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Foreign Investment Meeting, 2/24/75
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Foreign Investment Meeting, 2/24/75
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L. William Seidman Files (Ford Administration)
William Seidman's Subject Files
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Organization of Petroleum Exporting Countries
Investments, Foreign
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The original documents are located in Box 134, folder "Foreign Investment Meeting,
2/24/75" of the L. William Seidman Files at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
NATIONAL ARCHIVES AND RECORDS SERVICE
WITHDRAWAL SHEET (PRESIDENTIAL LIBRARIES)
FORM OF
DOCUMENT
CORRESPONDENTS OR TITLE
DATE
RESTRICTION
1. memo
Under Secretary of the Treasury for Monetary
2/24/75
C(A)
Affairs to Ochal
re: Foreign Investment Meeting 2/24/75
2. "Foreign Investment in the United States: Policy
Review" ca. 2/75
2a.
"Foreign Investment in the United States:
n.d.
A
Summary of Issues and Background" 7 pp.
2b. Tab A
"Options for U.S. Policy on Foreign Investment in
2/18/75
A
the United States" 24 pp.
2c. Tab D
"Probable Foreign Reaction to New U.S. Restraints
2/18/75
A
and Possible Impact of Restraints on International
Negotiations"
2d. Appendix
1 "Policies and Practices of Major Developed
n.d.
C(A)
Countries Relating to Inward Direct Investment"
3 pp.
2e. Tab F
Extract from minutes of CIEP Exec. Comm. meeting
12/21/73
A
of December 21, 1973
5 pp.
2f. Tab F cont. Extract from minutes of CIEP Exec. Comm.
5/22/74
A
meeting of May 22, 1974 10 pp.
FILE LOCATION
Seidman Subject File; Foreign Investment Meeting
LET 11/82
RESTRICTION CODES
(A) Closed by Executive Order 11652 governing access to national security information.
(B) Closed by statute or by the agency which originated the document.
(C) Closed in accordance with restrictions contained in the donor's deed of gift.
GENERAL SERVICES ADMINISTRATION
GSA FORM 7122 (7.72)
good speech
you may want to
add a Plan
V what is we do raths ?
TREASURY DEPARTMENT
DEPARTMENTAL STOCK FORM 2131
SPECIAL
FORD LIBRARY
It is Important
that this Paper
should be made
Special.
TD-OAS-DC
Jonegn In OFFICE wastment OF THE WE
PRESIDENT
fuB
WASHINGTON, D.C.
re: J. Bennet call for information on
To:list ;of names on draft testimony statement this AM
From: per Pearl Burland, Secy to Mr. Bennett
a.m.
Date:
Time
p.m.
Secy. Simon - Treas.
Robinson - State
Greenspan
Enders
Gov. Wallich, Fed. Res Bd.
Asst. Secy. Commerce Pate
Hormatz
Garten OMB
Niehuss CIEP
Garrett - SEC
Ogilvie 0MB
J. Darling - Defense
Steffen - SEC
Richard Smith - State
Above are "outside" distribution
call back if "inside" Trea sury distributi on needed
1
ruk
GERALD LIBRARY R. FORD
GERALD R. FORD LIBRARY
This form marks the file location of item number
,
as listed on the pink form (GSA form 7122, Withdrawal Sheet) at
the front of the folder.
[ca.2775]
CONFIDENTIAL ATTACHMENT
Foreign Investment in the United States:
Policy Review
Contents
Summary of Issues and Background
Tab A.
Options for U.S. Policy on Foreign Investment
in the United States.
Tab B.
Survey of Laws and Regulations on Foreign
Investment and Safeguards Against Undesirable
Behavior by Foreign Investors
Tab C.
General Benefits and Costs of Foreign Investment in
the United States.
Tab D.
Probable Foreign Reaction to New U.S. Restraints
and Possible Impact of Restraints on International
Negotiations
Tab E.
OPEC Financial Accumulations:
1. A Survey of Projections of OPEC
Financial Accumulations.
2. OPEC Accumulations as a Proportion of
Financial Markets in 1980.
Tab. F.
Previous Statements of U.S. Policy on Foreign
Investment:
1. Guidance for Administration Witnesses
Who Testify Concerning Foreign Direct
Investment in the U.S., December 21, 1973
2. U.S. Policy and Objectives on International
Investment, May 22, 1974.
CONFIDENTIAL ATTACHMENT
GERALD B. FORD LIBRARY
GERALD R. FORD LIBRARY
This form marks the file location of item number 2a,
,
as listed on the pink form (GSA form 7122, Withdrawal Sheet) at
the front of the folder.
A
FORD Na LIBRARY GERALD
GERALD R. FORD LIBRARY
This form marks the file location of item number 2b
,
as listed on the pink form (GSA form 7122, Withdrawal Sheet) at
the front of the folder.
APPENDIX 1
2/14/75
Treaties of Friendship, Commerce and Navigation
The traditional friendship, commerce and navigation treaty
(FCN) is designed to establish an agreed framework within which
inutually beneficial economic relations between two countries
can take place. The executive branch has long regarded these
treaties as an important element in promoting our national
interest and building a strong world economy.
FORD & GERALD LIBRARY
To our benefit, the treaties establish a comprehensive
basis for the protection of American commerce and citizens
and their business and other interests abroad, including the
right to prompt, adequate and effective compensation in the
event of nationalization. However, the FCN treaties are not
one-sided. Rights assured to Americans in foreign countries
are also assured in equivalent measure to foreigners in this
country.
From the viewpoint of economic foreign policy a measure of
incentive for the FCNs was the desire to establish agreed
legal conditions favorable to private investment. The heart
of "modern" (i.e. post World War II) FCN treaties (and those
with our OECD partners are generally of this type) is the
provision relating to the establishment and operation of
companies.
This provision may be divided into two parts: (1) the
right to establish and acquire majority interests in enterprises
in the territory of the other party is governed by the "national
treatment" standard. (National treatment is defined in the
treaties as "treatment accorded within the territories of a
contracting party upon terms no less favorable than the treat-
ment accorded therein, in like situations, to nations, companies,
products, vessels or other objects, as the case may be, of such
party ") There are no FCN treaties with OPEC countries which
contain this provision.
(2)
the "controlled" domestic
company is itself assured national treatment, and discrimination
against it in any way by reason of its domination by nationals
of the foreign cosignatory to the FCN Treaty
is not
permissible. Our FCN treaty with Iran has such a provision.
(Our 1933 Provisional Executive Agreement with Saudi Arabia might
be interpreted to provide similar protection for established enter-
prises. However, Article V of the Agreement provides that "should
the Government of the United States of America be prevented by
future action of its legislature from carrying out the terms of
these stipulations, the obligations thereof shall thereupon lapse".
Thus, screening legislation would terminate the agreement auto-
matically, within the terms of the agreement itself.)
The FCN treaties do exempt certain areas from the "national
treatment" standard in order to conform with laws and/or policies
in existence when the treaties were negotiated and in order
not to infringe upon other treaty obligations of the
- 2 -
United States or our national security interests. Thus,
specific exclusions from national treatment are provided in
the areas of communications, air and water transport, banking,
and exploitation of natural resources. Also, the modern FCN
provides that its terms do not preclude the application of
measures relating to fissionable materials, regulating the
production of or traffic in implements of war, or traffic
in other materials carried on directly or indirectly for
the purpose of supplying a military establishment or measures
necessary to protect essential security interests.
The following is a preliminary list of those countries with which
we now have an FCN which calls for, or can be interpreted to call
for, national treatment in the establishment and acquisition of
enterprises:
Belgium
France
Federal Republic of Germany
Ireland
Israel
Italy
Japan
Korea
Luxembourg
Muscat and Oman*
Netherlands
FORD & GERALD LIBRARY
Nicaragua
Thailand
Togolese Republic
Each of these treaties has a provision designed to prevent
use of treaty rights by nationals of third countries. Thus,
Article XIII of our treaty with France provides, in language
similar to that in the other listed treaties,
The High Contracting Parties may deny to any
company, in the ownership or direction of which
nationals of a third country or countries have
directly or indirectly a controlling interest, the
advantages of the present Convention, except with
respect to recognition of juridical status and
access to the courts.
*Muscat and Oman, not a member of OPEC, now earns approximately
$900 million per year from petroleum exports. These earnings
are largely used for internal development and it is not expected
that the country will become a net capital exporter.
LIMITED OFFICIAL USE
February 6, 1975
Survey of Laws and Regulations on Foreign Investment and
Safeguards Against Undesirable Behavior by Foreign Investors
General Considerations
At the microeconomic level, the general U.S. policy of
non-intervention in foreign investment in the United States
is based on the proposition that it contributes to the dyna-
mism of the American economy by stimulating competition and
seeking out new investment opportunities. Thus, government
intervention is called for only in cases where there is a
strong presumption that the market outcome would be socially
undesirable. Whether this proposition is valid is dependent
on the assumption that foreign investors are motivated
essentially by economic factors and that their over-all
motivations are basically the same as those of U.S. investors.
To the extent that non-economic factors might, however, in-
fluence investment decisions, it is prudent and essential
that the United States have safeguards against foreign in-
vestments that find their motivation outside the market.
Since such safeguards are not without cost, the question
comes down to the optimal trade-off between the cost of current
or additional safeguards on the one hand and the danger to the
national interest of doing without such safeguards on the
other hand.
Safeguards can be divided into two basic categories:
Active (before the fact) and passive or standby (after the
fact). That is, safeguards can be designed to forestall
foreign investments which are presumed to be inimical to the
national interest or designed to neutralize or counteract
foreign investments which are found in practice to be inimical
to the national interest Surveillance of foreign investment
can also be considered a safeguard, in that it can serve to
alert the authorities to the need or possible need for action
in the form of activating existing powers to take the appropri-
ate measures or to seek the necessary authority from the
Congress.
For analytical purposes, all current or potential safe-
guards fall into one of the following categories:
Active safeguards
Advance notice of intended investments (registration)
Restrictions
GERALD R. LIBRARY FORD
a. on a case-by-case basis (screening)
b. on the basis of predetermined and announced
criteria.
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FORD & GERATO LIBRARY
Passive or standby
Comprehensive and detailed reporting
Authority to counteract, to be applied on an
ad hoc basis
The basic argument for predetermined restrictions on
foreign investment is, in essence, that an ounce of prevention
is worth a pound of cure. Even where standby safeguards exist,
it is argued that considerable damage could be done before the
unwanted investment is detected and the process of counter-
action is implemented.
A fundamental difficulty of this approach is the
problem of making valid judgments on the desirability of
the various kinds of foreign investments before the fact.
At the microeconomic level, it is the manner in which foreign
investors exercise the privileges, powers and leverage
accompanying ownership rather than the fact of ownership that
is relevant. For example, a foreign interest in a "critical"
or "key" company can be exercised in a passive and benign
manner with no ill effects while a foreign interest in a
noncritical, e.g. consumer products, company can be
exercised in a highly disruptive manner.
Meaningful evaluations of individual companies or in-
dustries from the standpoint of being "key" or "vital" to the
national interest are difficult and obviously controversial.
Companies or industries that might fit such classification to-
day may be common within a few years, given the rapid and un-
predictable advance of technology. An effort to keep restric-
tions current on foreign investment in "key" or "vital"
industries would require continuing determinations respecting
companies or industries clearly and directly vital to national
defense, and there would be no logical stopping point. More-
over, arguments for restrictions based on purely protectionist
and other considerations not related to the national interest
would undoubtedly be advanced in terms of the national
interest, and the process could lead to an ever widening array
of restrictions against foreign investment.
Granting this, it could be argued that, since investment in
a company increases the potential for misusing the company,
this potential should be minimized in cases where misuse would
be particularly damaging to the national interest. To fore-
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- 3 -
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stall this contingency, there are currently Federal restrictions
which limit foreign investment in certain industries, such as
atomic energy, aviation, shipping, and communications. Also,
Defense Department regulations act as an indirect prohibition
on foreign acquisition of any firm that does classified work
for the Government in that such acquisition could cause the
firm to lose such contracts.
In the case of the few U.S. companies where a foreign
takeover would be patently intolerable, the provocative nature
of the action should be as obvious to potential foreign investors as
it is to ourselves. Given the remedies which are available to
this Government, it is debatable that any foreign investors
would want to risk retaliation. Thus, one might legitimately
ask whether the added safeguards justify the unsettling effects
on the U.S. and foreign business community which would arise
from a registration requirement or additional active safeguards
on inward foreign investment.
A number of Federal and state laws and regulatory con-
straints assure that economic activities of companies are
consistent with national and/or community interests. Some
of the more important of these are antitrust laws, export
controls, SEC laws, the National Labor Relations Act and
state laws giving certain protections to minority shareholders
against majority shareholders. These and other constraints
apply equally to foreign and U.S. owned companies. Thus,
potential abuses of economic power by foreign owned companies
are already heavily circumscribed. In addition, depending
upon the circumstances the Federal Government has broad
powers--in the Trading With the Enemy Act, the Defense
Production Act, and the Selective Service Act--to control
and regulate the activities of companies in the interest
of national security and to deny access to defense secrets
by any firm under foreign ownership, control or influence.
This formidable array of safeguards against undesirable
behavior by foreign-owned firms is adequate for the present.
Such "chinks in the armor" as foreign investors might discover
and attempt to exploit are best dealt with when and if these
contingencies arise. There is no reasonable likelihood that a
significant amount of damage to the national interest could be
done before the Congress passed corrective legislation. Also,
it is a moot question as to which, if any, of the various kinds
FORD & LIBRARY GERALD
LIMITED OFFICIAL USE
1
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of possible activities not covered by current safeguards
would be contrary to the national interest. This is the
"gray area" on which it would be difficult to reach a
consensus, particularly in the abstract or before the fact.
In regard to the adequacy of the information presently
available to the Federal Government on inward foreign investment,
"adequacy" obviously depends on what the Government considers
that it needs to know and how the data would be used. The
answers to these questions will determine whether aggregated
or disaggregated data are needed as well as the amount of
detail on individual investors.
Present reporting requirements of various Federal agencies
produce information which, if assimilated in one place and
thoroughly analyzed, could produce a more comprehensive, detailed
picture of foreign investment on a flow basis than is presently available.
The major pieces of this over-all reporting net are the Commerce Depart-
ment (direct investment), the Treasury Department (portfolio
investment) and the SEC (acquisitions of more than 5 percent
of the stock of a company whose securities are publicly traded).
Other regulatory agencies and the DOD also collect information
on foreign investment in U.S. companies subject to regulation
by them. Moreover, the benchmark surveys being undertaken
by the Commerce and Treasury Departments, by late 1975 or early
1976, will yield a comprehensive census of all longterm foreign
investment as of end-1974. This information will become dated
over time since the flow data collected by the Commerce and
Treasury Departments are not collected on such a detailed
basis. However, if these flow data, along with data from
various other agencies, particularly the SEC, which collect
information on foreign investment are carefully restructured,
it would be possible to continue to have an up-to-date, detailed
picture of foreign investment in the United States.
Some observers believe that an important information gap
exists relating to the identity of foreign investors. When
foreign investors use nominees to acquire and hold U.S.
securities our records may show only the holder of record
rather than the beneficial owners of the securities. The
extent to which this is the case is not fully known but in
any case there is a difference of opinion as to how meaningful
or necessary it is to know the identity of beneficial owners
or their country of residence, or just how meaningful ownership
is in terms of control over corporate activity. The SEC is presently
FORD R. GERALD LIBRARY
LIMITED OFFICIAL USE
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inquiring into many of these issues and may recommend changes
in legislation or practice.
GERAID R. FOR
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 6 -
I. Introduction
U.S. policy on international investment has been based
on the belief that the free flow of capital across borders
in response to market forces best served U.S. interests.
Thus, this country has tradionally based its investment
policy on freedom of investment and has neither offered
special inducements to foreign investors nor put barriers
in their way beyond those necessary to protect national
security and other essential interests.
The recent larger accumulation of funds by oil-produc-
ing countries has given rise to Congressional and public
interest in the possible scale, direction, and effect of
foreign investment in this country. That much of these
accumulations is in the hands of officials rather than
private foreign investors, who might be motivated by
noneconomic factors, gives rise to some concern.
In light of the widespread interest in the impact
of inward foreign investment in the United States, a
review of the information currently available to the
Federal Government on foreign investment in the United
States and the existing legal restraints and power regard-
ing this investment is made in the first part of this paper.
The next sections of the paper discuss the possible misuses
of U.S. companies by foreign investors and the various
restrictions which we have and other safeguards which have
been proposed. The final sections give an overall assessment
of the potential dangers and safeguards and conclusions
regarding the need for additional safeguards.
II. Current Information on Foreign Investment
A. Foreign Investment in U.S. Enterprises: Book value
(equity and debt) of foreign direct investment in the United
States at the end of 1973 was $17.7 billion while the estimated
market value of foreign portfolio holdings of corporate securities
was $36.8 billion. The comparable figures for U.S. investment
abroad are $107 billion and $25.2 billion respectively. Total
direct and portfolio equity investment in the United States
by foreigners amounted to about 4 percent of the value of
outstanding U.S. stock at the end of 1973. About half of the
direct investment is in manufacturing and one quarter in
petroleum.
FORD & LIBRARM GERALD
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- 7 -
Equity investment in the United States by foreigners was
of relatively low magnitude in 1974. Data for the full year
are not yet available, but the increase in the equity portion of
direct investment was only $500 million in the first half of the
year and net purchases of U.S. stocks for portfolio investment
were less than $400 million in the first ten months of the year.
The inflow of this type of investment in 1974 was substantially
less than in 1973 when equity investment was $1.5 billion for
direct investment and portfolio purchases were $2.8 billion.
Even in 1973 when direct investment (equity and debt) was as
large as $2.5 billion it was still a small factor in the $152.2
billion of domestic non-residential investment.
Eighty percent of the foreign direct and portfolio invest-
ment in the United States comes from Canada, Europe and Japan.
We have no way of determining, however, the extent to which
the beneficial owners of the securities may be residents of
other areas.
B. Reporting of Ownership for Statistical Purposes:
Foreign investments in U.S. stocks are collected for statistical
purposes and balance of payments presentation by the Depart-
ments of Treasury and Commerce.
The Treasury collects data on a monthly basis from over
200 reporters on transactions in U.S. corporate stocks including
new issues, redemptions, transactions in outstanding securities
and some direct investment. The gross sales and purchases of
foreigners are published monthly in the Treasury Bulletin
with a country breakdown. Data on individual investors are
not collected.
The Commerce Department has collected, on a quarterly
basis, data on foreign equity investment in U.S. firms, when
the foreign participation exceeds 25 percent of their outstand-
ing voting stock and is over $2 million in the equity and debt
accounts. Beginning with the first quarter of 1975, the
participation threshold for reporting will be dropped from
25 to 10 percent. The identity of the individual foreign
investor and the U.S. company is kept confidential within
the statistical section of the Department of Commerce.
Statistics are published quarterly in the Survey of Current
Business. Commerce also publishes annually an estimate of
the outstanding value of foreign portfolio holdings of U.S.
stocks.
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FORD & LIBRARY GERALD
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- 8 -
In addition to the on-going reporting programs of
Commerce and Treasury to collect data on the flow of foreign
investment to the United States these agencies are undertaking
one-time benchmark surveys of foreign investment outstanding
as of end-1974. The data from these surveys, which will be
partially available by October, 1975 and in greater detail
by April, 1976, will show foreign investment in every U.S.
company of significant size broken down by kind of investment
and kind of investor by country of residence.
C. Reporting of Ownership for Regulatory Purposes:
The Securities and Exchange Commission requires reports
designed to warn of substantial changes in ownership and
control of publicly held and traded corporations having
assets of $1 million or more and five hundred or more stock-
holders. Any person, American or foreign, who acquires
ownership of a registered equity security of 5 percent
or more of the amount outstanding, must report detailed
information on the transaction and the purchaser within ten
days to the issuer of the security, each exchange in which
the security is traded and the Commission. After a 5-percent
acquisition, such person would be required to file further
reports whenever his acquisition exceeded 2 percent in any
12-month period. The same reporting requirements apply to
tender offers which would result in ownership of 5 percent
or more. The filing must be made at the time the announce-
ment is made public. Moreover, every person who is owner of
10 percent or more of a registered equity security must
report any changes in ownership over the 10 percent level ten
days after the close of each month. Only the name and address
of the holder are required. Directors and officers of the
corporation must give their holdings no matter what the
percentage is.
Failure to comply with the reporting requirements of the
SEC, carries a maximum penalty of a $10,000 fine and up to 2
years in prison. If it can be proved the person was unaware
of the requirements only a fine is levied.
The names of companies and amount of shares involved are
listed for the 5 percent holdings and tender offers in the
SEC Statistical Bulletin. The detailed reports filed by
firms are available for public inspection at the SEC Public
Reference Room. U.S. and foreign firms are required to
identify beneficial owners and to disclose other relevant
information in such filings. When intermediaries are used FORD
the beneficial owners are still required to be disclosed
although this might not occur in all instances.
GERALD
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- 9 -
Other Federal regulatory commissions generally require
reports on ownership when permits are requested and annually
thereafter; these reports are open for public inspection
and copying. The commissions also require reports on the
debts which includes the identity of individual creditors
in many cases.
The Federal Maritime Commission asks water carriers for
the top 30 security holders and their voting powers and
holders of 5 percent or more of each class of stock. Freight
forwarders need identify only stockholders (including citizen-
ship) who individually own or hold 5 percent or more of the
stock.
The Federal Communications Commission requests reports
on holders of 3 percent or more voting interest in broadcast
companies, and generally makes supplemental requests regard-
ing voting rights down to 1 percent. Common carriers of
communications, however, need report the 30 largest holdings
of each class of stock to the FCC.
The Federal Power Commission asks public utilities and
natural gas companies for the 10 stockholders with the
highest voting powers and the number of votes each could cast
at a stockholders meeting.
The Interstate Commerce Commission asks for identifica-
tion of the security holders with the highest voting powers --
the top five in the case of railroad lessors, the top 10 in
motor carriers and the top 30 in railroads.
The Civil Aeronautics Board requires the names of stock-
holders holding more than 5 percent of the capital stock
of a U.S. air carrier. The trustees and nominees holding
5 percent of the stock are required to give the names of
the stockholders for whom the stock is held and who have the
power to vote the stock. In addition, banks and stockholders
must report the identity of any person where the account
contains 1 percent or more of the stock.
GERALD FORD LIBRARY
The Department of Defense requires each contractor to
submit a Certificate Pertaining to Foreign Affiliation to
meet the DOD Industrial Security Regulations. If the total
foreign ownership is above 6 percent, the firm must identify
the individual owners. This can be difficult because of the
use of nominee account by stockholders. However, the Defense
Department is more concerned with foreign control, than
ownership, and once this control is exerted by foreigners,
the U.S. management is aware of it and notifies Defense.
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- 10-
The Treasury Department requires, under the Federal
Alcohol Administration Act, applicants for permits to
produce and distribute beverage liquors to submit details on
their identity and keep the Department informed of any change
in ownership. In the case of corporations, persons owning
10 percent or more of the voting stock must be identified,
in addition to the directors and officers. If a foreigner
is identified, the Treasury Department obtains background
information, including criminal records. from police authorities
abroad.
D. Beneficial Ownership: The ability of the reports on
ownership to identify foreigners depends on the degree to
which the commissions dig behind the listing of nominees to
determine the "beneficial owner," i.e., the person who has the
power to vote or directs the sale of securities. According to a
report by the General Accounting Office in 1973, it appears,
that for large regulated companies, the names of nominees are
often shown in lieu of stockowner names in reports to regulatory
agencies.
The problem of beneficial owners was among those covered
at the SEC "takeover" hearings that were held in December on
the general adequacy of the present filing requirements out-
lined above. The SEC staff is expected to make recommendations
to the Commission this spring on possible improvements in the
disclosure requirements under the 5 percent reporting require-
ment and possible reduction in the reporting level to 1 percent
ownership, amongst other changes.
Even if the regulatory commissions required domestic
nominees to disclose the owner for whose account the stock
is held, a foreigner could use a nominee located in a foreign
country. Although the percentage of foreign ownerships could
still be determined, the actual identity of the foreigner could
not. Requiring their identity would involve a problem of
legal jurisdiction. Some countries such as Switzerland
prohibit the provision of such information by banks.
III. Existing Legal Restraints and Powers of USG to Control
Foreign Investment
This section outlines key Federal laws and regulations
(1) restricting foreign investment in the US or (2)
controlling or regulating the conduct of foreign controlled
business activity. In addition to these Federal controls,
a number of state laws provide additional regulation and
&
FUND
safeguards.
GERALD
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- 11 -
From this survey it appears that there is minimal danger
that foreign investment in the United States can be used in a
way detrimental to our national interest because of the
protections afforded by (1) general laws to insure against
abuse of economic power and (2) specific legislation dealing
with foreign investment.
A. Laws of General Application
Every foreign investment is subject to the same laws
and regulatory constraints which control United States
business. It is this factor -- i.e. pervasive general laws
to ensure that all economic activity is conducted in our
national interest -- that provides us with the most protection
against potential misuse of control by foreign investors. A
few of the more important of these laws are summarized below.
1. Antitrust Laws -- The antitrust laws contain no
specific prohibitions on foreign investment. However, they
apply equally to U.S. and foreign corporations and prevent a
foreign investor from (a) illegally monopolizing a specific
sector; (b) engaging in various anti-competitive practices; or
(c) making a purchase of, or engaging in a merger or joining
venture with, a U.S. firm if the result would be to substantially
lessen competition or tend to create a monopoly. The laws
have wide application -- applying to any act affecting U.S.
foreign commerce -- and both the Justice Department and the
FTC interpret their powers broadly. The FTC has particularly
broad investigatory powers and requires prenotification of
mergers of a certain size.
2. Export Controls -- Although export controls do not
restrict foreign investment in the U.S., they are an important
tool in ensuring that a foreign investor does not use his U.S.
investment to drain essential resources from our economy.
The Export Administration Act prevents the export of U.S.
resources when (1) national security is threatened or (2)
there is an excessive drain of scarce materials and a serious
inflationary impact from foreign demand or (3) controls are
needed to further U.S. foreign policy. The Commerce Department
is required to monitor exports when such exports would lead to
a domestic price increase or a shortage which would have a
serious impact on the economy. (See National Defense and
Energy sections below for special controls on armaments and
energy exports).
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3. SEC Laws -- While the SEC laws do not prevent foreign
investment, they do require disclosure of significant foreign
investment (by beneficial owner) and are designed to regulate
potentially harmful activities. SEC regulations re tender
offers, shareholder disclosure requirements, stock price
manipulation and preservation of an orderly market make no
fundamental distinction between domestic and foreign investors
and apply equally to both types of investor.
4. Industrial Relations -- The National Labor Relations
Act and other labor laws apply to all firms operating in the
United States to prevent unfair labor practices (e.g. runaway
plants and arbitrary dismissal or treatment of workers). All
industrial plants must comply with federal laws designed to
assure every worker in the United States safe and healthful
working conditions.
5. Rights of Minority Shareholders -- Most state
corporation laws, as well as the common law, provide protection
for minority shareholders against irresponsible action by
majority shareholders. Experience indicates that these
rights can be used to help prevent abuse of power by a controll-
ing foreign shareholder. For example, if a foreign investor
tried to use his control of a United States firm to destroy
or disrupt for political purposes, minority shareholders could
sue to enjoin such action.
6. General Control by Regulatory Agencies -- All investors
(domestic as well as foreign) operating in certain critical
sectors of the economy are regulated by one or more regulatory
agencies (e.g. FPC, ICC, CAB, FMC, AEC, SEC, FDA, REA) or by
special laws dealing with that sector (e.g. Public Utility
Holding Company Act or Bank Holding Company Act).
B. Broad Emergency Powers
1. Trading With the Enemy Act -- This Act gives the
President the power (during a war or national emergency) to
completely control foreign owned interests in property in the
United States. There should, however, be a connection or
nexus between the emergency and the action taken.
2. Control of Enemy or Hostile Alien Assets -- Various
regulations permit the government to regulate or prohibit all
transactions (including investment in the United States)
involving certain listed "enemies or hostile aliens."
Although the list is now limited (PRC, North Vietnam, North
Korea, Cuba) it could be extended to include any other nation
without legislation.
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3. Condemnation Power -- The United States Government
has the basic power to condemn any property within its
jurisdiction if it is done for a proper public purpose and
just compensation is paid.
4. National Defense Powers -- See C-2 below for special
Presidential powers relating to national defense needs.
5. Emergency Legislative Action -- The Congress always
has the power to control or prevent any clear and present
threat to our national or economic security by immediate
legislative action which the Executive Branch could request.
C. National Defense
1. Any activity involving classified contracts -- Under
its Industrial Security Regulations the Defense Department
may deny security clearances required to do classified work
for the United States Government to any firm under "foreign
ownership, control or influence." The regulations do not
directly prevent foreign ownership of producers of defense
items but only provide protection against foreign access to
classified information that could be gained by a company
contracting with the United States Government. However, they
do act as an indirect prohibition on foreign acquisition
of any firm that does classified work with the Unted States
Government in that such acquisition could cause the firm to
lose its classified government business.
2. Priority Performance Powers -- (A) The Defense
Production Act gives the President power to (1) require the
priority performance of defense related contracts and (2)
allocate materials and facilities necessary or appropriate for
the national defense. (B) The Selective Service Act provides
that, if the President determines it is in the interest of
national security and if Congress has authorized funds to
procure a particular product, the President has power to place
priority orders for that product and take possession of the
facility if they are not fulfilled. (Note: There are legal
questions as to whether these acts give the President the
power to prevent plant closure or to require the continuance
of defense related business).
D. Energy
1. Energy Export Controls -- In addition to general
export controls which could be used to prevent all energy
exports, the FPC regulates the export of natural gas from
the United States and issues a permit only if the export is
in the national interest. In addition, the Federal Energy
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Act requires FEA to monitor exports of coal, crude oil, residual
oil or any refined petroleum product.
2. Atomic Energy -- The Atomic Energy Act prohibits
licenses for the operation of atomic energy utilization or
production facilities to be issued to aliens or foreign owned
or controlled corporations. There is no similar prohibition
for fabrication of fuel elements, uranium mining or melting
or activities involving radioactive isotopes. However, all
of these activities are highly regulated by the AEC which can
prohibit activities in there areas which are "inimical to the
nation's welfare."
3. Mining and Drilling in the United States -- There
are certain restrictions on foreign controlled corporations
mining and drilling for coal, gas, oil etc on federally owned
lands. See E-1 below for details.
4. Regulation of Pipelines -- With respect to pipelines
on federal lands, foreign controlled corporations can own an
interest only if their home country grants reciprocal rights
to United States companies. With respect to pipelines on
non-federal land, foreign investors are not precluded from
ownership or control but are subject to ICC and FPC regulation.
E. Natural Resources
1. Mineral Resources -- Under the Mineral Leasing Act
of 1920, aliens cannot hold any interest in a pipeline or a
mineral, coal or oil shale lease on federal lands. However,
foreign controlled corporations may hold such interest if
their country grants reciprocal rights to United States
companies. There is, however, no prohibition on a foreign
controlled corporation holding a lease to (1) drill on the
United States outer continental shelf; (2) operate under
Geothermal Steam Act or (3) locate and mine uranium under the
Mining Law of 1972. Such corporations would be subject to the
terms of these acts and to the specific terms of the leases
granted to them.
2. Fishing -- Transfer of control to a foreign investor
of a United States fishing company or a United States
shipyard engaged in the construction, maintenance or repair
of fishing vessels must be approved by the Maritime Adminis-
tration. There are also other minor restrictions -- e.g. no
fishing by aliens in Alaskan waters and no alien fishing vessels
can land catch in the United States.
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3. Land -- (a) Federal Land: The Alien Land Law
prevents foreign ownership of federal public land except by
foreign controlled United States corporations whose parent
country grants reciprocal privileges to United States
citizens. (b) State Land: A few states have restrictions on
foreign ownership of land under their jurisdiction.
F. Communications, Media and Dissemination of Foreign
Propaganda
1. Communications and Media: Foreign investment in the
United States communications and media sectors is controlled
by the Federal Communications Act which (1) prohibits (with
minor exceptions) aliens or foreign owned or controlled United
States corporations from receiving a license to operate an
instrument for the transmission of radio communications (2)
prohibits the FCC from approving a merger among telegraph
carriers which would result in more than 20 percent of the
capital stock of the carrier being controlled by a foreign
entity; and (3) closely regulates all common carriers engaged
in interstate or foreign communication by wire or radio.
2. Foreign Propaganda and Political Activity: The
Foreign Propaganda Dissemination Act requires any United States
corporation (e.g. a newspaper or magazine) which is controlled
or financed by a foreign entity to file a registration statement
with the Attorney General if it carries on any activity in
the United States intended to influence United States domestic
or foreign policy or promote the interests of a foreign
government. While there are exemptions for diplomats, nations
deemed vital to our national defense and various non-political
activities, the scope of the law is broad and requires registra-
tion, filing and disclosure with respect to a wide range of
political propaganda disseminated in the United States on
behalf of foreign interests.
G. Transportation
1. Aviation -- Foreign investment in the aviation
sector is regulated by the Federal Aviation Act which (a)
limits the persons who may carry passengers and cargo within
the United States to United States citizens and United States
controlled corporations and (b) requires CAB approval for any
foreign air carrier or any person controlling a foreign air
carrier (e.g. a foreign government) to acquire control of any
United States citizen engaged in any phase of aeronautics.
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2. Maritime and Shipping -- Foreign investment in the
United States maritime industry is restricted by a series of
laws which (1) limit ownership and operation of certain
vessels to United States citizens; (2) prohibit transfer or
mortgage of United States vessels, shipyards, drydocks or ship
repair facilities to non-United States citizens without
Secretary of Commerce approval; (3) prevent non-United States
citizens from receiving cons ruction or operating differential
subsidies and (4) limit United States coastwise trade to
vessels owned by United States citizens. No corporation is a
United States citizen unless (a) the controlling interest is
owned by citizens of the United States and (b) the chief
executive officer, board chairman and a majority of the quorum
of directors are United States citizens.
H. Banking and Finance
1. Banking -- Because of the dual banking system in the
United States, most foreign banks have chosen to establish in
the United States under state charters and, therefore, are
controlled by state law. Only ten states permit foreign
banking activities in the United States and those that do (e.g.
New York, California and Illinois) closely regulate them.
Depending on the nature of the state charter and the nature
of the bank's activities, foreign banks may be subject to
regulation by the Federal Reserve Board and the FDIC and may
be controlled by general legislation like the Bank Holding
Company Act. In addition, the Federal Reserve proposed
legislation in the 93rd Congress (S. 4205) providing for federal
licensing and regulation of all foreign banking activity in
the United States; and the Board plans to have it reintroduced
in the current session of Congress.
2. Insurance -- There are no restrictions on foreign
alien or corporation ownership of insurance companies although
five states do prevent foreign governments from owning
insurance companies. Most states have special requirements
for foreign controlled insurance companies -- including
mandatory establishment of trusteed deposits up to the
amount of the company's outstanding liabilities. Many states
have citizenship requirements for directors and all states
license and closely regulate insurance activities in their
state.
3. Securities Industry -- The SEC, the NASD and most
stock exchanges do not restrict or prohibit ownership of
brokerage houses by aliens. However, foreign as well as
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domestic investors are subject to the same SEC, NASD and
stock exchange regulations as domestic investors. The NYSE
does, however, impose limits on foreign ownership of its
members. The Trust Indenture Act of 1939 requires that at
least one trustee under a qualified trust indenture be
organized under the laws of the United States.
I. Agriculture
Although there are no specific prohibitions on foreign
investment in agriculture, foreign citizens and foreign
controlled corporations are denied the benefits of many
programs relating to agriculture. For example, Farmers Home
Administration loans for rural housing are limited to United
States citizens; and grazing on public lands is regulated by
the Forest Service and the Bureau of Land Management. In
addition, the Export Administration Act described above
could be used to prevent export by foreign investors of
food and other agricultural products needed in the United States.
Various agencies (e.g. the Food and Drug Administration
and the Meat Inspection Division of the Department of
Agriculture) administer a number of acts designed to maintain
food standards and protect the public from misleading market-
ing practices.
J. Special Aspects of Foreign Government Investment
Most United States laws make no distinction between
investment in the United States by foreign private entities or
investment by foreign governments or governmental entities.
This means that the bulk of the restrictions and regulations
outlined above apply to investment in the United States by
foreign governments and, where relevant, prevent or regulate
activities of foreign governmental investment in the United
States. There are, however, a few areas in which foreign
government investment is treated differently. These are
outlined in this section.
2. Sovereign Immunity -- The United States follows
the so-called restrictive theory of sovereign immunity which
means that a foreign government engaging in public acts would
be immune from suit in the United States but not when engaged
in commercial acts. Thus, foreign governments should not
expect sovereign immunity to protect them from suit with
respect to most investment in the United States. There are,
however, some minor problems concerning (1) the lack of a
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statutory procedure for service of process; (2) immunity of
a foreign government from execution of a judgment and (3)
the fact that the State Department and not the courts
determine factual and legal questions about the validity of a
foreign government's claim of sovereign immunity. These
problems would, however, be eliminated by a State/Justice
proposed bill which would incorporate the restrictive theory
into statute, provide a method for service of process, limit
immunity from execution and transfer the task of determining
whether a foreign state is entitled to immunity from the
State Department to the courts.
3. Reporting Requirements -- Existing reporting require-
ments relating to the collection of foreign direct investment
data apply to foreign governments. However, the Bureau of
Economic Analysis in the Commerce Department indicates that
the reporting regulations are rarely observed by companies
in which a foreign government has a controling interest and
that the United States Government presently has no way of
enforcing them against a foreign government or government
controlled investor.
4. Tax Law -- Foreign governments are generally exempt
from taxes on investment in the United States. However, the
exemption does not apply to the income of a separate profit-
making corporation, wherever organized, which is owned by a
foreign government. Distributions to the government from such
corporations would, however, be tax free.
5. Antitrust Laws -- There is a technical legal issue
over the application of our antitrust laws to foreign
governments. American courts have held that the Sherman
Act does not confer jurisdiction on United States courts over
acts by foreign sovereigns and that only acts by persons
and corporations are covered. Thus, the key factor in any
determination as to the applicability of United States anti-
trust laws to the investment activity of a foreign government
would be whether it used a separate corporation of the type
generally engaged in commercial activity.
6. SEC Laws -- No differentiation is made between
foreign governments and other foreign investors by federal
laws concerning investment in United States securities. This
means that the reporting and disclosure requirements of the
Securities Exchange Act of 1934 do apply to foreign governments
and foreign government controlled corporations. There are,
however, special regulations relating to the government
issuance of securities in the United States.
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IV. Potential Misuse of Foreign Investment in U.S. Firms
This section outlines some of the potential dangers which
might arise from foreign control of individual U.S. firms.
Although it deals with possible abuses of economic power by
foreign investors, there is no inference on the part of the
U.S. Government regarding the likelihood of such abuses.
They are listed as representative possible abuses. Many
would involve substantial economic cost to the foreign
investor and would occur only if he was substantially motivated
by political and not economic objectives.
A. National Security. A foreign investor may use his control
over a US corporation in a way contrary to US national
security interests.
Danger
Existing Protection
1. Acquire US defense manu-
1. DOD Industrial Security
facturer.
Regulations protect against
access to classified
material and act as indirect
prohibition to acquisition
of defense manufacturer.
Depending on the precise
nature of the acquired busi-
ness, approval of a US
regulatory agency may be
required. Finally, the
Foreign Assets Control Regu-
lations prevent acquisition
by nationals of hostile
nations.
2. Move US defense manufacturer 2. Existing regulations prohibit
abroad
unapproved export of classified
technology related to defense
manufacture. Also, facility
clearance for classified work
will not be granted to contrac-
tor activities outside the US.
3. Obtain information. access to classified 3. DOD Industrial Security Regula-
tions provide broad protection.
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4. Slow down production
4. The Selective Service
process or refuse to supply
Act and the Trading with
in the event of national
Enemy Act give the Presi-
emergency.
dent powers he can use to
require priority orders
to be filled or to take over
a plant in certain circum-
stances. In addition, many
state corporation laws
would give minority
shareholders rights if
irresponsible corporate
action were taken to the
detriment of profits.
5. Foreign influence over US
5.
No effective protection
firms might cause a US com-
except that US corporation
pany to deal with a foreign
is subject to all US laws
sovereign in a way contrary
regulating economic
to US security interests.
activity which would put
(e.g. compromise during nego-
some limits on foreign
tiations re nationalization
influence in negotiations
or price or supply.)
with foreign entities.
B. Economic Interests. A foreign investor may operate a firm
in a way contrary to US economic interests by (1) depriving the
US of productive capacity; (2) introducing foreign management
practices or (3) failing to take a pro US line in negotiations
with foreign nations.
Danger
Existing Protections
1. Deprive US of productive
1.
There is no single, specific
capacity by :
protection against these
a. buying a plant and clos-
types of actions. However,
ing it or moving it
such action (a) would involve
abroad
substantial economic cost
b. letting the plant
(b) create problems with
depreciate
labor contracts and union
C. cutting essential
rights and (c) could con-
expenditure like R&D
stitute an antitrust or
d. selling off key assets
SEC violation if done for
anticompetitive reasons or
if control was obtained via
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tender offer and intention
to close or move abroad was
not disclosed. In addition,
export controls could be
used to prevent movement of
equipment and technology abroad
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Lastly, minority shareholders
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would have rights under
certain state corporate
laws to prevent irresponsi-
ble corporate action by
majority shareholders.
2. Introduction of alien
2. US workers have some pro-
management practices
tection under collective
bargaining contracts (if
unionized) and existing
labor laws prevent unfair
labor practices.
3. Foreign influence over a
3. See A-4 above.
firm might cause the
company to take actions
in dealing with foreign
nations (e.g. in nationa-
lization or price or
supply negotiations)
contrary to US interests.
D: Natural Resources. A foreign investor might use his invest-
ment in a way that would (1) deprive the US of essential natural
resources or (2) retard the development of our natural resources.
Danger
Existing Protection
1. Drain scarce materials
1.
Existing export control
from the US (e.g. food,
laws provide for monitoring
energy or critical minerals
and controls in cases
and resources).
where export would have
an inflationary impact,
lead to domestic shortages
or threaten our national
security.
2. Foreign owners sit on
2. President has power under
land or leases and not
the Selective Service Act,
develop the resources.
Defense Production Act and
Trading with the Enemy Act
to require priority orders
or to take over a mine in
certain circumstances.
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E. Foreign Investor as Creditor. A foreign creditor might
use his influence as a creditor to gain control over assets
of a US debtor corporation.
Danger
Existing Protection
1. Influence disposition of
1. U.S. bankruptcy laws and
assets in liquidation or
laws of creditors rights put
bankruptcy.
some limits on extent of
foreign debtor influence.
2. Power to accelerate loan,
Debtor influence can be
exercise security interest,
minimized by careful drafting
etc. in event of default.
of loan documents, requiring
subordinated indebtedness,
3. Debtor consent can be with-
keeping foreign percentage
held to block acquisition
below "blocking percent"
or disposition of assets,
under indenture, etc. Also
merger, management changes,
use of U.S. trustee and need
reorganization, etc.
to comply with provisions
of Trust Indenture Act of
1940 in cases of publicly
held debt.
F. Competition. A foreign investor may use his economic
power to (a) gain a monopoly or unfair competitive position
in key US industries; (b) engage in predatory pricing or
conduct or (c) gain an undue concentration or accumulation
of economic power
Danger
Existing Protection
1. Individual country gains
1. Antitrust laws would prevent
control of key industry.
abuse of monopoly power
2. A group of countries
2. AT laws should prohibit--
(or individuals) gains
especially if act in concert.
control of a key industry.
3. Foreign investor's US
3. If use monopoly power or
activities give strong
restrain trade, AT laws
market power and perhaps
should protect.
competitive advantage
(e.g. vertical integration)
when combines with its
foreign activities.
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Dangers
Existing Protections
4. Economic motives lead to
4. No different than activities
try to drive competitors
of some domestic investors and
out of business, improve
existing AT laws (e.g.
market position or gain a
Robinson-Patman and laws
monopoly.
re unfair competition)
should protect.
5.
Political motives lead
5.
AT laws should protect but
investors to retaliate
check (a) technical problems
against companies which
re application of AT laws to
deal with enemies of the
governments and (b) enforce-
foreign investor country.
ment problems re service
of process and levy and
execution on assets if
enterprise is owned by a
foreign government.
6. No antitrust violation but a 6.
No real protection except
rather pervasive influence
a series of older laws
in US economy because of
limiting the extent of
widespread investments
foreign investment in key
a. Foreign private investors
sectors.. Some control
b. Foreign government
(query as to how much) can
investors.
be exerted over foreign
government investors
through diplomatic channels.
G. Political Objectives. A foreign investor (expecially if
government controlled) may use his influence over a US firm to
advance political objectives of the parent nation.
Danger
Existing Protection
1. The firm would dis-
1. The Foreign Propaganda Dis-
seminate propaganda
semination Act would
advocating the objectives
require the firm to file
of the parent nation.
an extensive registration
statement with the
Attorney General and
clearly indicate that any
propaganda disseminated
was sent on behalf of a
foreign government.
2.
The firm would attempt
2.
The Federal Election Cam-
to influence the U.S.
paign Act Amendments of
political processes
1974 apply to all contribu-
tors in Federal political
campaigns. Contributions
FORD
by any individual may not
aggregate more than $25,000
in any one year.
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3.
The firm might refuse to
3
The antitrust laws provide
purchase from or sell to
protection if the boycott
nations unsympathetic to
or refusal to deal con-
the objectives of the
stitutes a restraint of
investors parent nation.
trade.
4.
Acquire a US arms producer
4.
There are various controls
and require it to manu-
on the export of essential
facture arms abroad in the
classified technology
parent nation.
related to arms manufacture.
And USG facility clearance
will not be granted to
contractor activities out-
side the US.
H. Government Investor. A foreign government might use its
status as a sovereign to avoid some of the ordinary incidents
of investment like taxation or lawsuits.
Danger
Existing Protection
1. The doctrine of sovereign
1. The US adheres to the doctrine
immunity would prevent
of sovereign immunity which
lawsuits against foreign
means that a foreign govern-
governments.
ment would not be immune
from suit when engaged
in commercial activites
in the US. There are,
however, problems with
execution on a foreign
sovereign's assets to
satisfy a judgment.
Foreign governments engaging
in international investment
can be required to waive
defense of sovereign
immunity as a condition
precedent to the invest-
ment.
2.
Foreign governments engaging
2.
While foreign governments
in direct investment in the
are generally exempt from
US might use tax exemptions
taxes on investment in the
as a way to gain a competitive
US, the exemption does not
advantage over US firms in
apply to the income of a
the same market.
separate profit making
corporation which is
owned by a foreign govern-
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V.
Possible Restrictions and Other Actions Regarding
Foreign Investment
A. Proposals in the 93rd Congress
The bills introduced during the 93rd Congress give an
indication of the approaches toward foreign investment
that might be taken in the current Congress.
(1) Percentage Limitations. Certain proposals would
establish a maximum percentage limit on foreign
ownership of any U.S. enterprise. Variations on
this approach include different limits for equity
participation and debt participation; limits only
for foreign participation in selected U.S. industries
(as specified in the legislation or administratively)
which (a) have access to data concerning national
security or (b) produce basic materials (e.g. energy,
steel, etc.).
(2) Reporting. Other proposals would require U.S.
firms to identify existing foreign ownership
interests. Such legislation would confer upon
a single agency ongoing responsibility to collect
data on OPEC investment as it affects the United States.
Some proposals would require foreign investors
themselves to report their acquisitions to the
United States Government.
(3) Prior Notice. All foreign investors desiring to
purchase an interest in a publicly held U.S. firm
would be required to register in advance of their
purchase with the SEC. Also, prior United States
Government approval of broker, dealer or bank
transactions in the securities of certain industries
would be required to assure that foreign investors are
not acquiring these securities. These measures, which
were tied to other investment restrictions, would
presumably insure adequate information concerning the
scope of foreign investment and permit the United
States Government to act in advance to block acquisitions
found to be undesirable.
(4) General Restraints on Doing Business. United States
constrols would be extended over foreign firms doing
business in the United States through branches,
divisions or subsidiaries.
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B. Proposals in the 94th Congress
Only a few bills relating to foreign investment in
the United States have been introduced so far.
(1) Reporting
(a) Senator Hugh Scott has introduced a bill
(S.329) which would require any foreign
investor or his agent who accumulates an
interest in a U.S. business worth more than
$10,000 or which exceeds more than 0.5
percent of its securities, to submit reports
to the Commerce Department on a quarterly
basis.
(b) Senator Harrison Williams has sponsored
legislation (S.425) with a number of far-
reaching provisions.
-- It would require the disclosure of the
beneficial ownership of more than 5 percent
of the securities of all publicly traded
corporations. This would be accomplished by
an amendment to the SEC's 13 (d) statement to
elicit information as to the owner's
residence and nationality and identical data
concerning any person who possesses sole or
shared voting authority over the securities.
-- The tender offer provisions of the
Williams Act would be amended to require that
foreign investors file a 13 (d), statement
with the SEC 30 days in advance of any
acquisition of 5 percent or more of the
equity securities of a U.S. company. The
statement would be confidential.
-- This statement would be transmitted by the
SEC to the President, who could review the
proposed transaction and prohibit it during
the 30-day period. The criteria for this
decision-making process include adverse
effects on the U.S. domestic economy, foreign
policy, or national security.
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-- The SEC, the Attorney General, or any
U.S. corporation in which a foreign investor
had acquired an interest or any shareholder
of such a corporation would be authorized
to sue in federal court to unwind any
acquisition made in violation of the pre-
notification requirements. Among other
powers the court would be specifically
authorized to freeze voting rights of
shares or to compel their disposition.
In the event of disobedience of any order,
the court could vest ownership of the
securities in a trustee who could then sell
them.
-- Issuers of reigstered securities would be
required to maintain and file with the
SEC a list of the names and nationalities
of the beneficial owners of their equity
securities.
(2) Restrictions
(a) Representatives Fish and Roe have introduced
identical bills to restrict foreign investment
in the United States (HR 411 and HR 945)
and to creat a Joint Congressional Committee
on Foreign Investment Control in the United
States (HR 418 and HR 954).
-- The National Foreign Investment Control
Commission would limit and restrict (and
possibly require divestiture of) foreign
investment in certain corporations and
natural resources deemed essential to our
national security and/or economic security.
-- The Joint Congressional Committee would
oversee the operations of the Commission
and make recommendations to both houses of
Congress or the Commission concerning
matters under its jurisdiction.
(b) Representative Stark has sponsored a bill
(HR 2052) to amend the Bank Holding Company
Act of 1956 to prevent aliens from owning
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more than one U.S. bank. Currently, foreign
investors using personal funds instead of
LIBRARY
corporate money are exempt from the Act.
LIMITED OFFICIAL USE
February 13, 1975
APPENDIX 2
LEGAL AUTHORITY FOR REGULATION OF FOREIGN INVESTMENT IN
THE UNITED STATES UNDER SECTION 5(b) OF THE TRADING WITH
THE ENEMY ACT (12 U.S.C. 95a, 50 U.S.C. APP. 5(b)). 1/
Section (b) of the Trading with the Enemy Act, which
served as the statutory basis for Executive Order 11387,
January 1, 1968, establishing the Foreign Direct Investment
Program, could furnish a legal foundation for a program of
investigation, required reporting, and regulation of invest-
ment by foreign individuals or enterprises in the United
States. As will be indicated herein, using this "emergency"
authority for a regulatory program of possibly indefinite
duration is not without legal difficulty. It would be possible,
and more appropriate, to use the statute as the basis for a
temporary "bridge" program to monitor, screen, or otherwise
regulate foreign investment while permanent enabling legis-
lation were worked out with Congress.
Section (b) has been judicially interpreted as an
expression of congressional intent to confer on the President,
in time of war or national emergency, broad power to monitor
and regulate international transactions affecting the nation's
monetary and economic security. The breadth and constitution-
1/
Section 5(b) was originally enacted as part of the Trading
with the Enemy Act of 1917 and is frequently referred to as
the "Act of October 6, 1917, as amended". It is codified
at both 12 U.S.C. 95a and 50 U.S.C. App. 5(b). Its inclusion
in the banking title (Title 12) stems from its amendment and
reenactment in section 2 of the Emergency Banking Act of 1933.
48 Stat. 1. Thus, where it is desirable to avoid highlighting
the "trading with the enemy" character of the statute,
official reference is sometimes made to the "Emergency Banking
Act of 1933, as amended" (later amendments were added in 1940
and 1941). However, section 2 of the Emergency Banking Act
is simply an amendment to the underlying 1917 Act and fur-
nishes no independent authority.
2/
See e.g., Smith V. Witherow, 102 F. 2d 638 (C.A. 3, 1939);
Ruffino V. United States 114 F. 2d 696 (C.A. 9, 1940); Pike
V. United States, 340 F. 2d 487 (C.A. 9, 1955); Sardino V.
Federal Reserve Bank of New York, 361 F. 2d 106 (C.A. 2, 1966).
GERALD LIBRARY ? FORD
-2-
ality of that statutory delegation to the Executive have been
consistently upheld, particularly in cases construing the
Foreign Assets Control Regulations 31 C.F.R. Part 500. 3/
The substantive provisions of Section 5(b), grant authority
to the President, acting through any agency or by means of any
regulation, to --
(A) investigate, regulate, or prohibit any trans-
actions in foreign exchange, transfers of credit
or payments between, by, through, or to any bank-
ing institution, and the importing, exporting,
hoarding, melting, or earmarking of gold or silver
coin or bullion, currency or securities,
Paragraph (A) of the section essentially aims at international
transactions of a monetary character. Paragraph (B) conveys
power to --
(B) investigate, regulate, direct and compel, nullify,
void, prevent or prohibit, any acquisition [,] holding,
withholding, use, transfer, withdrawal, transportation,
importation, or exportation of, or dealingin, or
exercising any right, power, or privilege with respect
to, or transactions involving, any property in which
any foreign country or a national thereof has any
interest,
(emphasis added)
The jurisdictional reach of both paragraphs, extends to trans-
actions "by any person or with respect to any property subject
to the jurisdiction of the United States."
In addition to regulatory authority over international
transactions, the President possesses broad authority to require
reporting of such transactions. Both paragraphs 5(b) (1) (A) and
(B) above permit the President to "investigate" the transactions
indentified therein. More specifically, the statute states:
[T]he President shall, in the manner hereinabove
provided, require any person to keep a full record
of, and to furnish under oath, in the form of reports
3/
See e.g., United States V. China Daily News, 224 F. 2d 670
(2d Cir. 1955), cert. denied, 350 U.S. 885 (1955); United
States V. Quong, 303 F. 2d 499 (6th Cir. 1962), cert. denied,
371 U.S. 863 (1962); Teague V. Regional Commissioner of
Customs, 404 F. 2d 441 (2d Cir. 1968), cert. denied 394 U.S.
977 (1969), reh. denied, 395 U.S. 930 (1969).
FORD is GERATO LIBRARY
-3-
or otherwise complete information relative to any act
or transactions referred to in this subdivision either
before, during, or after, the completion thereof, or
relative to any interest in foreign property, or
relative to any property in which any foreign country
or any national thereof has or has had any interest,
(emphasis added)
This provision permits the President or any official or agency
he might designate to require reports regarding current or
past investment transactions. See In re Indusco, 15 F.R.D. 7,
9-10 (S.D.N.Y. 1953). It has been recognized that while the
regulatory powers of Section 5(b) are extremely broad, the
reporting powers are, if anything, even broader. Clark V.
Edmunds, 73 F. Supp. 392 (W.D. Va. 1947).
With regard to screening of or substantive restrictions
on foreign investment here, the reasoning of a 1968 Attorney
General's Opinion concluding that a firm legal basis for the
Foreign Direct Investment Program was provided by Section 5(b)
possesses relevance to inward investment as well (42 Op. Atty.
Gen., No. 35, at 9):
A continual substantial excess of dollar outflows
over dollar inflows could undermine the value of the
dollar in international commerce and threaten the
world's monetary system, which depends upon a stable
dollar. The Foreign Direct Investment Program, in
seeking to control the flow of investment dollars
out of the United States,
proceeds on the same
basis as these earlier orders controlling the outflow
of gold and capital in other contexts.
With respect to foreign investment here, an even stronger case
than the balance-of-payments argument can be advanced, partic-
ularly if the investors are foreign governments and national
security related industries are involved.
In particular, the authority conveyed in Section 5 (b) (1) (B)
to investigate, regulate, or prohibit any transaction in which
a foreign country or national thereof has any interest is per-
tinent to monitoring, screening, or regulation of foreign invest-
ment here. The type of "interest" that is amenable to reg-
ulation is very broadly construed. see e.g. United States V.
Broverman, 180 F. Supp. 631 (S.D.N.Y. 1959) and would extend to
purchases of the equity or debt of United States businesses.
FORD & LIBARAY GERALD
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The cases have consistently recognized that the foreign
state is always a third-party beneficiary of transactions by
its nationals that bring foreign capital, particularly in hard
currencies, within its borders. That successful foreign direct
investment in the United States would result in an eventual
outflow of American dollars in the form of investment income
to foreign nations is obvious despite the short-term balance
of payments benefit to the United States from the initial
capitalization of such investments. The cases make clear that
the United States interest in control of ultimate movements
of its currency resources is a sound basis for the regulation
under Section (b) of transactions by any person within the
jurisdiction of the United States (whether a U.S. national or
not) in property in which a foreign country or a national
thereof has an interest of almost any kind whatsoever. Insofar
as such foreign investments might also impinge on our national
security or impair the conduct of our foreign policy, an even
stronger case can be made.
One potential drawback in the utilization of Section 5(b)
as a statutory underpinning for a regulatory program of
potentially indefinite duration is that its authority is
operative only during time of war or national emergency,
despite the great discretion accorded the President in declaring
an emergency. The 1950 emergency declared by President Truman
was consistently sustained in the courts for decades after
its proclamation. The courts have resisted the impulse to
independently determine whether an emergency is stale or to
confine its application to a particular set of originating or
historical circumstances. Moreover, on August 15, 1971,
President Nixon declared a balance-of-payments emergency which
has not been terminated (Proc. No. 4074, 36 Fed. Reg. 5724).
No court has as yet ruled that there must be a particular
relationship between the nature of an emergency and the Section
5(b) action taken thereunder. However, the charge that such a
relationship does not exist has frequently been levelled against
specific uses of Section 5(b) powers.
4/ Sardino V. Federal Reserve Bank, 361 F. 2d 106 (2d Cir. 1966),
cert. denied, 385 U.S. 898 (1966); Teague V. Regional Commr.
of Customs, 404 F. 2d 441 (2d Cir. 1968), cert. denied 394
U.S. 977 (1969), reh. denied, 395 U.S. 930 (1969); Pike V.
United States, 340 F. 2d 487, 489 (9th Cir. 1965); United
States V. Lane, 218 F. Supp. 459, 461-464 (S.D.N.Y. 1963)
Welch V. Kennedy, 319 F. Supp. 945, 947-48 (D.D.C. 1970)
GERALD FORD LIBRARY
-5-
The "emergency" problem could be alleviated by the
declaration of a new emergency dealing with the Petrodollar
problem. However, despite judicial abstinence to date from re-
examining emergency declarations, there is conceptual difficulty
in regarding a problem, however serious, which may persist
for a decade or more, as an "emergency" not amenable to leg-
islative redress. Litigation and Congressional criticism of
a new "emergency" of indefinite duration could be expected.
The national emergencies bill which passed the Senate on
October 7, 1974 would provide for limitations on the declaration
and duration of future emergencies and terminate existing
emergency powers within l year of enactment. However, by
Administration request, Section 5(b) was exempted entirely
from the provisions of the bill.
Moreover, despite the broad construction of Section 5(b)
by the courts to date, there have been recent adverse decisions
that may indicate that the President's exercise of the statute's
powers may in the future receive less tolerant scrutiny by
the courts.
In March 2, 1973, a federal district court judge ruled
orally that Section 5(b) did not authorize an indictment
charging a violation of the Foreign Direct Investment Program.
United States V. Ryan, Crim. N. 2038-78 (D.D.C. 1973). The Ryan
case was settled pending appeal when the investor agreed to
file delinquent reports. The district court wrote no opinion
and was apparently motivated by the narrow facts of the case
rather than an overview of Section 5(b). The case is thus not
a weighty precedent, but nonetheless cannot be ignored in
assessing judicial risks under Section 5(b).
More importantly, in Yoshida Intl., Inc. V. United States,
378 F. Supp. 1155 (Cust. Ct. 1974), the Court ruled that
Section 5(b) did not authorize the President's imposition of
an import surcharge in Proclamation 4074 on August 15, 1971.
Although the court was partly influenced by what it took to
be a conflict with trade legislation, it also took a generally
narrow view of Section 5(b). The case is presently on appeal
by the Government.
Any use of Section 5(b) involves not only a legal judgment
but a policy decision as to whether the program in question is
worth the risk of provoking a narrowing of the statute, or the
circumstances when it can be used, by the judiciary or by
Congress. Section 5(b) is a valuable tool for the Executive
which should be used with discretion to avoid any impairment
of the authority.
FORD 2. GERALD LIBRARY
D
General Benefits and Costs of Foreign Investment
in the United States
February 7, 1975
Introduction
At the macroeconomic level the principal benefit to
the United States of minimizing the restrictions against
the inflow of foreign investments is the resulting general
increase in the resources available to the domestic economy.
These resources became available through the functioning of
an increasingly interdependent world economy in which flows
of capital are directed by market forces to their most
productive uses, and the U.S. as well as all other countries
benefits from a more efficient allocation of capital and
other resources. Thus, the basic case for freedom of capital
flows among countries, including foreign investment flows into
the United States, is the same as the basic case for a free
enterprise economy and an open world economy. There is the
general presumption that average self-interest motivated
market behavior will lead to socially desirable outcomes
and an efficient allocation of resources. Government inter-
vention is called for only in cases where there is a strong
presumption that the market outcome would be socially
undesirable.
In examining the macroeconomic effects of foreign
investment, it is important to keep in mind that the greater
resource availability brought about by net foreign investment
in a given year carries with it the necessity of increased
foreign payments in future years. Thus capital inflows will
affect the pattern of current account deficits and surplus
not only in the initial year of the inflow but also over the
life time of the investments until they are liquidated.
Under our present regime of generally flexible exchange
rates, however, it would not be desirable for the government
to attempt to regulate capital flows with the objective of
achieving some target time path of current account surplus
and deficits.
1/ The term "foreign investment" usually refers to foreign
acquisitions or holdings of U.S. assets in the form of plant and
equipment, stocks, bonds and other long-term investments as
opposed to short-term liquid, holdings such as bank deposits. It
should be noted, however, that all foreign claims on the United
States, in whatever form, constitute foreign investment and there
is no a priori basis for differentiating between the various kinds
&
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of foreign investment as regards their economic effects. In fact,
GERALD
LIBRARY
a large part of what is commonly identified as "foreign investment"
or as "inflows of foreign capital" is merely a change in the form
of foreign claims on the United States. When a foreigner
purchases long-term assets in the United States, the purchase
is usually financed by drawing on dollars held in bank accounts
in the United States. Thus in such cases an increase in foreign
long-term claims on the United States (a "capital inflow") is
offset by a decrease in foreign short-term claims on the United
States (a "capital outflow") and there is no net effect on the
international investment position of the United States.
- 2 -
The fact that the return of foreign-source capital
accrues to foreigners rather than to U.S. persons does not
mean that U.S. national income is less than in the case of
investments from U.S.-source capital. Thus the outflow of
dividend and interest payments to foreign investors is matched
by an equivalent or greater increase in national income as a
result of the foreign capital. This general economic
presumption is reinforced by consideration of domestic tax
effects. For example, if an increment of capital earns an
economic return of 20 percent and it is taxed by the U.S.
Government at a rate of 50 percent then the cost to the
United States of foreign-source capital is 10 percent while
the gain to U.S. output is 20 percent.
Competition
An important general benefit to the U.S. economy from
foreign investment is that of increased competition which can
cause new innovation by American firms, lower consumer prices,
and increases in the quality of products.
Investment in a new facility would seem to be more likely
to provide a stimulus to competition than a takeover of an
existing firm. Yet takeovers do not necessarily represent
"passive" investments. The investing entity presumably
enters to make a profit and often will bring different
management techniques, patterns of behavior, and perhaps
technology with it. These alone may be sufficient to
spur competition with its attendent benefits. The danger
that the opposite will occur, i.e. a reduction in competition,
can be handled adequately by antitrust enforcement methods,
a subject discussed in more detail in the paper on specific
dangers.
Capital Formation
By providing greater access to resources, foreign invest-
ment can have an important beneficial effect on capital forma-
tion in the United States, an issue of particular importance
at this time. There is general agreement that future capital
requirements of the United States are massive and concern
whether actual capital formation will be at the levels needed
for sustained, non-inflationary growth.
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- 3 -
Clearly, the main solutions to these problems lie in
the area of controlling inflation, improving incentives to
save and invest, and encouraging economic growth through
macroeconomic policies and regulatory reform. Yet many
corporations, bankers and financiers see the potential of
substantial investments of oil producer funds in the United
States private sector as an important new source of capital
funds which will make it easier for the United States to
finance its capital requirements in the private sector
and presumably will result in an increase in capital forma-
tion over what otherwise would occur. Others, mainly
economists, have argued that because capital is fungible
and domestic and international capital markets are relatively
efficient, it is difficult to show that substantial foreign
long term investments in the private sector of the U.S. economy
will result in a significant increase in productive assets in
the private sector over what would occur if these funds were
invested elsewhere in the integrated capital markets, say in
Treasury bills or Eurodollar deposits.
Foreign investment would increase the stock of productive
assets in the United States in the private sector if:
(1) in the case of direct investments, foreign investors
undertook projects domestic investors would not have
undertaken; or
(2) foreign investment reduced the cost of capital to
U.S. companies.
In the first case, foreign investors would have to have
some special ability not possessed by domestic investors or
different objectives. Several significant existing foreign
direct investments in this country probably fall in this
category. OPEC investments in the United States are not
likely, at least for some time, to be in areas where they
have some special ability or technology. But it does seem
likely that oil producers will in certain cases have different
objectives from domestic investors. Probably the number of
sizable grass-roots investments by oil producers will remain
small. But they have shown a particular interest already in
real estate development and agribusiness, and certain down-
stream oil industry investments might be more attractive to
producing countries than to domestic investors.
FORD & LIBRARY 079830
- 4 -
The second case, the potential effect on the cost of
capital to U.S. companies, is the more important consideration.
This case concerns the purchase by foreigners of new or
outstanding issues of corporate stocks or bonds or direct
financial participation in U.S. companies. In the sense of
GNP accounting, these transactions themselves are not invest-
ments; they are merely shifts of ownership of existing wealth
from one person to another; they are not directly income
producing although they presumably increase utility, and
they are not counted in GNP. These transactions occur in a
free market and thus presumably do result in an increase in
utility or net benefits to those that participate in the
transactions. Yet such financial transfers, although not
immediately associated with income creation, would indirectly
affect business investment if they resulted in a reduction
in the cost of capital funds.
If we assume that OPEC investors will desire to place
a significant amount of their funds directly into long term
investments in the private sector of the U.S. economy, we
still must consider the likely net effect of these invest-
ments on capital formation. The United States, of course,
will import real resources only to the extent of a current
account deficit. We know that an inflow of funds in a given
market does not mean that supply in that market increases by
the full amount. Well functioning capital markets work to
even up the supply of capital to the various markets until
rates of return, adjusted for risk and liquidity, are equal
throughout the economy.
In the case of producer country investments in the U.S.
corporate sector, it seems likely that the market adjustments
would not be completely offsetting, and some reduction in the
corporate cost of capital would result. The net increase in
capital formation in this sector, however, would be significantly
less than the gross inflow of foreign funds. Sizable producer
investments in the stock market could induce additional domestic
purchases by improving the business investment climate generally,
and in particular, in the equity markets. Such an improvement
might eventually prov transitional, but the transition period
could be quite length Yet, some domestic investors may
view the surge in stock prices as quite temporary and not
justified by expected future profits. These investors would
presumably withdraw from the equity market and invest their
funds where the expected return is greater.
FORD 2. GERALD LIBRARY
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Another consideration is the likely change in asset
preferences of investors that will result from the transfer
of ownership of investable funds to the producers. The
present yields on financial assets domestically and inter-
nationally reflect the asset preferences of existing investors
and institutions. It is believed that some OPEC investors
may well see investments in U.S. corporate securities (debt
and equity) in a more favorable light than the existing
set of investors. These new investors are governments, or
government-directed, and they are considering not only the
expected profitability of such investments from the viewpoint
of portfolio investors but also such factors as prestige, the
possible benefits to domestic development programs (e.g.
technology transfers), or other national interests (e.g.
defense requirements).
If indeed investor preferences shift towards U.S. corporate
liabilities, one would expect a shift in yields, reducing
yields on corporate securities and raising yields on other
assets, at least relatively. This would lead to increased
capital formation in the corporate sector and (unless there
is a general increase in saving and a general reduction in
the cost of capital due to the oil price increases) a reduction
in capital formation in sectors where the cost of capital has
increased. Such yield shifts based on a change in the set of
investors in the United States might well be permanent.
However, the size of the yield shifts due to oil producer
investments is not likely to be very great. Despite the
large total amount of investable funds at their disposal,
it does not appear that the volume of funds they are likely
to place in the U.S. corporate sector will be large in comparison
to the total size of our corporate equity and debt markets.
Finally it must be noted that while direct placement of
OPEC funds into the corporate sector would have the most imme-
diate effect on the availability of capital in the corporate
sector, any net inflow of foreign capital into the United
States, even if into Treasury bills, would increase the total
amount of capital resources available to U.S. borrowers,
including the corporate sector, and presumably reduce the
cost of capital.
FORD 2. GERALD LIBRARY
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In summary, the role of a particular segment of the
spectrum of investors in our capital markets in determining
the rate of capital formation is rather uncertain. What
does appear clear is that imposition of restrictions on
the ways a group of investors are allowed to invest their
funds interferes with the allocation mechanism of the
private markets. The alternative for the private market
allocation mechanism is some official determination of where
funds should go. This alternative is likely to result in
considerably less than an optimal allocation of capital and
probably would tend to have a negative effect on capital
formation.
General Dangers or Costs of Foreign Investments
Turning to the dangers or negative aspects of foreign
investments in the United States, there are only two issues
which seem to fall in the general or macro category. The first
of these is the arguments heard in many countries that foreign
investment can adversely affect the national character, deter
domestic entrepreneurship and give to foreign interest
undesirable economic and political power over the domestic
economy. Such fears may have substance in a small country,
but have less relevance at the national level to a country
as large as the United States where even a large amount of
foreign investment will be a relatively smaller share of the
total economy. Moreover, as U.S. investors have found abroad,
even when foreign investors play a major economic role in
a smaller economy, the sovereign powers of the host government
are still pervasive and the actual powers of the foreign
investor are considerably less than what consideration of only
their economic importance to the country might suggest.
Under reasonable assumptions relating to their distri-
bution of funds, OPEC's investments should amount to between
1.5 and 5.0 percent of the value of securities in U.S.
financial markets. Even under the most extreme assumptions,
OPEC holdings would remain a small fraction of the value
of U.S. financial securities. and hence need not exert a
pervasive influence on the national character and operation
of the American economy. (For a detailed explanation of
these estimates, see OASIA Research paper, "OPEC Accumulations
as a Proportion of Financial Markets in 1980.")
FORD & GERALD LIBRARY
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A second general concern is that of access to U.S.
technology. This is, of course, a two way street; and in the
past the U.S. has benefitted from the introduction of new
technology by foreign investors, for example, in the
pharmaceutical industry. Yet, the present concern is
mainly with respect to OPEC country investors who have
little to offer the U.S. in the technology area. Will
increased foreign investments from the OPEC nations lead
to the transfer of commercially valuable technology abroad,
where such transfer would not otherwise have taken place?
The development strategies of at least some of the OPEC
countries involve rapid industrialization, with an apparent
emphasis on advanced technology. Given the very large revenues
they earn, such countries might offer above-market prices
to acquire particular technologies, in effect moving entire
firms from the United States to, say, Iran. The "loss" to
the United States in such cases at worst would be no greater
than if such a transfer were carried out by a U.S. firm. It
would likely be less unfavorable, for two reasons.
-- the over-the-market payment would yield a monopoly
rent to U.S. shareholders.
-- the rather primitive state of the economies of the
OPEC member makes it highly unlikely that advanced
industries located in these countries would be able
to mount effective competition to U.S. products for
many years to come.
Thus, it appears that premature transfer -- i.e., transfer
before market forces would cause it to occur -- would be
quite unlikely, and in any case would not be costly to the
United States, especially since generally there are several
competing sources of technology and product in the United
States -- e.g., aircraft, computers, machine tools.
If there is any danger to the United States from foreigners
gaining access to U.S. technology via inward direct investment,
it seems much more likely to come from other industrial
countries. If any policy is desirable, it should be general,
not strictly with respect to OPEC. As with flows of goods
and capital, economic theory indicates a strong presumption
in favor of a policy of neutrality -- i.e., allowing
market forces to determine flows of all these types, except
in such exceptional circumstances as national defense consider-
ations.
FORD P. GERALD LIBRARY
GERALD R. FORD LIBRARY
This form marks the file location of item number 2c,d,m,
as listed on the pink form (GSA form 7122, Withdrawal Sheet) at
the front of the folder.
APPENDIX 2
Treaties of Friendship, Commerce and Navigation
The traditional friendship, commerce and navigation treaty
(FCN) is designed to establish an agreed framework within which
mutually beneficial economic relations between two countries
can take place. The executive branch has long regarded these
treaties as an important element in promoting our national
interest and building a strong world economy.
To our benefit, the treaties establish a comprehensive
basis for the protection of American commerce and citizens
and their business and other interests abroad, including the
right to prompt, adequate and effective compensation in the
event of nationalization. However, the FCN treaties are not
one-sided. Rights assured to Americans in foreign countries
are also assured in equivalent measure to foreigners in this
country.
From the viewpoint of economic foreign policy a measure of
incentive for the FCNs was the desire to establish agreed
legal conditions favorable to private investment. The heart
of "modern" (i.e. post World War II) FCN treaties (and those
with our OECD partners are generally of this type) is the
provision relating to the establishment and operation of
companies.
This provision may be divided into two parts: (1) the
right to establish and acquire majority interests in enterprises
in the territory of the other party is governed by the "national
treatment" standard. (National treatment is defined in the
treaties as "treatment accorded within the territories of a
contracting party upon terms no less favorable than the treat-
ment accorded therein, in like situations, to nations, companies,
products, vessels or other objects, as the case may be, of such
party. ") There are no FCN treaties with OPEC countries which
contain this provision. Secondly, the "controlled" domestic
company is itself assured national treatment and discrimination
against it in any way by reason of its domination by alien
interests is not permissible. Our FCN treaty with Iran has
this provision. Our 1933 provisional agreement with Saudi
Arabia can be interpreted to provide similar protection.
The FCN treaties do exempt certain areas from the "national
treatment" standard in order to conform with laws and/or
policies in existence when the treaties were negotiated and in
order not to infringe upon other treaty obligations of the
GERALD FORD
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United States or our national security interests. Thus,
specific exclusions from national treatment are provided in
the areas of communications, air and water transport, banking, and
exploitation of natural resources. Also, the modern FCN
provides that it does not preclude the application of measures
regarding fissionable materials, the manufacture of
implements of war, traffic and materials carried on directly
or indirectly for the purpose of supplying military establish-
ments or necessary to protect essential security interests.
FORD & LIBRARY GERALD
LIMITED OFFICIAL USE
OPEC Accumulations as a Proportion of
Financial Markets in 1980
Recent estimates of peak OPEC accumulations lie in the
range of $200 to $300 billion in 1974 dollars, with the peak
occurring around 1980. In the following comparisons $250
million is used as' a round order of magnitude.
These accumulations, though massive in absolute magni-
tude, need to be compared with other magnitudes if their
economic significance is to be evaluated. Value of assets in
major world financial markets where these funds will be held
is perhaps the most relevant single comparison.
The value of equities, bonds, and short-term debt in
OECD and major international capital markets totalled nearly
$3 trillion in 1972 (in 1972 dollars; in 1974 dollars this
figure might be on the order of $3 1/2 trillion). The U.S.
accounted for roughly 3/4, or $2.2 trillion, of the 1972 total.
Assuming 10% annual market growth in nominal terms by
1974, total value of assets in these major world financial
markets would be nearly $3.6 trillion in 1974 dollars; the
U.S. share might be on the order of $2.7 trillion if the 75%
U.S. share holds up. (This compares closely with a McGraw-
Hill estimate of total U.S. debt - public and private -- of
$2.5 trillion in 1974.)
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A continued nominal growth of 10% per year, with inflation
rates of 12% through 1976 and 7% thereafter (the same
inflation rates assumed in deflating the 1980 OPEC accumula-
tions) yields an estimated capital market size of $3.8
trillion (constant 1974 dollars) in 1980. Since U.S. new
issues are a relatively smaller percentage of total new
issues (37% in 1972) than of outstandings, the U.S. share
would be reduced to perhaps. 70% or $2.7 trillion.
If OPEC financial accumulations total $250 billion (in
1974 dollars) in 1980, they would amount to less than 7 per-
cent of the total value of outstanding assets in the major
national and international financial markets. Even if we
allow for a 25% overestimate of capital market size in 1980,
the accumulations would be less than 9% of this smaller total
(i.e., of $2.85 trillion)
For the U.S., the relative size of OPEC holdings would
almost certainly be considerably smaller. For example, if
OPEC invested 20 percent (the current proportion) of its
total 1980 accumulations in the U.S., this would amount to 1.5
to 2.0 percent of U.S. financial assets. If OPEC invests as
much as 40 percent, or $100 billion, OPEC investments in the
U.S. would still be only 3.6 percent of the value of U.S.
1/ Such a comparison implies an actual shrinkage in real
terms of world capital markets between now and 1980.
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financial markets on the above assumption. Even with no real
growth in U.S. financial markets between now and 1980, OPEC
investments of $100 billion (in 1974 dollars) would amount to
less than 5 percent of total U.S. financial assets. In the
most extreme case -- total OPEC accumulation of $250 billion
in a U.S. capital market which has shown no growth between
now and 1980 --- OPEC investment would still amount to no more
than 10 percent of total value of U.S. financial markets.
The foregoing discussion suggests that appropriate U.S.
policy toward inward investment should not be strongly affect-
ed by the magnitude of OPEC dollar holdings. Even under the
most extreme assumptions, OPEC holdings would still be a
relatively small fraction of the size of U.S. financial
markets and hence need not exert a pervasive influence on
the national character or operation of the U.S. economy.
OASIA/Research
February 14, 1975
2 LIBRARY GERALD
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This form marks the file location of item number 2e-2f
as listed on the pink form (GSA form 7122, Withdrawal Sheet) at
the front of the folder.