July 23, 1999

The Honorable John Warner

Chairman

Committee on Armed Services

United States Senate

Washington D.C. 20510

Dear Mr. Chairman:

This letter expresses the views of the Department of the Treasury on section 1409 of S. 1059,

the "National Defense Authorization Act for Fiscal Year 2000," as passed by the House of Representatives. For the reasons that follow, the Department of the Treasury strongly opposes section 1409 and recommends that it be deleted from S. 1059.

Section 1409 would amend section 721 (the Exon-Florio provision) of the Defense Production Act of 1950. The Exon-Florio provision, which was enacted in 1988, authorizes the President to suspend or prohibit any foreign acquisition, merger, or takeover of a U.S. corporation that is determined to threaten the national security of the United States. The President may exercise this authority only if he finds there is credible evidence that the foreign entity exercising control might take action that threatens national security and provisions of law, other than the International Emergency Economic Powers Act and the Exon-Florio provision itself, do not provide adequate and appropriate authority to protect the national security.

To assist in making this determination, the Exon-Florio provision provides for the President or his designee to receive voluntary written notice of an acquisition, merger, or takeover of a U.S. corporation by a foreign entity. The President has delegated to the Committee on Foreign Investment in the United States (CFIUS) the responsibilities to receive such notices and, if necessary, to conduct an investigation of the acquisition, merger, or takeover. CFIUS is an interagency committee, chaired by the Department of the Treasury, that includes ten other agencies including the Departments of State, Defense, Justice, and Commerce.

In designing this approach, the Congress crafted an appropriate balance of the absolute necessity of protecting our national security interests and our strong policy interest in avoiding unnecessary burdens on investment. In a December 1995 report on the implementation of Exon-Florio, the GAO concluded that the voluntary notification and CFIUS review process serves both to protect the national security and to minimize any potential adverse effect of Exon-Florio on foreign direct investment (FDI) in the United States.

Section 1409 of S. 1059 would require that CFIUS receive notification with respect to all acquisitions of U.S. businesses that would result in foreign government control and that could affect national security. Section 1409 would impose an added burden on foreign investors without providing any meaningful additional protection of the national security. There are sufficient safeguards and incentives that maximize the likelihood that a transaction with national

security implications will be subject to CFIUS review. Under Exon-Florio regulations, transactions not notified by the parties can be notified by a CFIUS agency; CFIUS also regularly receives information about proposed or pending acquisitions from government agencies that are not members of CFIUS. Importantly, the regulations also provide that foreign acquisitions not reviewed by CFIUS indefinitely remain subject to an adverse Presidential action. This is a particular incentive for notification. Moreover, it is not unusual for third party lenders (banks, investment companies, etc.) to include in the loan agreement a requirement that notice be given to CFIUS to eliminate the risk of forced divestiture.

The enactment of section 1409 could seriously damage the investment environment in the United States. Throughout our history, the United States has maintained an open policy concerning FDI. Such a policy clearly is in our national interest because open investment flows advance economic efficiency, promote economic growth, strengthen competitiveness, and foster a higher standard of living. The mandatory notification contained in section 1409 is a form of screening that is inconsistent with an open investment policy.

Furthermore, section 1409 would significantly impair our efforts to prevent other countries from restricting investment opportunities afforded U.S. firms. The United States, as the largest host country for FDI, and as the country whose firms comprise the largest group of investors overseas, has a major stake in promoting open investment. For this reason, the United States has taken a leadership role in international fora to promote the economic benefits of liberalized treatment of foreign investment. A more restrictive investment policy in the United States would seriously undermine the U.S. government's role in promoting open investment regimes abroad and could lead to reciprocal treatment for U.S. companies seeking investment opportunities around the world.

We are aware of no evidence that suggests that non-notified transactions are a problem under the current system of voluntary notification. Amending the Exon-Florio provision would constitute a significant departure from longstanding U.S. policy that promotes FDI. The Exon-Florio provision was carefully crafted by the Congress over a decade ago to protect the national security and preserve our open investment policy.

The Office of Management and Budget has advised that there is no objection to the presentation of this report.

Sincerely,

/s/

Linda L. Robertson

Assistant Secretary

(Legislative Affairs and Public Liaison)

[Identical letters to the Honorable Carl Levin, Floyd Spence and Ike Skelton]