Ask the Scholar
Document scope · 1 page
Scholar
Ask about this object, its catalog metadata, its source description, or the page inventory.
For page-specific OCR and visual context, open one of the page chats.
Scholar Source Context
Document identity
localId
352356366
label
Foreign Investment in the U.S. (2)
core
doc
dtoType
document
citationUrl
pageCount
1
Source metadata
id
352356366
contentType
document
title
Foreign Investment in the U.S. (2)
citationUrl
collections
Arthur F. Burns Papers
Federal Reserve Board Subject Files
subjects
Organization of Petroleum Exporting Countries
Investments, Foreign
thumbnailUrl
largeImageUrl
imageCount
1
hasImages
yes
source
import
hasTranscription
no
Source extras
naId
352356366
coverageEndDate
logicalDate
1974-05-31
month
5
year
1974
coverageStartDate
day
1
logicalDate
1971-05-01
month
5
year
1971
levelOfDescription
fileUnit
recordType
description
ocrSource
nara-archive
Single page context
seq
1
pageIndex
0
type
document
mediaId
677c7cbe2bd88988
ocrText
The original documents are located in Box B48, folder "Foreign Investment in the U.S. (2)"
of the Arthur F. Burns Papers 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. Dr. Burns 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of America his copyrights in all of his unpublished writings in National Archives collections.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
CORRESPONDENTS OR TITLE
DATE
RESTRICTION
DOCUMENT
1. memo case, Bennett to Burns, 2/19/75
la. memo
Foreign Investment in the United States - Summary of [2/75]
A
Issues and Background (7 pp. )
opened 9/10/09
lb. memo
Options for U.S. Policy on Foreign Investment in the
2/18/75
A
United States (24 pp. )
opened 9/10/09
le. memo
re Probable Foreign Reaction to U.S Actions (5 pp. ) 2/18/75
A
pened 9/10/09
ld. report
re OPEC Finances (12 pp. )
1/29/75
A
le minutes
extract from minutes of CIEP Executive Committee
12/21/73
A
Meeting (1 p. ) opened 9/10/09
lf. minutes
extract from minutes of CIEP Executive Committee
5/22/74
A
Meeting (1 p.) opened 9/10/09
lg. memo
U.S. Policy and Objectives on International Invest-
[5/74]
A
ment (9 pp. )
opened 9/20/09
FILE LOCATION
Arthur Burns Papers
SR
Federal Reserve Board Subject File, Box B48
4/20/84
Foreign Investment in the U.S. (2)
RESTRICTION CODES
(A) Closed by Executive Order 12065 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 (REV. 1-81)
TREASURY
HE UNDER SECRETARY OF THE TRE SURY
FOR MONETARY AFFAIRS
WASHINGTON, D.C. 20220
February 19, 1975
MEMORANDUM FOR THE HONORABLE ARTHUR F. BURNS
CHAIRMAN, BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
Attached are two sets of the option and
background papers for the meeting next Monday
on U. S. policy on Foreign Investment in the
United States.
The meeting, which is scheduled for
February 24, at 10:30 a.m., will be held in
the Roosevelt Room at the White House.
Jack Jack F. Bennett Bennett
Attachments
FORD i LIBRARY 936670
FREASURY
THE UNDER SECRETARY OF THE TREASURY
FOR MONETARY AFFAIRS
WASHINGTON, D.C. 20220
February 14, 1975
MEMORANDUM FOR THE HONORABLE ARTHUR F. BURNS
CHAIRMAN, BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
Secretary Simon and General Scowcroft have asked
that I attempt to arrange a meeting at which options
and a possible recommendation for the President may be
considered for future U.S. policy on foreign invest-
ment in the United States. This meeting has been
scheduled for 10:30 AM Monday, February 24, and will
probably last from an hour to an hour and a half. It
has been suggested that each department limit its
attendance to a principal plus one. I know that
Secretary Simon and General Scowcroft would be grateful
if you could personally attend.
An interagency committee has prepared a set of
options and background papers for your consideration
and these will be circulated promptly.
The place of the meeting will be announced later.
In due course, I would be grateful if your office
could inform my office on 964 - 5847 of those who are
expected to attend.
Jack F. Bennett
AFB.
Ted B1
FORD is GERALO LIBRARY
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 FORD GERART
CONFIDENTIAL ATTACH NT
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
FORD & LIBRARY GERALD
CONFIDENTIAL
Foreign Investment in the United States
Summary of Issues and Background
The Problem
The United States has traditionally followed a policy
of freely admitting foreign investment to the United States,
offering no special incentives and, with a minimum of
government intervention to protect national security and
other essential interests, imposing no special barriers to
foreign investors. This policy has been based on the belief
that U.S. interests are best served by permitting the free
flow of capital across borders in response to market forces.
The recent large accumulations of funds by oil-producing
countries, coupled with the fact that these accumulations are
mainly in official rather than private hands, adds a new
element to international investment. For example, investments
by foreign governments raise the issue of political motivation.
Moreover, an array of investments made by a government are
subject to coordinated control to a degree that does not
arise in the case of similar investments made by unrelated
private investors within a particular country. Concern has
been expressed in the Congress and by the U.S. public over
the adequacy of our controls on foreign investment to protect
against abuses by foreign investors.
In light of these developments, should the U.S. Govern-
ment modify its existing policy (1) toward inward foreign
investment or (2) toward inward investment by official foreign
investors?
Key Issues
1. Is it likely that the funds that OPEC will have in the
United States will be of sufficient magnitude to create the
risk that OPEC investors might have a pervasive effect on our
foreign or domestic policies or our attitudes?
2. Irrespective of the potential magnitude, are existing
safeguards adequate to protect against undesirable behavior
by foreign investors or undesirable foreign investment, for
example concentrated in particular industries, especially in
areas of national security or essential national interest?
3. Should official foreign invèstment, particularly from -OPEC
countries, give rise to more concern than private foreign
incestment?
DECLASSIFIED
AUTHORITY Treasury the 8/22/06
GERALD FORD LIBRARY
CONFIDENTIAL
BY lab NARA, DATE 9/10/209
CONFIDENTIAL
- 2 -
4. As there are proposals before the Congress to restrict
inward foreign investment, should the Executive Branch make a
preemptive move in order to head off unduly restrictive
legislation?
5. What are the chances that the Congress would amend any
Administration requests for legislation on foreign investment
in a manner that would be unacceptable to the Administration?
6. Would it be preferable to delay any decisions until we
have a better feel for the magnitude and timing of OPEC invest-
ment in this country and Congressional and public reaction to it?
7. Is a prompt decision desirable to reduce uncertainty here
and abroad regarding U.S. policy on foreign investment in this
country?
8. Would new U.S. restrictions on inward foreign investment
result in (a) further restrictions by foreign governments on
U.S. investment overseas, and/or (b) restrictions by other
countries on OPEC long-term investments that would have the
effect of keeping OPEC funds in short-term instruments,
thereby adding to the uncertainties of the international financial
system, and/or (c) a reduction in oil production?
9. Is there a risk that a change in U.S. policy on inward
foreign investment might deter desirable investment or cause
foreigners to sell off their holdings of U.S. securities?
10. To what extent would a more restrictive policy be incon-
sistent with FCN treaty obligations and other international
agreements?
Basic Options
After an extensive review of current U.S. laws and
regulations relating to business activities and foreign in-
vestment in the U.S. economy, and bearing in mind the economic
and political implications of the OPEC surpluses, the following
four options have been developed to facilitiate consideration
of future U.S. policy with respect to such investment:
1. Maintain existing policy and improve implementation by
executive action, including the handling of problems of foreign
government investment on a bilateral government-to-government
basis.
CONFIDENTIAL
GERALD FORD LIBRARY
CONFIDENTIAL
- 3 -
2. Seek new legislation to improve reporting requirements
and strengthen existing powers to prevent abuses.
3. Seek legislation to require screening of
(a) all foreign investment in key industries, or
GERALD R. FORD LIBRARA
(b) all official foreign investment, or
(c) all official foreign investment in key industries.
4. Seek legislation to establish percentage ceilings on
official foreign investment, possibly combined with legislative
authorization for special investment funds for foreign govern-
ments.
More detailed discussion of the options is at Tab A.
Background
U.S. policy has been based on the belief that foreign
investment in the United States contributes to the dynamism
of the American economy by stimulating competition, and govern-
ment intervention has been kept to the minimum necessary to
protect national security and other essential interests.
Attached at Tab F are papers approved by the CIEP Executive
Committee in December 1973 and May 1974, which give a further
statement of this policy and put it in the context of inter-
national investment reform. These papers, however, did not
take account of the full implications of the financial
accumulations of the OPEC countries.
At the end of 1973, the book value of foreign direct
investment in the United States was $17.7 billion and the market
value of foreign portfolio investment in U.S. corporate securities
was $36.8 billion. (The comparable figures for U.S. investment
abroad are $107 billion and $25.2 billion respectively.)
Although full data for 1974 are not yet available, it appears
that OPEC direct and private portfolio investment in the
United States was less than $1 billion. Nevertheless, the
potential that the OPEC countries have for foreign investment
makes it essential that the United States have the means to
obtain adequate, timely information on foreign investment in
this country and adequate means to protect itself against
investment which is inimical to our national interest.
Present reporting requirements of various Federal agéncies
produce substantial information on foreign investment in this
country. The major information collectors are the Commerce
Department (on direct investment), the Treasury Department
CONFIDENTIAL
CONFIDENTIAL
- 4 -
(on portfolio investment) and the Securities and Exchange
Commission (on acquisitions of more than 5 percent of the
stock of a company whose securities are publicly traded).
Other regulatory agencies and the Department of Defense
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 will yield summary results by October
1975 and comprehensive data by April 1976 on inward long-
term foreign investment as of the end of 1974.
The important gaps in information available to policy
makers result from their inability to obtain data on specific
transactions. Although the Commerce Department obtains data
on direct investment in this country, it is constrained by
current laws and procedures from disclosing this information
to other Federal Government agencies. Also, the SEC obtains
information only on transactions in the shares of publicly
traded and registered corporations. Difficulty in tracing
beneficial owners may be an important information gap. The
SEC is presently inquiring into this issue, among others, and
may recommend changes in legislation or practice.
The bills introduced in the 93rd Congress give an indica-
tion of what might be expected in the current Congress. They
fell in four broad categories: Proposals to (1) establish
percentage limitations on foreign ownership of any U.S. enter-
prise or U.S. firm in certain industries, or debt participation,
(2) establish an agency to collect information on foreign
participation in the ownership of U.S. firms and require
U.S. firms to report foreign ownership, (3) require advance
notice of purchase of an interest in a publicly held U.S. firm
and permit the Government to act in advance to block undesirable
acquisitions, and (4) restrain foreign firms from doing business
in the United States.
Proposed legislation in some of these categories has
already been introduced in the 94th Congress. Senator Williams
has sponsored legislation that would inter alia require
(1) disclosure of beneficial ownership, (2) issuers of
registered securities to file with the SEC the names and
nationalities of all foreign owners of their equity securities
and (3) foreign investors to file 30 days in advance confidential
statements on tender offers to acquire five percent or more
of the equity securities of a U.S. company. The Williams bill
would also permit the President to review and prohibit tender
BERALD FORD LIBRARY
CONFIDENTIAL
CONFIDENTIAL
- 5 -
offers during the 30-day period, and the SEC, the Attorney
General, or any U.S. corporation in which a foreigner had
acquired an interest, or any shareholder of such corporation,
would be authorized to sue in a U.S. court to unwind a trans-
action. Senator Hugh Scott has introduced a bill that would
require any foreign investor or his agent to submit quarterly
reports to the Commerce Department on investments of 0.5 per-
cent in any U.S. firm worth more than $10,000. Representatives
Fish and Roe have introduced identical bills to establish a
Joint Congressional Committee on foreign investment in this
country and a National Foreign Investment Control Commission
which would control foreign investment and, possibly, be
given authority to require divestiture. Representative
Stark has proposed legislation to prevent foreigners from
owning more than one U.S. bank.
To forestall the possibility of foreign investment that
might be harmful to national security or other essential
interests, a number of Federal laws, regulations, and
administrative practices currently ban or severely limit
foreign investment in certain industries, such as atomic
GERALD
LIBRARY
energy, aviation, shipping, and communications. Defense
Department regulations act as an inhibition on
foreign acquisition of any firm that does classified work
for the Government in that such acquisition could cause the
firm to lose defense contracts. Moreover, a number of Federal
and state laws and regulations assure that economic activities
of companies, irrespective of ownership, 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. In addition, the Federal Government has broad
powers--in the Defense Production Act, the Selective Service
Act, and the Trading With the Enemy Act, the latter of which
is only available in a national emergency declared by the
President-- 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.
Thus it may be argued that a variety of laws,
regulations, and administrative practices generally protect
against the possibility of foreign investors abusing their
position in this country. However, it may be asked whether
existing laws are adequate to deal with politically motivated
investments or with the political influence that foreign.
governments might gain from the holding of controlling interest
in a number of important U.S. firms. The issue is posed by
the fact that most OPEC investment is official rather than
private.
CONFIDENTIAL
CONFIDENTIAL
- 6, -
The paper at Tab B is a more detailed discussion of
the disclosure requirements on foreign investment in this
country and the safeguards against unwanted foreign invest-
ment.
At the macroeconomic level, the basic case for freedom
of capital flows into the United States is the same as the
basic case for a free enterprise economy. The general
presumption is that market behavior motivated by self-interest
will lead to socially desirable outcomes and a more efficient
allocation of resources. For the period immediately ahead,
oil-producer investment funds can be an important new source
of funds to finance the capital requirements in the private
sector and presumably will result in an increase in capital
FORD
formation over what otherwise would occur. The outflow of
dividend and interest payments to foreign investors is
matched by an equivalent or greater increase in national
GERALD
LIBRARY
income as a result of the foreign capital. Moreover, the
increased competition can 'lead to innovation by foreign
firms, lower consumer prices, and increases in the quality
of products. This effect can occur both from takeovers and
acquisitions as well as new investment. The paper at Tab C
is a more detailed discussion of these points.
There also exists the possibility of official
investments being coordinated from abroad to hinder competition.
Also, the more important foreign official capital becomes in
the U.S. private sector, the more this sector is subject to
potential control by foreign governments whose interests do
not necessarily coincide with those of the United States.
Foreign reaction to any change in U.S. policy on inward
foreign investment will depend upon the severity of the change
and the nature of the country. A mandatory registration
procedure and disclosure would probably bring no reaction
from other OECD countries or less-developed countries. If
OPEC countries thought that registration and disclosure
represented a fundamental shift in the U.S. investment
climate, they might be concerned; however, they would also
recognize that, even with these requirements, the United
States would still be one of the least restrictive places
for OPEC investment. Screening or added restrictions could
produce a more negative reaction, and inhibit OPEC countries
from making some investments, but this possibility would be
reduced if the restrictions were limited to a few sectors.
New U.S. restrictions, particularly if they exceeded
the restrictions of other OECD countries or violated FCN
treaty obligations, could become an issue with other OECD
countries, have a negative effect on our efforts in the
OECD to maintain liberal policies toward foreign investment,
and in general encourage other countries to adopt restrictive
investment policies. The treaty problem, in particular, will
CONFIDENTIAL
CONFIDENTIAL
- 7 -
have to be given careful consideration. (An explanation of our
FCN treaties is given in the second appendix at Tab A.
As non-OPEC, less-developed countries have insignificant
investment in this country and already follow fairly restrictive
policies toward foreign investment, moderate new U.S. restrictions
probably would not result in retaliation against our investments,
but they might diminish the credibility of our
support of freedom of capital flows and make more difficult
our efforts in the United Nations and other international
organizations, and in bilateral negotiation's, to limit the
spread of economic nationalism. (The possible foreign reaction
is discussed in greater detail in the paper at Tab D.)
Estimates of the magnitude of funds which will be available
to OPEC countries for investment in this country and elsewhere
vary widely depending on the assumptions one makes regarding a
number of uncertain variables such as: (1) inflation, (2) the
absorptive capacity of oil-producing countries (3) the price of
oil, (4) the return on OPEC investments and (5) the distribu-
tion among OPEC countries of any production cutbacks undertaken
to maintain oil prices. Most recent projections suggest OPEC
accumulations are likely to be in the range of $200-300 billion
in 1980, and the 1985 total may be somewhat less than in 1980.
Current estimates are generally below those being made
6-8 months ago. However, while the exact amount is uncertain,
OPEC investable surpluses will clearly be very large.
If OPEC financial accumulations were assumed to be
$250 billion in 1980, they would be on the order of seven
percent of the total value of the OECD and other major inter-
national financial markets. If OPEC countries invested
20 percent of their total financial accumulations in the United
States, this would amount to 1.5-2.0 percent of all U.S.
financial assets. It should be noted that even with funds
equal to one percent or less of the value of our financial
markets, oil producers could buy controlling interests in many
firms that might be considered sensitive.
The first attachment at Tab E is a paper which compares
the various current estimates on OPEC financial accumulations
by 1980, and the second paper at this Tab is a discussion of
OPEC accumulations as a proportion of financial markets in 1980.
i
FORD
CONFIDENTIAL
GERALD
LIBRARY
is
FORD
GERALD
LIBRARY
February 18, 1975
Options for U.S. Policy
On Foreign Investment in the United States
After an extensive review of U.S. laws and regulations
relating to business activities and foreign investment, and
bearing in mind the econmic and political implications of large
OPEC surpluses, four options, which are discussed below, have
been developed to facilitate consideration of future U.S.
policy with respect to such investment. The proposed options
distinguish between official and private foreign investment
and between choices that may be adopted by the Executive
Branch or require legislation. The first three options are
presented in an order representing increasing U.S. Government
intervention. The fourth option represents a more specific
limitation, but it applies to official foreign investment
only.
THE
DECLASSIFIED
AUTHORITY Masuryth 8/22/06; statiguiation
FORD & GERALD LIBRARY
BY labr NARA, DATE 9/10/09
CONFIDENTI
- 2 -
GERALD R. FORD LIBRARY
Option 1 - Maintain existing policy and improve implementation
by executive action, including the handling of problems of
foreign government investment on a bilateral government-to-
government basis.
This option would maintain our traditional open door
policy and rely on existing restrictions and controls to regulate
foreign investment in the United States. It would, however,
improve implementation of our current policy by (1) making
administrative changes to expand our existing data gathering
and dissemination capability; (2) enforcing more rigorously
existing laws and regulations to control the entry and
activities of foreign investors; and (3) creating a new office
within the Executive Branch to serve as a focal point for
government activity with respect to foreign investment in the
United States.
Within current authority the Administration could also deal
with official foreign investment on a bilateral government-to-
government basis, making use of the Joint Commissions whenever
possible. The details could vary depending on the country, but
the essence would be for the investing government to define its
investment goals and for us to note areas where investment is
legally permitted andindicate kinds of activity that would
cause us problems. The arrangement might take the form of an
agreement between the U.S. Government and the investing govern-
ment.
Advantages
-- Utilizes powers the Administration has under existing
laws and does not require action by Congress, which might
overreact and add unnecessary restrictions on foreign invest-
ment.
-- Requires substantial current information (including
identity of beneficial owner) on all significant foreign
investment in publicly-traded companies U.S. companies with
more than $1 million assets and more than 500 shareholders.
-- Can be put into effect immediately whenever the
President decides action is necessary.
-- Adoption would give the Administration further time
to evaluate the need for more drastic action.
-- Consistent with our desire to create a free and open
economy and avoids new restrictions which could invite
retaliation, violate FCN treaties and undercut our efforts
in the OECD to encourage more liberal investment policies.
CONF IDENTIAL
CONFIDENTIAL
- 3 -
-- Treats substantial foreign government investment
as a political/foreign policy matter particularly suitable
for government-to government negotiations.
-- Enables USG to give informal guidance, which is a
type of screening of foreign investment.
-- Minimizes the likelihood of possibly contentious
investment.
-- Provides umbrella for foreign government investment
in the U.S.
-- Provides advance notice of foreign investment and time
by using existing legal and foreign policy tools.
Disadvantages
-- Existing confidentiality requirements would limit
disclosure of information on individual investors in areas
not covered by SEC.
-- Congress may not be satisfied with a system which
only requires disclosure of the beneficial owners of publicly
traded companies.
-- May not preclude Congressional action to enact new
restrictions and/or reporting requirements.
-- Bilateral arrangements between the U.S. and investing
governments may foster bilateralism.
-- Bilateral arrangements would involve the U.S. Govern-
ment in the investment process which might make us subject to
charges of arbitrarily favoring certain types of investments.
-- Consultation between the U.S. and the investing
governments may not adequately protect against unwanted foreign
investment.
-- Existing laws and residual powers to control foreign
investment may not be adequate to deal with foreign government
investment which may be motivated by political objectives.
CONFIDENTIAL
GERALD FORD LIBRARY
CONFIDENTIAL
- 4 -
Discussion
Adoption of this option is based on the assumption that
our existing powers and recourse to bilateral consultations
are adequate for the present to provide sufficient informa-
tion on, and control of, foreign investment in the United
States.
The administrative changes in existing programs might
include action by the SEC to (1) require specific identifica-
tion on its report forms of the nationality of all foreign
beneficial owners; (2) compile and publish a list of foreign
beneficial owners; and (3) express its intention to impose
all available sanctions (including the loss of voting rights)
on persons who violate its regulations. Commerce Depart-
ment (BEA) regulations require reports to be filed with
respect to every business enterprise in the United States
when foreign participation exceeds $2 million and foreigners
own an interest that exceeds 10 percent in such enterprise.
However, confidentiality requirements prevent disclosure of
any information re individual investors. Administrative
changes could be made to lower the percentage holding to
5 percent and the $2 million exemption to a smaller figure.
Our general laws to ensure against abuse of economic
power and a series of laws dealing specifically with foreign
investment give us substantial existing power to prevent
foreign investors from acting contrary to our national interest.
This option would see that these laws were rigorously en-
forced by centralizing watchdog responsibility with respect
to violations of existing laws in a newly created office
which would report periodically on the adequacy of existing
protections and controls.
Other functions of the new office would be to obtain (to
the extent permitted by existing confidentiality requirements)
data on foreign investment from all departments and agencies
actually collecting data; to explore the extent to which these
confidentiality requirements could be relaxed; and to prepare and
publish periodic reports on foreign investment. The new
office could be created by Executive Order, accompanied by
a statement from the President or high Administration
official outlining in detail the extent of our existing
authority and information.
CONFIDENTANT
GERALD FORD LIBRARY
CONFIDENTIAL
- 5 -
By centralizing information and publishing periodic
reports on foreign investment, we could provide adequate
information on significant non-government investment even
though there might be minor gaps as noted above. In
addition, existing laws give us broad power to prevent
misuse of foreign investment motivated by purely economic
considerations. Whether this is also adequate to handle OPEC
government investment depends on an assessment of the amount,
timing and direction of such investment flows and on whether
OPEC governments will be governed by political or economic
motives. The provision in this option for government-to-
government consultations (that is, in addition to the
consultations already being carried on) recognizes that
different OPEC investors will have different investment
objectives and needs and provides a flexible means of tailoring
our policy response to those needs.
LIBRARY GERALD P. FORD
-CONFIDENTIAL
CONFIDENTIAL
- 6 -
Option 2 -
Seek new legislation to improve reporting
requirements and strengthen existing powers
to prevent abuses.
Definition of Option. Under this option, the
Administration would ask Congress for legislative authority
to remedy the weaknesses in our existing reporting and
disclosure requirements for foreign investors. These im-
provements could be effected by building on an existing set
of requirements, for example those administered by the
SEC, or by establishing a new reporting system and a
bureaucracy to administer it. They would be designed
to enable us to obtain more complete information as to the
identity of foreign investors in firms whose stock is publicly
traded, as well as additional information on transactions
involving real estate and non-public companies.
The Administration might also seek legis-
lation to improve our existing powers to prevent foreign
private and/or government investors operating in our economy
from acting in a way contrary to our national interest. It
would not touch on entry of foreign investment -- which
would continue to be governed by existing laws -- but would
concentrate on use of the investment once the foreign in-
vestor was established here. The improvement in our powers
to control, and to remedy abuses caused by, existing invest-
ment could be provided by (1) plugging gaps in and/or ex-
panding the President's existing emergency powers -- under
the Defense Production, the Selective Service, and the
Trading with the Enemy Acts -- and/or (2) plugging gaps in
existing general laws affecting foreign investment.
Advantages
-- Meets Congressional concerns about the adequacy
of our information gathering capabilities.
-- Adoption would give the Administration further
time and better information to evaluate the need for more
drastic action.
-- Allows a free flow of investment into the U.S. but
improves our existing power to prevent action contrary to
our national interest.
-- Utilizes powers the U.S. has under existing laws to
regulate entry of foreign investment.
GERALD FORO LIBRARY
CONFIDENTIAL
R.
CONFIDENTIAL
GERALD
FORD
- 7 -
-- Concentrates the remedy on the problem of possible
misuse of foreign investment.
-- Consistent with our desire to create a free and
open economy and avoids new restrictions which could invite
retaliation, violate our FCN treaties, and undercut our
efforts in the OECD to encourage other countries to adopt
more liberal investment policies.
-- Would expand existing authority to deal with extreme
abuses after the fact.
Disadvantages
-- Does not meet concerns about deficiencies in
existing powers to deal with misuse of assets by a foreign
investor and does not provide protection against "pervasive
foreign influence."
-- Requires Congressional action and may serve as
magnet for more restrictive legislation and/or focus un-
wanted Congressional attention on the President's emergency
powers -- which are already under attack in Congress.
-- Creating a general reserve or residual power in the
President would, without precise standards or guidelines
for its use, create great uncertainty for a foreign investor
and might discourage foreign investment in the U.S.
-- Any expanded (or new) powers would be primarily
remedial and would not prevent all abuses of foreign invest-
ment in the U.S.
-- There are substantial doubts (which need to be re-
solved) as to whether the President could be given such
general powers to undo, resolve, or mitigate an individual
investment (as opposed to a class or category of transactions)
once it had been established here.
This option is concerned with improvements in our data-
gathering and disclosure capabilities, as well as our
capability to deal with abuses by foreign investors, including
our powers to correct extreme abuses after they occur. The
changes would be achieved by legislative action. Adoption
of the option would still allow investment to flow freely
into the United States in accordance with existing laws, on
the assumption that there is no clear way in all instances of
identifying unwanted foreign investment until the activities
of the investor are evaluated. (A number of U.S. laws already
prevent or limit foreign investment in various industries.)
CONFIDENTIAL
CONFIDENTIAL
- 8 -
The legislative changes would be designed to remedy
the weaknesses in our existing reporting and disclosure
requirements with respect to foreign investment that could
not be adequately dealt with by administrative action. A
major weakness of our existing requirements relates to the
identification of "beneficial owners" or the equity of
U.S. firms. This problem could be easily solved if all
that was involved in this type of case was use of a domestic
nominee by a foreign investor. In fact the SEC has recently
held hearings on this issue and may soon be proposing changes
in its practice or legislative authority to enable it to
deal with the nominee question. However, a simple dis-
closure requirement would not be sufficient in a case where
a foreign investor used a foreign nominee (or series of them)
to conceal his identity. Penetration of these nominee "veils"
would in many instances prove impossible because of problems
of legal jurisdiction and of protections embodied in the
commercial and bank secrecy laws of other countries. It
should, however, be noted that a foreign investor
hiding behind nominee "veils" who voted his shares or
otherwise acted in a way contrary to the interest of the
firm or the United States would probably expose himself
by his action.
A possible solution to the nominee problem would be to
ask Congress to authorize a strong disclosure requirement
backed up by an effective penalty for non-compliance. One
such penalty that has been suggested is suspension of the
voting rights of the stock in question, but other possible
formulas might be identified and explored. Responsibility
for implementation of the new requirements could be given
either to an existing agency or to one created especially
for this purpose.
With regard to improving our powers to prevent or to
correct major abuses, we would concentrate on weaknesses
in the Defense Production Act, the Selective Service Act,
and the Trading With the Enemy Act.
The Department of Defense has reservation as to the
FORD & LIBRARY GERALD
extent of the President's powers under the Defense Pro-
duction and the Selective Service Acts to ensure the
availability of productive capacity for Defense purposes.
For example, there are doubts as to (1) the extent of the
President's powers under these acts to prevent plant
closure or to require continuation of defense related
business, and (2) application of the Selective Service Act
in a non-war situation. In addition, the Trading With the
Enemy Act is under increasing criticism in Congress, and
new legislation might be necessary to ensure its continued
application in a non-emergency situation. Moreover, there
CONFIDENTIAL
-CONFIDENTIAL
- 9 -
are doubts as to whether the President could (or would want
to) apply the Trading With the Enemy Act after the fact to
undo, or mitigate abuses by indivual foreign investors on an
ad hoc case-by-case basis without precise standards. There-
fore, any consideration of broad new emergency powers to
deal with foreign investment after it had entered would need
a careful review of the legality and desirability of giving
the President broad powers to control (e.g. seize or divest)
individual firms on an ad hoc basis.
Adoption of the option would not give absolute assurance
that it would prevent all possible abuses by foreign in-
vestors. On the other hand, there are numerous and possibly
more effective measures outside the field of investment
(for example, selective letting of contracts or placing of
purchase orders, or selective placement of funds) that a
foreigner could employ to influence a U.S. firm to act in
a desired way.
FORD & LIBRARY GERALD
CONFIDENTIAL
CONFIDENTIAL
- 10 -
Option 3 - Impose Screening Procedures on Inward Foreign
Investment Under New Legislation
Definition of Option - This option calls for the establishment
of a mandatory screening procedure, to be applicable to new
direct investment as well as foreign acquisitions and mergers
with U.S. firms. Its application to certain investments would
be prohibited by existing FCN treaties. It would be supple-
mental to our existing measures affecting foreign investment.
The screening procedure could be established in either of
three ways. Suboption A is a discussion of a screening
procedure applicable to all foreign investors in industries
that are considered "key" to the U.S. national interest.
Suboption B is discussion of a screening procedure applicable
to official foreign investment in all sectors of the U.S.
economy. Suboption C is a discussion of a screening procedure
applicable only to official foreign investment in key industries.
The suboptions have several elements in common. The
criteria for the screening process should be published to avoid
confusion on the part of foreign investors and U.S. firms.
Each suboption would require prior notification of a central
authority which would be responsible for ascertaining, in
accordance with internal U.S. Government procedures to be
developed, whether there was any objection to the transaction.
If this option should be adopted, it would be desirable to
invoke currently available authority to prevent foreign investors
from rushing into the U.S. market ahead of the enactment of
legislation. Such authority is found in Section (b) of the
Trading With the Enemy Act as amended; a legal statement on
the Act is the second appendix to this paper.
Screening of certain investments would conflict with some
Treaties of Friendship, Commerce and Navigation. Accordingly,
further study would be necessary to determine how potential
treaty conflicts might best be handled, for example, by prior
consultation aimed at avoiding a treaty conflict, by renegotia-
tion of relevant treaties, or by having the screening legisla-
tion exempt treaty countries from the screening process. The
first Appendix to this paper contains a discussion of the FCN
Treaty issue. It should be noted that the problem of a
treaty conflict arises, in the case of screening initial
investments, only with a few countries (many of which are OECD
members and non-OPEC members) from which official foreign in-
vestment is limited. Moreover, all FCN treaties permit
screening of investments in certain sensitive areas.
-CONFIDENTIAL
FORD & LIBRARY 9ERALD
- 11 -
Suboption A - Screen foreign investment in industries that
are key to the national interest.
Definition of Suboption A. This proposal requires a prior
determination that certain industries are key to the national
interest and that all foreign investment in these industries
should be screened, before the investment is consummated.
Advantages
-- Deals directly with the concern that foreign investors
might gain an unacceptable degree of influence in key industries.
-- Provides an opportunity for the U.S. Government to
prohibit any foreign investment in key industries or to allow
it to proceed subject to whatever conditions the Government
might decide to apply.
-- Might remove some uncertainty regarding U.S. policy
on foreign investment.
-- Reduces possibility that Congress might impose
unacceptable restrictions.
-- Nondiscriminatory between investors.
Disadvantages
-- Definition of key industries is inherently difficult
or arbitrary.
-- Administration would be continuously subjected to
pressure from foreign investors, U.S. firms, or interested
third parties to make decisions on grounds not related to
national interest.
-- Congress may pass more restrictive legislation anyway;
particularly Congress may add to the list of proscribed sectors.
-- Complex, cumbersome and expensive to administer.
FORD & LIBRARY 076839
-12 april
-- Places affected firms at a disadvantage in raising
capital.
-- Risk that U.S. Government might block or restrict
transaction would prejudice seller's bargaining position.
-- Marked departure from our longstanding commitment
to creation of a free and open world economy and our efforts
to achieve international investment reform.
-- Screening could deter some desirable foreign invest-
ment.
-- May be in conflict with FCN treaty obligations.
Discussion
A significant difficulty with Suboption A is the
problem of defining an industry or company that is key to our
national interest. Any definition is subject to criticism.
For example, any company that requires a security clearance
to work on a U.S. Government contract could be considered
key; this definition would, however, apply to some 12,000
FORD
U.S. firms. One might also screen foreign investment in
U.S. firms that do not use advanced technology and do not
produce defense-related goods but are critical to national
GERALD
LIBRARY
survival. Examples include (by no means exhaustively) the
steel industry, food and foodstuff processing, and vehicles
and parts. Factors that would have to be taken into account
in developing a screening procedure for foreign investment in
key industries are given in the annex to this option.
Any lists of key industries would generate pressure for
additions which would be reflected in the Congress.
Suboption B - Screen official foreign investments in U.S.
industries.
Definition of Suboption B. This proposal focuses on the type of
foreign investor rather than on the U.S. concern and applies
a screening procedure to official foreign investment. Private
foreign investment would continue freely to enter the United
States subject to the prohibitions and restrictions of current
U.S. laws and regulations.
Advantages
-- Deals directly with the concern that foreign govern-
ments might make unwanted investments in U.S. firms.
-- Provides an opportunity for the U.S. Government to
prohibit any official foreign investment or to allow it to
proceed subject to whatever conditions this Government might
decide to apply.
CONFIDENTIAL
- 13 -
-- Removes uncertainty regarding U.S. policy on private
foreign investment.
-- Avoids need to specify in advance industries in which
foreigners may not invest.
-- Reduces possibility of Congressional action and risk
that unacceptable restrictions might be imposed.
Disadvantages
-- Creates uncertainty for official foreign investors.
-- Might discourage official foreign investment
-- Would be regarded by OPEC countries as specifically
directed against them.
-- Might lead to charges of discrimination between
various official foreign investors. including charges of
FCN treaty violations.
-- Difficult to define an official foreign investor.
-- Administration would be continuously subject to
pressure from official foreign investors, U.S. firms, and
interested third parties.
-- Complex, cumbersome, and expensive to administer
-- Risk that U.S. Government would block or restrict
transaction would prejudice seller's bargaining position.
Discussion
A critical element in Suboption B is the definition of
official foreign investment. A test of the functions of the
investor may be inadequate, as in many foreign countries
enterprises that would be regarded in the United States as
in the private sector are government corporations or
government-controlled corporations. Moreover, some monarchies
have immense wealth for foreign investment and follow motiva-
tions sufficiently different from a private investor so as to be
regarded as official investors; this is particularly true
with respect to OPEC countries in the Middle East.
FORD is GERALD LIBRARY
CONFIDENTIAL
- 14-
The term "government corporation" or "government-
controlled corporation" covers several obvious categories of
organizations and enterprises (central government departments,
central monetary authorities and central banks). Government-
controlled corporations that engage in commercial activities
(for example, foreign airlines and some industry) present a
special problem of definition. Also, a gray area arises in
the case of government-private joint ventures, with either
private foreign or U.S. citizens. Moreover, while it might
be obvious that the screening procedure should be applied to
investment by monarchs, it is less clear to what degree of
kinship the procedure should be applied. In light of the
extended family relationships in some countries, it might
be necessary to look to laws and traditions of the country
from whence the foreign investor comes.
Identifying official foreign investors could be made difficult
by the use of intermediaries in the United States or abroad.
Suboption C - Screen official foreign investment in key U.S.
industries.
Definition of Suboption C. This suboption gets down to the
central issue of insulating key U.S. industries from manipula-
tion by those foreign investors who might be most likely to be
motivated by political rather than economic considerations.
It would not apply to all private foreign investment or to
official foreign investment in nonessential industries,
Advantages
-- Deals directly with the concern over the potential
for unacceptable control by official foreign investors over
key U.S. industries.
-- Introduces no new restrictions on private foreign
investment.
-- Does not overtly discriminate against OPEC countries.
-- Might remove some uncertainty regarding U.S. policy
or foreign investment.
-- Nondiscriminatory between foreign countries.
LIBRARY GERALD ? FORD
- 15-
Disadvantages
-- If applied to all countries, apparently conflicts
with a number of FCN treaties (i.e., provision on national
treatment for establishment and acquisition). If applied
only in absence of such FCN treaty provisions, then issue of
OPEC unhappiness over policy aimed almost entirely at them
is intensified. (We have no such FCN treaty provision with
any OPEC country.)
-- Will be viewed by OPEC countries as aimed specifically
at them in attempt to control their investment options,
which could lead to some reductions in oil production.
-- Does not cover land sales, per se, which, while
difficult to deal with in view of predominate role of State
and local governments in land use questions, is a politically
sensitive issue.
-- Definition of key industries is inherently difficult
or arbitrary.
-- Administration would be continuously subjected to
pressure from foreign investors, U.S. firms, or interested
third parties to make decisions on grounds not related to
national interest.
-- Congress may pass more restrictive legislation anyway;
particularly Congress may add to the list of proscribed sectors.
-- Complex, cumbersome and expensive to administer.
-- Places affected firms at a disadvantage in raising
capital.
-- Risk that U.S. Government might block or restrict
transaction would prejudice seller's bargaining position.
-- Screening could deter some desirable foreign investment.
FORD & LIBRARY GERALD
CONFIDENTIAL
- 16 -
ANNEX to OPTION 3
Screening of Foreign Investment in Key Industries
I.
Introduction
The purpose of this annex is to illustrate how a
screening procedure might be structured and to present an
example of a possible set of screening criteria. There are
numerous possible variations of any such procedure and the
following factors are for the most part the minimum measures
which would have to be adopted. If the Administration were
to choose the screening option, then considerable further
effort in developing the procedures and criteria would be
necessary.
II. Scope
Screening would supplement current laws, regulations and
administrative procedures which already limit (de jure and
de facto) foreign investment in certain industries. As it would
not be feasible or desirable to screen all foreign acquisitions
of U.S. securities, threshold levels should be established,
above which screening would be required. In the case of equities,
screening could be required when the participation in the owner-
ship by a foreigner, or foreigners deemed to be acting in
concert, exceeded, say, 10 percent of the outstanding voting
shares of the firm.
It might also be desirable to consider whether a percentage
level should be established at which screening would be re-
quired of additional equity purchases by unrelated foreigners.
Foreign loans to U.S. firms would also be subjected to
screening whenever any loan exceeded, say, 15 percent of the
total long-term outstanding debt of the corporation. Transactions
below a floor of, say, $1 million would be exempt from screening.
Screening would apply at entry, and the United States would
rely on existing laws to regulate firms after entry. Existing
foreign investments would be grandfathered. However, the
possibility that foreign-owned U.S. firms, after entry, might
make investments in firms in sensitive industries, which would
have been covered by the screening procedure, gives rise to
the risk that this safeguard against undesirable foreign in-
vestment could be circumvented. This loophole could be
closed only by subjecting secondary investment by foreign-
owned firms unrelated to the primary investment to
the same criteria that would apply to the initial investment.
CONFIDENTIAL
BERALD FORD LIBRARY
CONFIDENTIAL
- 17 -
Application of screening to secondary investment, however,
would be in conflict with our FCN treaties with a number of
important countries, including, among the OPEC countries,
Iran and possibly Saudi Arabia.
Screening might apply to investments in such industries
as defense, transportation, communications, news media and
energy. With regard to defense considerations, one possible
approach would be to consider as a defense industry any firm
that holds a security clearance to sell goods or services
to a U.S. Government agency.
III. Screening Procedure
GERALD
LIBRARY
1. The foreign investor, the U.S. firm being acquired
and any other parties to the transaction would all have to
notify the Federal screening office of the intended invest-
ment. Penalties to force compliance should be imposed.
2. The U.S. Government would have 30 days in which to
consider the proposed transaction. If, at the end of 30 days,
the parties to the transaction had not been advised to the
contrary by the screening office, they would be free to
consummate the transaction. However, the consideration period
could be extended by notification from the screening office
to the parties that the Government needed additional time to
consider the proposed transaction.
3. Upon receiving notification of the proposed trans-
action, the screening office would notify the appropriate
U.S. Government agencies. The information, however, would
be privileged. The departments and agencies to be notified
would vary, depending upon the circumstances.
4. The departments and agencies so notified would have
to inform the screening office urgently if they had any ob-
jection to the proposed transaction. Any agency might request
a delay in consideration of the application and the convening
of an interagency committee for discussion of the transaction.
IV. Screening Criteria
The following list of screening criteria is purely illustra-
tive, and much further interagency consideration would be required
to develop a definitive list.
(a) Possible effects on national security.
(b) The effect that the intended transaction might have
on competition both domestically and internationally to
the extent that it would affect the United States.
CONFIDENTIAL
CONFIDENTIAL
-18 -
(c) The likely opportunity to influence public opinion
in the United States as a result of the investment.
(d) The foreign policy implications of the intended
transaction.
(e) The likely effect on future inward foreign investment.
(f) The importance to the U.S. firm of the transaction,
taking into account the financial condition of the firm.
(g) The cumulative result of the proposed investment, in-
cluding the extent to which this investment increases the
exposure of a sector of the U.S. economy to foreign influ-
ence or the United States as a whole to foreign influence.
(h) In the case of investments in the form of debt,
the extent to which they might give the investor leverage
or de facto control in the U.S. company.
V. The screening process would not exempt the investment
from
U.S. laws, regulations, and administrative practices
which would apply to investment in the United States, either
by a U.S. citizen or a foreigner. It should be made clear
to the foreign investor that he would have to satisfy all
legal requirements.
FORD & LIBRARY GERALD
CONFIDENTIAL
CONFIDENTIAL
- 19 -
Inward Investment Policy Review
Option 4 - Limit Official Foreign Investment in the United States
An upper limit would be set on foreign official acquisition
of the stock and long-term debt of existing U.S. firms, e.g.,
10 percent of equity and 15 percent of long-term debt. These
limits would also apply to official foreign holdings in newly
established enterprises. The limitation would contain a grand-
father clause which would exclude forced divestiture or ex-
propriation. This restriction on foreign official holdings
would be imposed through new legislation which would include
provision for a Presidential national interest waiver to give
the Executive Branch adequate flexibility in administering it.
Two complementary elements would be required in conjunc-
tion with the imposition of a limit on foreign government
investment as a necessary part of this option: (1) a compre-
hensive reporting and disclosure system for all foreign
investment, and (2) prior coordination with the other OECD
countries to assure a consistent policy affecting OPEC invest-
ments. A third element which would be desirable, would be
the creation of a class of investment trusts for foreign govern-
ments which would provide them with an attractive alternative
to direct holdings of corporate equity and debt. This class
of funds would be provided for by legislation and subject to
U.S. Government control in a manner similar to that of regu-
lated investment companies for private investors. These funds
would serve USG policy purposes by encouraging a broadening
of the OPEC investment portfolio. (A policy including this
feature is treated as sub-option A and the additional advan-
tages and disadvantages relating to it are treated separately
following those regarding the main option.)
Percentile limitations on official foreign investment
would conflict with some of our FCN treaties. Accordingly,
further study would be necessary to determine how potential
treaty conflicts might best be handled, for example, by
prior negotiation aimed at avoiding a treaty conflict,
by renegotiation of relevant treaties, or by having the
legislation exempt treaty countries. The first appendix
to this paper contains a discussion of the FCN treaty issue.
If this option should be adopted, it would be desirable
to invoke currently available authority to prevent foreign
investors from rushing into the U.S. market ahead of the
eanctment of legislation. Such authority is found in
Section 5(b) of the Trading With the Enemy Act as amended
a legal statement on the Act is attached.
CONFIDENTIAL
GERALD
LIBRARY
- 20 -
Advantages
-- Deals directly with our principal concern regarding
the potential for politically unacceptable influence
gained through major investment interest in U.S.
firms on the part of OPEC governments.
-- Introduces investment. no new restrictions on foreign private
-- Does not overtly discriminate against OPEC countries.
-- Avoids need for prior screening.
-- Provides guidelines which remove uncertainty regarding
reception of OPEC investments.
-- Encourages the OPEC countries to develop broad and
diversified investment portfolios.
FORD & LIBRARY GERALD
-- Establishes a basis on which to seek a coordinated
consumer country policy vis a vis OPEC investment.
-- Does not require that USG attempt difficult task of
making judgments regarding which U.S. industries are
vital to our national interest and which are not.
-- Involves the Congress in the establishment of the
policy, thus allaying foreign government fears of
Congressional repudiation of an Administration policy
position.
Disadvantages
-- If applied to all countries, apparently conflicts
with a number of FCN treaties (i.e., provision on
national treatment for establishment and acquisition).
If applied only in absence of such FCN treaty provisions,
then issue of OPEC unhappiness over policy aimed almost
entirely at them is intensified. (We have no such
FCN treaty provision with any OPEC country.)
-- Administration of Presidential waiver provision could
be troublesome in terms of foreign government pressures
and potential violation of MFN principles.
-- Will be viewed by OPEC countries as aimed specifically
at them in attempt to control their investment
options, which could lead to some reductions in oil
production.
-- Does not cover land sales, per se, which, while
difficult to deal with in view of predominate role
of State and local governments in land use questions,
is a politically sensitive issue.
CONFIDENTIAL
CONFIDENTIAL
- 21 -
-- Submission of Administration legislative proposal could
attract undesirable restrictive amendments; however,
a bold Administration proposal in an area where Con-
gress has expressed concern would appear comparatively
invulnerable to the attachment of unwanted "Christmas
tree" ornaments.
-- Could result in reduction of investment inflows.
-- Putting percentage limits on long-term investments
could force OPEC countries to remain short-term
investors, thereby increasing instability of inter-
national banking system.
Suboption A - Limitation on Foreign Government Investments
Combined with Special Investment Funds for
Foreign Governments
A logical adjunct to placing ceilings on direct foreign
equity holdings of U.S. firms and of long-term corporate debt
would be to create an additional attractive indirect channel
for foreign government investment. Details on how such funds
might be created and operated are included in the discussion
section below. This suboption would present the following
additional advantages and disadvantages to those of the main
option: (The investment fund could also be used with other
options.)
Advantages
-- Provides an additional channel for foreign official
investment at the same time that direct holdings are
being limited.
-- Is consistent with our goal of broadening the distribu-
tion of foreign government, particularly OPEC, invest-
ment and thereby limiting the extent to which oil
producer investment is translated into political
power.
-- Congressional approval is likely to be required to
establish the investment funds; as a result such funds
would have a Congressional blessing which alternative
investments would not have.
Disadvantages
-- OPEC Government receptivity is not known and could FORD
be negative.
CONFIDENTIAL
GERALD
LIBRARY
- 22 -
-- Any appearance of giving incentives to government
investors would be criticized at home and in other
non-OPEC countries: conversely, omission of incentives
would reduce the attractiveness of the funds as an
alternative investment channel.
-- Making the funds in effect a favored avenue for
foreign government investment could be criticized
within this country as being contrary to normal U.S.
Government-business relationships.
-- The funds would be powerful and influential forces
and could have an unpredictable impact on international
financial and equity markets.
Discussion
The proposed ceiling on direct foreign official holdings
would actually affect very little OPEC investment based on
our experience so far. Thus, it is aimed at potential rather
than actual investment patterns.
With regard to possible conflict with FCN treaties it
might be possible to make a case that the intent of those
treaties was to deal with private not government investment.
However, to avoid apparent conflicts with U.S. treaty obliga-
tions, we are excluding
from the limitation
countries with FCN provisions calling for national treatment
on establishment and acquisition, while still covering all the
OPEC countries. New FCN treaty negotiations would have to
take the effect of this policy option into account by exclud-
ing government investment from a national treatment provision.
In addition to OPEC states, certain OECD states with whom
we do not have FCN treaties (for example, the U.K., Canada and
Australia) would also be affected. However, we do not antici-
pate massive official investment from those countries, and we
would anticipate no special problems arising as a result of this.
FORD
The investment funds contemplated under the suboption
would be subject to some limitation on the percentages of
equity or debt that they could hold in a single company.
GERALD
LIBRARY
Each such fund would be required to have separate management
and no collusion among them would be permitted. Their use
would be optional and in no way limit the choice of invest-
ment channels open to OPEC. Further, management of the funds
would be divorced from direct control by foreign governments
and would be independent of them in the exercise of voting
rights obtained through the fund's equity holdings.
There should be no limit on foreign governments' indirect
holdings of equity through participation in more than one
CONFIDENTIAL
CONF IDENTIAL
- 23 -
of these specially created investment funds, since the
dilution of control which would be provided by this device
would be adequate protection against undue influence. Thus,
a foreign government might participate in investment funds
that together hold substantially more than 10 percent of
the stock of a particular corporation. In that way, foreign
governments could enjoy the economic benefits of a major
shareholder while being divorced from management control.
Creation of such investment funds would have to be
handled carefully in order to give them some appeal to
foreign official investors, without providing undue special
incentives. This could be accomplished by emphasizing the
acceptability of such investments, a factor which is of
particular importance to government investors. The establish-
ment of such funds would probably require Congressional action,
and legislation would give foreign governments Congressional
blessing for such investments which they would not otherwise
obtain. In a situation where the attitude of the U.S. Congress
is a major uncertainty for foreign investors, such a blessing
would be an important factor. Further, the existence of
limits on direct foreign government holdings will itself act
as an incentive to the use of the investment funds.
Coordination of consumer country policies toward foreign
government investment would be essential for the success of
this option and suboption. This would involve (1) coordinated
arrangements for setting up the investment funds, (2) parallel
registration and disclosure requirements, and (3) parallel
limitations on direct foreign government holdings of equities
and long-term corporate debt. This could be accomplished
within the IEA or the OECD.
Uncoordinated consumer country inward investment policies
could produce a snowball effect in which restrictions on OPEC
government investment by one country could divert massive
funds to another consumer country which would then be forced
to enact even tighter restrictions. The end result could
be a general level of investment restrictions so high that
OPEC countries would be encouraged to cut back on oil produc-
tion. The absence of coordination could also result in a
channeling of OPEC investment to the consumer countries with
weakest economies, such as Italy, which could not afford to
match high levels of restrictions, and would thus give the
OPEC countries very significant economic and political
leverage in those countries.
&
FORD
CONFIDENTIAL
GERALD
LIBRARY
CONFIDENTIAL
- 24 -
Suitable vehicles are available for early discussion
of these issues in the IEA and the OECD, (e.g., the inner
group of the XCSS meets in February, the new OECD investment
committee will meet in February, and a new IEA financial
group is about to be formed). Any unilateral modification
of any of the consuming countries investment policy without
consultations would threaten the unity of the group vis a
vis the oil producing countries.
There have been clear indications that the oil consuming
countries are willing, in fact anxious, to develop a coordi-
nated strategy with regard to OPEC investments, and it is
noteworthy that our Embassy in Bonn has
reported that
German Finance Minister Apel has publicly stated that OPEC
investments have raised the requirement for serious vigilance
and possibly legal barriers. He stated that there are limits
to the amount and types of direct investment which the German
Government would permit within the Federal Republic.
The reporting and disclosure system called for under
this option may or may not require additional legislation
depending on whether a comprehensive and effective system
can be created from existing authority and reporting require-
ments. In any case, the reporting system could be put in
place before action is completed on the other elements of
the option.
CONFIDENTIAL
FORD & LIBRARY GERALD
LIMITED OFFICIAL US
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
FORD is LIBRARY GERALD
a. on a case-by-case basis (screening)
b. on the basis of predetermined and announced
criteria.
- 2 -
FORD & GERALD 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-
- 3 -
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
GERALD FORD LIBRARY
OFFICIAL DEE
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 & LIBRARY GFRAVO
- 5 -
inquiring into many of these issues and may recommend changes
in legislation or practice.
FORD & & LIBRARY 07VN39
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
GERALD
LIBRARY
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 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.
LIMITED OFFICIAL USE
FORD is LIBRARY 0ERALD
LIMITED OFFICIAL USE
- 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,
GERALD FORD LIBRARY
the beneficial owners are still required to be disclosed,
although this might not occur in all instances.
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 9 -
LIBRARY GERALD R. FORD
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.
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.
LITTED OFFICIAL
LIMITED OFFICIAL USE
- 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
safeguards.
GERALD LIBRARY R. FORD
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 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).
LIMITED OFFICIAL USE
GERALD FORD LIBRARY
LIMITED OFFICIAL USE
- 12 -
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
GERALD FORD LIBRARY
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.
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 13 -
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
FORD is LIBRARY GERALD
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
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 14 -
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.
LIMITED OFFICIAL USE
GERALD
LIBRARY
LIMITED OFFICIAL USE
- 15 -
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.
BERALD FORD LIBRARY
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 16 -
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 construction 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
FORD :- LIBRARY 07V839
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 17 -
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
FORD :- LIBRARY GERALD
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
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 18 -
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.
FORD is LIBRARY
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.
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 19 -
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
GERAJO FORD VIBRARI
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.
LIMITED OFFICIAL USE
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
tender offer and intention
FORD LIBRARY
to close or move abroad was
not disclosed. In addition,
export controls could be
used to prevent movement of
equipment and technology abroad.
Lastly, minority shareholders
- 21.
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.
GERÊLO FORD LIBRARY
- 22 -
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.
FORD & LIBRARY GERALD
23
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
GERALD FORD LIBRARY
campaigns. Contributions
by any individual may not
aggregate more than $25,000
in any one year.
- 24 -
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.
GERALD FORD LIBRARY
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-
ment.
LIMITED OFFICIAL USE
- 25 -
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.
FORD & LIBRARY GERALD
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 26 -
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.
FORD is LIBRARY GERALD
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 27 -
-- 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
FORD is LIBRARY GERALD
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
more than one U.S. bank. Currently, foreign
investors using personal funds instead of
corporate money are exempt from the Act.
LIMITED OFFICIAL USE
c
GERALD LIBRARY 4 GRO
Genera¹ Benefits and Costs of Foreign Investment
in the United State
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
BERALD FORD LIBRARY
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
of foreign investment as regards their economic effects. In fact,
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.
FORD & LIBRARY GERALD
- 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
GERALD
LIBRARY
- 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 prove transitional, but the transition period
could be quite lengthy. 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
GERALD
LIBRARY
- 5 -
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.
GERAALO FORD LIBRARY
- 6 -
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.")
GERALD FORD LIBRARY
- 7 -
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 i LIBRARY GERALD
1817
07
FORD
is
CONFIDENTIAL
February 18, 1975
Probable Foreign Reaction to New U.S. Restraints
and
Possible Impact of Restraints on International Negotiations
Foreign reactions to a modification of our inward invest-
ment policy will vary according to the magnitude of the change
and its effects on particular countries. This paper assesses
the probable reactions and the impact on international negotia-
tions if the U.S. Government were to impose (1) a mandatory
registration and disclosure requirement and/or (2) screening
or added specific restrictions. Once the range of specific
policy options has been developed, the State Department will
query our missions concerning possible foreign reaction.
I. Mandatory Registration and Public Disclosure
A registration requirement would centralize and extend
somewhat the present reporting requirements of SEC, Commerce,
Treasury, and other government agencies. The information
obtained through registration could be made available to the
public. Substantial penalties would be imposed for non-
compliance. The requirement would not discriminate as between
foreign investors and, by itself, would not violate our FCN
obligations.
The nature of the foreign reaction will depend on whether
such a requirement is ex-ante or ex-post and on whether it is
interpreted as signaling a major change in U.S. inward
investment policy.
OPEC Reaction:
Given the concern of most OPEC investors for anonymity and
security, even a simple registration requirement could have
a negative impact on our relations with OPEC countries, espe-
cially if registration were interpreted as representing a funda-
mental shift in the climate for OPEC investment in the United
States. Possible negative reactions which have been mentioned
include:
-- general deterioration of U.S.-oil producer relations,
including discontinuation of Joint Commissions;
-- diminished OPEC investment in the United States;
-- further OPEC oil production cutbacks;
DECLASSIFIED
AUTHORITY Treasury its 8/22/06 stateginalines
BY Hh NARA, DATE 9/10/09
BERALD FORD LIBRARY
CONFIDENTIAL
CONFIDENTIAL
- 2 -
-- continued resistance to any reduction in oil price
levels;
-- intransigence in other negotiations including Arab/
Israeli questions (by Muslim OPEC members) and the
Secretary's "New Dialogue" with Latin America (by
Ecuador and Venezuela).
Most other major developed countries (and OPEC countries)
already require registration of foreign direct investment.
Many have additional, more stringent restrictions (see the first
appendix for details). The degree of enforcement varies
widely and over time. Thus, even with registration, the
United States would remain one of the least. restrictive sites
for OPEC investment. Careful prior consultations on a non-
discriminatory reporting requirement could minimize adverse
reaction by the oil producers. It therefore seems unlikely
that a registration requirement identified as an attempt to
meet a legitimate need for information without fundamentally
altering our policy of neutrality on inward investment would
result in significant deterioration in U.S.-oil producer
investment relations.
OECD Reaction:
Since most OECD countries already have registration
requirements, U.S. adoption of such a policy should not be a
major source of concern for them. Still, a public disclosure
provision might elicit complaints from individual foreign
investors, especially if it were not applied equally to U.S.
investors as well. Also, any attempt to employ the registra-
tion requirement to determine beneficial ownership would come
into conflict with certain bank and commercial secrecy laws.
Prior consultations with our OECD partners about such a
requirement would help to reduce any adverse reactions and
would advance our objective of promoting regular multilateral
consultations within the OECD on government investment
policies.
LDC Reaction:
Apart from OPEC members, developing countries have
negligible investments in the United States. Therefore, a
registration and disclosure requirement would probably not
have a significant impact on our relations with the LDCs.
CONFIDENTIAL
GERALD FORD LIBRARY
CONPIDENTIA
- 3 -
II. Screening or Added Restrictions
The next step beyond an ex-post registration require-
ment would be an increase in ex-ante restraints such as
screening or new specific sectoral limitations. Such
measures would have a greater foreign relations impact
than registration. It would be difficult to predict
what, if any, differing foreign reaction would result
from screening as opposed to new specific limitations.
It would seem reasonable to postulate, however, that
any new restraints affecting inward investment "across
the board" would have a greater impact than screening or
new limitations in a few sensitive sectors.
Stand-by authority for screening or new restrictions
could produce a more negative reaction than restraints which
were immediately operational. Stand-by authority would
increase foreign investor uncertainty, and thereby add to
our uncertainty as to their intentions. Stand-by authority
could also involve our inward investment policy more
directly in U.S. domestic affairs since xenophobic groups
and existing corporate managements seeking to protect their
vested interests could be expected to agitate to have the
stand-by authority invoked. Such action could increase the
possibility of a proposed investment becoming an irritant
in our relations with another country, especially as a global
screening procedure would violate numerous of our FCN treaties.
OPEC Reaction:
The desire of the OPEC nations for developing their
industries and national defense production infrastructure and
technology has already led some of them to seek investments
in sensitive industries of developed country economies. While
economic motives undoubtedly play an important part in these
investment and loan activities, security and political
considerations are also present.
New sectoral restrictions or screening are likely to
prevent OPEC states from making some investments which they
otherwise would. If the investment restrictions were limited
to a relatively few sensitive sectors, the OPEC reaction
might be reduced. Even with some new sectoral restrictions,
the United States and West Germany are likely to provide the
OPEC countries with their most attractive investment
opportunities. It should be noted that many of the complaints
which have been heard from OPEC investors concern the
presentord BERALD LIBRARY
CONFIDENTIAL
CONFIDENTIAL
- 4 -
uncertainty about the future course of U.S. inward invest-
ment policy. In this regard, it might be well for us to heed
our own advice to the LDCs: Stability of the rules of the game
is extremely important to any investor.
The risk of decreased OPEC investment and of oil production
cutbacks increases with the extent of any new restrictions.
Restrictions which were directed specifically against OPEC
countries would almost certainly stimulate retaliation. The
harsh criticism of Ecuador and Venezuela to the anti-cartel
provisions of the Trade Act are indicative of the sensitivity
of these OPEC members to discriminatory treatment. A veiled
attempt to get at the OPEC nations by restricting "government"
investment might carry a similar risk and would certainly en-
courage evasion efforts.
Most of the OPEC countries with financial surpluses are
newcomers to the ranks of major foreign investors. Conse-
quently, their inward investment policies have been predominantly
determined by domestic or regional political considerations. As
OPEC foreign investments increase, however, the treatment of
these investments will probably become more of a factor in
shaping their inward investment policies. In such circumstances,
new U.S. ex-ante investment restraints could well discourage the
OPEC countries from liberalizing their own extensive restric-
tions or lead to the imposition of additional restrictions.
It seems debatable whether that OPEC nations would take extreme
retaliatory action (such as nationalization) against American
firms solely on the basis of moderate and nondiscriminatory
new U.S. inward investment restrictions. New U.S. restrictions
which blocked specific projected OPEC investments would increase
the likelihood of adverse reaction by oil producer governments.
Prior consultations with the OPEC nations on changes in
our inward investment policy would help to moderate the
negative impact of a more toward a more restrictive inward
investment policy.
OECD Reaction:
The United States maintains one of the most liberal
inward investment policies of any major industrialized
country. Canada and Australia both have explicit across-
the-board screening mechanisms and de facto screening
takes place in many other OECD countries, including the
U.K., France and Japan. The less developed members of
FORD is LIBRARY GERALD
CONFIDENTIA'
CONFIDENTIAL
- 5 -
OECD all maintain numerous restrictions on inward investment.
Moderate new U.S. restrictions in sensitive sectors therefore
should not result in retaliation by other OECD members against
U.S. investments although they could discourage some OECD
investments here. New U.S. restrictions, even if relatively
modest, might well become an intergovernmental issue if they had
the effect of blocking specific investments being contemplated
by firms in other OECD countries. Broad new restrictions
which violated our FCN treaty obligations would elicit protests
and invite retaliation against our investments. (See appendix
2 for a discussion of FCN Treaties.) A more restrictive U.S.
inward investment policy could have a negative effect on our
ability to lead efforts in the current OECD investment exercise
to maintain liberal policies toward foreign investment.
A more restrictive U.S. policy could also lend greater
respectability to the more extreme restrictions imposed
by other countries and would strengthen the hands of those
such as Canada and Australia who are not anxious for any
new OECD action in the field of government investment
policies. New U.S. derogations to the OECD Capital Movements
Code would encourage others to weaken their own commitments.
Prior consultation in the OECD aimed at coordinating OECD
policies would somewhat lessen the adverse reaction to a more
restrictive policy.
The OECD countries are unlikely to favor a U.S. policy
which discriminates against the OPEC nations. No OECD
countries currently maintain policies which explicitly discriminate
against foreign investors by nationality, apart from limited
reciprocal preferential treatment among EC member countries.
The Europeans and Japan would oppose measures which would
increase the possibility of confrontation with the oil
exporters and have tended to favor measures, such as the IMF
recycling plan, which would strengthen the role of OPEC
nations in the world financial system. In addition, there
would be concern that discrimination against OPEC
investment today might be extended to them tomorrow.
The Japanese surely recall that in 1973 it was their invest-
ment -- not those of Arab oil producers -- which produced the
public outcry in the United States.
On the other hand, the British and German governments are
currently reviewing their inward investment policies, reportedly
in response to public reaction in their countries to some
highly publicized transactions involving OPEC investors.
Preliminary reports indicate that they are considering
BERALD FORD LIBRARY
-CONFIDENTIAL
APPENDIX 1
LIMITED OFFICIAL USE
POLICIES AND PRACTICES OF MAJOR DEVELOPED COUNTRIES
RELATING TO INWARD DIRECT INVESTMENT
(Particularly from OPEC Countries)
In general, the policies and practices of major developed
countries relating to inward investment which are summarized
below represent their traditional views on this subject and
do not stem directly from the recent concerns with OPEC
investment (although the implementation of existing policies
may in some cases have been adjusted to take such concerns
into account). One explanation for the current inactivity
is the fact that, for most countries other than the United
States, the question of sizeable inward investments in critical
industries is one which has been confronted--ar resolved--
before when faced with U.S. investments. While OPEC invest-
ments may have certain special qualtities (for example, the
fact that most involve takeovers of existing enterprises
rather than creation of new ones), many countries already have
safeguards which they consider adequate to protect their
economies.
A second reason is that many of the smaller countries do
not expect to have large amounts of petrodollars invested in
their economies. It may well be that most of these would
react negatively should extensive investments materialize,
especially if they were concentrated in vital economic
sectors. Such a reaction might be influenced heavily by the
attitudes towards OPEC investments expressed by the OECD
members, particularly the United States and the FRG, which
have traditionally pledged support for the principle of
freedom of international capital movements as embodied in the
OECD Code of Liberalization of Capital Movements (of which
FORD
all OECD members except Canada are adherents).
The following notes relate to the summary of country
GERALD
LIBRARY
policies and practices below:
-- Screening involves discretionary power by the national
government in approving or disapproving individual
investments, as opposed to outright restrictions.
-- Except where otherwise noted, countries have taken
no overt steps designed to control OPEC investments
in particular, either in policy or in practice.
-- The statement "foreign direct investment generally
welcome" does not necessarily exclude restrictions
on investment in specific vital sectors comparable
to those currently imposed in the United States with
respect to atomic energy, air transport, coastal
shipping, etc.
LIMITED OFFICIAL USE
LIMITED OFFICIAL USE
- 2 -
Australia:
(1) Screening of all foreign direct investments.
(2) Policy is aimed at maximizing Australian ownership
and control of local resource industries.
Belgium:
(1) Foreign direct investment generally welcome.
Canada:
(1) Screening of foreign takeovers of domestic corporations
(prospectively of new investments).
Denmark:
(1) Foreign direct investment generally welcome.
(2) Indications that balance of payments concerns are
leading Danes to seek petrodollars loans and in-
vestments.
France:
(1) Screening of all foreign direct investments.
(2) Indication that OPEC or other foreign takeovers of
heavy industry, such as Iranian purchase of interest
in Krupp, would not be permitted.
Germany:
(1) Foreign direct investment generally welcome, with an
ex post reporting requirement. (Following the unex-
pected Kuwait investment in Daimler-Benz, Chancellor
Helmut Schmidt reportedly now favors legislation to
require ex ante disclosure of the names of foreigners
undertaking direct investment in German companies.)
Italy:
(1) Foreign direct investment generally welcome.
(2) Balance of payments concerns are leading the Italians
to actively encourage petrodollar recycling in Italy.
LIMITED OFFICIAL USE
FORD is LIBRARY GERALD
LIMITED OFFICIAL USE
- 3 -
Japan:
(1) Screening of all foreign direct investments.
Netherlands:
(1) Foreign direct investment generally welcome.
Switzerland:
(1) Foreign direct investment generally welcome.
(2) Indications that foreign takeovers of Swiss
firms would be opposed.
United Kingdom:
(1) Screening of all foreign direct investments.
(2) Labour Government may move toward increasing
general restrictions on foreign direct invest-
ments of any origin.
FORD & LIBRARY 076830
LIMITED OFFICIAL USE
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
FORD & LIBRARY GERALD
- 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 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 & GERALD LIBRARY
E
in
GERALD
FORD LIBRARY
GERALD R. FORD LIBRARY
This form marks the file location of item number Id
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
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.)
FORD & LIBRARY 076839
LIMITED OFFICIAL USE
- 2 -
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.
GERALD FORD LIBRARY
LIMITED OFFICIAL USE
- 3 -
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
FORD is LIBRARY GERALD
RALD / R. FORD LIBRA
CONFIDENTIAL
Extract from minutes of CIEP Executive Committee
Meeting of December 21, 1973
V.
International Investment
A. Foreign Investment in the U.S.
Mr. Flanigan noted that a number of hearings had been
scheduled by various Congressional committees on foreign
investment in the U.S. and that a CIEP working group had
developed an outline of a suggested approach for Adminis-
tration witnesses for approval by the Committee. Mr.
Niehuss reported that three bills relating to foreign
investment in the U.S. had already been introduced and
that hearings were scheduled or contemplated by four
different committees early next year. He noted that the
CIEP interagency working group had suggested that
Administration witnesses state that U.S. policy was to
(a) continue to freely admit foreign investment into the
U.S. and to treat foreign investors on the basis of
equality with domestic investors once they were operating
in the U.S.; (b) work towards the development of a better
data base with respect to foreign investment in the U.S.;
and (c) review existing restrictions on foreign investment
in the U.S. to see if they were still needed. There was
no discussion or objection and it was agreed to accept the
working group's suggested policy for Administration witnesses.
DECLASSIFIED
NSC Memo, 3/30/06, State Dept. Guidelines
E.O. 12958 (as amended) SEC 3.3
By Un
NARA, Date 9/10/09 elines
is
FORD
GERALD
LIBRARY
CONFIDENTIAL
GUIDANCE FOR ADMINISTRATION
WITNESSES WHO TESTIFY CONCERVING
FOREIGN DIRECT INVESTMENT IN
THE U.S.
Background
Although foreign direct investment in the U.S. (herein-
after referred to as "FDI") rose from $7.6 billion to $14.4
billion in the decade from 1962 to 1972, there were wide
fluctuations in the yearly growth. It varied from a low of
$257 million in 1966 to a high of $1,452 million in 1970,
which was followed by a sharp drop to $385 in 1971 and a
subsequent rise in 1972 to $708. It is certain that 1973 FDI
will show a substantial increase over 1972; FDI for the first
six months of 1973 was $728 million, and projections for the
entire year range from $1 to $1.5 billion (See Tab 1 for
Statistical Summary).
The 1973 growth has been accompanied by widespread publi-
city given to such developments as the Canada Development Corpora-
tion tender offer to Texasgulf and Japanese investment in Hawaii
and California. In addition, the devaluation of the dollar,
the uncertainty as to future U.S. trade policy, the growing
size and sophistication of foreign firms and the depressed
state of our stock market have created fears of even larger
increases in 1974.
AS a result, a number of Congressmen have introduced or
begun drafting) bills which would restrict FDI. For example,
the Dent Bill would prevent non-U.S. citizens from owning more
than 5% of the voting securities of U.S. companies registered
under the Securities Exchange Act of 1934. In addition,
Congressman Moss is drafting a bill which would limit foreign
control of companies in the energy and national defense sectors.
(See Tab 2 for a Summary of Expected Congressional Activity).
Current Policy
U.S. policy with respect to international investment
has been based on the premise that the operation of free market
forces in determining the direction of worldwide investment
flows will maximize the efficient use and allocation of
capital resources in the international economy. Accordingly,
our basic policy toward FDI has been to admit and treat
foreign capital on a basis of equality with domestic capital.
We have offered foreign investors no special incentives
FORD & LIBRARY GERALD
to attract them to the U.S. and, with a few interna-
tionally recognized exceptions, have imposed no
special barriers to FDI. In other words, our policy has
been to freely admit foreign investors and to treat them
on the basis of equality with domestic investors once they
are operating within the U.S. Such a policy has been
consistent with our overall dedication to the freest
possible trade, nondiscrimination against foreigners, and
encouragement of competition from all sources. It is
also consistent with our obligations under the OECD Capital
Movements Code and is reflected in bilateral treaties of
Friendship, Commerce and Navigation with most of our
major trading partners.
We have, however, imposed some restrictions on FDI
in certain sensitive sectors of the economy which have
a fiduciary character, relate to the national defense or
involve the exploitation of certain natural resources.
The most important sectors affected are coastwise and
freshwater shipping, domestic radio communications, domestic
air transport, acquisition or exploitation of federal
mineral lands and hydroelectric power. These restrictions
are generally accepted internationally as appropriate
exceptions to national treatment and are incorporated into most
of our bilateral treaties. Additionally, restrictions on foreign
investment, particularly in banking, insurance and
land ownership are imposed by many states. A CIEP working
group is reviewing state restrictions and incentives along
with the general question of state powers to regulate FDI,
(See Tab 3 for a summary of the current restrictions on FDI)
Frame of Reference
Any policy with respect to FDI should be consistent
with the President's view that:
"an open system for international investment,
is
FORD
one which eliminates artificial incentives or
impediments here and abroad, offers great
GERALD
promise for improved prosperity throughout
LIBRARY
the world" (April 10, 1973 Message concerning
the Trade Bill).
In addition, U.S. policy with respect to FDI should
be made in the context of the Administration's overall
efforts to contribute to the productive reform of the
international economic system. As Secretary Shultz noted
recently:
-3-
"International monetary reform, international
trade and investment, and improving the quantity and
quality of international development assistance
are all aspects of the same problem of constructing
an endurable system of economic intercourse.
Because they are inextricably linked, because we
must negotiate in all these fields with the same
countries and frequently with the same individuals,
what the United States does or does not do in regard
to (one area) will inevitably have a profound
impact on what we are able to accomplish in the
remaining fields". (November 14, 1973 Statement re
IDA and ADB replenishment).
Because of this interrelationship, the adoption of new
restrictions on, or incentives for, FDI could seriously
undercut our efforts to liberalize trade and investment through
international negotiations.
Suggested Approach for Administration Witnesses
No change in current policy is proposed. This means
that Administration witnesses should (a) resist Congressional
attempts to add restrictions to FDI and (b) state that our
policy is to continue to freely admit foreign investors and to
treat them on the basis of equality with domestic investors
once they are operating within the U.S.
Major Reasons for the Suggested Approach
BERALD FORD LIBRARY
1. FDI is currently so small in relation to the size
of our economy that (a) it has no significant effect
on such factors as aggregate demand, employment,
the money supply and the implementation of our
macroeconomic policy and (b) there is no imminent or
prospective threat. of foreign domination or control
of any significant or critical sector of our economy;
2. New restrictions (or incentives) would be contrary
to the President's desire to create an "open system
of international investment
which climinates
artificial incentives or impediments here and
abroad
"
3. Added restrictions (or incentives) would scriously
undercut our efforts to liberalize international
investment in multilateral forums like the OECD;
-4-
4. Restrictions would invite foreign retaliation and
contribute to the growth of protectionism abroad,
and new U.S. incentives might encourage competition
among countries to attract investment;
5. Given the uncertainty as to the net effects of
FDI on our balance of payments and its relative
insignificance in our overall balance of payments
flows, there is no compelling reason to restrict (or
grant incentives to) FDI for balance of payments
reasons;
6. Introduction of new restrictions would reduce the
economic benefits from FDI (e.g. new competi-
tion and technology leading to lower prices and
better products and services for U.S. consumers) ;
7. We already have substantial power under existing laws
(e.g. antitrust laws, securities laws, and Defense
Department regulations) to protect the economy from
foreign control or to prevent foreign access to
classified materials;
8. Granting special incentives to attract FDI would
discriminate against U.S. business and subsidize
its foreign competitors
9. New restrictions would conflict with international
obligations which we have assumed in Treaties of
Friendship, Commerce and Navigation with many of
our major trading partners; and
10. Added restrictions are directly contrary to the
efforts of many states to attract foreign investment.
Attachments: The following materials may be useful to
Administration witnesses:
1. A brief statistical summary of FDI (Tab 1)
2. A brief summary of proposed Congressional activity
with respect to FDI (Tab 3);
3. A summary of the current restrictions on FDI
(Tab 2).
FUND LIBRARY 07V839
4. A summary of economic analysis rc FDI (Tab 4).
CONFIDENTIAL
Extract from minutes of CIEP Executive Committee
Meeting of May 22, 1974
IV. International Investment
B. Investment Policy Paper
The revised paper "U.S. Policy and Objectives on
International Investment" has been approved and is attached.
It will be used for internal U.S. Government guidance in the
development of positions on investment issues and as an
indication of future work needed on particular problems.
Attachment
CONFIDENTIAL
GERALD
FORD & LIBRARY
DECLASSIFIED
E.O. 12958 (as amended) SEC 3.3
NSC Memo, 3/30/06, State Dept. Guidelines
By
NARA, Date 9/10/09
CONFIDENT
U.S. POLICY AND OBJECTIVES ON
INTERNATIONAL INVESTMENT
General Premises
U.S. policy with respect to international investment should aim
at the following objectives:
A.
Promotion of economic growth and development in
the United States,
B.
Promotion of political-economic relations with
other nations.
We believe these objectives can best be accomplished within an
international economic system providing an environment which:
i.
facilitates international trade and capital
flows among nations:
ii.
involves a minimum of governmental interference
with international economic transactions while
placing maximum reliance on market forces to
direct world trade and investment;
iii. evolves within a framework of international
FORD LIBRARY & GERALD
cooperation.
General Investment Objectives
In this framework, the basic U.S. policy objectives concerning
investment are to achieve--to the extent possible and consistent
with the nature of progress in other areas of international economic
cooperation--an international investment environment in which
government policies would play a neutral role, neither encouraging
nor discouraging investment flows. It is recognized that the ideal of
neutrality cannot be achieved short of a complete international
harmonization of policies, which for the time being is an unrealistic
goal. Furthermore, every nation, including the U.S. needs to
preserve flexibility to act to protect its security and other vital
DECLASSIFIED
E.O. 12958 (as amended) SEC 3.3
CONFIDENTIAL
NSC Memo, 3/30/06, State Dept. Guidelines
By la
NARA, Date 9/10/09
- 2 -
CONFIDENTIAL
national interests. Nevertheless, it is desirable to work
toward an international system of investment behavior which
will maximize the achievement of the following:
I.
Investment capital should be free to move to its most
productive use in response to market forces and motiva-
tions, with the minimum possible distortion resulting
from national policies or practices governing or affecting
investment. There should be a presumption against the
use of controls on capital flows. In cases where controls
are resorted to they should be subject to international
consultation and surveillance. This includes controls for
balance of payments or cyclical policy reasons as well as
controls on entry and establishment of foreign investors
for structural or for non-economic reasons. Moreover,
national incentives and disincentives affecting investment
of a kind which can be expected to have substantial inter-
national effects should be avoided. When considered
necessary for the achievement of legitimate national
objectives such policies should be amenable to interna-
tional examination and discussion.
II. Foreign investors should be given national treatment, which
means they should be treated no less favorably than other
host-country nationals, subject to the same rights and obli-
gations conferred or imposed by that country's laws and
GERALD FORD LIBRARY
guaranteed full legal protection under them.
III. Foreign investors are not subjected to special, politically-
motivated inducements, constraints or arbitrary treatment,
and actions by governments regarding particular foreign
investments are taken subject to defined rules and procedures.
IV. Adequate mechanisms are developed to facilitate inter-
national consultations on investment issues, and disputes
which arise among governments are settled in accordance
with international law pursuant to agreed and fair procedures.
Exceptions to these principles (including the neutrality of govern-
ment policies, national security limitations, etc.), should be
specifically defined, applied on an MFN basis, and recognized as
subjects for intergovernmental consultation (as outlined in the
following sections).
CONFIDENTIAL
- 3 -
CONFIDENT
L
Specific Negotiating Objectives
In the complex task of reshaping the world's economic system,
careful attention should be given to coordinating our efforts in the
three areas of monetary reform, multilateral trade liberalization,
and liberalization of foreign investment. The total implications of
changes in each of these areas cannot be perceived until at least
the broad outlines of the overall restructuring of the international
economic system are in view. Nevertheless, it is not realistic,
and hence not desirable to try to negotiate international agreements
in all three areas as a single "package". Rather, where areas of
consensus already exist or appear to be possible we should move
ahead and attempt to obtain agreements which meet specific
negotiating objectives, which are discussed in detail below.
I.
Governments interfere with the operation of market flows
in three basic ways:
(1) Through the imposition of exchange controls or other
restrictions on capital movements for balance of payments
purposes. Our objective here is to strengthen internationally-
agreed guidelines or criteria governing the use of exchange
controls. The appropriate forum for negotiating this objec-
tive is through the C-20 (or IMF) negotiations on international
monetary reform.
As regards the negotiations over new investment rules,
we seek agreement to the principles that, in the administra-
tion of exchange controls or other restrictions when imposed,
governments will ensure that the controls do not operate to
the competitive disadvantage of enterprises controlled by
foreign investors in their business activities relative to
operations of enterprises controlled by their nationals, and
that disagreements over these matters between governments
are a proper subject for international consultation.
We should also keep the activities of the Organization for
Economic Cooperation and Development (OECD) in these
matters (eg., the surveillance function of the Working Party 3
and the implementation of the OECD's Capital Movements and
Invisible Transactions Codes) under review, both in terms of
their adequacy and of their possible use as models for wider
application.
FORD
GERALD LIBRARY
CONFIDENTIAL
- 4 -
CONFIDENTIAL
(2) Discriminatory Measures: Through domestic
legislation, policy, or administrative practice, governments
may induce or prevent particular kinds of foreign investment
in a manner or under criteria which differ from the laws,
policies, or practices governing equivalent activities by
their nationals. As a general proposition, our objective
here is to secure international agreement that removes the
discriminatory elements of these laws, policies, or practices,
(i.e., that new investors are given national treatment) with,
of course, appropriate exceptions for national security and
other clearly defined, generally accepted and limited purposes.
We reocgnize that many governments currently maintain
laws or procedures by which inward direct investments
are screened for acceptability or are otherwise required
to meet standards or criteria which do not apply to activities
of nationals. Basically, we do not favor these types of con-
trols in principle and should urge their removal. We should
also resist efforts to derogate from existing commitments to
avoid discriminatory measures. However, since we cannot
realistically expect these countries to eliminate these laws
or practices soon, it may be opportune to try to fix limits
within which the existing discrimination can be contained, and
to, therefore, seek agreement to the following principles by
those countries which maintain discriminatory practices:
(a) Countries imposing such controls should
make all limitations or qualifying criteria public
and clearly defined.
(b) Once an investor satisfies these criteria and
is accepted as an established investor, he shall
not be required to meet new criteria not required
of nationally-owned enterprises after his investment
is made.
(c) If a particular investment proposal is denied,
the government will state the reasons for denial
and afford the investor either a reasonable amount
of time to modify his proposal to meet the objec-
tions, and/or reasonable rights of appeal.
FORD & LIBRARY GERALD
CONFIDENTIAL
- 5 -
CONFIDENT
L
(d) There will be no discrimination among foreign
investors because of their nationality. Investors
from all countries will be guaranteed MFN treat-
ment. (There would be no exception for members
of a purely trading arrangement, such as a customs
union or free trade area.)
(e) Disagreements over the implementation of
discriminatory laws or practices should be
recognized as a proper matter for international
consultation.
(3) Non-Discriminatory Distortions: Through certain national
policies or practices affecting investment governments distort
the operation of market forces. This area includes a variety
of different national laws or practices which (by design or as
a side effect) may induce or discourage investment flows into
or away from particular countries which economic factors
alone would not do.
In many instances, these laws or practices are designed
to promote valid national or international objectives. Our
objective is, in general, to minimize the adverse conse-
quences (if any) resulting from such distortions and to
prevent projected or potential damage to the economy or
firms of other countries.
We will, therefore, develop objectives and strategies
through interagency consultations in such areas as (but
not necessarily limited to):
(a) investment subsidies and other incentives
which distort trade and investment patterns;
(b) tax and accounting practices affecting
international investment;
(c) technology transfers connected with
investment;
(d) laws designed to promote or regulate
BERALD FORD LIBRARY
competition (anti-trust or restrictive business
practice laws);
(e) information collection and exchange;
(f) extraterritorial application of national laws.
CONFIDENTIAL
- 6 -
CONFIDENTIAL
II. National Treatment for Foreign Investors
In addition to our desire for national treatment for new investors,
one of our priority objectives in the investment field is to
secure a workable international agreement that limits de jure
discrimination and prohibits the considerable amount of
de facto discrimination among foreign-controlled and national-
controlled enterprises which exists in some countries. To
the extent that there is discrimination in the award of public
contracts, it should be most appropriately addressed in the
negotiations over a new international code on government
procurement. However, it also arises over such matters
as access to local capital markets, pressures to invest or
export, etc.
Our objectives are thus:
(1) Agreement to a firm national treatment rule (or
"guidelines") for foreign investors which are established
in accordance with publicly known host-country law and
criteria, and that any exceptions (eg., limits on activities
for national security or other specifically defined reasons,
such as limits of Federal jurisdiction over states or provinces)
should be clearly stated in public laws or regulations.
(2) Guarantee of full protection under, and benefits
conferred by, host-country law and access to courts.
(3) Recognition that disagreements concerning national
treatment of established investors are a proper matter
for intergovernmental consultation and dispute resolution.
III. Protection of Investors and Governments from Political
Influence
In order to insulate the activities of international investors to the
extent possible from disputes arising from, or centered on,
domestic or international politics, our objective is to seek
agreement to the following principles:
(1) Apart from publicly known requirements or criteria
which may apply uniquely to foreign investors (as dis-
FORD & LIBRARY 9ERALD
cussed in I(2) and II(1) above), governments will not seek
to influence or pressure foreign investors in ways which
differ from policies applied to host-country nationals.
CONF IDENTIAL
- 7 -
CONFIDENTIAL
(2) As regards those areas where home and host
country laws create conflicting obligations on investors,
we should examine within the U.S. government the possi-
bility of negotiating agreed procedures for handling specific
cases and, where possible, new general guidelines for
resolving such conflicts.
(3) We are willing to explore mutually acceptable agree-
ments defining areas in which government-to-government
discussion of policies relating to investment in general
or particular investments are deemed to be proper (as
in those instances cited elsewhere in this paper).
(4) Governments should refrain from punitive action
against private foreign investors from particular countries
with whom they may have political disputes except to the
extent recognized in international law.
(5) In case of expropriation or nationalization (which
is recognized in international law as limited to instances
which serve public purposes) host countries will afford
prompt, adequate and effective compensation to foreign
investors (regardless of whether such compensation is
paid in the nationalization of enterprises controlled by
the host-country's nationals). Disputes over compensation
will be settled in accordance with agreed arbitration,
conciliation or other arrangements consistent with inter-
national law (including, where appropriate, fact-finding
arrangements, etc.).
IV. Consultative Mechanism and Dispute Settlement
Arrangements on investment policies should include
mechanisms for consultations and the settlement of
disputes. In a world-wide forum these mechanisms may
be of various types. It would be desirable that they enjoy
high-level leadership and participation. It is difficult at
this time to define what might realistically be achieved in
global negotiations on the establishment of mechanisms
CONFIDENTIAL
FORD LIBRARY is CERALD
- 8 -
CONFIDENT
for consultations and the settlement of disputes. The
U.S. continues to support the International Center for
the Settlement of Investment Disputes, and favors adherence
to this mechanism by all countries.
Within the OECD, past mechanisms for consultation and
resolution of disagreements concerning government invest-
ment have lacked high-level leadership and participation.
Rather than, for example, relegating consultation over
investment matters among developed countries just to a
technical committee of OECD, there is wide agreement on
the need for a higher-level mechanism in which continuing
consultation and negotiation of needed new agreements (as
envisaged in I above) can take place, with policy-level
guidance provided periodically and regularly.
For the present, this role of high-level consultation and
guidance should be exercised by the XCSS. However, it
is not now clear whether the XCSS can or should retain this
function indefinitely, given its general mandate to review
and guide the organization's activities in the full range of
its work. Thus, as part of the OECD's continuing effort
on investment reform, attention must be given to the
adequacy of the existing mechanisms for consultation.
We, therefore, will propose that this issue be included
on the XCSS agenda for further discussion. One of the
options (in addition to that of keeping this function per-
manently within the XCSS mandate) should be to determine
whether there may be a need for a new high-level committee
(similar in concept to the EPC or WP-3) which would meet
periodically with representatives from capitals. The mandate,
whether exercised by the XCSS or a new committee, should
be to:
(1) Review the progress of negotiations on new inter-
national agreements concerning specific investment issues
(eg., investment incentives; tax matters, etc.) and give
policy guidance to the work groups. (This work should be
carefully coordinated with similar work in other OECD
committees--eg., the Trade, Fiscal and Business
Practices Committees, as well as work on related
matters going forward in GATT and IMF.)
GERALD FORD LIBRARY
CONFIDENTIAL
- 9 -
CONFIDENT L
(2) Conduct consultations concerning issues which
may have arisen among countries over particular
problems.
Implementation
The main effort to implement the above policy objectives should
take place initially among the developed OECD countries. The
U.S. goal is to pursue negotiations on new arrangements and guide-
lines concerning investment within the OECD framework using
the XCSS as the principal governing mechanism for setting the
tasks and pace of the negotiations. Negotiation of new agreements
or supplements to the OECD Capital Movements Code encompassing
objectives I through IV above should proceed to a conclusion as
rapidly as possible. Our negotiators will be guided by the fact
that we wish to preserve the gains achieved through the Capital
Movements Code, and that the purpose of these negotiations is
largely to strengthen that Code or to enlarge its scope to the
extent possible.
In negotiations in the UN (eg., in the proposed Declaration on
the Economic Rights and Duties of States) or in regional activities
(eg., the OAS), U.S. negotiators will be guided by the above
objectives in defining the U.S. positions. The U.S. is, in
principle, willing to reach agreements on one or several of these
sets of principles with foreign countries so disposed on either
global or regional bases. In negotiations with LDC's, it should
be recognized that there may be special considerations which
would necessitate acquiesing in certain non-neutral government
policies with respect to foreign investment in developing countries.
In such cases, care should be taken to preserve as much as possible
the spirit of the principles outlined above.
FORD & LIBRARY GERALD
CONFIDENTIAL