUMENT\n1. memo case, Bennett to Burns, 2/19/75\nla. memo\nForeign Investment in the United States - Summary of [2/75]\nA\nIssues and Background (7 pp. )\nopened 9/10/09\nlb. memo\nOptions for U.S. Policy on Foreign Investment in the\n2/18/75\nA\nUnited States (24 pp. )\nopened 9/10/09\nle. memo\nre Probable Foreign Reaction to U.S Actions (5 pp. ) 2/18/75\nA\npened 9/10/09\nld. report\nre OPEC Finances (12 pp. )\n1/29/75\nA\nle minutes\nextract from minutes of CIEP Executive Committee\n12/21/73\nA\nMeeting (1 p. ) opened 9/10/09\nlf. minutes\nextract from minutes of CIEP Executive Committee\n5/22/74\nA\nMeeting (1 p.) opened 9/10/09\nlg. memo\nU.S. Policy and Objectives on International Invest-\n[5/74]\nA\nment (9 pp. )\nopened 9/20/09\nFILE LOCATION\nArthur Burns Papers\nSR\nFederal Reserve Board Subject File, Box B48\n4/20/84\nForeign Investment in the U.S. (2)\nRESTRICTION CODES\n(A) Closed by Executive Order 12065 governing access to national security information.\n(B) Closed by statute or by the agency which originated the document.\n(C) Closed in accordance with restrictions contained in the donor's deed of gift.\nGENERAL SERVICES ADMINISTRATION\nGSA FORM 7122 (REV. 1-81)\nTREASURY\nHE UNDER SECRETARY OF THE TRE SURY\nFOR MONETARY AFFAIRS\nWASHINGTON, D.C. 20220\nFebruary 19, 1975\nMEMORANDUM FOR THE HONORABLE ARTHUR F. BURNS\nCHAIRMAN, BOARD OF GOVERNORS\nFEDERAL RESERVE SYSTEM\nAttached are two sets of the option and\nbackground papers for the meeting next Monday\non U. S. policy on Foreign Investment in the\nUnited States.\nThe meeting, which is scheduled for\nFebruary 24, at 10:30 a.m., will be held in\nthe Roosevelt Room at the White House.\nJack Jack F. Bennett Bennett\nAttachments\nFORD i LIBRARY 936670\nFREASURY\nTHE UNDER SECRETARY OF THE TREASURY\nFOR MONETARY AFFAIRS\nWASHINGTON, D.C. 20220\nFebruary 14, 1975\nMEMORANDUM FOR THE HONORABLE ARTHUR F. BURNS\nCHAIRMAN, BOARD OF GOVERNORS\nFEDERAL RESERVE SYSTEM\nSecretary Simon and General Scowcroft have asked\nthat I attempt to arrange a meeting at which options\nand a possible recommendation for the President may be\nconsidered for future U.S. policy on foreign invest-\nment in the United States. This meeting has been\nscheduled for 10:30 AM Monday, February 24, and will\nprobably last from an hour to an hour and a half. It\nhas been suggested that each department limit its\nattendance to a principal plus one. I know that\nSecretary Simon and General Scowcroft would be grateful\nif you could personally attend.\nAn interagency committee has prepared a set of\noptions and background papers for your consideration\nand these will be circulated promptly.\nThe place of the meeting will be announced later.\nIn due course, I would be grateful if your office\ncould inform my office on 964 - 5847 of those who are\nexpected to attend.\nJack F. Bennett\nAFB.\nTed B1\nFORD is GERALO LIBRARY\nCONFIDENTIAL ATTACHMENT\nForeign Investment in the United States:\nPolicy Review\nContents\nSummary of Issues and Background\nTab A.\nOptions for U.S. Policy on Foreign Investment\nin the United States.\nTab B.\nSurvey of Laws and Regulations on Foreign\nInvestment and Safeguards Against Undesirable\nBehavior by Foreign Investors\nTab C.\nGeneral Benefits and Costs of Foreign Investment in\nthe United States.\nTab D.\nProbable Foreign Reaction to New U.S. Restraints\nand Possible Impact of Restraints on International\nNegotiations\nTab E.\nOPEC Financial Accumulations:\n1. A Survey of Projections of OPEC\nFinancial Accumulations.\n2. OPEC Accumulations as a Proportion of\nFinancial Markets in 1980.\nTab. F.\nPrevious Statements of U.S. Policy on Foreign\nInvestment:\n1. Guidance for Administration Witnesses\nWho Testify Concerning Foreign Direct\nInvestment in the U.S., December 21, 1973\n2. U.S. Policy and Objectives on International\nInvestment, May 22, 1974.\nCONFIDENTIAL ATTACHMENT\nGERALD FORD GERART\nCONFIDENTIAL ATTACH NT\nForeign Investment in the United States:\nPolicy Review\nContents\nSummary of Issues and Background\nTab A.\nOptions for U.S. Policy on Foreign Investment\nin the United States.\nTab B.\nSurvey of Laws and Regulations on Foreign\nInvestment and Safeguards Against Undesirable\nBehavior by Foreign Investors\nTab C.\nGeneral Benefits and Costs of Foreign Investment in\nthe United States.\nTab D.\nProbable Foreign Reaction to New U.S. Restraints\nand Possible Impact of Restraints on International\nNegotiations\nTab E.\nOPEC Financial Accumulations:\n1. A Survey of Projections of OPEC\nFinancial Accumulations.\n2. OPEC Accumulations as a Proportion of\nFinancial Markets in 1980.\nTab. F.\nPrevious Statements of U.S. Policy on Foreign\nInvestment:\n1.\nGuidance for Administration Witnesses\nWho Testify Concerning Foreign Direct\nInvestment in the U.S., December 21, 1973\n2. U.S. Policy and Objectives on International\nInvestment, May 22, 1974.\nCONFIDENTIAL ATTACHMENT\nFORD & LIBRARY GERALD\nCONFIDENTIAL\nForeign Investment in the United States\nSummary of Issues and Background\nThe Problem\nThe United States has traditionally followed a policy\nof freely admitting foreign investment to the United States,\noffering no special incentives and, with a minimum of\ngovernment intervention to protect national security and\nother essential interests, imposing no special barriers to\nforeign investors. This policy has been based on the belief\nthat U.S. interests are best served by permitting the free\nflow of capital across borders in response to market forces.\nThe recent large accumulations of funds by oil-producing\ncountries, coupled with the fact that these accumulations are\nmainly in official rather than private hands, adds a new\nelement to international investment. For example, investments\nby foreign governments raise the issue of political motivation.\nMoreover, an array of investments made by a government are\nsubject to coordinated control to a degree that does not\narise in the case of similar investments made by unrelated\nprivate investors within a particular country. Concern has\nbeen expressed in the Congress and by the U.S. public over\nthe adequacy of our controls on foreign investment to protect\nagainst abuses by foreign investors.\nIn light of these developments, should the U.S. Govern-\nment modify its existing policy (1) toward inward foreign\ninvestment or (2) toward inward investment by official foreign\ninvestors?\nKey Issues\n1. Is it likely that the funds that OPEC will have in the\nUnited States will be of sufficient magnitude to create the\nrisk that OPEC investors might have a pervasive effect on our\nforeign or domestic policies or our attitudes?\n2. Irrespective of the potential magnitude, are existing\nsafeguards adequate to protect against undesirable behavior\nby foreign investors or undesirable foreign investment, for\nexample concentrated in particular industries, especially in\nareas of national security or essential national interest?\n3. Should official foreign invèstment, particularly from -OPEC\ncountries, give rise to more concern than private foreign\nincestment?\nDECLASSIFIED\nAUTHORITY Treasury the 8/22/06\nGERALD FORD LIBRARY\nCONFIDENTIAL\nBY lab NARA, DATE 9/10/209\nCONFIDENTIAL\n- 2 -\n4. As there are proposals before the Congress to restrict\ninward foreign investment, should the Executive Branch make a\npreemptive move in order to head off unduly restrictive\nlegislation?\n5. What are the chances that the Congress would amend any\nAdministration requests for legislation on foreign investment\nin a manner that would be unacceptable to the Administration?\n6. Would it be preferable to delay any decisions until we\nhave a better feel for the magnitude and timing of OPEC invest-\nment in this country and Congressional and public reaction to it?\n7. Is a prompt decision desirable to reduce uncertainty here\nand abroad regarding U.S. policy on foreign investment in this\ncountry?\n8. Would new U.S. restrictions on inward foreign investment\nresult in (a) further restrictions by foreign governments on\nU.S. investment overseas, and/or (b) restrictions by other\ncountries on OPEC long-term investments that would have the\neffect of keeping OPEC funds in short-term instruments,\nthereby adding to the uncertainties of the international financial\nsystem, and/or (c) a reduction in oil production?\n9. Is there a risk that a change in U.S. policy on inward\nforeign investment might deter desirable investment or cause\nforeigners to sell off their holdings of U.S. securities?\n10. To what extent would a more restrictive policy be incon-\nsistent with FCN treaty obligations and other international\nagreements?\nBasic Options\nAfter an extensive review of current U.S. laws and\nregulations relating to business activities and foreign in-\nvestment in the U.S. economy, and bearing in mind the economic\nand political implications of the OPEC surpluses, the following\nfour options have been developed to facilitiate consideration\nof future U.S. policy with respect to such investment:\n1. Maintain existing policy and improve implementation by\nexecutive action, including the handling of problems of foreign\ngovernment investment on a bilateral government-to-government\nbasis.\nCONFIDENTIAL\nGERALD FORD LIBRARY\nCONFIDENTIAL\n- 3 -\n2. Seek new legislation to improve reporting requirements\nand strengthen existing powers to prevent abuses.\n3. Seek legislation to require screening of\n(a) all foreign investment in key industries, or\nGERALD R. FORD LIBRARA\n(b) all official foreign investment, or\n(c) all official foreign investment in key industries.\n4. Seek legislation to establish percentage ceilings on\nofficial foreign investment, possibly combined with legislative\nauthorization for special investment funds for foreign govern-\nments.\nMore detailed discussion of the options is at Tab A.\nBackground\nU.S. policy has been based on the belief that foreign\ninvestment in the United States contributes to the dynamism\nof the American economy by stimulating competition, and govern-\nment intervention has been kept to the minimum necessary to\nprotect national security and other essential interests.\nAttached at Tab F are papers approved by the CIEP Executive\nCommittee in December 1973 and May 1974, which give a further\nstatement of this policy and put it in the context of inter-\nnational investment reform. These papers, however, did not\ntake account of the full implications of the financial\naccumulations of the OPEC countries.\nAt the end of 1973, the book value of foreign direct\ninvestment in the United States was $17.7 billion and the market\nvalue of foreign portfolio investment in U.S. corporate securities\nwas $36.8 billion. (The comparable figures for U.S. investment\nabroad are $107 billion and $25.2 billion respectively.)\nAlthough full data for 1974 are not yet available, it appears\nthat OPEC direct and private portfolio investment in the\nUnited States was less than $1 billion. Nevertheless, the\npotential that the OPEC countries have for foreign investment\nmakes it essential that the United States have the means to\nobtain adequate, timely information on foreign investment in\nthis country and adequate means to protect itself against\ninvestment which is inimical to our national interest.\nPresent reporting requirements of various Federal agéncies\nproduce substantial information on foreign investment in this\ncountry. The major information collectors are the Commerce\nDepartment (on direct investment), the Treasury Department\nCONFIDENTIAL\nCONFIDENTIAL\n- 4 -\n(on portfolio investment) and the Securities and Exchange\nCommission (on acquisitions of more than 5 percent of the\nstock of a company whose securities are publicly traded).\nOther regulatory agencies and the Department of Defense\nalso collect information on foreign investment in U.S.\ncompanies subject to regulation by them. Moreover, the\nbenchmark surveys being undertaken by the Commerce and\nTreasury Departments will yield summary results by October\n1975 and comprehensive data by April 1976 on inward long-\nterm foreign investment as of the end of 1974.\nThe important gaps in information available to policy\nmakers result from their inability to obtain data on specific\ntransactions. Although the Commerce Department obtains data\non direct investment in this country, it is constrained by\ncurrent laws and procedures from disclosing this information\nto other Federal Government agencies. Also, the SEC obtains\ninformation only on transactions in the shares of publicly\ntraded and registered corporations. Difficulty in tracing\nbeneficial owners may be an important information gap. The\nSEC is presently inquiring into this issue, among others, and\nmay recommend changes in legislation or practice.\nThe bills introduced in the 93rd Congress give an indica-\ntion of what might be expected in the current Congress. They\nfell in four broad categories: Proposals to (1) establish\npercentage limitations on foreign ownership of any U.S. enter-\nprise or U.S. firm in certain industries, or debt participation,\n(2) establish an agency to collect information on foreign\nparticipation in the ownership of U.S. firms and require\nU.S. firms to report foreign ownership, (3) require advance\nnotice of purchase of an interest in a publicly held U.S. firm\nand permit the Government to act in advance to block undesirable\nacquisitions, and (4) restrain foreign firms from doing business\nin the United States.\nProposed legislation in some of these categories has\nalready been introduced in the 94th Congress. Senator Williams\nhas sponsored legislation that would inter alia require\n(1) disclosure of beneficial ownership, (2) issuers of\nregistered securities to file with the SEC the names and\nnationalities of all foreign owners of their equity securities\nand (3) foreign investors to file 30 days in advance confidential\nstatements on tender offers to acquire five percent or more\nof the equity securities of a U.S. company. The Williams bill\nwould also permit the President to review and prohibit tender\nBERALD FORD LIBRARY\nCONFIDENTIAL\nCONFIDENTIAL\n- 5 -\noffers during the 30-day period, and the SEC, the Attorney\nGeneral, or any U.S. corporation in which a foreigner had\nacquired an interest, or any shareholder of such corporation,\nwould be authorized to sue in a U.S. court to unwind a trans-\naction. Senator Hugh Scott has introduced a bill that would\nrequire any foreign investor or his agent to submit quarterly\nreports to the Commerce Department on investments of 0.5 per-\ncent in any U.S. firm worth more than $10,000. Representatives\nFish and Roe have introduced identical bills to establish a\nJoint Congressional Committee on foreign investment in this\ncountry and a National Foreign Investment Control Commission\nwhich would control foreign investment and, possibly, be\ngiven authority to require divestiture. Representative\nStark has proposed legislation to prevent foreigners from\nowning more than one U.S. bank.\nTo forestall the possibility of foreign investment that\nmight be harmful to national security or other essential\ninterests, a number of Federal laws, regulations, and\nadministrative practices currently ban or severely limit\nforeign investment in certain industries, such as atomic\nGERALD\nLIBRARY\nenergy, aviation, shipping, and communications. Defense\nDepartment regulations act as an inhibition on\nforeign acquisition of any firm that does classified work\nfor the Government in that such acquisition could cause the\nfirm to lose defense contracts. Moreover, a number of Federal\nand state laws and regulations assure that economic activities\nof companies, irrespective of ownership, are consistent with\nnational and/or community interests. Some of the more\nimportant of these are antitrust laws, export controls, SEC\nlaws, the National Labor Relations Act and state laws giving\ncertain protections to minority shareholders against majority\nshareholders. In addition, the Federal Government has broad\npowers--in the Defense Production Act, the Selective Service\nAct, and the Trading With the Enemy Act, the latter of which\nis only available in a national emergency declared by the\nPresident-- to control and regulate the activities of companies\nin the interest of national security and to deny access to\ndefense secrets by any firm under foreign ownership, control\nor influence.\nThus it may be argued that a variety of laws,\nregulations, and administrative practices generally protect\nagainst the possibility of foreign investors abusing their\nposition in this country. However, it may be asked whether\nexisting laws are adequate to deal with politically motivated\ninvestments or with the political influence that foreign.\ngovernments might gain from the holding of controlling interest\nin a number of important U.S. firms. The issue is posed by\nthe fact that most OPEC investment is official rather than\nprivate.\nCONFIDENTIAL\nCONFIDENTIAL\n- 6, -\nThe paper at Tab B is a more detailed discussion of\nthe disclosure requirements on foreign investment in this\ncountry and the safeguards against unwanted foreign invest-\nment.\nAt the macroeconomic level, the basic case for freedom\nof capital flows into the United States is the same as the\nbasic case for a free enterprise economy. The general\npresumption is that market behavior motivated by self-interest\nwill lead to socially desirable outcomes and a more efficient\nallocation of resources. For the period immediately ahead,\noil-producer investment funds can be an important new source\nof funds to finance the capital requirements in the private\nsector and presumably will result in an increase in capital\nFORD\nformation over what otherwise would occur. The outflow of\ndividend and interest payments to foreign investors is\nmatched by an equivalent or greater increase in national\nGERALD\nLIBRARY\nincome as a result of the foreign capital. Moreover, the\nincreased competition can 'lead to innovation by foreign\nfirms, lower consumer prices, and increases in the quality\nof products. This effect can occur both from takeovers and\nacquisitions as well as new investment. The paper at Tab C\nis a more detailed discussion of these points.\nThere also exists the possibility of official\ninvestments being coordinated from abroad to hinder competition.\nAlso, the more important foreign official capital becomes in\nthe U.S. private sector, the more this sector is subject to\npotential control by foreign governments whose interests do\nnot necessarily coincide with those of the United States.\nForeign reaction to any change in U.S. policy on inward\nforeign investment will depend upon the severity of the change\nand the nature of the country. A mandatory registration\nprocedure and disclosure would probably bring no reaction\nfrom other OECD countries or less-developed countries. If\nOPEC countries thought that registration and disclosure\nrepresented a fundamental shift in the U.S. investment\nclimate, they might be concerned; however, they would also\nrecognize that, even with these requirements, the United\nStates would still be one of the least restrictive places\nfor OPEC investment. Screening or added restrictions could\nproduce a more negative reaction, and inhibit OPEC countries\nfrom making some investments, but this possibility would be\nreduced if the restrictions were limited to a few sectors.\nNew U.S. restrictions, particularly if they exceeded\nthe restrictions of other OECD countries or violated FCN\ntreaty obligations, could become an issue with other OECD\ncountries, have a negative effect on our efforts in the\nOECD to maintain liberal policies toward foreign investment,\nand in general encourage other countries to adopt restrictive\ninvestment policies. The treaty problem, in particular, will\nCONFIDENTIAL\nCONFIDENTIAL\n- 7 -\nhave to be given careful consideration. (An explanation of our\nFCN treaties is given in the second appendix at Tab A.\nAs non-OPEC, less-developed countries have insignificant\ninvestment in this country and already follow fairly restrictive\npolicies toward foreign investment, moderate new U.S. restrictions\nprobably would not result in retaliation against our investments,\nbut they might diminish the credibility of our\nsupport of freedom of capital flows and make more difficult\nour efforts in the United Nations and other international\norganizations, and in bilateral negotiation's, to limit the\nspread of economic nationalism. (The possible foreign reaction\nis discussed in greater detail in the paper at Tab D.)\nEstimates of the magnitude of funds which will be available\nto OPEC countries for investment in this country and elsewhere\nvary widely depending on the assumptions one makes regarding a\nnumber of uncertain variables such as: (1) inflation, (2) the\nabsorptive capacity of oil-producing countries (3) the price of\noil, (4) the return on OPEC investments and (5) the distribu-\ntion among OPEC countries of any production cutbacks undertaken\nto maintain oil prices. Most recent projections suggest OPEC\naccumulations are likely to be in the range of $200-300 billion\nin 1980, and the 1985 total may be somewhat less than in 1980.\nCurrent estimates are generally below those being made\n6-8 months ago. However, while the exact amount is uncertain,\nOPEC investable surpluses will clearly be very large.\nIf OPEC financial accumulations were assumed to be\n$250 billion in 1980, they would be on the order of seven\npercent of the total value of the OECD and other major inter-\nnational financial markets. If OPEC countries invested\n20 percent of their total financial accumulations in the United\nStates, this would amount to 1.5-2.0 percent of all U.S.\nfinancial assets. It should be noted that even with funds\nequal to one percent or less of the value of our financial\nmarkets, oil producers could buy controlling interests in many\nfirms that might be considered sensitive.\nThe first attachment at Tab E is a paper which compares\nthe various current estimates on OPEC financial accumulations\nby 1980, and the second paper at this Tab is a discussion of\nOPEC accumulations as a proportion of financial markets in 1980.\ni\nFORD\nCONFIDENTIAL\nGERALD\nLIBRARY\nis\nFORD\nGERALD\nLIBRARY\nFebruary 18, 1975\nOptions for U.S. Policy\nOn Foreign Investment in the United States\nAfter an extensive review of U.S. laws and regulations\nrelating to business activities and foreign investment, and\nbearing in mind the econmic and political implications of large\nOPEC surpluses, four options, which are discussed below, have\nbeen developed to facilitate consideration of future U.S.\npolicy with respect to such investment. The proposed options\ndistinguish between official and private foreign investment\nand between choices that may be adopted by the Executive\nBranch or require legislation. The first three options are\npresented in an order representing increasing U.S. Government\nintervention. The fourth option represents a more specific\nlimitation, but it applies to official foreign investment\nonly.\nTHE\nDECLASSIFIED\nAUTHORITY Masuryth 8/22/06; statiguiation\nFORD & GERALD LIBRARY\nBY labr NARA, DATE 9/10/09\nCONFIDENTI\n- 2 -\nGERALD R. FORD LIBRARY\nOption 1 - Maintain existing policy and improve implementation\nby executive action, including the handling of problems of\nforeign government investment on a bilateral government-to-\ngovernment basis.\nThis option would maintain our traditional open door\npolicy and rely on existing restrictions and controls to regulate\nforeign investment in the United States. It would, however,\nimprove implementation of our current policy by (1) making\nadministrative changes to expand our existing data gathering\nand dissemination capability; (2) enforcing more rigorously\nexisting laws and regulations to control the entry and\nactivities of foreign investors; and (3) creating a new office\nwithin the Executive Branch to serve as a focal point for\ngovernment activity with respect to foreign investment in the\nUnited States.\nWithin current authority the Administration could also deal\nwith official foreign investment on a bilateral government-to-\ngovernment basis, making use of the Joint Commissions whenever\npossible. The details could vary depending on the country, but\nthe essence would be for the investing government to define its\ninvestment goals and for us to note areas where investment is\nlegally permitted andindicate kinds of activity that would\ncause us problems. The arrangement might take the form of an\nagreement between the U.S. Government and the investing govern-\nment.\nAdvantages\n-- Utilizes powers the Administration has under existing\nlaws and does not require action by Congress, which might\noverreact and add unnecessary restrictions on foreign invest-\nment.\n-- Requires substantial current information (including\nidentity of beneficial owner) on all significant foreign\ninvestment in publicly-traded companies U.S. companies with\nmore than $1 million assets and more than 500 shareholders.\n-- Can be put into effect immediately whenever the\nPresident decides action is necessary.\n-- Adoption would give the Administration further time\nto evaluate the need for more drastic action.\n-- Consistent with our desire to create a free and open\neconomy and avoids new restrictions which could invite\nretaliation, violate FCN treaties and undercut our efforts\nin the OECD to encourage more liberal investment policies.\nCONF IDENTIAL\nCONFIDENTIAL\n- 3 -\n-- Treats substantial foreign government investment\nas a political/foreign policy matter particularly suitable\nfor government-to government negotiations.\n-- Enables USG to give informal guidance, which is a\ntype of screening of foreign investment.\n-- Minimizes the likelihood of possibly contentious\ninvestment.\n-- Provides umbrella for foreign government investment\nin the U.S.\n-- Provides advance notice of foreign investment and time\nby using existing legal and foreign policy tools.\nDisadvantages\n-- Existing confidentiality requirements would limit\ndisclosure of information on individual investors in areas\nnot covered by SEC.\n-- Congress may not be satisfied with a system which\nonly requires disclosure of the beneficial owners of publicly\ntraded companies.\n-- May not preclude Congressional action to enact new\nrestrictions and/or reporting requirements.\n-- Bilateral arrangements between the U.S. and investing\ngovernments may foster bilateralism.\n-- Bilateral arrangements would involve the U.S. Govern-\nment in the investment process which might make us subject to\ncharges of arbitrarily favoring certain types of investments.\n-- Consultation between the U.S. and the investing\ngovernments may not adequately protect against unwanted foreign\ninvestment.\n-- Existing laws and residual powers to control foreign\ninvestment may not be adequate to deal with foreign government\ninvestment which may be motivated by political objectives.\nCONFIDENTIAL\nGERALD FORD LIBRARY\nCONFIDENTIAL\n- 4 -\nDiscussion\nAdoption of this option is based on the assumption that\nour existing powers and recourse to bilateral consultations\nare adequate for the present to provide sufficient informa-\ntion on, and control of, foreign investment in the United\nStates.\nThe administrative changes in existing programs might\ninclude action by the SEC to (1) require specific identifica-\ntion on its report forms of the nationality of all foreign\nbeneficial owners; (2) compile and publish a list of foreign\nbeneficial owners; and (3) express its intention to impose\nall available sanctions (including the loss of voting rights)\non persons who violate its regulations. Commerce Depart-\nment (BEA) regulations require reports to be filed with\nrespect to every business enterprise in the United States\nwhen foreign participation exceeds $2 million and foreigners\nown an interest that exceeds 10 percent in such enterprise.\nHowever, confidentiality requirements prevent disclosure of\nany information re individual investors. Administrative\nchanges could be made to lower the percentage holding to\n5 percent and the $2 million exemption to a smaller figure.\nOur general laws to ensure against abuse of economic\npower and a series of laws dealing specifically with foreign\ninvestment give us substantial existing power to prevent\nforeign investors from acting contrary to our national interest.\nThis option would see that these laws were rigorously en-\nforced by centralizing watchdog responsibility with respect\nto violations of existing laws in a newly created office\nwhich would report periodically on the adequacy of existing\nprotections and controls.\nOther functions of the new office would be to obtain (to\nthe extent permitted by existing confidentiality requirements)\ndata on foreign investment from all departments and agencies\nactually collecting data; to explore the extent to which these\nconfidentiality requirements could be relaxed; and to prepare and\npublish periodic reports on foreign investment. The new\noffice could be created by Executive Order, accompanied by\na statement from the President or high Administration\nofficial outlining in detail the extent of our existing\nauthority and information.\nCONFIDENTANT\nGERALD FORD LIBRARY\nCONFIDENTIAL\n- 5 -\nBy centralizing information and publishing periodic\nreports on foreign investment, we could provide adequate\ninformation on significant non-government investment even\nthough there might be minor gaps as noted above. In\naddition, existing laws give us broad power to prevent\nmisuse of foreign investment motivated by purely economic\nconsiderations. Whether this is also adequate to handle OPEC\ngovernment investment depends on an assessment of the amount,\ntiming and direction of such investment flows and on whether\nOPEC governments will be governed by political or economic\nmotives. The provision in this option for government-to-\ngovernment consultations (that is, in addition to the\nconsultations already being carried on) recognizes that\ndifferent OPEC investors will have different investment\nobjectives and needs and provides a flexible means of tailoring\nour policy response to those needs.\nLIBRARY GERALD P. FORD\n-CONFIDENTIAL\nCONFIDENTIAL\n- 6 -\nOption 2 -\nSeek new legislation to improve reporting\nrequirements and strengthen existing powers\nto prevent abuses.\nDefinition of Option. Under this option, the\nAdministration would ask Congress for legislative authority\nto remedy the weaknesses in our existing reporting and\ndisclosure requirements for foreign investors. These im-\nprovements could be effected by building on an existing set\nof requirements, for example those administered by the\nSEC, or by establishing a new reporting system and a\nbureaucracy to administer it. They would be designed\nto enable us to obtain more complete information as to the\nidentity of foreign investors in firms whose stock is publicly\ntraded, as well as additional information on transactions\ninvolving real estate and non-public companies.\nThe Administration might also seek legis-\nlation to improve our existing powers to prevent foreign\nprivate and/or government investors operating in our economy\nfrom acting in a way contrary to our national interest. It\nwould not touch on entry of foreign investment -- which\nwould continue to be governed by existing laws -- but would\nconcentrate on use of the investment once the foreign in-\nvestor was established here. The improvement in our powers\nto control, and to remedy abuses caused by, existing invest-\nment could be provided by (1) plugging gaps in and/or ex-\npanding the President's existing emergency powers -- under\nthe Defense Production, the Selective Service, and the\nTrading with the Enemy Acts -- and/or (2) plugging gaps in\nexisting general laws affecting foreign investment.\nAdvantages\n-- Meets Congressional concerns about the adequacy\nof our information gathering capabilities.\n-- Adoption would give the Administration further\ntime and better information to evaluate the need for more\ndrastic action.\n-- Allows a free flow of investment into the U.S. but\nimproves our existing power to prevent action contrary to\nour national interest.\n-- Utilizes powers the U.S. has under existing laws to\nregulate entry of foreign investment.\nGERALD FORO LIBRARY\nCONFIDENTIAL\nR.\nCONFIDENTIAL\nGERALD\nFORD\n- 7 -\n-- Concentrates the remedy on the problem of possible\nmisuse of foreign investment.\n-- Consistent with our desire to create a free and\nopen economy and avoids new restrictions which could invite\nretaliation, violate our FCN treaties, and undercut our\nefforts in the OECD to encourage other countries to adopt\nmore liberal investment policies.\n-- Would expand existing authority to deal with extreme\nabuses after the fact.\nDisadvantages\n-- Does not meet concerns about deficiencies in\nexisting powers to deal with misuse of assets by a foreign\ninvestor and does not provide protection against \"pervasive\nforeign influence.\"\n-- Requires Congressional action and may serve as\nmagnet for more restrictive legislation and/or focus un-\nwanted Congressional attention on the President's emergency\npowers -- which are already under attack in Congress.\n-- Creating a general reserve or residual power in the\nPresident would, without precise standards or guidelines\nfor its use, create great uncertainty for a foreign investor\nand might discourage foreign investment in the U.S.\n-- Any expanded (or new) powers would be primarily\nremedial and would not prevent all abuses of foreign invest-\nment in the U.S.\n-- There are substantial doubts (which need to be re-\nsolved) as to whether the President could be given such\ngeneral powers to undo, resolve, or mitigate an individual\ninvestment (as opposed to a class or category of transactions)\nonce it had been established here.\nThis option is concerned with improvements in our data-\ngathering and disclosure capabilities, as well as our\ncapability to deal with abuses by foreign investors, including\nour powers to correct extreme abuses after they occur. The\nchanges would be achieved by legislative action. Adoption\nof the option would still allow investment to flow freely\ninto the United States in accordance with existing laws, on\nthe assumption that there is no clear way in all instances of\nidentifying unwanted foreign investment until the activities\nof the investor are evaluated. (A number of U.S. laws already\nprevent or limit foreign investment in various industries.)\nCONFIDENTIAL\nCONFIDENTIAL\n- 8 -\nThe legislative changes would be designed to remedy\nthe weaknesses in our existing reporting and disclosure\nrequirements with respect to foreign investment that could\nnot be adequately dealt with by administrative action. A\nmajor weakness of our existing requirements relates to the\nidentification of \"beneficial owners\" or the equity of\nU.S. firms. This problem could be easily solved if all\nthat was involved in this type of case was use of a domestic\nnominee by a foreign investor. In fact the SEC has recently\nheld hearings on this issue and may soon be proposing changes\nin its practice or legislative authority to enable it to\ndeal with the nominee question. However, a simple dis-\nclosure requirement would not be sufficient in a case where\na foreign investor used a foreign nominee (or series of them)\nto conceal his identity. Penetration of these nominee \"veils\"\nwould in many instances prove impossible because of problems\nof legal jurisdiction and of protections embodied in the\ncommercial and bank secrecy laws of other countries. It\nshould, however, be noted that a foreign investor\nhiding behind nominee \"veils\" who voted his shares or\notherwise acted in a way contrary to the interest of the\nfirm or the United States would probably expose himself\nby his action.\nA possible solution to the nominee problem would be to\nask Congress to authorize a strong disclosure requirement\nbacked up by an effective penalty for non-compliance. One\nsuch penalty that has been suggested is suspension of the\nvoting rights of the stock in question, but other possible\nformulas might be identified and explored. Responsibility\nfor implementation of the new requirements could be given\neither to an existing agency or to one created especially\nfor this purpose.\nWith regard to improving our powers to prevent or to\ncorrect major abuses, we would concentrate on weaknesses\nin the Defense Production Act, the Selective Service Act,\nand the Trading With the Enemy Act.\nThe Department of Defense has reservation as to the\nFORD & LIBRARY GERALD\nextent of the President's powers under the Defense Pro-\nduction and the Selective Service Acts to ensure the\navailability of productive capacity for Defense purposes.\nFor example, there are doubts as to (1) the extent of the\nPresident's powers under these acts to prevent plant\nclosure or to require continuation of defense related\nbusiness, and (2) application of the Selective Service Act\nin a non-war situation. In addition, the Trading With the\nEnemy Act is under increasing criticism in Congress, and\nnew legislation might be necessary to ensure its continued\napplication in a non-emergency situation. Moreover, there\nCONFIDENTIAL\n-CONFIDENTIAL\n- 9 -\nare doubts as to whether the President could (or would want\nto) apply the Trading With the Enemy Act after the fact to\nundo, or mitigate abuses by indivual foreign investors on an\nad hoc case-by-case basis without precise standards. There-\nfore, any consideration of broad new emergency powers to\ndeal with foreign investment after it had entered would need\na careful review of the legality and desirability of giving\nthe President broad powers to control (e.g. seize or divest)\nindividual firms on an ad hoc basis.\nAdoption of the option would not give absolute assurance\nthat it would prevent all possible abuses by foreign in-\nvestors. On the other hand, there are numerous and possibly\nmore effective measures outside the field of investment\n(for example, selective letting of contracts or placing of\npurchase orders, or selective placement of funds) that a\nforeigner could employ to influence a U.S. firm to act in\na desired way.\nFORD & LIBRARY GERALD\nCONFIDENTIAL\nCONFIDENTIAL\n- 10 -\nOption 3 - Impose Screening Procedures on Inward Foreign\nInvestment Under New Legislation\nDefinition of Option - This option calls for the establishment\nof a mandatory screening procedure, to be applicable to new\ndirect investment as well as foreign acquisitions and mergers\nwith U.S. firms. Its application to certain investments would\nbe prohibited by existing FCN treaties. It would be supple-\nmental to our existing measures affecting foreign investment.\nThe screening procedure could be established in either of\nthree ways. Suboption A is a discussion of a screening\nprocedure applicable to all foreign investors in industries\nthat are considered \"key\" to the U.S. national interest.\nSuboption B is discussion of a screening procedure applicable\nto official foreign investment in all sectors of the U.S.\neconomy. Suboption C is a discussion of a screening procedure\napplicable only to official foreign investment in key industries.\nThe suboptions have several elements in common. The\ncriteria for the screening process should be published to avoid\nconfusion on the part of foreign investors and U.S. firms.\nEach suboption would require prior notification of a central\nauthority which would be responsible for ascertaining, in\naccordance with internal U.S. Government procedures to be\ndeveloped, whether there was any objection to the transaction.\nIf this option should be adopted, it would be desirable to\ninvoke currently available authority to prevent foreign investors\nfrom rushing into the U.S. market ahead of the enactment of\nlegislation. Such authority is found in Section (b) of the\nTrading With the Enemy Act as amended; a legal statement on\nthe Act is the second appendix to this paper.\nScreening of certain investments would conflict with some\nTreaties of Friendship, Commerce and Navigation. Accordingly,\nfurther study would be necessary to determine how potential\ntreaty conflicts might best be handled, for example, by prior\nconsultation aimed at avoiding a treaty conflict, by renegotia-\ntion of relevant treaties, or by having the screening legisla-\ntion exempt treaty countries from the screening process. The\nfirst Appendix to this paper contains a discussion of the FCN\nTreaty issue. It should be noted that the problem of a\ntreaty conflict arises, in the case of screening initial\ninvestments, only with a few countries (many of which are OECD\nmembers and non-OPEC members) from which official foreign in-\nvestment is limited. Moreover, all FCN treaties permit\nscreening of investments in certain sensitive areas.\n-CONFIDENTIAL\nFORD & LIBRARY 9ERALD\n- 11 -\nSuboption A - Screen foreign investment in industries that\nare key to the national interest.\nDefinition of Suboption A. This proposal requires a prior\ndetermination that certain industries are key to the national\ninterest and that all foreign investment in these industries\nshould be screened, before the investment is consummated.\nAdvantages\n-- Deals directly with the concern that foreign investors\nmight gain an unacceptable degree of influence in key industries.\n-- Provides an opportunity for the U.S. Government to\nprohibit any foreign investment in key industries or to allow\nit to proceed subject to whatever conditions the Government\nmight decide to apply.\n-- Might remove some uncertainty regarding U.S. policy\non foreign investment.\n-- Reduces possibility that Congress might impose\nunacceptable restrictions.\n-- Nondiscriminatory between investors.\nDisadvantages\n-- Definition of key industries is inherently difficult\nor arbitrary.\n-- Administration would be continuously subjected to\npressure from foreign investors, U.S. firms, or interested\nthird parties to make decisions on grounds not related to\nnational interest.\n-- Congress may pass more restrictive legislation anyway;\nparticularly Congress may add to the list of proscribed sectors.\n-- Complex, cumbersome and expensive to administer.\nFORD & LIBRARY 076839\n-12 april\n-- Places affected firms at a disadvantage in raising\ncapital.\n-- Risk that U.S. Government might block or restrict\ntransaction would prejudice seller's bargaining position.\n-- Marked departure from our longstanding commitment\nto creation of a free and open world economy and our efforts\nto achieve international investment reform.\n-- Screening could deter some desirable foreign invest-\nment.\n-- May be in conflict with FCN treaty obligations.\nDiscussion\nA significant difficulty with Suboption A is the\nproblem of defining an industry or company that is key to our\nnational interest. Any definition is subject to criticism.\nFor example, any company that requires a security clearance\nto work on a U.S. Government contract could be considered\nkey; this definition would, however, apply to some 12,000\nFORD\nU.S. firms. One might also screen foreign investment in\nU.S. firms that do not use advanced technology and do not\nproduce defense-related goods but are critical to national\nGERALD\nLIBRARY\nsurvival. Examples include (by no means exhaustively) the\nsteel industry, food and foodstuff processing, and vehicles\nand parts. Factors that would have to be taken into account\nin developing a screening procedure for foreign investment in\nkey industries are given in the annex to this option.\nAny lists of key industries would generate pressure for\nadditions which would be reflected in the Congress.\nSuboption B - Screen official foreign investments in U.S.\nindustries.\nDefinition of Suboption B. This proposal focuses on the type of\nforeign investor rather than on the U.S. concern and applies\na screening procedure to official foreign investment. Private\nforeign investment would continue freely to enter the United\nStates subject to the prohibitions and restrictions of current\nU.S. laws and regulations.\nAdvantages\n-- Deals directly with the concern that foreign govern-\nments might make unwanted investments in U.S. firms.\n-- Provides an opportunity for the U.S. Government to\nprohibit any official foreign investment or to allow it to\nproceed subject to whatever conditions this Government might\ndecide to apply.\nCONFIDENTIAL\n- 13 -\n-- Removes uncertainty regarding U.S. policy on private\nforeign investment.\n-- Avoids need to specify in advance industries in which\nforeigners may not invest.\n-- Reduces possibility of Congressional action and risk\nthat unacceptable restrictions might be imposed.\nDisadvantages\n-- Creates uncertainty for official foreign investors.\n-- Might discourage official foreign investment\n-- Would be regarded by OPEC countries as specifically\ndirected against them.\n-- Might lead to charges of discrimination between\nvarious official foreign investors. including charges of\nFCN treaty violations.\n-- Difficult to define an official foreign investor.\n-- Administration would be continuously subject to\npressure from official foreign investors, U.S. firms, and\ninterested third parties.\n-- Complex, cumbersome, and expensive to administer\n-- Risk that U.S. Government would block or restrict\ntransaction would prejudice seller's bargaining position.\nDiscussion\nA critical element in Suboption B is the definition of\nofficial foreign investment. A test of the functions of the\ninvestor may be inadequate, as in many foreign countries\nenterprises that would be regarded in the United States as\nin the private sector are government corporations or\ngovernment-controlled corporations. Moreover, some monarchies\nhave immense wealth for foreign investment and follow motiva-\ntions sufficiently different from a private investor so as to be\nregarded as official investors; this is particularly true\nwith respect to OPEC countries in the Middle East.\nFORD is GERALD LIBRARY\nCONFIDENTIAL\n- 14-\nThe term \"government corporation\" or \"government-\ncontrolled corporation\" covers several obvious categories of\norganizations and enterprises (central government departments,\ncentral monetary authorities and central banks). Government-\ncontrolled corporations that engage in commercial activities\n(for example, foreign airlines and some industry) present a\nspecial problem of definition. Also, a gray area arises in\nthe case of government-private joint ventures, with either\nprivate foreign or U.S. citizens. Moreover, while it might\nbe obvious that the screening procedure should be applied to\ninvestment by monarchs, it is less clear to what degree of\nkinship the procedure should be applied. In light of the\nextended family relationships in some countries, it might\nbe necessary to look to laws and traditions of the country\nfrom whence the foreign investor comes.\nIdentifying official foreign investors could be made difficult\nby the use of intermediaries in the United States or abroad.\nSuboption C - Screen official foreign investment in key U.S.\nindustries.\nDefinition of Suboption C. This suboption gets down to the\ncentral issue of insulating key U.S. industries from manipula-\ntion by those foreign investors who might be most likely to be\nmotivated by political rather than economic considerations.\nIt would not apply to all private foreign investment or to\nofficial foreign investment in nonessential industries,\nAdvantages\n-- Deals directly with the concern over the potential\nfor unacceptable control by official foreign investors over\nkey U.S. industries.\n-- Introduces no new restrictions on private foreign\ninvestment.\n-- Does not overtly discriminate against OPEC countries.\n-- Might remove some uncertainty regarding U.S. policy\nor foreign investment.\n-- Nondiscriminatory between foreign countries.\nLIBRARY GERALD ? FORD\n- 15-\nDisadvantages\n-- If applied to all countries, apparently conflicts\nwith a number of FCN treaties (i.e., provision on national\ntreatment for establishment and acquisition). If applied\nonly in absence of such FCN treaty provisions, then issue of\nOPEC unhappiness over policy aimed almost entirely at them\nis intensified. (We have no such FCN treaty provision with\nany OPEC country.)\n-- Will be viewed by OPEC countries as aimed specifically\nat them in attempt to control their investment options,\nwhich could lead to some reductions in oil production.\n-- Does not cover land sales, per se, which, while\ndifficult to deal with in view of predominate role of State\nand local governments in land use questions, is a politically\nsensitive issue.\n-- Definition of key industries is inherently difficult\nor arbitrary.\n-- Administration would be continuously subjected to\npressure from foreign investors, U.S. firms, or interested\nthird parties to make decisions on grounds not related to\nnational interest.\n-- Congress may pass more restrictive legislation anyway;\nparticularly Congress may add to the list of proscribed sectors.\n-- Complex, cumbersome and expensive to administer.\n-- Places affected firms at a disadvantage in raising\ncapital.\n-- Risk that U.S. Government might block or restrict\ntransaction would prejudice seller's bargaining position.\n-- Screening could deter some desirable foreign investment.\nFORD & LIBRARY GERALD\nCONFIDENTIAL\n- 16 -\nANNEX to OPTION 3\nScreening of Foreign Investment in Key Industries\nI.\nIntroduction\nThe purpose of this annex is to illustrate how a\nscreening procedure might be structured and to present an\nexample of a possible set of screening criteria. There are\nnumerous possible variations of any such procedure and the\nfollowing factors are for the most part the minimum measures\nwhich would have to be adopted. If the Administration were\nto choose the screening option, then considerable further\neffort in developing the procedures and criteria would be\nnecessary.\nII. Scope\nScreening would supplement current laws, regulations and\nadministrative procedures which already limit (de jure and\nde facto) foreign investment in certain industries. As it would\nnot be feasible or desirable to screen all foreign acquisitions\nof U.S. securities, threshold levels should be established,\nabove which screening would be required. In the case of equities,\nscreening could be required when the participation in the owner-\nship by a foreigner, or foreigners deemed to be acting in\nconcert, exceeded, say, 10 percent of the outstanding voting\nshares of the firm.\nIt might also be desirable to consider whether a percentage\nlevel should be established at which screening would be re-\nquired of additional equity purchases by unrelated foreigners.\nForeign loans to U.S. firms would also be subjected to\nscreening whenever any loan exceeded, say, 15 percent of the\ntotal long-term outstanding debt of the corporation. Transactions\nbelow a floor of, say, $1 million would be exempt from screening.\nScreening would apply at entry, and the United States would\nrely on existing laws to regulate firms after entry. Existing\nforeign investments would be grandfathered. However, the\npossibility that foreign-owned U.S. firms, after entry, might\nmake investments in firms in sensitive industries, which would\nhave been covered by the screening procedure, gives rise to\nthe risk that this safeguard against undesirable foreign in-\nvestment could be circumvented. This loophole could be\nclosed only by subjecting secondary investment by foreign-\nowned firms unrelated to the primary investment to\nthe same criteria that would apply to the initial investment.\nCONFIDENTIAL\nBERALD FORD LIBRARY\nCONFIDENTIAL\n- 17 -\nApplication of screening to secondary investment, however,\nwould be in conflict with our FCN treaties with a number of\nimportant countries, including, among the OPEC countries,\nIran and possibly Saudi Arabia.\nScreening might apply to investments in such industries\nas defense, transportation, communications, news media and\nenergy. With regard to defense considerations, one possible\napproach would be to consider as a defense industry any firm\nthat holds a security clearance to sell goods or services\nto a U.S. Government agency.\nIII. Screening Procedure\nGERALD\nLIBRARY\n1. The foreign investor, the U.S. firm being acquired\nand any other parties to the transaction would all have to\nnotify the Federal screening office of the intended invest-\nment. Penalties to force compliance should be imposed.\n2. The U.S. Government would have 30 days in which to\nconsider the proposed transaction. If, at the end of 30 days,\nthe parties to the transaction had not been advised to the\ncontrary by the screening office, they would be free to\nconsummate the transaction. However, the consideration period\ncould be extended by notification from the screening office\nto the parties that the Government needed additional time to\nconsider the proposed transaction.\n3. Upon receiving notification of the proposed trans-\naction, the screening office would notify the appropriate\nU.S. Government agencies. The information, however, would\nbe privileged. The departments and agencies to be notified\nwould vary, depending upon the circumstances.\n4. The departments and agencies so notified would have\nto inform the screening office urgently if they had any ob-\njection to the proposed transaction. Any agency might request\na delay in consideration of the application and the convening\nof an interagency committee for discussion of the transaction.\nIV. Screening Criteria\nThe following list of screening criteria is purely illustra-\ntive, and much further interagency consideration would be required\nto develop a definitive list.\n(a) Possible effects on national security.\n(b) The effect that the intended transaction might have\non competition both domestically and internationally to\nthe extent that it would affect the United States.\nCONFIDENTIAL\nCONFIDENTIAL\n-18 -\n(c) The likely opportunity to influence public opinion\nin the United States as a result of the investment.\n(d) The foreign policy implications of the intended\ntransaction.\n(e) The likely effect on future inward foreign investment.\n(f) The importance to the U.S. firm of the transaction,\ntaking into account the financial condition of the firm.\n(g) The cumulative result of the proposed investment, in-\ncluding the extent to which this investment increases the\nexposure of a sector of the U.S. economy to foreign influ-\nence or the United States as a whole to foreign influence.\n(h) In the case of investments in the form of debt,\nthe extent to which they might give the investor leverage\nor de facto control in the U.S. company.\nV. The screening process would not exempt the investment\nfrom\nU.S. laws, regulations, and administrative practices\nwhich would apply to investment in the United States, either\nby a U.S. citizen or a foreigner. It should be made clear\nto the foreign investor that he would have to satisfy all\nlegal requirements.\nFORD & LIBRARY GERALD\nCONFIDENTIAL\nCONFIDENTIAL\n- 19 -\nInward Investment Policy Review\nOption 4 - Limit Official Foreign Investment in the United States\nAn upper limit would be set on foreign official acquisition\nof the stock and long-term debt of existing U.S. firms, e.g.,\n10 percent of equity and 15 percent of long-term debt. These\nlimits would also apply to official foreign holdings in newly\nestablished enterprises. The limitation would contain a grand-\nfather clause which would exclude forced divestiture or ex-\npropriation. This restriction on foreign official holdings\nwould be imposed through new legislation which would include\nprovision for a Presidential national interest waiver to give\nthe Executive Branch adequate flexibility in administering it.\nTwo complementary elements would be required in conjunc-\ntion with the imposition of a limit on foreign government\ninvestment as a necessary part of this option: (1) a compre-\nhensive reporting and disclosure system for all foreign\ninvestment, and (2) prior coordination with the other OECD\ncountries to assure a consistent policy affecting OPEC invest-\nments. A third element which would be desirable, would be\nthe creation of a class of investment trusts for foreign govern-\nments which would provide them with an attractive alternative\nto direct holdings of corporate equity and debt. This class\nof funds would be provided for by legislation and subject to\nU.S. Government control in a manner similar to that of regu-\nlated investment companies for private investors. These funds\nwould serve USG policy purposes by encouraging a broadening\nof the OPEC investment portfolio. (A policy including this\nfeature is treated as sub-option A and the additional advan-\ntages and disadvantages relating to it are treated separately\nfollowing those regarding the main option.)\nPercentile limitations on official foreign investment\nwould conflict with some of our FCN treaties. Accordingly,\nfurther study would be necessary to determine how potential\ntreaty conflicts might best be handled, for example, by\nprior negotiation aimed at avoiding a treaty conflict,\nby renegotiation of relevant treaties, or by having the\nlegislation exempt treaty countries. The first appendix\nto this paper contains a discussion of the FCN treaty issue.\nIf this option should be adopted, it would be desirable\nto invoke currently available authority to prevent foreign\ninvestors from rushing into the U.S. market ahead of the\neanctment of legislation. Such authority is found in\nSection 5(b) of the Trading With the Enemy Act as amended\na legal statement on the Act is attached.\nCONFIDENTIAL\nGERALD\nLIBRARY\n- 20 -\nAdvantages\n-- Deals directly with our principal concern regarding\nthe potential for politically unacceptable influence\ngained through major investment interest in U.S.\nfirms on the part of OPEC governments.\n-- Introduces investment. no new restrictions on foreign private\n-- Does not overtly discriminate against OPEC countries.\n-- Avoids need for prior screening.\n-- Provides guidelines which remove uncertainty regarding\nreception of OPEC investments.\n-- Encourages the OPEC countries to develop broad and\ndiversified investment portfolios.\nFORD & LIBRARY GERALD\n-- Establishes a basis on which to seek a coordinated\nconsumer country policy vis a vis OPEC investment.\n-- Does not require that USG attempt difficult task of\nmaking judgments regarding which U.S. industries are\nvital to our national interest and which are not.\n-- Involves the Congress in the establishment of the\npolicy, thus allaying foreign government fears of\nCongressional repudiation of an Administration policy\nposition.\nDisadvantages\n-- If applied to all countries, apparently conflicts\nwith a number of FCN treaties (i.e., provision on\nnational treatment for establishment and acquisition).\nIf applied only in absence of such FCN treaty provisions,\nthen issue of OPEC unhappiness over policy aimed almost\nentirely at them is intensified. (We have no such\nFCN treaty provision with any OPEC country.)\n-- Administration of Presidential waiver provision could\nbe troublesome in terms of foreign government pressures\nand potential violation of MFN principles.\n-- Will be viewed by OPEC countries as aimed specifically\nat them in attempt to control their investment\noptions, which could lead to some reductions in oil\nproduction.\n-- Does not cover land sales, per se, which, while\ndifficult to deal with in view of predominate role\nof State and local governments in land use questions,\nis a politically sensitive issue.\nCONFIDENTIAL\nCONFIDENTIAL\n- 21 -\n-- Submission of Administration legislative proposal could\nattract undesirable restrictive amendments; however,\na bold Administration proposal in an area where Con-\ngress has expressed concern would appear comparatively\ninvulnerable to the attachment of unwanted \"Christmas\ntree\" ornaments.\n-- Could result in reduction of investment inflows.\n-- Putting percentage limits on long-term investments\ncould force OPEC countries to remain short-term\ninvestors, thereby increasing instability of inter-\nnational banking system.\nSuboption A - Limitation on Foreign Government Investments\nCombined with Special Investment Funds for\nForeign Governments\nA logical adjunct to placing ceilings on direct foreign\nequity holdings of U.S. firms and of long-term corporate debt\nwould be to create an additional attractive indirect channel\nfor foreign government investment. Details on how such funds\nmight be created and operated are included in the discussion\nsection below. This suboption would present the following\nadditional advantages and disadvantages to those of the main\noption: (The investment fund could also be used with other\noptions.)\nAdvantages\n-- Provides an additional channel for foreign official\ninvestment at the same time that direct holdings are\nbeing limited.\n-- Is consistent with our goal of broadening the distribu-\ntion of foreign government, particularly OPEC, invest-\nment and thereby limiting the extent to which oil\nproducer investment is translated into political\npower.\n-- Congressional approval is likely to be required to\nestablish the investment funds; as a result such funds\nwould have a Congressional blessing which alternative\ninvestments would not have.\nDisadvantages\n-- OPEC Government receptivity is not known and could FORD\nbe negative.\nCONFIDENTIAL\nGERALD\nLIBRARY\n- 22 -\n-- Any appearance of giving incentives to government\ninvestors would be criticized at home and in other\nnon-OPEC countries: conversely, omission of incentives\nwould reduce the attractiveness of the funds as an\nalternative investment channel.\n-- Making the funds in effect a favored avenue for\nforeign government investment could be criticized\nwithin this country as being contrary to normal U.S.\nGovernment-business relationships.\n-- The funds would be powerful and influential forces\nand could have an unpredictable impact on international\nfinancial and equity markets.\nDiscussion\nThe proposed ceiling on direct foreign official holdings\nwould actually affect very little OPEC investment based on\nour experience so far. Thus, it is aimed at potential rather\nthan actual investment patterns.\nWith regard to possible conflict with FCN treaties it\nmight be possible to make a case that the intent of those\ntreaties was to deal with private not government investment.\nHowever, to avoid apparent conflicts with U.S. treaty obliga-\ntions, we are excluding\nfrom the limitation\ncountries with FCN provisions calling for national treatment\non establishment and acquisition, while still covering all the\nOPEC countries. New FCN treaty negotiations would have to\ntake the effect of this policy option into account by exclud-\ning government investment from a national treatment provision.\nIn addition to OPEC states, certain OECD states with whom\nwe do not have FCN treaties (for example, the U.K., Canada and\nAustralia) would also be affected. However, we do not antici-\npate massive official investment from those countries, and we\nwould anticipate no special problems arising as a result of this.\nFORD\nThe investment funds contemplated under the suboption\nwould be subject to some limitation on the percentages of\nequity or debt that they could hold in a single company.\nGERALD\nLIBRARY\nEach such fund would be required to have separate management\nand no collusion among them would be permitted. Their use\nwould be optional and in no way limit the choice of invest-\nment channels open to OPEC. Further, management of the funds\nwould be divorced from direct control by foreign governments\nand would be independent of them in the exercise of voting\nrights obtained through the fund's equity holdings.\nThere should be no limit on foreign governments' indirect\nholdings of equity through participation in more than one\nCONFIDENTIAL\nCONF IDENTIAL\n- 23 -\nof these specially created investment funds, since the\ndilution of control which would be provided by this device\nwould be adequate protection against undue influence. Thus,\na foreign government might participate in investment funds\nthat together hold substantially more than 10 percent of\nthe stock of a particular corporation. In that way, foreign\ngovernments could enjoy the economic benefits of a major\nshareholder while being divorced from management control.\nCreation of such investment funds would have to be\nhandled carefully in order to give them some appeal to\nforeign official investors, without providing undue special\nincentives. This could be accomplished by emphasizing the\nacceptability of such investments, a factor which is of\nparticular importance to government investors. The establish-\nment of such funds would probably require Congressional action,\nand legislation would give foreign governments Congressional\nblessing for such investments which they would not otherwise\nobtain. In a situation where the attitude of the U.S. Congress\nis a major uncertainty for foreign investors, such a blessing\nwould be an important factor. Further, the existence of\nlimits on direct foreign government holdings will itself act\nas an incentive to the use of the investment funds.\nCoordination of consumer country policies toward foreign\ngovernment investment would be essential for the success of\nthis option and suboption. This would involve (1) coordinated\narrangements for setting up the investment funds, (2) parallel\nregistration and disclosure requirements, and (3) parallel\nlimitations on direct foreign government holdings of equities\nand long-term corporate debt. This could be accomplished\nwithin the IEA or the OECD.\nUncoordinated consumer country inward investment policies\ncould produce a snowball effect in which restrictions on OPEC\ngovernment investment by one country could divert massive\nfunds to another consumer country which would then be forced\nto enact even tighter restrictions. The end result could\nbe a general level of investment restrictions so high that\nOPEC countries would be encouraged to cut back on oil produc-\ntion. The absence of coordination could also result in a\nchanneling of OPEC investment to the consumer countries with\nweakest economies, such as Italy, which could not afford to\nmatch high levels of restrictions, and would thus give the\nOPEC countries very significant economic and political\nleverage in those countries.\n&\nFORD\nCONFIDENTIAL\nGERALD\nLIBRARY\nCONFIDENTIAL\n- 24 -\nSuitable vehicles are available for early discussion\nof these issues in the IEA and the OECD, (e.g., the inner\ngroup of the XCSS meets in February, the new OECD investment\ncommittee will meet in February, and a new IEA financial\ngroup is about to be formed). Any unilateral modification\nof any of the consuming countries investment policy without\nconsultations would threaten the unity of the group vis a\nvis the oil producing countries.\nThere have been clear indications that the oil consuming\ncountries are willing, in fact anxious, to develop a coordi-\nnated strategy with regard to OPEC investments, and it is\nnoteworthy that our Embassy in Bonn has\nreported that\nGerman Finance Minister Apel has publicly stated that OPEC\ninvestments have raised the requirement for serious vigilance\nand possibly legal barriers. He stated that there are limits\nto the amount and types of direct investment which the German\nGovernment would permit within the Federal Republic.\nThe reporting and disclosure system called for under\nthis option may or may not require additional legislation\ndepending on whether a comprehensive and effective system\ncan be created from existing authority and reporting require-\nments. In any case, the reporting system could be put in\nplace before action is completed on the other elements of\nthe option.\nCONFIDENTIAL\nFORD & LIBRARY GERALD\nLIMITED OFFICIAL US\nFebruary 6, 1975\nSurvey of Laws and Regulations on Foreign Investment and\nSafeguards Against Undesirable Behavior by Foreign Investors\nGeneral Considerations\nAt the microeconomic level, the general U.S. policy of\nnon-intervention in foreign investment in the United States\nis based on the proposition that it contributes to the dyna-\nmism of the American economy by stimulating competition and\nseeking out new investment opportunities. Thus, government\nintervention is called for only in cases where there is a\nstrong presumption that the market outcome would be socially\nundesirable. Whether this proposition is valid is dependent\non the assumption that foreign investors are motivated\nessentially by economic factors and that their over-all\nmotivations are basically the same as those of U.S. investors.\nTo the extent that non-economic factors might, however, in-\nfluence investment decisions, it is prudent and essential\nthat the United States have safeguards against foreign in-\nvestments that find their motivation outside the market.\nSince such safeguards are not without cost, the question\ncomes down to the optimal trade-off between the cost of current\nor additional safeguards on the one hand and the danger to the\nnational interest of doing without such safeguards on the\nother hand.\nSafeguards can be divided into two basic categories:\nActive (before the fact) and passive or standby (after the\nfact). That is, safeguards can be designed to forestall\nforeign investments which are presumed to be inimical to the\nnational interest or designed to neutralize or counteract\nforeign investments which are found in practice to be inimical\nto the national interest Surveillance of foreign investment\ncan also be considered a safeguard, in that it can serve to\nalert the authorities to the need or possible need for action\nin the form of activating existing powers to take the appropri-\nate measures or to seek the necessary authority from the\nCongress,\nFor analytical purposes, all current or potential safe-\nguards fall into one of the following categories:\nActive safeguards\nAdvance notice of intended investments (registration)\nRestrictions\nFORD is LIBRARY GERALD\na. on a case-by-case basis (screening)\nb. on the basis of predetermined and announced\ncriteria.\n- 2 -\nFORD & GERALD LIBRARY\nPassive or standby\nComprehensive and detailed reporting\nAuthority to counteract, to be applied on an\nad hoc basis\nThe basic argument for predetermined restrictions on\nforeign investment is, in essence, that an ounce of prevention\nis worth a pound of cure. Even where standby safeguards exist,\nit is argued that considerable damage could be done before the\nunwanted investment is detected and the process of counter-\naction is implemented.\nA fundamental difficulty of this approach is the\nproblem of making valid judgments on the desirability of\nthe various kinds of foreign investments before the fact.\nAt the microeconomic level, it is the manner in which foreign\ninvestors exercise the privileges, powers and leverage\naccompanying ownership rather than the fact of ownership that\nis relevant. For example, a foreign interest in a \"critical\"\nor \"key\" company can be exercised in a passive and benign\nmanner with no ill effects while a foreign interest in a\nnoncritical, e.g. consumer products, company can be\nexercised in a highly disruptive manner.\nMeaningful evaluations of individual companies or in-\ndustries from the standpoint of being \"key\" or \"vital\" to the\nnational interest are difficult and obviously controversial.\nCompanies or industries that might fit such classification to-\nday may be common within a few years, given the rapid and un-\npredictable advance of technology. An effort to keep restric-\ntions current on foreign investment in \"key\" or \"vital\"\nindustries would require continuing determinations respecting\ncompanies or industries clearly and directly vital to national\ndefense, and there would be no logical stopping point. More-\nover, arguments for restrictions based on purely protectionist\nand other considerations not related to the national interest\nwould undoubtedly be advanced in terms of the national\ninterest, and the process could lead to an ever widening array\nof restrictions against foreign investment.\nGranting this, it could be argued that, since investment in\na company increases the potential for misusing the company,\nthis potential should be minimized in cases where misuse would\nbe particularly damaging to the national interest. To fore-\n- 3 -\nstall this contingency, there are currently Federal restrictions\nwhich limit foreign investment in certain industries, such as\natomic energy, aviation, shipping, and communications. Also,\nDefense Department regulations act as an indirect prohibition\non foreign acquisition of any firm that does classified work\nfor the Government in that such acquisition could cause the\nfirm to lose such contracts.\nIn the case of the few U.S. companies where a foreign\ntakeover would be patently intolerable, the provocative nature\nof the action should be as obvious to potential foreign investors as\nit is to ourselves. Given the remedies which are available to\nthis Government, it is debatable that any foreign investors\nwould want to risk retaliation. Thus, one might legitimately\nask whether the added safeguards justify the unsettling effects\non the U.S. and foreign business community which would arise\nfrom a registration requirement or additional active safeguards\non inward foreign investment.\nA number of Federal and state laws and regulatory con-\nstraints assure that economic activities of companies are\nconsistent with national and/or community interests. Some\nof the more important of these are antitrust laws, export\ncontrols, SEC laws, the National Labor Relations Act and\nstate laws giving certain protections to minority shareholders\nagainst majority shareholders. These and other constraints\napply equally to foreign and U.S. owned companies. Thus,\npotential abuses of economic power by foreign owned companies\nare already heavily circumscribed. In addition, depending\nupon the circumstances the Federal Government has broad\npowers--in the Trading With the Enemy Act, the Defense\nProduction Act, and the Selective Service Act--to control\nand regulate the activities of companies in the interest\nof national security and to deny access to defense secrets\nby any firm under foreign ownership, control or influence.\nThis formidable array of safeguards against undesirable\nbehavior by foreign-owned firms is adequate for the present.\nSuch \"chinks in the armor\" as foreign investors might discover\nand attempt to exploit are best dealt with when and if these\ncontingencies arise. There is no reasonable likelihood that a\nsignificant amount of damage to the national interest could be\ndone before the Congress passed corrective legislation. Also,\nit is a moot question as to which, if any, of the various kinds\nGERALD FORD LIBRARY\nOFFICIAL DEE\nof possible activities not covered by current safeguards\nwould be contrary to the national interest. This is the\n\"gray area\" on which it would be difficult to reach a\nconsensus, particularly in the abstract or before the fact.\nIn regard to the adequacy of the information presently\navailable to the Federal Government on inward foreign investment,\n\"adequacy\" obviously depends on what the Government considers\nthat it needs to know and how the data would be used. The\nanswers to these questions will determine whether aggregated\nor disaggregated data are needed as well as the amount of\ndetail on individual investors.\nPresent reporting requirements of various Federal agencies\nproduce information which, if assimilated in one place and\nthoroughly analyzed, could produce a more comprehensive, detailed\npicture of foreign investment on a flow basis than is presently available.\nThe major pieces of this over-all reporting net are the Commerce Depart-\nment (direct investment), the Treasury Department (portfolio\ninvestment) and the SEC (acquisitions of more than 5 percent\nof the stock of a company whose securities are publicly traded).\nOther regulatory agencies and the DOD also collect information\non foreign investment in U.S. companies subject to regulation\nby them. Moreover, the benchmark surveys being undertaken\nby the Commerce and Treasury Departments, by late 1975 or early\n1976, will yield a comprehensive census of all longterm foreign\ninvestment as of end-1974. This information will become dated\nover time since the flow data collected by the Commerce and\nTreasury Departments are not collected on such a detailed\nbasis. However, if these flow data, along with data from\nvarious other agencies, particularly the SEC, which collect\ninformation on foreign investment are carefully restructured,\nit would be possible to continue to have an up-to-date, detailed\npicture of foreign investment in the United States.\nSome observers believe that an important information gap\nexists relating to the identity of foreign investors. When\nforeign investors use nominees to acquire and hold U.S.\nsecurities our records may show only the holder of record\nrather than the beneficial owners of the securities. The\nextent to which this is the case is not fully known but in\nany case there is a difference of opinion as to how meaningful\nor necessary it is to know the identity of beneficial owners\nor their country of residence, or just how meaningful ownership\nis in terms of control over corporate activity. The SEC is presently\nFORD & LIBRARY GFRAVO\n- 5 -\ninquiring into many of these issues and may recommend changes\nin legislation or practice.\nFORD & & LIBRARY 07VN39\nLIMITED OFFICIAL USE\n- 6 -\nI. Introduction\nU.S. policy on international investment has been based\non the belief that the free flow of capital across borders\nin response to market forces best served U.S. interests.\nThus, this country has tradionally based its investment\npolicy on freedom of investment and has neither offered\nspecial inducements to foreign investors nor put barriers\nin their way beyond those necessary to protect national\nsecurity and other essential interests.\nThe recent larger accumulation of funds by oil-produc-\ning countries has given rise to Congressional and public\ninterest in the possible scale, direction, and effect of\nforeign investment in this country. That much of these\naccumulations is in the hands of officials rather than\nprivate foreign investors, who might be motivated by\nnoneconomic factors, gives rise to some concern.\nIn light of the widespread interest in the impact\nof inward foreign investment in the United States, a\nreview of the information currently available to the\nFederal Government on foreign investment in the United\nStates and the existing legal restraints and power regard-\ning this investment is made in the first part of this paper.\nThe next sections of the paper discuss the possible misuses\nof U.S. companies by foreign investors and the various\nrestrictions which we have and other safeguards which have\nbeen proposed. The final sections give an overall assessment\nof the potential dangers and safeguards and conclusions\nregarding the need for additional safeguards.\nII. Current Information on Foreign Investment\nA. Foreign Investment in U.S. Enterprises: Book value\n(equity and debt) of foreign direct investment in the United\nStates at the end of 1973 was $17.7 billion while the estimated\nmarket value of foreign portfolio holdings of corporate securities\nwas $36.8 billion. The comparable figures for U.S. investment\nabroad are $107 billion and $25.2 billion respectively. Total\ndirect and portfolio equity investment in the United States\nby foreigners amounted to about 4 percent of the value of\noutstanding U.S. stock at the end of 1973. About half of the\ndirect investment is in manufacturing and one quarter in\npetroleum.\nFORD\nGERALD\nLIBRARY\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 7 -\nEquity investment in the United States by foreigners was\nof relatively low magnitude in 1974. Data for the full year\nare not yet available, but the increase in the equity portion of\ndirect investment was only $500 million in the first half of the\nyear and net purchases of U.S. stocks for portfolio investment\nwere less than $400 million in the first ten months of the year.\nThe inflow of this type of investment in 1974 was substantially\nless than in 1973 when equity investment was $1.5 billion for\ndirect investment and portfolio purchases were $2.8 billion.\nEven in 1973 when direct investment (equity and debt) was as\nlarge as $2.5 billion it was still a small factor in the $152.2\nbillion of domestic non-residential investment.\nEighty percent of the foreign direct and portfolio invest-\nment in the United States comes from Canada, Europe and Japan.\nWe have no way of determining, however, the extent to which\nthe beneficial owners of the securities may be residents of\nother areas.\nB. Reporting of Ownership for Statistical Purposes:\nForeign investments in U.S. stocks are collected for statistical\npurposes and balance of payments presentation by the Depart-\nments of Treasury and Commerce.\nThe Treasury collects data on a monthly basis from over\n200 reporters on transactions in U.S. corporate stocks including\nnew issues, redemptions, transactions in outstanding securities\nand some direct investment. The gross sales and purchases of\nforeigners are published monthly in the Treasury Bulletin\nwith a country breakdown. Data on individual investors are\nnot collected.\nThe Commerce Department has collected, on a quarterly\nbasis, data on foreign equity investment in U.S. firms, when\nthe foreign participation exceeds 25 percent of their outstand-\ning voting stock and is over $2 million in the equity and debt\naccounts. Beginning with the first quarter of 1975, the\nparticipation threshold for reporting will be dropped from\n25 to 10 percent. The identity of the individual foreign\ninvestor and the U.S. company is kept confidential within\nthe statistical section of the Department of Commerce.\nStatistics are published quarterly in the Survey of Current\nBusiness. Commerce also publishes annually an estimate of\nthe outstanding value of foreign portfolio holdings of U.S.\nstocks.\nLIMITED OFFICIAL USE\nFORD is LIBRARY 0ERALD\nLIMITED OFFICIAL USE\n- 8 -\nIn addition to the on-going reporting programs of\nCommerce and Treasury to collect data on the flow of foreign\ninvestment to the United States these agencies are undertaking\none-time benchmark surveys of foreign investment outstanding\nas of end-1974. The data from these surveys, which will be\npartially available by October, 1975 and in greater detail\nby April, 1976, will show foreign investment in every U.S.\ncompany of significant size broken down by kind of investment\nand kind of investor by country of residence.\nC. Reporting of Ownership for Regulatory Purposes:\nThe Securities and Exchange Commission requires reports\ndesigned to warn of substantial changes in ownership and\ncontrol of publicly held and traded corporations having\nassets of $1 million or more and five hundred or more stock-\nholders. Any person, American or foreign, who acquires\nownership of a registered equity security of 5 percent\nor more of the amount outstanding, must report detailed\ninformation on the transaction and the purchaser within ten\ndays to the issuer of the security, each exchange in which\nthe security is traded and the Commission. After a 5-percent\nacquisition, such person would be required to file further\nreports whenever his acquisition exceeded 2 percent in any\n12-month period. The same reporting requirements apply to\ntender offers which would result in ownership of 5 percent\nor more. The filing must be made at the time the announce-\nment is made public. Moreover, every person who is owner of\n10 percent or more of a registered equity security must\nreport any changes in ownership over the 10 percent level ten\ndays after the close of each month. Only the name and address\nof the holder are required. Directors and officers of the\ncorporation must give their holdings no matter what the\npercentage is.\nFailure to comply with the reporting requirements of the\nSEC, carries a maximum penalty of a $10,000 fine and up to 2\nyears in prison. If it can be proved the person was unaware\nof the requirements only a fine is levied.\nThe names of companies and amount of shares involved are\nlisted for the 5 percent holdings and tender offers in the\nSEC Statistical Bulletin. The detailed reports filed by\nfirms are available for public inspection at the SEC Public\nReference Room. U.S. and foreign firms are required to\nidentify beneficial owners and to disclose other relevant\ninformation in such filings. When intermediaries are used,\nGERALD FORD LIBRARY\nthe beneficial owners are still required to be disclosed,\nalthough this might not occur in all instances.\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 9 -\nLIBRARY GERALD R. FORD\nOther Federal regulatory commissions generally require\nreports on ownership when permits are requested and annually\nthereafter; these reports are open for public inspection\nand copying. The commissions also require reports on the\ndebts which includes the identity of individual creditors\nin many cases.\nThe Federal Maritime Commission asks water carriers for\nthe top 30 security holders and their voting powers and\nholders of 5 percent or more of each class of stock. Freight\nforwarders need identify only stockholders (including citizen-\nship) who individually own or hold 5 percent or more of the\nstock.\nThe Federal Communications Commission requests reports\non holders of 3 percent or more voting interest in broadcast\ncompanies, and generally makes supplemental requests regard-\ning voting rights down to 1 percent. Common carriers of\ncommunications, however, need report the 30 largest holdings\nof each class of stock to the FCC.\nThe Federal Power Commission asks public utilities and\nnatural gas companies for the 10 stockholders with the\nhighest voting powers and the number of votes each could cast\nat a stockholders meeting.\nThe Interstate Commerce Commission asks for identifica-\ntion of the security holders with the highest voting powers --\nthe top five in the case of railroad lessors, the top 10 in\nmotor carriers and the top 30 in railroads.\nThe Civil Aeronautics Board requires the names of stock-\nholders holding more than 5 percent of the capital stock\nof a U.S. air carrier. The trustees and nominees holding\n5 percent of the stock are required to give the names of\nthe stockholders for whom the stock is held and who have the\npower to vote the stock. In addition, banks and stockholders\nmust report the identity of any person where the account\ncontains 1 percent or more of the stock.\nThe Department of Defense requires each contractor to\nsubmit a Certificate Pertaining to Foreign Affiliation to\nmeet the DOD Industrial Security Regulations. If the total\nforeign ownership is above 6 percent, the firm must identify\nthe individual owners. This can be difficult because of the\nuse of nominee account by stockholders. However, the Defense\nDepartment is more concerned with foreign control, than\nownership, and once this control is exerted by foreigners,\nthe U.S. management is aware of it and notifies Defense.\nLITTED OFFICIAL\nLIMITED OFFICIAL USE\n- 10-\nThe Treasury Department requires, under the Federal\nAlcohol Administration Act, applicants for permits to\nproduce and distribute beverage liquors to submit details on\ntheir identity and keep the Department informed of any change\nin ownership. In the case of corporations, persons owning\n10 percent or more of the voting stock must be identified,\nin addition to the directors and officers. If a foreigner\nis identified, the Treasury Department obtains background\ninformation, including criminal records. from police authorities\nabroad.\nD. Beneficial Ownership: The ability of the reports on\nownership to identify foreigners depends on the degree to\nwhich the commissions dig behind the listing of nominees to\ndetermine the \"beneficial owner,\" i.e., the person who has the\npower to vote or directs the sale of securities. According to a\nreport by the General Accounting Office in 1973, it appears,\nthat for large regulated companies, the names of nominees are\noften shown in lieu of stockowner names in reports to regulatory\nagencies.\nThe problem of beneficial owners was among those covered\nat the SEC \"takeover\" hearings that were held in December on\nthe general adequacy of the present filing requirements out-\nlined above. The SEC staff is expected to make recommendations\nto the Commission this spring on possible improvements in the\ndisclosure requirements under the 5 percent reporting require-\nment and possible reduction in the reporting level to 1 percent\nownership, amongst other changes.\nEven if the regulatory commissions required domestic\nnominees to disclose the owner for whose account the stock\nis held, a foreigner could use a nominee located in a foreign\ncountry. Although the percentage of foreign ownerships could\nstill be determined, the actual identity of the foreigner could\nnot. Requiring their identity would involve a problem of\nlegal jurisdiction. Some countries such as Switzerland\nprohibit the provision of such information by banks.\nIII. Existing Legal Restraints and Powers of USG to Control\nForeign Investment\nThis section outlines key Federal laws and regulations\n(1) restricting foreign investment in the US or (2)\ncontrolling or regulating the conduct of foreign controlled\nbusiness activity. In addition to these Federal controls,\na number of state laws provide additional regulation and\nsafeguards.\nGERALD LIBRARY R. FORD\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 11 -\nFrom this survey it appears that there is minimal danger\nthat foreign investment in the United States can be used in a\nway detrimental to our national interest because of the\nprotections afforded by (1) general laws to insure against\nabuse of economic power and (2) specific legislation dealing\nwith foreign investment.\nA. Laws of General Application\nEvery foreign investment is subject to the same laws\nand regulatory constraints which control United States\nbusiness. It is this factor -- i.e. pervasive general laws\nto ensure that all economic activity is conducted in our\nnational interest -- that provides us with the most protection\nagainst potential misuse of control by foreign investors. A\nfew of the more important of these laws are summarized below.\n1. Antitrust Laws -- The antitrust laws contain no\nspecific prohibitions on foreign investment. However, they\napply equally to U.S. and foreign corporations and prevent a\nforeign investor from (a) illegally monopolizing a specific\nsector; (b) engaging in various anti-competitive practices; or\n(c) making a purchase of, or engaging in a merger or joining\nventure with, a U.S. firm if the result would be to substantially\nlessen competition or tend to create a monopoly. The laws\nhave wide application -- applying to any act affecting U.S.\nforeign commerce -- and both the Justice Department and the\nFTC interpret their powers broadly. The FTC has particularly\nbroad investigatory powers and requires prenotification of\nmergers of a certain size.\n2. Export Controls -- Although export controls do not\nrestrict foreign investment in the U.S., they are an important\ntool in ensuring that a foreign investor does not use his U.S.\ninvestment to drain essential resources from our economy.\nThe Export Administration Act prevents the export of U.S.\nresources when (1) national security is threatened or (2)\nthere is an excessive drain of scarce materials and a serious\ninflationary impact from foreign demand or (3) controls are\nneeded to further U.S. foreign policy. The Commerce Department\nis required to monitor exports when such exports would lead to\na domestic price increase or a shortage which would have a\nserious impact on the economy. (See National Defense and\nEnergy sections below for special controls on armaments and\nenergy exports).\nLIMITED OFFICIAL USE\nGERALD FORD LIBRARY\nLIMITED OFFICIAL USE\n- 12 -\n3. SEC Laws -- While the SEC laws do not prevent foreign\ninvestment, they do require disclosure of significant foreign\ninvestment (by beneficial owner) and are designed to regulate\npotentially harmful activities. SEC regulations re tender\noffers, shareholder disclosure requirements, stock price\nmanipulation and preservation of an orderly market make no\nfundamental distinction between domestic and foreign investors\nand apply equally to both types of investor.\n4. Industrial Relations -- The National Labor Relations\nAct and other labor laws apply to all firms operating in the\nUnited States to prevent unfair labor practices (e.g. runaway\nplants and arbitrary dismissal or treatment of workers). All\nindustrial plants must comply with federal laws designed to\nassure every worker in the United States safe and healthful\nworking conditions.\n5. Rights of Minority Shareholders -- Most state\ncorporation laws, as well as the common law, provide protection\nfor minority shareholders against irresponsible action by\nmajority shareholders. Experience indicates that these\nrights can be used to help prevent abuse of power by a controll-\ning foreign shareholder. For example, if a foreign investor\ntried to use his control of a United States firm to destroy\nor disrupt for political purposes, minority shareholders could\nsue to enjoin such action.\n6. General Control by Regulatory Agencies -- All investors\n(domestic as well as foreign) operating in certain critical\nsectors of the economy are regulated by one or more regulatory\nagencies (e.g. FPC, ICC, CAB, FMC, AEC, SEC, FDA, REA) or by\nspecial laws dealing with that sector (e.g. Public Utility\nHolding Company Act or Bank Holding Company Act).\nB. Broad Emergency Powers\nGERALD FORD LIBRARY\n1. Trading With the Enemy Act -- This Act gives the\nPresident the power (during a war or national emergency) to\ncompletely control foreign owned interests in property in the\nUnited States. There should, however, be a connection or\nnexus between the emergency and the action taken.\n2. Control of Enemy or Hostile Alien Assets -- Various\nregulations permit the government to regulate or prohibit all\ntransactions (including investment in the United States)\ninvolving certain listed \"enemies or hostile aliens.\"\nAlthough the list is now limited (PRC, North Vietnam, North\nKorea, Cuba) it could be extended to include any other nation\nwithout legislation.\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 13 -\n3. Condemnation Power -- The United States Government\nhas the basic power to condemn any property within its\njurisdiction if it is done for a proper public purpose and\njust compensation is paid.\n4. National Defense Powers -- See C-2 below for special\nPresidential powers relating to national defense needs.\n5. Emergency Legislative Action -- The Congress always\nhas the power to control or prevent any clear and present\nthreat to our national or economic security by immediate\nlegislative action which the Executive Branch could request.\nC. National Defense\n1. Any activity involving classified contracts -- Under\nits Industrial Security Regulations the Defense Department\nmay deny security clearances required to do classified work\nfor the United States Government to any firm under \"foreign\nownership, control or influence.\" The regulations do not\ndirectly prevent foreign ownership of producers of defense\nitems but only provide protection against foreign access to\nclassified information that could be gained by a company\ncontracting with the United States Government. However, they\ndo act as an indirect prohibition on foreign acquisition\nof any firm that does classified work with the Unted States\nGovernment in that such acquisition could cause the firm to\nlose its classified government business.\n2. Priority Performance Powers -- (A) The Defense\nProduction Act gives the President power to (1) require the\npriority performance of defense related contracts and (2)\nallocate materials and facilities necessary or appropriate for\nthe national defense. (B) The Selective Service Act provides\nthat, if the President determines it is in the interest of\nnational security and if Congress has authorized funds to\nprocure a particular product, the President has power to place\npriority orders for that product and take possession of the\nfacility if they are not fulfilled. (Note: There are legal\nquestions as to whether these acts give the President the\npower to prevent plant closure or to require the continuance\nof defense related business).\nD. Energy\nFORD is LIBRARY GERALD\n1. Energy Export Controls -- In addition to general\nexport controls which could be used to prevent all energy\nexports, the FPC regulates the export of natural gas from\nthe United States and issues a permit only if the export is\nin the national interest. In addition, the Federal Energy\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 14 -\nAct requires FEA to monitor exports of coal, crude oil, residual\noil or any refined petroleum product.\n2. Atomic Energy -- The Atomic Energy Act prohibits\nlicenses for the operation of atomic energy utilization or\nproduction facilities to be issued to aliens or foreign owned\nor controlled corporations. There is no similar prohibition\nfor fabrication of fuel elements, uranium mining or melting\nor activities involving radioactive isotopes. However, all\nof these activities are highly regulated by the AEC which can\nprohibit activities in there areas which are \"inimical to the\nnation's welfare.\"\n3. Mining and Drilling in the United States -- There\nare certain restrictions on foreign controlled corporations\nmining and drilling for coal, gas, oil etc on federally owned\nlands. See E-1 below for details.\n4. Regulation of Pipelines -- With respect to pipelines\non federal lands, foreign controlled corporations can own an\ninterest only if their home country grants reciprocal rights\nto United States companies. With respect to pipelines on\nnon-federal land, foreign investors are not precluded from\nownership or control but are subject to ICC and FPC regulation.\nE. Natural Resources\n1. Mineral Resources -- Under the Mineral Leasing Act\nof 1920, aliens cannot hold any interest in a pipeline or a\nmineral, coal or oil shale lease on federal lands. However,\nforeign controlled corporations may hold such interest if\ntheir country grants reciprocal rights to United States\ncompanies. There is, however, no prohibition on a foreign\ncontrolled corporation holding a lease to (1) drill on the\nUnited States outer continental shelf; (2) operate under\nGeothermal Steam Act or (3) locate and mine uranium under the\nMining Law of 1972. Such corporations would be subject to the\nterms of these acts and to the specific terms of the leases\ngranted to them.\n2. Fishing -- Transfer of control to a foreign investor\nof a United States fishing company or a United States\nshipyard engaged in the construction, maintenance or repair\nof fishing vessels must be approved by the Maritime Adminis-\ntration. There are also other minor restrictions -- e.g. no\nfishing by aliens in Alaskan waters and no alien fishing vessels\ncan land catch in the United States.\nLIMITED OFFICIAL USE\nGERALD\nLIBRARY\nLIMITED OFFICIAL USE\n- 15 -\n3. Land -- (a) Federal Land: The Alien Land Law\nprevents foreign ownership of federal public land except by\nforeign controlled United States corporations whose parent\ncountry grants reciprocal privileges to United States\ncitizens. (b) State Land: A few states have restrictions on\nforeign ownership of land under their jurisdiction.\nF. Communications, Media and Dissemination of Foreign\nPropaganda\n1. Communications and Media: Foreign investment in the\nUnited States communications and media sectors is controlled\nby the Federal Communications Act which (1) prohibits (with\nminor exceptions) aliens or foreign owned or controlled United\nStates corporations from receiving a license to operate an\ninstrument for the transmission of radio communications (2)\nprohibits the FCC from approving a merger among telegraph\ncarriers which would result in more than 20 percent of the\ncapital stock of the carrier being controlled by a foreign\nentity; and (3) closely regulates all common carriers engaged\nin interstate or foreign communication by wire or radio.\n2. Foreign Propaganda and Political Activity: The\nForeign Propaganda Dissemination Act requires any United States\ncorporation (e.g. a newspaper or magazine) which is controlled\nor financed by a foreign entity to file a registration statement\nwith the Attorney General if it carries on any activity in\nthe United States intended to influence United States domestic\nor foreign policy or promote the interests of a foreign\ngovernment. While there are exemptions for diplomats, nations\ndeemed vital to our national defense and various non-political\nactivities, the scope of the law is broad and requires registra-\ntion, filing and disclosure with respect to a wide range of\npolitical propaganda disseminated in the United States on\nbehalf of foreign interests.\nG. Transportation\n1. Aviation -- Foreign investment in the aviation\nsector is regulated by the Federal Aviation Act which (a)\nlimits the persons who may carry passengers and cargo within\nthe United States to United States citizens and United States\ncontrolled corporations and (b) requires CAB approval for any\nforeign air carrier or any person controlling a foreign air\ncarrier (e.g. a foreign government) to acquire control of any\nUnited States citizen engaged in any phase of aeronautics.\nBERALD FORD LIBRARY\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 16 -\n2. Maritime and Shipping -- Foreign investment in the\nUnited States maritime industry is restricted by a series of\nlaws which (1) limit ownership and operation of certain\nvessels to United States citizens; (2) prohibit transfer or\nmortgage of United States vessels, shipyards, drydocks or ship\nrepair facilities to non-United States citizens without\nSecretary of Commerce approval; (3) prevent non-United States\ncitizens from receiving construction or operating differential\nsubsidies and (4) limit United States coastwise trade to\nvessels owned by United States citizens. No corporation is a\nUnited States citizen unless (a) the controlling interest is\nowned by citizens of the United States and (b) the chief\nexecutive officer, board chairman and a majority of the quorum\nof directors are United States citizens.\nH. Banking and Finance\n1. Banking -- Because of the dual banking system in the\nUnited States, most foreign banks have chosen to establish in\nthe United States under state charters and, therefore, are\ncontrolled by state law. Only ten states permit foreign\nbanking activities in the United States and those that do (e.g.\nNew York, California and Illinois) closely regulate them.\nDepending on the nature of the state charter and the nature\nof the bank's activities, foreign banks may be subject to\nregulation by the Federal Reserve Board and the FDIC and may\nbe controlled by general legislation like the Bank Holding\nCompany Act. In addition, the Federal Reserve proposed\nlegislation in the 93rd Congress (S. 4205) providing for federal\nlicensing and regulation of all foreign banking activity in\nthe United States; and the Board plans to have it reintroduced\nin the current session of Congress.\n2. Insurance -- There are no restrictions on foreign\nalien or corporation ownership of insurance companies although\nfive states do prevent foreign governments from owning\ninsurance companies. Most states have special requirements\nfor foreign controlled insurance companies -- including\nmandatory establishment of trusteed deposits up to the\namount of the company's outstanding liabilities. Many states\nhave citizenship requirements for directors and all states\nlicense and closely regulate insurance activities in their\nstate.\n3. Securities Industry -- The SEC, the NASD and most\nstock exchanges do not restrict or prohibit ownership of\nbrokerage houses by aliens. However, foreign as well as\nFORD :- LIBRARY 07V839\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 17 -\ndomestic investors are subject to the same SEC, NASD and\nstock exchange regulations as domestic investors. The NYSE\ndoes, however, impose limits on foreign ownership of its\nmembers. The Trust Indenture Act of 1939 requires that at\nleast one trustee under a qualified trust indenture be\norganized under the laws of the United States.\nI. Agriculture\nAlthough there are no specific prohibitions on foreign\ninvestment in agriculture, foreign citizens and foreign\ncontrolled corporations are denied the benefits of many\nprograms relating to agriculture. For example, Farmers Home\nAdministration loans for rural housing are limited to United\nStates citizens; and grazing on public lands is regulated by\nthe Forest Service and the Bureau of Land Management. In\naddition, the Export Administration Act described above\ncould be used to prevent export by foreign investors of\nfood and other agricultural products needed in the United States.\nVarious agencies (e.g. the Food and Drug Administration\nand the Meat Inspection Division of the Department of\nAgriculture) administer a number of acts designed to maintain\nfood standards and protect the public from misleading market-\ning practices.\nJ. Special Aspects of Foreign Government Investment\nMost United States laws make no distinction between\ninvestment in the United States by foreign private entities or\ninvestment by foreign governments or governmental entities.\nThis means that the bulk of the restrictions and regulations\noutlined above apply to investment in the United States by\nforeign governments and, where relevant, prevent or regulate\nactivities of foreign governmental investment in the United\nStates. There are, however, a few areas in which foreign\nFORD :- LIBRARY GERALD\ngovernment investment is treated differently. These are\noutlined in this section.\n2. Sovereign Immunity -- The United States follows\nthe so-called restrictive theory of sovereign immunity which\nmeans that a foreign government engaging in public acts would\nbe immune from suit in the United States but not when engaged\nin commercial acts. Thus, foreign governments should not\nexpect sovereign immunity to protect them from suit with\nrespect to most investment in the United States. There are,\nhowever, some minor problems concerning (1) the lack of a\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 18 -\nstatutory procedure for service of process; (2) immunity of\na foreign government from execution of a judgment and (3)\nthe fact that the State Department and not the courts\ndetermine factual and legal questions about the validity of a\nforeign government's claim of sovereign immunity. These\nproblems would, however, be eliminated by a State/Justice\nproposed bill which would incorporate the restrictive theory\ninto statute, provide a method for service of process, limit\nimmunity from execution and transfer the task of determining\nwhether a foreign state is entitled to immunity from the\nState Department to the courts.\n3. Reporting Requirements -- Existing reporting require-\nments relating to the collection of foreign direct investment\ndata apply to foreign governments. However, the Bureau of\nEconomic Analysis in the Commerce Department indicates that\nthe reporting regulations are rarely observed by companies\nin which a foreign government has a controling interest and\nthat the United States Government presently has no way of\nenforcing them against a foreign government or government\ncontrolled investor.\n4. Tax Law -- Foreign governments are generally exempt\nfrom taxes on investment in the United States. However, the\nexemption does not apply to the income of a separate profit-\nmaking corporation, wherever organized, which is owned by a\nforeign government. Distributions to the government from such\ncorporations would, however, be tax free.\n5. Antitrust Laws -- There is a technical legal issue\nover the application of our antitrust laws to foreign\ngovernments. American courts have held that the Sherman\nAct does not confer jurisdiction on United States courts over\nacts by foreign sovereigns and that only acts by persons\nand corporations are covered. Thus, the key factor in any\ndetermination as to the applicability of United States anti-\ntrust laws to the investment activity of a foreign government\nwould be whether it used a separate corporation of the type\ngenerally engaged in commercial activity.\nFORD is LIBRARY\n6. SEC Laws -- No differentiation is made between\nforeign governments and other foreign investors by federal\nlaws concerning investment in United States securities. This\nmeans that the reporting and disclosure requirements of the\nSecurities Exchange Act of 1934 do apply to foreign governments\nand foreign government controlled corporations. There are,\nhowever, special regulations relating to the government\nissuance of securities in the United States.\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 19 -\nIV.\nPotential Misuse of Foreign Investment in U.S. Firms\nThis section outlines some of the potential dangers which\nmight arise from foreign control of individual U.S. firms.\nAlthough it deals with possible abuses of economic power by\nforeign investors, there is no inference on the part of the\nU.S. Government regarding the likelihood of such abuses.\nThey are listed as representative possible abuses. Many\nwould involve substantial economic cost to the foreign\ninvestor and would occur only if he was substantially motivated\nby political and not economic objectives.\nA. National Security. A foreign investor may use his control\nover a US corporation in a way contrary to US national\nsecurity interests.\nDanger\nExisting Protection\n1. Acquire US defense manu-\n1. DOD Industrial Security\nfacturer.\nRegulations protect against\naccess to classified\nmaterial and act as indirect\nprohibition to acquisition\nof defense manufacturer.\nDepending on the precise\nGERAJO FORD VIBRARI\nnature of the acquired busi-\nness, approval of a US\nregulatory agency may be\nrequired. Finally, the\nForeign Assets Control Regu-\nlations prevent acquisition\nby nationals of hostile\nnations.\n2. Move US defense manufacturer 2. Existing regulations prohibit\nabroad\nunapproved export of classified\ntechnology related to defense\nmanufacture. Also, facility\nclearance for classified work\nwill not be granted to contrac-\ntor activities outside the US.\n3. Obtain information. access to classified 3. DOD Industrial Security Regula-\ntions provide broad protection.\nLIMITED OFFICIAL USE\n4.\nSlow down production\n4.\nThe Selective Service\nprocess or refuse to supply\nAct and the Trading with\nin the event of national\nEnemy Act give the Presi-\nemergency.\ndent powers he can use to\nrequire priority orders\nto be filled or to take over\na plant in certain circum-\nstances. In addition, many\nstate corporation laws\nwould give minority\nshareholders rights if\nirresponsible corporate\naction were taken to the\ndetriment of profits.\n5. Foreign influence over US\n5.\nNo effective protection\nfirms might cause a US com-\nexcept that US corporation\npany to deal with a foreign\nis subject to all US laws\nsovereign in a way contrary\nregulating economic\nto US security interests.\nactivity which would put\n(e.g. compromise during nego-\nsome limits on foreign\ntiations re nationalization\ninfluence in negotiations\nor price or supply.)\nwith foreign entities.\nB. Economic Interests. A foreign investor may operate a firm\nin a way contrary to US economic interests by (1) depriving the\nUS of productive capacity; (2) introducing foreign management\npractices or (3) failing to take a pro US line in negotiations\nwith foreign nations.\nDanger\nExisting Protections\n1. Deprive US of productive\n1.\nThere is no single, specific\ncapacity by :\nprotection against these\na. buying a plant and clos-\ntypes of actions. However,\ning it or moving it\nsuch action (a) would involve\nabroad\nsubstantial economic cost\nb. letting the plant\n(b) create problems with\ndepreciate\nlabor contracts and union\nc. cutting essential\nrights and (c) could con-\nexpenditure like R&D\nstitute an antitrust or\nd. selling off key assets\nSEC violation if done for\nanticompetitive reasons or\nif control was obtained via\ntender offer and intention\nFORD LIBRARY\nto close or move abroad was\nnot disclosed. In addition,\nexport controls could be\nused to prevent movement of\nequipment and technology abroad.\nLastly, minority shareholders\n- 21.\nwould have rights under\ncertain state corporate\nlaws to prevent irresponsi-\nble corporate action by\nmajority shareholders.\n2. Introduction of alien\n2. US workers have some pro-\nmanagement practices\ntection under collective\nbargaining contracts (if\nunionized) and existing\nlabor laws prevent unfair\nlabor practices.\n3. Foreign influence over a\n3. See A-4 above.\nfirm might cause the\ncompany to take actions\nin dealing with foreign\nnations (e.g. in nationa-\nlization or price or\nsupply negotiations)\ncontrary to US interests.\nD. Natural Resources. A foreign investor might use his invest-\nment in a way that would (1) deprive the US of essential natural\nresources or (2) retard the development of our natural resources.\nDanger\nExisting Protection\n1. Drain scarce materials\n1. Existing export control\nfrom the US (e.g. food,\nlaws provide for monitoring\nenergy or critical minerals\nand controls in cases\nand resources).\nwhere export would have\nan inflationary impact,\nlead to domestic shortages\nor threaten our national\nsecurity.\n2. Foreign owners sit on\n2. President has power under\nland or leases and not\nthe Selective Service Act,\ndevelop the resources.\nDefense Production Act and\nTrading with the Enemy Act\nto require priority orders\nor to take over a mine in\ncertain circumstances.\nGERÊLO FORD LIBRARY\n- 22 -\nE. Foreign Investor as Creditor. A foreign creditor might\nuse his influence as a creditor to gain control over assets\nof a US debtor corporation.\nDanger\nExisting Protection\n1. Influence disposition of\n1. U.S. bankruptcy laws and\nassets in liquidation or\nlaws of creditors rights put\nbankruptcy.\nsome limits on extent of\nforeign debtor influence.\n2. Power to accelerate loan,\nDebtor influence can be\nexercise security interest,\nminimized by careful drafting\netc. in event of default.\nof loan documents, requiring\nsubordinated indebtedness,\n3. Debtor consent can be with-\nkeeping foreign percentage\nheld to block acquisition\nbelow \"blocking percent\"\nor disposition of assets,\nunder indenture, etc. Also\nmerger, management changes,\nuse of U.S. trustee and need\nreorganization, etc.\nto comply with provisions\nof Trust Indenture Act of\n1940 in cases of publicly\nheld debt.\nF. Competition. A foreign investor may use his economic\npower to (a) gain a monopoly or unfair competitive position\nin key US industries; (b) engage in predatory pricing or\nconduct or (c) gain an undue concentration or accumulation\nof economic power\nDanger\nExisting Protection\n1. Individual country gains\n1. Antitrust laws would prevent\ncontrol of key industry.\nabuse of monopoly power\n2. A group of countries\n2. AT laws should prohibit--\n(or individuals) gains\nespecially if act in concert.\ncontrol of a key industry.\n3. Foreign investor's US\n3. If use monopoly power or\nactivities give strong\nrestrain trade, AT laws\nmarket power and perhaps\nshould protect.\ncompetitive advantage\n(e.g. vertical integration)\nwhen combines with its\nforeign activities.\nFORD & LIBRARY GERALD\n23\nDangers\nExisting Protections\n4.\nEconomic motives lead to\n4. No different than activities\ntry to drive competitors\nof some domestic investors and\nout of business, improve\nexisting AT laws (e.g.\nmarket position or gain a\nRobinson-Patman and laws\nmonopoly.\nre unfair competition)\nshould protect.\n5. Political motives lead\n5. AT laws should protect but\ninvestors to retaliate\ncheck (a) technical problems\nagainst companies which\nre application of AT laws to\ndeal with enemies of the\ngovernments and (b) enforce-\nforeign investor country.\nment problems re service\nof process and levy and\nexecution on assets if\nenterprise is owned by a\nforeign government.\n6.\nNo antitrust violation but a 6.\nNo real protection except\nrather pervasive influence\na series of older laws\nin US economy because of\nlimiting the extent of\nwidespread investments\nforeign investment in key\na. Foreign private investors\nsectors. Some control\nb. Foreign government\n(query as to how much) can\ninvestors.\nbe exerted over foreign\ngovernment investors\nthrough diplomatic channels.\nG. Political Objectives. A foreign investor (expecially if\ngovernment controlled) may use his influence over a US firm to\nadvance political objectives of the parent nation.\nDanger\nExisting Protection\n1. The firm would dis-\n1. The Foreign Propaganda Dis-\nseminate propaganda\nsemination Act would\nadvocating the objectives\nrequire the firm to file\nof the parent nation.\nan extensive registration\nstatement with the\nAttorney General and\nclearly indicate that any\npropaganda disseminated\nwas sent on behalf of a\nforeign government.\n2.\nThe firm would attempt\n2. The Federal Election Cam-\nto influence the U.S.\npaign Act Amendments of\npolitical processes\n1974 apply to all contribu-\ntors in Federal political\nGERALD FORD LIBRARY\ncampaigns. Contributions\nby any individual may not\naggregate more than $25,000\nin any one year.\n- 24 -\n3.\nThe firm might refuse to\n3\nThe antitrust laws provide\npurchase from or sell to\nprotection if the boycott\nnations unsympathetic to\nor refusal to deal con-\nthe objectives of the\nstitutes a restraint of\ninvestors parent nation.\ntrade.\n4.\nAcquire a US arms producer\n4.\nThere are various controls\nand require it to manu-\non the export of essential\nfacture arms abroad in the\nclassified technology\nparent nation.\nrelated to arms manufacture.\nAnd USG facility clearance\nwill not be granted to\ncontractor activities out-\nside the US.\nH. Government Investor. A foreign government might use its\nstatus as a sovereign to avoid some of the ordinary incidents\nof investment like taxation or lawsuits.\nDanger\nExisting Protection\n1. The doctrine of sovereign\n1.\nThe US adheres to the doctrine\nimmunity would prevent\nof sovereign immunity which\nlawsuits against foreign\nmeans that a foreign govern-\ngovernments.\nment would not be immune\nfrom suit when engaged\nin commercial activites\nin the US. There are,\nhowever, problems with\nexecution on a foreign\nsovereign's assets to\nsatisfy a judgment.\nGERALD FORD LIBRARY\nForeign governments engaging\nin international investment\ncan be required to waive\ndefense of sovereign\nimmunity as a condition\nprecedent to the invest-\nment.\n2. Foreign governments engaging\n2.\nWhile foreign governments\nin direct investment in the\nare generally exempt from\nUS might use tax exemptions\ntaxes on investment in the\nas a way to gain a competitive\nUS, the exemption does not\nadvantage over US firms in\napply to the income of a\nthe same market.\nseparate profit making\ncorporation which is\nowned by a foreign govern-\nment.\nLIMITED OFFICIAL USE\n- 25 -\nV.\nPossible Restrictions and Other Actions Regarding\nForeign Investment\nA. Proposals in the 93rd Congress\nThe bills introduced during the 93rd Congress give an\nindication of the approaches toward foreign investment\nthat might be taken in the current Congress.\n(1) Percentage Limitations. Certain proposals would\nestablish a maximum percentage limit on foreign\nownership of any U.S. enterprise. Variations on\nthis approach include different limits for equity\nparticipation and debt participation; limits only\nfor foreign participation in selected U.S. industries\n(as specified in the legislation or administratively)\nwhich (a) have access to data concerning national\nsecurity or (b) produce basic materials (e.g. energy,\nsteel, etc.).\n(2) Reporting. Other proposals would require U.S.\nfirms to identify existing foreign ownership\ninterests. Such legislation would confer upon\na single agency ongoing responsibility to collect\ndata on OPEC investment as it affects the United States.\nSome proposals would require foreign investors\nthemselves to report their acquisitions to the\nUnited States Government.\n(3) Prior Notice. All foreign investors desiring to\npurchase an interest in a publicly held U.S. firm\nwould be required to register in advance of their\npurchase with the SEC. Also, prior United States\nGovernment approval of broker, dealer or bank\ntransactions in the securities of certain industries\nwould be required to assure that foreign investors are\nnot acquiring these securities. These measures, which\nwere tied to other investment restrictions, would\npresumably insure adequate information concerning the\nscope of foreign investment and permit the United\nStates Government to act in advance to block acquisitions\nfound to be undesirable.\n(4) General Restraints on Doing Business. United States\nconstrols would be extended over foreign firms doing\nbusiness in the United States through branches,\ndivisions or subsidiaries.\nFORD & LIBRARY GERALD\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 26 -\nB. Proposals in the 94th Congress\nOnly a few bills relating to foreign investment in\nthe United States have been introduced so far.\n(1) Reporting\n(a) Senator Hugh Scott has introduced a bill\n(S.329) which would require any foreign\ninvestor or his agent who accumulates an\ninterest in a U.S. business worth more than\n$10,000 or which exceeds more than 0.5\npercent of its securities, to submit reports\nto the Commerce Department on a quarterly\nbasis.\n(b) Senator Harrison Williams has sponsored\nlegislation (S.425) with a number of far-\nreaching provisions.\n-- It would require the disclosure of the\nbeneficial ownership of more than 5 percent\nof the securities of all publicly traded\ncorporations. This would be accomplished by\nan amendment to the SEC's 13 (d) statement to\nelicit information as to the owner's\nresidence and nationality and identical data\nconcerning any person who possesses sole or\nshared voting authority over the securities.\n-- The tender offer provisions of the\nWilliams Act would be amended to require that\nforeign investors file a 13 (d), statement\nwith the SEC 30 days in advance of any\nacquisition of 5 percent or more of the\nequity securities of a U.S. company. The\nstatement would be confidential.\n-- This statement would be transmitted by the\nSEC to the President, who could review the\nproposed transaction and prohibit it during\nthe 30-day period. The criteria for this\ndecision-making process include adverse\neffects on the U.S. domestic economy, foreign\npolicy, or national security.\nFORD is LIBRARY GERALD\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 27 -\n-- The SEC, the Attorney General, or any\nU.S. corporation in which a foreign investor\nhad acquired an interest or any shareholder\nof such a corporation would be authorized\nto sue in federal court to unwind any\nacquisition made in violation of the pre-\nnotification requirements. Among other\npowers the court would be specifically\nauthorized to freeze voting rights of\nshares or to compel their disposition.\nIn the event of disobedience of any order,\nthe court could vest ownership. of the\nsecurities in a trustee who could then sell\nthem.\n-- Issuers of reigstered securities would be\nrequired to maintain and file with the\nSEC a list of the names and nationalities\nof the beneficial owners of their equity\nsecurities.\n(2) Restrictions\n(a) Representatives Fish and Roe have introduced\nidentical bills to restrict foreign investment\nin the United States (HR 411 and HR 945)\nand to creat a Joint Congressional Committee\non Foreign Investment Control in the United\nStates (HR 418 and HR 954).\n-- The National Foreign Investment Control\nCommission would limit and restrict (and\npossibly require divestiture of) foreign\ninvestment in certain corporations and\nnatural resources deemed essential to our\nnational security and/or economic security.\n-- The Joint Congressional Committee would\noversee the operations of the Commission\nFORD is LIBRARY GERALD\nand make recommendations to both houses of\nCongress or the Commission concerning\nmatters under its jurisdiction.\n(b) Representative Stark has sponsored a bill\n(HR 2052) to amend the Bank Holding Company\nAct of 1956 to prevent aliens from owning\nmore than one U.S. bank. Currently, foreign\ninvestors using personal funds instead of\ncorporate money are exempt from the Act.\nLIMITED OFFICIAL USE\nc\nGERALD LIBRARY 4 GRO\nGenera¹ Benefits and Costs of Foreign Investment\nin the United State\nFebruary 7, 1975\nIntroduction\nAt the macroeconomic level the principal benefit to\nthe United States of minimizing the restrictions against\nthe inflow of foreign investments is the resulting general\nincrease in the resources available to the domestic economy.\nThese resources became available through the functioning of\nan increasingly interdependent world economy in which flows\nof capital are directed by market forces to their most\nproductive uses, and the U.S. as well as all other countries\nbenefits from a more efficient allocation of capital and\nother resources. Thus, the basic case for freedom of capital\nflows among countries, including foreign investment flows into\nthe United States, is the same as the basic case for a free\nenterprise economy and an open world economy. There is the\ngeneral presumption that average self-interest motivated\nmarket behavior will lead to socially desirable outcomes\nand an efficient allocation of resources. Government inter-\nvention is called for only in cases where there is a strong\npresumption that the market outcome would be socially\nundesirable.\nIn examining the macroeconomic effects of foreign\ninvestment, it is important to keep in mind that the greater\nresource availability brought about by net foreign investment\nin a given year carries with it the necessity of increased\nforeign payments in future years. Thus capital inflows will\naffect the pattern of current account deficits and surplus\nnot only in the initial year of the inflow but also over the\nlife time of the investments until they are liquidated.\nUnder our present regime of generally flexible exchange\nrates, however, it would not be desirable for the government\nto attempt to regulate capital flows with the objective of\nachieving some target time path of current account surplus\nand deficits.\n1/ The term \"foreign investment\" usually refers to foreign\nBERALD FORD LIBRARY\nacquisitions or holdings of U.S. assets in the form of plant and\nequipment, stocks, bonds and other long-term investments as\nopposed to short-term liquid holdings such as bank deposits. It\nshould be noted, however, that all foreign claims on the United\nStates, in whatever form, constitute foreign investment and there\nis no a priori basis for differentiating between the various kinds\nof foreign investment as regards their economic effects. In fact,\na large part of what is commonly identified as \"foreign investment\"\nor as \"inflows of foreign capital\" is merely a change in the form\nof foreign claims on the United States. When a foreigner\npurchases long-term assets in the United States, the purchase\nis usually financed by drawing on dollars held in bank accounts\nin the United States. Thus in such cases an increase in foreign\nlong-term claims on the United States (a \"capital inflow\") is\noffset by a decrease in foreign short-term claims on the United\nStates (a \"capital outflow\") and there is no net effect on the\ninternational investment position of the United States.\n- 2 -\nThe fact that the return of foreign-source capital\naccrues to foreigners rather than to U.S. persons does not\nmean that U.S. national income is less than in the case of\ninvestments from U.S. -source capital. Thus the outflow of\ndividend and interest payments to foreign investors is matched\nby an equivalent or greater increase in national income as a\nresult of the foreign capital. This general economic\npresumption is reinforced by consideration of domestic tax\neffects. For example, if an increment of capital earns an\neconomic return of 20 percent and it is taxed by the U.S.\nGovernment at a rate of 50 percent then the cost to the\nUnited States of foreign-source capital is 10 percent while\nthe gain to U.S. output is 20 percent.\nCompetition\nAn important general benefit to the U.S. economy from\nforeign investment is that of increased competition which can\ncause new innovation by American firms, lower consumer prices,\nand increases in the quality of products.\nInvestment in a new facility would seem to be more likely\nto provide a stimulus to competition than a takeover of an\nexisting firm. Yet takeovers do not necessarily represent\n\"passive\" investments. The investing entity presumably\nenters to make a profit and often will bring different\nmanagement techniques, patterns of behavior, and perhaps\ntechnology with it. These alone may be sufficient to\nspur competition with its attendent benefits. The danger\nthat the opposite will occur, i.e. a reduction in competition,\ncan be handled adequately by antitrust enforcement methods,\na subject discussed in more detail in the paper on specific\ndangers.\nCapital Formation\nBy providing greater access to resources, foreign invest-\nment can have an important beneficial effect on capital forma-\ntion in the United States, an issue of particular importance\nat this time. There is general agreement that future capital\nrequirements of the United States are massive and concern\nwhether actual capital formation will be at the levels needed\nfor sustained, non-inflationary growth.\nFORD & LIBRARY GERALD\n- 3 -\nClearly, the main solutions to these problems lie in\nthe area of controlling inflation, improving incentives to\nsave and invest, and encouraging economic growth through\nmacroeconomic policies and regulatory reform. Yet many\ncorporations, bankers and financiers see the potential of\nsubstantial investments of oil producer funds in the United\nStates private sector as an important new source of capital\nfunds which will make it easier for the United States to\nfinance its capital requirements in the private sector\nand presumably will result in an increase in capital forma-\ntion over what otherwise would occur. Others, mainly\neconomists, have argued that because capital is fungible\nand domestic and international capital markets are relatively\nefficient, it is difficult to show that substantial foreign\nlong term investments in the private sector of the U.S. economy\nwill result in a significant increase in productive assets in\nthe private sector over what would occur if these funds were\ninvested elsewhere in the integrated capital markets, say in\nTreasury bills or Eurodollar deposits.\nForeign investment would increase the stock of productive\nassets in the United States in the private sector if:\n(1) in the case of direct investments, foreign investors\nundertook projects domestic investors would not have\nundertaken; or\n(2) foreign investment reduced the cost of capital to\nU.S. companies.\nIn the first case, foreign investors would have to have\nsome special ability not possessed by domestic investors or\ndifferent objectives. Several significant existing foreign\ndirect investments in this country probably fall in this\ncategory. OPEC investments in the United States are not\nlikely, at least for some time, to be in areas where they\nhave some special ability or technology. But it does seem\nlikely that oil producers will in certain cases have different\nobjectives from domestic investors. Probably the number of\nsizable grass-roots investments by oil producers will remain\nsmall. But they have shown a particular interest already in\nreal estate development and agribusiness, and certain down-\nstream oil industry investments might be more attractive to\nproducing countries than to domestic investors.\nFORD\nGERALD\nLIBRARY\n- 4 -\nThe second case, the potential effect on the cost of\ncapital to U.S. companies, is the more important consideration.\nThis case concerns the purchase by foreigners of new or\noutstanding issues of corporate stocks or bonds or direct\nfinancial participation in U.S. companies. In the sense of\nGNP accounting, these transactions themselves are not invest-\nments; they are merely shifts of ownership of existing wealth\nfrom one person to another; they are not directly income\nproducing although they presumably increase utility, and\nthey are not counted in GNP. These transactions occur in a\nfree market and thus presumably do result in an increase in\nutility or net benefits to those that participate in the\ntransactions. Yet such financial transfers, although not\nimmediately associated with income creation, would indirectly\naffect business investment if they resulted in a reduction\nin the cost of capital funds.\nIf we assume that OPEC investors will desire to place\na significant amount of their funds directly into long term\ninvestments in the private sector of the U.S. economy, we\nstill must consider the likely net effect of these invest-\nments on capital formation. The United States, of course,\nwill import real resources only to the extent of a current\naccount deficit. We know that an inflow of funds in a given\nmarket does not mean that supply in that market increases by\nthe full amount. Well functioning capital markets work to\neven up the supply of capital to the various markets until\nrates of return, adjusted for risk and liquidity, are equal\nthroughout the economy.\nIn the case of producer country investments in the U.S.\ncorporate sector, it seems likely that the market adjustments\nwould not be completely offsetting, and some reduction in the\ncorporate cost of capital would result. The net increase in\ncapital formation in this sector, however, would be significantly\nless than the gross inflow of foreign funds. Sizable producer\ninvestments in the stock market could induce additional domestic\npurchases by improving the business investment climate generally,\nand in particular, in the equity markets. Such an improvement\nmight eventually prove transitional, but the transition period\ncould be quite lengthy. Yet, some domestic investors may\nview the surge in stock prices as quite temporary and not\njustified by expected future profits. These investors would\npresumably withdraw from the equity market and invest their\nfunds where the expected return is greater.\n&\nFORD\nGERALD\nLIBRARY\n- 5 -\nAnother consideration is the likely change in asset\npreferences of investors that will result from the transfer\nof ownership of investable funds to the producers. The\npresent yields on financial assets domestically and inter-\nnationally reflect the asset preferences of existing investors\nand institutions. It is believed that some OPEC investors\nmay well see investments in U.S. corporate securities (debt\nand equity) in a more favorable light than the existing\nset of investors. These new investors are governments, or\ngovernment-directed, and they are considering not only the\nexpected profitability of such investments from the viewpoint\nof portfolio investors but also such factors as prestige, the\npossible benefits to domestic development programs (e.g.\ntechnology transfers), or other national interests (e.g.\ndefense requirements).\nIf indeed investor preferences shift towards U.S. corporate\nliabilities, one would expect a shift in yields, reducing\nyields on corporate securities and raising yields on other\nassets, at least relatively. This would lead to increased\ncapital formation in the corporate sector and (unless there\nis a general increase in saving and a general reduction in\nthe cost of capital due to the oil price increases) a reduction\nin capital formation in sectors where the cost of capital has\nincreased. Such yield shifts based on a change in the set of\ninvestors in the United States might well be permanent.\nHowever, the size of the yield shifts due to oil producer\ninvestments is not likely to be very great. Despite the\nlarge total amount of investable funds at their disposal,\nit does not appear that the volume of funds they are likely\nto place in the U.S. corporate sector will be large in comparison\nto the total size of our corporate equity and debt markets.\nFinally it must be noted that while direct placement of\nOPEC funds into the corporate sector would have the most imme-\ndiate effect on the availability of capital in the corporate\nsector, any net inflow of foreign capital into the United\nStates, even if into Treasury bills, would increase the total\namount of capital resources available to U.S. borrowers,\nincluding the corporate sector, and presumably reduce the\ncost of capital.\nGERAALO FORD LIBRARY\n- 6 -\nIn summary, the role of a particular segment of the\nspectrum of investors in our capital markets in determining\nthe rate of capital formation is rather uncertain. What\ndoes appear clear is that imposition of restrictions on\nthe ways a group of investors are allowed to invest their\nfunds interferes with the allocation mechanism of the\nprivate markets. The alternative for the private market\nallocation mechanism is some official determination of where\nfunds should go. This alternative is likely to result in\nconsiderably less than an optimal allocation of capital and\nprobably would tend to have a negative effect on capital\nformation.\nGeneral Dangers or Costs of Foreign Investments\nTurning to the dangers or negative aspects of foreign\ninvestments in the United States, there are only two issues\nwhich seem to fall in the general or macro category. The first\nof these is the arguments heard in many countries that foreign\ninvestment can adversely affect the national character, deter\ndomestic entrepreneurship and give to foreign interest\nundesirable economic and political power over the domestic\neconomy. Such fears may have substance in a small country,\nbut have less relevance at the national level to a country\nas large as the United States where even a large amount of\nforeign investment will be a relatively smaller share of the\ntotal economy. Moreover, as U.S. investors have found abroad,\neven when foreign investors play a major economic role in\na smaller economy, the sovereign powers of the host government\nare still pervasive and the actual powers of the foreign\ninvestor are considerably less than what consideration of only\ntheir economic importance to the country might suggest.\nUnder reasonable assumptions relating to their distri-\nbution of funds, OPEC's investments should amount to between\n1.5 and 5.0 percent of the value of securities in U.S.\nfinancial markets. Even under the most extreme assumptions,\nOPEC holdings would remain a small fraction of the value\nof U.S. financial securities and hence need not exert a\npervasive influence on the national character and operation\nof the American economy. (For a detailed explanation of\nthese estimates, see OASIA Research paper, \"OPEC Accumulations\nas a Proportion of Financial Markets in 1980.\")\nGERALD FORD LIBRARY\n- 7 -\nA second general concern is that of access to U.S.\ntechnology. This is, of course, a two way street; and in the\npast the U.S. has benefitted from the introduction of new\ntechnology by foreign investors, for example, in the\npharmaceutical industry. Yet, the present concern is\nmainly with respect to OPEC country investors who have\nlittle to offer the U.S. in the technology area. Will\nincreased foreign investments from the OPEC nations lead\nto the transfer of commercially valuable technology abroad,\nwhere such transfer would not otherwise have taken place?\nThe development strategies of at least some of the OPEC\ncountries involve rapid industrialization, with an apparent\nemphasis on advanced technology. Given the very large revenues\nthey earn, such countries might offer above-market prices\nto acquire particular technologies, in effect moving entire\nfirms from the United States to, say, Iran. The \"loss\" to\nthe United States in such cases at worst would be no greater\nthan if such a transfer were carried out by a U.S. firm. It\nwould likely be less unfavorable, for two reasons.\n-- the over-the-market payment would yield a monopoly\nrent to U.S. shareholders.\n-- the rather primitive state of the economies of the\nOPEC member makes it highly unlikely that advanced\nindustries located in these countries would be able\nto mount effective competition to U.S. products for\nmany years to come.\nThus, it appears that premature transfer --- i.e., transfer\nbefore market forces would cause it to occur -- would be\nquite unlikely, and in any case would not be costly to the\nUnited States, especially since generally there are several\ncompeting sources of technology and product in the United\nStates -- e.g., aircraft, computers, machine tools.\nIf there is any danger to the United States from foreigners\ngaining access to U.S. technology via inward direct investment,\nit seems much more likely to come from other industrial\ncountries. If any policy is desirable, it should be general,\nnot strictly with respect to OPEC. As with flows of goods\nand capital, economic theory indicates a strong presumption\nin favor of a policy of neutrality -- i.e., allowing\nmarket forces to determine flows of all these types, except\nin such exceptional circumstances as national defense consider-\nations.\nFORD i LIBRARY GERALD\n1817\n07\nFORD\nis\nCONFIDENTIAL\nFebruary 18, 1975\nProbable Foreign Reaction to New U.S. Restraints\nand\nPossible Impact of Restraints on International Negotiations\nForeign reactions to a modification of our inward invest-\nment policy will vary according to the magnitude of the change\nand its effects on particular countries. This paper assesses\nthe probable reactions and the impact on international negotia-\ntions if the U.S. Government were to impose (1) a mandatory\nregistration and disclosure requirement and/or (2) screening\nor added specific restrictions. Once the range of specific\npolicy options has been developed, the State Department will\nquery our missions concerning possible foreign reaction.\nI. Mandatory Registration and Public Disclosure\nA registration requirement would centralize and extend\nsomewhat the present reporting requirements of SEC, Commerce,\nTreasury, and other government agencies. The information\nobtained through registration could be made available to the\npublic. Substantial penalties would be imposed for non-\ncompliance. The requirement would not discriminate as between\nforeign investors and, by itself, would not violate our FCN\nobligations.\nThe nature of the foreign reaction will depend on whether\nsuch a requirement is ex-ante or ex-post and on whether it is\ninterpreted as signaling a major change in U.S. inward\ninvestment policy.\nOPEC Reaction:\nGiven the concern of most OPEC investors for anonymity and\nsecurity, even a simple registration requirement could have\na negative impact on our relations with OPEC countries, espe-\ncially if registration were interpreted as representing a funda-\nmental shift in the climate for OPEC investment in the United\nStates. Possible negative reactions which have been mentioned\ninclude:\n-- general deterioration of U.S.-oil producer relations,\nincluding discontinuation of Joint Commissions;\n-- diminished OPEC investment in the United States;\n-- further OPEC oil production cutbacks;\nDECLASSIFIED\nAUTHORITY Treasury its 8/22/06 stateginalines\nBY Hh NARA, DATE 9/10/09\nBERALD FORD LIBRARY\nCONFIDENTIAL\nCONFIDENTIAL\n- 2 -\n-- continued resistance to any reduction in oil price\nlevels;\n-- intransigence in other negotiations including Arab/\nIsraeli questions (by Muslim OPEC members) and the\nSecretary's \"New Dialogue\" with Latin America (by\nEcuador and Venezuela).\nMost other major developed countries (and OPEC countries)\nalready require registration of foreign direct investment.\nMany have additional, more stringent restrictions (see the first\nappendix for details). The degree of enforcement varies\nwidely and over time. Thus, even with registration, the\nUnited States would remain one of the least. restrictive sites\nfor OPEC investment. Careful prior consultations on a non-\ndiscriminatory reporting requirement could minimize adverse\nreaction by the oil producers. It therefore seems unlikely\nthat a registration requirement identified as an attempt to\nmeet a legitimate need for information without fundamentally\naltering our policy of neutrality on inward investment would\nresult in significant deterioration in U.S.-oil producer\ninvestment relations.\nOECD Reaction:\nSince most OECD countries already have registration\nrequirements, U.S. adoption of such a policy should not be a\nmajor source of concern for them. Still, a public disclosure\nprovision might elicit complaints from individual foreign\ninvestors, especially if it were not applied equally to U.S.\ninvestors as well. Also, any attempt to employ the registra-\ntion requirement to determine beneficial ownership would come\ninto conflict with certain bank and commercial secrecy laws.\nPrior consultations with our OECD partners about such a\nrequirement would help to reduce any adverse reactions and\nwould advance our objective of promoting regular multilateral\nconsultations within the OECD on government investment\npolicies.\nLDC Reaction:\nApart from OPEC members, developing countries have\nnegligible investments in the United States. Therefore, a\nregistration and disclosure requirement would probably not\nhave a significant impact on our relations with the LDCs.\nCONFIDENTIAL\nGERALD FORD LIBRARY\nCONPIDENTIA\n- 3 -\nII. Screening or Added Restrictions\nThe next step beyond an ex-post registration require-\nment would be an increase in ex-ante restraints such as\nscreening or new specific sectoral limitations. Such\nmeasures would have a greater foreign relations impact\nthan registration. It would be difficult to predict\nwhat, if any, differing foreign reaction would result\nfrom screening as opposed to new specific limitations.\nIt would seem reasonable to postulate, however, that\nany new restraints affecting inward investment \"across\nthe board\" would have a greater impact than screening or\nnew limitations in a few sensitive sectors.\nStand-by authority for screening or new restrictions\ncould produce a more negative reaction than restraints which\nwere immediately operational. Stand-by authority would\nincrease foreign investor uncertainty, and thereby add to\nour uncertainty as to their intentions. Stand-by authority\ncould also involve our inward investment policy more\ndirectly in U.S. domestic affairs since xenophobic groups\nand existing corporate managements seeking to protect their\nvested interests could be expected to agitate to have the\nstand-by authority invoked. Such action could increase the\npossibility of a proposed investment becoming an irritant\nin our relations with another country, especially as a global\nscreening procedure would violate numerous of our FCN treaties.\nOPEC Reaction:\nThe desire of the OPEC nations for developing their\nindustries and national defense production infrastructure and\ntechnology has already led some of them to seek investments\nin sensitive industries of developed country economies. While\neconomic motives undoubtedly play an important part in these\ninvestment and loan activities, security and political\nconsiderations are also present.\nNew sectoral restrictions or screening are likely to\nprevent OPEC states from making some investments which they\notherwise would. If the investment restrictions were limited\nto a relatively few sensitive sectors, the OPEC reaction\nmight be reduced. Even with some new sectoral restrictions,\nthe United States and West Germany are likely to provide the\nOPEC countries with their most attractive investment\nopportunities. It should be noted that many of the complaints\nwhich have been heard from OPEC investors concern the\npresentord BERALD LIBRARY\nCONFIDENTIAL\nCONFIDENTIAL\n- 4 -\nuncertainty about the future course of U.S. inward invest-\nment policy. In this regard, it might be well for us to heed\nour own advice to the LDCs: Stability of the rules of the game\nis extremely important to any investor.\nThe risk of decreased OPEC investment and of oil production\ncutbacks increases with the extent of any new restrictions.\nRestrictions which were directed specifically against OPEC\ncountries would almost certainly stimulate retaliation. The\nharsh criticism of Ecuador and Venezuela to the anti-cartel\nprovisions of the Trade Act are indicative of the sensitivity\nof these OPEC members to discriminatory treatment. A veiled\nattempt to get at the OPEC nations by restricting \"government\"\ninvestment might carry a similar risk and would certainly en-\ncourage evasion efforts.\nMost of the OPEC countries with financial surpluses are\nnewcomers to the ranks of major foreign investors. Conse-\nquently, their inward investment policies have been predominantly\ndetermined by domestic or regional political considerations. As\nOPEC foreign investments increase, however, the treatment of\nthese investments will probably become more of a factor in\nshaping their inward investment policies. In such circumstances,\nnew U.S. ex-ante investment restraints could well discourage the\nOPEC countries from liberalizing their own extensive restric-\ntions or lead to the imposition of additional restrictions.\nIt seems debatable whether that OPEC nations would take extreme\nretaliatory action (such as nationalization) against American\nfirms solely on the basis of moderate and nondiscriminatory\nnew U.S. inward investment restrictions. New U.S. restrictions\nwhich blocked specific projected OPEC investments would increase\nthe likelihood of adverse reaction by oil producer governments.\nPrior consultations with the OPEC nations on changes in\nour inward investment policy would help to moderate the\nnegative impact of a more toward a more restrictive inward\ninvestment policy.\nOECD Reaction:\nThe United States maintains one of the most liberal\ninward investment policies of any major industrialized\ncountry. Canada and Australia both have explicit across-\nthe-board screening mechanisms and de facto screening\ntakes place in many other OECD countries, including the\nU.K., France and Japan. The less developed members of\nFORD is LIBRARY GERALD\nCONFIDENTIA'\nCONFIDENTIAL\n- 5 -\nOECD all maintain numerous restrictions on inward investment.\nModerate new U.S. restrictions in sensitive sectors therefore\nshould not result in retaliation by other OECD members against\nU.S. investments although they could discourage some OECD\ninvestments here. New U.S. restrictions, even if relatively\nmodest, might well become an intergovernmental issue if they had\nthe effect of blocking specific investments being contemplated\nby firms in other OECD countries. Broad new restrictions\nwhich violated our FCN treaty obligations would elicit protests\nand invite retaliation against our investments. (See appendix\n2 for a discussion of FCN Treaties.) A more restrictive U.S.\ninward investment policy could have a negative effect on our\nability to lead efforts in the current OECD investment exercise\nto maintain liberal policies toward foreign investment.\nA more restrictive U.S. policy could also lend greater\nrespectability to the more extreme restrictions imposed\nby other countries and would strengthen the hands of those\nsuch as Canada and Australia who are not anxious for any\nnew OECD action in the field of government investment\npolicies. New U.S. derogations to the OECD Capital Movements\nCode would encourage others to weaken their own commitments.\nPrior consultation in the OECD aimed at coordinating OECD\npolicies would somewhat lessen the adverse reaction to a more\nrestrictive policy.\nThe OECD countries are unlikely to favor a U.S. policy\nwhich discriminates against the OPEC nations. No OECD\ncountries currently maintain policies which explicitly discriminate\nagainst foreign investors by nationality, apart from limited\nreciprocal preferential treatment among EC member countries.\nThe Europeans and Japan would oppose measures which would\nincrease the possibility of confrontation with the oil\nexporters and have tended to favor measures, such as the IMF\nrecycling plan, which would strengthen the role of OPEC\nnations in the world financial system. In addition, there\nwould be concern that discrimination against OPEC\ninvestment today might be extended to them tomorrow.\nThe Japanese surely recall that in 1973 it was their invest-\nment -- not those of Arab oil producers -- which produced the\npublic outcry in the United States.\nOn the other hand, the British and German governments are\ncurrently reviewing their inward investment policies, reportedly\nin response to public reaction in their countries to some\nhighly publicized transactions involving OPEC investors.\nPreliminary reports indicate that they are considering\nBERALD FORD LIBRARY\n-CONFIDENTIAL\nAPPENDIX 1\nLIMITED OFFICIAL USE\nPOLICIES AND PRACTICES OF MAJOR DEVELOPED COUNTRIES\nRELATING TO INWARD DIRECT INVESTMENT\n(Particularly from OPEC Countries)\nIn general, the policies and practices of major developed\ncountries relating to inward investment which are summarized\nbelow represent their traditional views on this subject and\ndo not stem directly from the recent concerns with OPEC\ninvestment (although the implementation of existing policies\nmay in some cases have been adjusted to take such concerns\ninto account). One explanation for the current inactivity\nis the fact that, for most countries other than the United\nStates, the question of sizeable inward investments in critical\nindustries is one which has been confronted--ar resolved--\nbefore when faced with U.S. investments. While OPEC invest-\nments may have certain special qualtities (for example, the\nfact that most involve takeovers of existing enterprises\nrather than creation of new ones), many countries already have\nsafeguards which they consider adequate to protect their\neconomies.\nA second reason is that many of the smaller countries do\nnot expect to have large amounts of petrodollars invested in\ntheir economies. It may well be that most of these would\nreact negatively should extensive investments materialize,\nespecially if they were concentrated in vital economic\nsectors. Such a reaction might be influenced heavily by the\nattitudes towards OPEC investments expressed by the OECD\nmembers, particularly the United States and the FRG, which\nhave traditionally pledged support for the principle of\nfreedom of international capital movements as embodied in the\nOECD Code of Liberalization of Capital Movements (of which\nFORD\nall OECD members except Canada are adherents).\nThe following notes relate to the summary of country\nGERALD\nLIBRARY\npolicies and practices below:\n-- Screening involves discretionary power by the national\ngovernment in approving or disapproving individual\ninvestments, as opposed to outright restrictions.\n-- Except where otherwise noted, countries have taken\nno overt steps designed to control OPEC investments\nin particular, either in policy or in practice.\n-- The statement \"foreign direct investment generally\nwelcome\" does not necessarily exclude restrictions\non investment in specific vital sectors comparable\nto those currently imposed in the United States with\nrespect to atomic energy, air transport, coastal\nshipping, etc.\nLIMITED OFFICIAL USE\nLIMITED OFFICIAL USE\n- 2 -\nAustralia:\n(1) Screening of all foreign direct investments.\n(2) Policy is aimed at maximizing Australian ownership\nand control of local resource industries.\nBelgium:\n(1) Foreign direct investment generally welcome.\nCanada:\n(1) Screening of foreign takeovers of domestic corporations\n(prospectively of new investments).\nDenmark:\n(1) Foreign direct investment generally welcome.\n(2) Indications that balance of payments concerns are\nleading Danes to seek petrodollars loans and in-\nvestments.\nFrance:\n(1) Screening of all foreign direct investments.\n(2) Indication that OPEC or other foreign takeovers of\nheavy industry, such as Iranian purchase of interest\nin Krupp, would not be permitted.\nGermany:\n(1) Foreign direct investment generally welcome, with an\nex post reporting requirement. (Following the unex-\npected Kuwait investment in Daimler-Benz, Chancellor\nHelmut Schmidt reportedly now favors legislation to\nrequire ex ante disclosure of the names of foreigners\nundertaking direct investment in German companies.)\nItaly:\n(1) Foreign direct investment generally welcome.\n(2) Balance of payments concerns are leading the Italians\nto actively encourage petrodollar recycling in Italy.\nLIMITED OFFICIAL USE\nFORD is LIBRARY GERALD\nLIMITED OFFICIAL USE\n- 3 -\nJapan:\n(1) Screening of all foreign direct investments.\nNetherlands:\n(1) Foreign direct investment generally welcome.\nSwitzerland:\n(1) Foreign direct investment generally welcome.\n(2) Indications that foreign takeovers of Swiss\nfirms would be opposed.\nUnited Kingdom:\n(1) Screening of all foreign direct investments.\n(2) Labour Government may move toward increasing\ngeneral restrictions on foreign direct invest-\nments of any origin.\nFORD & LIBRARY 076830\nLIMITED OFFICIAL USE\nAPPENDIX 2\nTreaties of Friendship, Commerce and Navigation\nThe traditional friendship, commerce and navigation treaty\n(FCN) is designed to establish an agreed framework within which\nmutually beneficial economic relations between two countries\ncan take place. The executive branch has long regarded these\ntreaties as an important element in promoting our national\ninterest and building a strong world economy.\nTo our benefit, the treaties establish a comprehensive\nbasis for the protection of American commerce and citizens\nand their business and other interests abroad, including the\nright to prompt, adequate and effective compensation in the\nevent of nationalization. However, the FCN treaties are not\none-sided. Rights assured to Americans in foreign countries\nare also assured in equivalent measure to foreigners in this\ncountry.\nFrom the viewpoint of economic foreign policy a measure of\nincentive for the FCNs was the desire to establish agreed\nlegal conditions favorable to private investment. The heart\nof \"modern\" (i.e. post World War II) FCN treaties (and those\nwith our OECD partners are generally of this type) is the\nprovision relating to the establishment and operation of\ncompanies.\nThis provision may be divided into two parts: (1) the\nright to establish and acquire majority interests in enterprises\nin the territory of the other party is governed by the \"national\ntreatment\" standard. (National treatment is defined in the\ntreaties as \"treatment accorded within the territories of a\ncontracting party upon terms no less favorable than the treat-\nment accorded therein, in like situations, to nations, companies,\nproducts, vessels or other objects, as the case may be, of such\nparty. \") There are no FCN treaties with OPEC countries which\ncontain this provision. Secondly, the \"controlled\" domestic\ncompany is itself assured national treatment and discrimination\nagainst it in any way by reason of its domination by alien\ninterests is not permissible. Our FCN treaty with Iran has\nthis provision. Our 1933 provisional agreement with Saudi\nArabia can be interpreted to provide similar protection.\nThe FCN treaties do exempt certain areas from the \"national\ntreatment\" standard in order to conform with laws and/or\npolicies in existence when the treaties were negotiated and in\norder not to infringe upon other treaty obligations of the\nFORD & LIBRARY GERALD\n- 2 -\nUnited States or our national security interests. Thus,\nspecific exclusions from national treatment are provided in\nthe areas of communications, air and water transport, banking, and\nexploitation of natural resources. Also, the modern FCN\nprovides that it does not preclude the application of measures\nregarding fissionable materials, the manufacture of\nimplements of war, traffic and materials carried on directly\nor indirectly for the purpose of supplying military establish-\nments or necessary to protect essential security interests.\nFORD & GERALD LIBRARY\nE\nin\nGERALD\nFORD LIBRARY\nGERALD R. FORD LIBRARY\nThis form marks the file location of item number Id\nas listed on the pink form (GSA Form 7122, Withdrawal Sheet)\nat the front of the folder.\nLIMITED OFFICIAL USE\nOPEC Accumulations as a Proportion of\nFinancial Markets in 1980\nRecent estimates of peak OPEC accumulations lie in the\nrange of $200 to $300 billion in 1974 dollars, with the peak\noccurring around 1980. In the following comparisons $250\nmillion is used as' a round order of magnitude.\nThese accumulations, though massive in absolute magni-\ntude, need to be compared with other magnitudes if their\neconomic significance is to be evaluated. Value of assets in\nmajor world financial markets where these funds will be held\nis perhaps the most relevant single comparison.\nThe value of equities, bonds, and short-term debt in\nOECD and major international capital markets totalled nearly\n$3 trillion in 1972 (in 1972 dollars; in 1974 dollars this\nfigure might be on the order of $3 1/2 trillion). The U.S.\naccounted for roughly 3/4, or $2.2 trillion, of the 1972 total.\nAssuming 10% annual market growth in nominal terms by\n1974, total value of assets in these major world financial\nmarkets would be nearly $3.6 trillion in 1974 dollars; the\nU.S. share might be on the order of $2.7 trillion if the 75%\nU.S. share holds up. (This compares closely with a McGraw-\nHill estimate of total U.S. debt -- public and private -- of\n$2.5 trillion in 1974.)\nFORD & LIBRARY 076839\nLIMITED OFFICIAL USE\n- 2 -\nA continued nominal growth of 10% per year, with inflation\nrates of 12% through 1976 and 7% thereafter (the same\ninflation rates assumed in deflating the 1980 OPEC accumula-\ntions) yields an estimated capital market size of $3.8\ntrillion (constant 1974 dollars) in 1980. Since U.S. new\nissues. are a relatively smaller percentage of total new\nissues (37% in 1972) than of outstandings, the U.S. share\nwould be reduced to perhaps 70% or $2.7 trillion.\nIf OPEC financial accumulations total $250 billion (in\n1974 dollars) in 1980, they would amount to less than 7 per-\ncent of the total value of outstanding assets in the major\nnational and international financial markets. Even if we\nallow for a 25% overestimate of capital market size in 1980,\nthe accumulations would be less than 9% of this smaller total\n(i.e., of $2.85 trillion)\nFor the U.S., the relative size of OPEC holdings would\nalmost certainly be considerably smaller. For example, if\nOPEC invested 20 percent (the current proportion) of its\ntotal 1980 accumulations in the U.S., this would amount to 1.5\nto 2.0 percent of U.S. financial assets. If OPEC invests as\nmuch as 40 percent, or $100 billion, OPEC investments in the\nU.S. would still be only 3.6 percent of the value of U.S.\n1/ Such a comparison implies an actual shrinkage in real\nterms of world capital markets between now and 1980.\nGERALD FORD LIBRARY\nLIMITED OFFICIAL USE\n- 3 -\nfinancial markets on the above assumption. Even with no real\ngrowth in U.S. financial markets between now and 1980, OPEC\ninvestments of $100 billion (in 1974 dollars) would amount to\nless than 5 percent of total U.S. financial assets. In the\nmost extreme case -- total OPEC accumulation of $250 billion\nin a U.S. capital market which has shown no growth between\nnow and 1980 -- OPEC investment would still amount to no more\nthan 10 percent of total value of U.S. financial markets.\nThe foregoing discussion suggests that appropriate U.S.\npolicy toward inward investment should not be strongly affect-\ned by the magnitude of OPEC dollar holdings. Even under the\nmost extreme assumptions, OPEC holdings would still be a\nrelatively small fraction of the size of U.S. financial\nmarkets and hence need not exert a pervasive influence on\nthe national character or operation of the U.S. economy.\nOASIA/Research\nFebruary 14, 1975\nFORD is LIBRARY GERALD\nRALD / R. FORD LIBRA\nCONFIDENTIAL\nExtract from minutes of CIEP Executive Committee\nMeeting of December 21, 1973\nV.\nInternational Investment\nA. Foreign Investment in the U.S.\nMr. Flanigan noted that a number of hearings had been\nscheduled by various Congressional committees on foreign\ninvestment in the U.S. and that a CIEP working group had\ndeveloped an outline of a suggested approach for Adminis-\ntration witnesses for approval by the Committee. Mr.\nNiehuss reported that three bills relating to foreign\ninvestment in the U.S. had already been introduced and\nthat hearings were scheduled or contemplated by four\ndifferent committees early next year. He noted that the\nCIEP interagency working group had suggested that\nAdministration witnesses state that U.S. policy was to\n(a) continue to freely admit foreign investment into the\nU.S. and to treat foreign investors on the basis of\nequality with domestic investors once they were operating\nin the U.S.; (b) work towards the development of a better\ndata base with respect to foreign investment in the U.S.;\nand (c) review existing restrictions on foreign investment\nin the U.S. to see if they were still needed. There was\nno discussion or objection and it was agreed to accept the\nworking group's suggested policy for Administration witnesses.\nDECLASSIFIED\nNSC Memo, 3/30/06, State Dept. Guidelines\nE.O. 12958 (as amended) SEC 3.3\nBy Un\nNARA, Date 9/10/09 elines\nis\nFORD\nGERALD\nLIBRARY\nCONFIDENTIAL\nGUIDANCE FOR ADMINISTRATION\nWITNESSES WHO TESTIFY CONCERVING\nFOREIGN DIRECT INVESTMENT IN\nTHE U.S.\nBackground\nAlthough foreign direct investment in the U.S. (herein-\nafter referred to as \"FDI\") rose from $7.6 billion to $14.4\nbillion in the decade from 1962 to 1972, there were wide\nfluctuations in the yearly growth. It varied from a low of\n$257 million in 1966 to a high of $1,452 million in 1970,\nwhich was followed by a sharp drop to $385 in 1971 and a\nsubsequent rise in 1972 to $708. It is certain that 1973 FDI\nwill show a substantial increase over 1972; FDI for the first\nsix months of 1973 was $728 million, and projections for the\nentire year range from $1 to $1.5 billion (See Tab 1 for\nStatistical Summary).\nThe 1973 growth has been accompanied by widespread publi-\ncity given to such developments as the Canada Development Corpora-\ntion tender offer to Texasgulf and Japanese investment in Hawaii\nand California. In addition, the devaluation of the dollar,\nthe uncertainty as to future U.S. trade policy, the growing\nsize and sophistication of foreign firms and the depressed\nstate of our stock market have created fears of even larger\nincreases in 1974.\nAS a result, a number of Congressmen have introduced or\nbegun drafting) bills which would restrict FDI. For example,\nthe Dent Bill would prevent non-U.S. citizens from owning more\nthan 5% of the voting securities of U.S. companies registered\nunder the Securities Exchange Act of 1934. In addition,\nCongressman Moss is drafting a bill which would limit foreign\ncontrol of companies in the energy and national defense sectors.\n(See Tab 2 for a Summary of Expected Congressional Activity).\nCurrent Policy\nU.S. policy with respect to international investment\nhas been based on the premise that the operation of free market\nforces in determining the direction of worldwide investment\nflows will maximize the efficient use and allocation of\ncapital resources in the international economy. Accordingly,\nour basic policy toward FDI has been to admit and treat\nforeign capital on a basis of equality with domestic capital.\nWe have offered foreign investors no special incentives\nFORD & LIBRARY GERALD\nto attract them to the U.S. and, with a few interna-\ntionally recognized exceptions, have imposed no\nspecial barriers to FDI. In other words, our policy has\nbeen to freely admit foreign investors and to treat them\non the basis of equality with domestic investors once they\nare operating within the U.S. Such a policy has been\nconsistent with our overall dedication to the freest\npossible trade, nondiscrimination against foreigners, and\nencouragement of competition from all sources. It is\nalso consistent with our obligations under the OECD Capital\nMovements Code and is reflected in bilateral treaties of\nFriendship, Commerce and Navigation with most of our\nmajor trading partners.\nWe have, however, imposed some restrictions on FDI\nin certain sensitive sectors of the economy which have\na fiduciary character, relate to the national defense or\ninvolve the exploitation of certain natural resources.\nThe most important sectors affected are coastwise and\nfreshwater shipping, domestic radio communications, domestic\nair transport, acquisition or exploitation of federal\nmineral lands and hydroelectric power. These restrictions\nare generally accepted internationally as appropriate\nexceptions to national treatment and are incorporated into most\nof our bilateral treaties. Additionally, restrictions on foreign\ninvestment, particularly in banking, insurance and\nland ownership are imposed by many states. A CIEP working\ngroup is reviewing state restrictions and incentives along\nwith the general question of state powers to regulate FDI,\n(See Tab 3 for a summary of the current restrictions on FDI)\nFrame of Reference\nAny policy with respect to FDI should be consistent\nwith the President's view that:\n\"an open system for international investment,\nis\nFORD\none which eliminates artificial incentives or\nimpediments here and abroad, offers great\nGERALD\npromise for improved prosperity throughout\nLIBRARY\nthe world\" (April 10, 1973 Message concerning\nthe Trade Bill).\nIn addition, U.S. policy with respect to FDI should\nbe made in the context of the Administration's overall\nefforts to contribute to the productive reform of the\ninternational economic system. As Secretary Shultz noted\nrecently:\n-3-\n\"International monetary reform, international\ntrade and investment, and improving the quantity and\nquality of international development assistance\nare all aspects of the same problem of constructing\nan endurable system of economic intercourse.\nBecause they are inextricably linked, because we\nmust negotiate in all these fields with the same\ncountries and frequently with the same individuals,\nwhat the United States does or does not do in regard\nto (one area) will inevitably have a profound\nimpact on what we are able to accomplish in the\nremaining fields\". (November 14, 1973 Statement re\nIDA and ADB replenishment).\nBecause of this interrelationship, the adoption of new\nrestrictions on, or incentives for, FDI could seriously\nundercut our efforts to liberalize trade and investment through\ninternational negotiations.\nSuggested Approach for Administration Witnesses\nNo change in current policy is proposed. This means\nthat Administration witnesses should (a) resist Congressional\nattempts to add restrictions to FDI and (b) state that our\npolicy is to continue to freely admit foreign investors and to\ntreat them on the basis of equality with domestic investors\nonce they are operating within the U.S.\nMajor Reasons for the Suggested Approach\nBERALD FORD LIBRARY\n1. FDI is currently so small in relation to the size\nof our economy that (a) it has no significant effect\non such factors as aggregate demand, employment,\nthe money supply and the implementation of our\nmacroeconomic policy and (b) there is no imminent or\nprospective threat. of foreign domination or control\nof any significant or critical sector of our economy;\n2. New restrictions (or incentives) would be contrary\nto the President's desire to create an \"open system\nof international investment\nwhich climinates\nartificial incentives or impediments here and\nabroad\n\"\n3. Added restrictions (or incentives) would scriously\nundercut our efforts to liberalize international\ninvestment in multilateral forums like the OECD;\n-4-\n4. Restrictions would invite foreign retaliation and\ncontribute to the growth of protectionism abroad,\nand new U.S. incentives might encourage competition\namong countries to attract investment;\n5. Given the uncertainty as to the net effects of\nFDI on our balance of payments and its relative\ninsignificance in our overall balance of payments\nflows, there is no compelling reason to restrict (or\ngrant incentives to) FDI for balance of payments\nreasons;\n6. Introduction of new restrictions would reduce the\neconomic benefits from FDI (e.g. new competi-\ntion and technology leading to lower prices and\nbetter products and services for U.S. consumers) ;\n7. We already have substantial power under existing laws\n(e.g. antitrust laws, securities laws, and Defense\nDepartment regulations) to protect the economy from\nforeign control or to prevent foreign access to\nclassified materials;\n8. Granting special incentives to attract FDI would\ndiscriminate against U.S. business and subsidize\nits foreign competitors\n9. New restrictions would conflict with international\nobligations which we have assumed in Treaties of\nFriendship, Commerce and Navigation with many of\nour major trading partners; and\n10. Added restrictions are directly contrary to the\nefforts of many states to attract foreign investment.\nAttachments: The following materials may be useful to\nAdministration witnesses:\n1. A brief statistical summary of FDI (Tab 1)\n2. A brief summary of proposed Congressional activity\nwith respect to FDI (Tab 3);\n3. A summary of the current restrictions on FDI\n(Tab 2).\nFUND LIBRARY 07V839\n4. A summary of economic analysis rc FDI (Tab 4).\nCONFIDENTIAL\nExtract from minutes of CIEP Executive Committee\nMeeting of May 22, 1974\nIV. International Investment\nB. Investment Policy Paper\nThe revised paper \"U.S. Policy and Objectives on\nInternational Investment\" has been approved and is attached.\nIt will be used for internal U.S. Government guidance in the\ndevelopment of positions on investment issues and as an\nindication of future work needed on particular problems.\nAttachment\nCONFIDENTIAL\nGERALD\nFORD & LIBRARY\nDECLASSIFIED\nE.O. 12958 (as amended) SEC 3.3\nNSC Memo, 3/30/06, State Dept. Guidelines\nBy\nNARA, Date 9/10/09\nCONFIDENT\nU.S. POLICY AND OBJECTIVES ON\nINTERNATIONAL INVESTMENT\nGeneral Premises\nU.S. policy with respect to international investment should aim\nat the following objectives:\nA.\nPromotion of economic growth and development in\nthe United States,\nB.\nPromotion of political-economic relations with\nother nations.\nWe believe these objectives can best be accomplished within an\ninternational economic system providing an environment which:\ni.\nfacilitates international trade and capital\nflows among nations:\nii.\ninvolves a minimum of governmental interference\nwith international economic transactions while\nplacing maximum reliance on market forces to\ndirect world trade and investment;\niii. evolves within a framework of international\nFORD LIBRARY & GERALD\ncooperation.\nGeneral Investment Objectives\nIn this framework, the basic U.S. policy objectives concerning\ninvestment are to achieve--to the extent possible and consistent\nwith the nature of progress in other areas of international economic\ncooperation--an international investment environment in which\ngovernment policies would play a neutral role, neither encouraging\nnor discouraging investment flows. It is recognized that the ideal of\nneutrality cannot be achieved short of a complete international\nharmonization of policies, which for the time being is an unrealistic\ngoal. Furthermore, every nation, including the U.S. needs to\npreserve flexibility to act to protect its security and other vital\nDECLASSIFIED\nE.O. 12958 (as amended) SEC 3.3\nCONFIDENTIAL\nNSC Memo, 3/30/06, State Dept. Guidelines\nBy la\nNARA, Date 9/10/09\n- 2 -\nCONFIDENTIAL\nnational interests. Nevertheless, it is desirable to work\ntoward an international system of investment behavior which\nwill maximize the achievement of the following:\nI.\nInvestment capital should be free to move to its most\nproductive use in response to market forces and motiva-\ntions, with the minimum possible distortion resulting\nfrom national policies or practices governing or affecting\ninvestment. There should be a presumption against the\nuse of controls on capital flows. In cases where controls\nare resorted to they should be subject to international\nconsultation and surveillance. This includes controls for\nbalance of payments or cyclical policy reasons as well as\ncontrols on entry and establishment of foreign investors\nfor structural or for non-economic reasons. Moreover,\nnational incentives and disincentives affecting investment\nof a kind which can be expected to have substantial inter-\nnational effects should be avoided. When considered\nnecessary for the achievement of legitimate national\nobjectives such policies should be amenable to interna-\ntional examination and discussion.\nII. Foreign investors should be given national treatment, which\nmeans they should be treated no less favorably than other\nhost-country nationals, subject to the same rights and obli-\ngations conferred or imposed by that country's laws and\nGERALD FORD LIBRARY\nguaranteed full legal protection under them.\nIII. Foreign investors are not subjected to special, politically-\nmotivated inducements, constraints or arbitrary treatment,\nand actions by governments regarding particular foreign\ninvestments are taken subject to defined rules and procedures.\nIV. Adequate mechanisms are developed to facilitate inter-\nnational consultations on investment issues, and disputes\nwhich arise among governments are settled in accordance\nwith international law pursuant to agreed and fair procedures.\nExceptions to these principles (including the neutrality of govern-\nment policies, national security limitations, etc.), should be\nspecifically defined, applied on an MFN basis, and recognized as\nsubjects for intergovernmental consultation (as outlined in the\nfollowing sections).\nCONFIDENTIAL\n- 3 -\nCONFIDENT\nL\nSpecific Negotiating Objectives\nIn the complex task of reshaping the world's economic system,\ncareful attention should be given to coordinating our efforts in the\nthree areas of monetary reform, multilateral trade liberalization,\nand liberalization of foreign investment. The total implications of\nchanges in each of these areas cannot be perceived until at least\nthe broad outlines of the overall restructuring of the international\neconomic system are in view. Nevertheless, it is not realistic,\nand hence not desirable to try to negotiate international agreements\nin all three areas as a single \"package\". Rather, where areas of\nconsensus already exist or appear to be possible we should move\nahead and attempt to obtain agreements which meet specific\nnegotiating objectives, which are discussed in detail below.\nI.\nGovernments interfere with the operation of market flows\nin three basic ways:\n(1) Through the imposition of exchange controls or other\nrestrictions on capital movements for balance of payments\npurposes. Our objective here is to strengthen internationally-\nagreed guidelines or criteria governing the use of exchange\ncontrols. The appropriate forum for negotiating this objec-\ntive is through the C-20 (or IMF) negotiations on international\nmonetary reform.\nAs regards the negotiations over new investment rules,\nwe seek agreement to the principles that, in the administra-\ntion of exchange controls or other restrictions when imposed,\ngovernments will ensure that the controls do not operate to\nthe competitive disadvantage of enterprises controlled by\nforeign investors in their business activities relative to\noperations of enterprises controlled by their nationals, and\nthat disagreements over these matters between governments\nare a proper subject for international consultation.\nWe should also keep the activities of the Organization for\nEconomic Cooperation and Development (OECD) in these\nmatters (eg., the surveillance function of the Working Party 3\nand the implementation of the OECD's Capital Movements and\nInvisible Transactions Codes) under review, both in terms of\ntheir adequacy and of their possible use as models for wider\napplication.\nFORD\nGERALD LIBRARY\nCONFIDENTIAL\n- 4 -\nCONFIDENTIAL\n(2) Discriminatory Measures: Through domestic\nlegislation, policy, or administrative practice, governments\nmay induce or prevent particular kinds of foreign investment\nin a manner or under criteria which differ from the laws,\npolicies, or practices governing equivalent activities by\ntheir nationals. As a general proposition, our objective\nhere is to secure international agreement that removes the\ndiscriminatory elements of these laws, policies, or practices,\n(i.e., that new investors are given national treatment) with,\nof course, appropriate exceptions for national security and\nother clearly defined, generally accepted and limited purposes.\nWe reocgnize that many governments currently maintain\nlaws or procedures by which inward direct investments\nare screened for acceptability or are otherwise required\nto meet standards or criteria which do not apply to activities\nof nationals. Basically, we do not favor these types of con-\ntrols in principle and should urge their removal. We should\nalso resist efforts to derogate from existing commitments to\navoid discriminatory measures. However, since we cannot\nrealistically expect these countries to eliminate these laws\nor practices soon, it may be opportune to try to fix limits\nwithin which the existing discrimination can be contained, and\nto, therefore, seek agreement to the following principles by\nthose countries which maintain discriminatory practices:\n(a) Countries imposing such controls should\nmake all limitations or qualifying criteria public\nand clearly defined.\n(b) Once an investor satisfies these criteria and\nis accepted as an established investor, he shall\nnot be required to meet new criteria not required\nof nationally-owned enterprises after his investment\nis made.\n(c) If a particular investment proposal is denied,\nthe government will state the reasons for denial\nand afford the investor either a reasonable amount\nof time to modify his proposal to meet the objec-\ntions, and/or reasonable rights of appeal.\nFORD & LIBRARY GERALD\nCONFIDENTIAL\n- 5 -\nCONFIDENT\nL\n(d) There will be no discrimination among foreign\ninvestors because of their nationality. Investors\nfrom all countries will be guaranteed MFN treat-\nment. (There would be no exception for members\nof a purely trading arrangement, such as a customs\nunion or free trade area.)\n(e) Disagreements over the implementation of\ndiscriminatory laws or practices should be\nrecognized as a proper matter for international\nconsultation.\n(3) Non-Discriminatory Distortions: Through certain national\npolicies or practices affecting investment governments distort\nthe operation of market forces. This area includes a variety\nof different national laws or practices which (by design or as\na side effect) may induce or discourage investment flows into\nor away from particular countries which economic factors\nalone would not do.\nIn many instances, these laws or practices are designed\nto promote valid national or international objectives. Our\nobjective is, in general, to minimize the adverse conse-\nquences (if any) resulting from such distortions and to\nprevent projected or potential damage to the economy or\nfirms of other countries.\nWe will, therefore, develop objectives and strategies\nthrough interagency consultations in such areas as (but\nnot necessarily limited to):\n(a) investment subsidies and other incentives\nwhich distort trade and investment patterns;\n(b) tax and accounting practices affecting\ninternational investment;\n(c) technology transfers connected with\ninvestment;\n(d) laws designed to promote or regulate\nBERALD FORD LIBRARY\ncompetition (anti-trust or restrictive business\npractice laws);\n(e) information collection and exchange;\n(f) extraterritorial application of national laws.\nCONFIDENTIAL\n- 6 -\nCONFIDENTIAL\nII. National Treatment for Foreign Investors\nIn addition to our desire for national treatment for new investors,\none of our priority objectives in the investment field is to\nsecure a workable international agreement that limits de jure\ndiscrimination and prohibits the considerable amount of\nde facto discrimination among foreign-controlled and national-\ncontrolled enterprises which exists in some countries. To\nthe extent that there is discrimination in the award of public\ncontracts, it should be most appropriately addressed in the\nnegotiations over a new international code on government\nprocurement. However, it also arises over such matters\nas access to local capital markets, pressures to invest or\nexport, etc.\nOur objectives are thus:\n(1) Agreement to a firm national treatment rule (or\n\"guidelines\") for foreign investors which are established\nin accordance with publicly known host-country law and\ncriteria, and that any exceptions (eg., limits on activities\nfor national security or other specifically defined reasons,\nsuch as limits of Federal jurisdiction over states or provinces)\nshould be clearly stated in public laws or regulations.\n(2) Guarantee of full protection under, and benefits\nconferred by, host-country law and access to courts.\n(3) Recognition that disagreements concerning national\ntreatment of established investors are a proper matter\nfor intergovernmental consultation and dispute resolution.\nIII. Protection of Investors and Governments from Political\nInfluence\nIn order to insulate the activities of international investors to the\nextent possible from disputes arising from, or centered on,\ndomestic or international politics, our objective is to seek\nagreement to the following principles:\n(1) Apart from publicly known requirements or criteria\nwhich may apply uniquely to foreign investors (as dis-\nFORD & LIBRARY 9ERALD\ncussed in I(2) and II(1) above), governments will not seek\nto influence or pressure foreign investors in ways which\ndiffer from policies applied to host-country nationals.\nCONF IDENTIAL\n- 7 -\nCONFIDENTIAL\n(2) As regards those areas where home and host\ncountry laws create conflicting obligations on investors,\nwe should examine within the U.S. government the possi-\nbility of negotiating agreed procedures for handling specific\ncases and, where possible, new general guidelines for\nresolving such conflicts.\n(3) We are willing to explore mutually acceptable agree-\nments defining areas in which government-to-government\ndiscussion of policies relating to investment in general\nor particular investments are deemed to be proper (as\nin those instances cited elsewhere in this paper).\n(4) Governments should refrain from punitive action\nagainst private foreign investors from particular countries\nwith whom they may have political disputes except to the\nextent recognized in international law.\n(5) In case of expropriation or nationalization (which\nis recognized in international law as limited to instances\nwhich serve public purposes) host countries will afford\nprompt, adequate and effective compensation to foreign\ninvestors (regardless of whether such compensation is\npaid in the nationalization of enterprises controlled by\nthe host-country's nationals). Disputes over compensation\nwill be settled in accordance with agreed arbitration,\nconciliation or other arrangements consistent with inter-\nnational law (including, where appropriate, fact-finding\narrangements, etc.).\nIV. Consultative Mechanism and Dispute Settlement\nArrangements on investment policies should include\nmechanisms for consultations and the settlement of\ndisputes. In a world-wide forum these mechanisms may\nbe of various types. It would be desirable that they enjoy\nhigh-level leadership and participation. It is difficult at\nthis time to define what might realistically be achieved in\nglobal negotiations on the establishment of mechanisms\nCONFIDENTIAL\nFORD LIBRARY is CERALD\n- 8 -\nCONFIDENT\nfor consultations and the settlement of disputes. The\nU.S. continues to support the International Center for\nthe Settlement of Investment Disputes, and favors adherence\nto this mechanism by all countries.\nWithin the OECD, past mechanisms for consultation and\nresolution of disagreements concerning government invest-\nment have lacked high-level leadership and participation.\nRather than, for example, relegating consultation over\ninvestment matters among developed countries just to a\ntechnical committee of OECD, there is wide agreement on\nthe need for a higher-level mechanism in which continuing\nconsultation and negotiation of needed new agreements (as\nenvisaged in I above) can take place, with policy-level\nguidance provided periodically and regularly.\nFor the present, this role of high-level consultation and\nguidance should be exercised by the XCSS. However, it\nis not now clear whether the XCSS can or should retain this\nfunction indefinitely, given its general mandate to review\nand guide the organization's activities in the full range of\nits work. Thus, as part of the OECD's continuing effort\non investment reform, attention must be given to the\nadequacy of the existing mechanisms for consultation.\nWe, therefore, will propose that this issue be included\non the XCSS agenda for further discussion. One of the\noptions (in addition to that of keeping this function per-\nmanently within the XCSS mandate) should be to determine\nwhether there may be a need for a new high-level committee\n(similar in concept to the EPC or WP-3) which would meet\nperiodically with representatives from capitals. The mandate,\nwhether exercised by the XCSS or a new committee, should\nbe to:\n(1) Review the progress of negotiations on new inter-\nnational agreements concerning specific investment issues\n(eg., investment incentives; tax matters, etc.) and give\npolicy guidance to the work groups. (This work should be\ncarefully coordinated with similar work in other OECD\ncommittees--eg., the Trade, Fiscal and Business\nPractices Committees, as well as work on related\nmatters going forward in GATT and IMF.)\nGERALD FORD LIBRARY\nCONFIDENTIAL\n- 9 -\nCONFIDENT L\n(2) Conduct consultations concerning issues which\nmay have arisen among countries over particular\nproblems.\nImplementation\nThe main effort to implement the above policy objectives should\ntake place initially among the developed OECD countries. The\nU.S. goal is to pursue negotiations on new arrangements and guide-\nlines concerning investment within the OECD framework using\nthe XCSS as the principal governing mechanism for setting the\ntasks and pace of the negotiations. Negotiation of new agreements\nor supplements to the OECD Capital Movements Code encompassing\nobjectives I through IV above should proceed to a conclusion as\nrapidly as possible. Our negotiators will be guided by the fact\nthat we wish to preserve the gains achieved through the Capital\nMovements Code, and that the purpose of these negotiations is\nlargely to strengthen that Code or to enlarge its scope to the\nextent possible.\nIn negotiations in the UN (eg., in the proposed Declaration on\nthe Economic Rights and Duties of States) or in regional activities\n(eg., the OAS), U.S. negotiators will be guided by the above\nobjectives in defining the U.S. positions. The U.S. is, in\nprinciple, willing to reach agreements on one or several of these\nsets of principles with foreign countries so disposed on either\nglobal or regional bases. In negotiations with LDC's, it should\nbe recognized that there may be special considerations which\nwould necessitate acquiesing in certain non-neutral government\npolicies with respect to foreign investment in developing countries.\nIn such cases, care should be taken to preserve as much as possible\nthe spirit of the principles outlined above.\nFORD & LIBRARY GERALD\nCONFIDENTIAL"
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