Henry Kissinger was isolated. It was the morning of February 24, 1975, and a meeting was underway to decide the Ford administration’s policy on inward foreign direct investment (IFDI) in the United States. This obscure issue had been building as a matter of public and political concern for several years, a consequence of surging investments from rising trade partners, and, in more recent months, from OPEC countries seeking to “recycle” their surpluses by purchasing dollar-denominated assets. The previous fall, after the Senate held hearings on a bill that would establish a “Foreign Investment Review Administration,” members of the Ford administration concluded that some executive response was urgently needed. But how to respond? Contrary to previous scholarship on the subject, the growing conflict over the future of IFDI governance in the United States divided not only Congress and the Executive. A split had also emerged between the State and Treasury departments over just how far, and in what ways, the United States should deviate from its long tradition of liberal IFDI policies. That was the source of the Secretary of State’s isolation this morning: he, and his deputy Thomas O. Enders, were simply willing to stray further than other members of the administration.
The impact of this meeting would prove to be far-reaching for American public policy in this domain and would also set an example for other states confronting similar challenges in a globalizing world. Out of this meeting emerged the Committee on Foreign Investment of the United States (CFIUS), an interagency committee housed in the Treasury Department that continues to review investments to this day. Formally established by President Ford’s executive order on May 7, 1975, CFIUS has since had its powers elevated or procedures reformed through legislation passed in 1988, 1992, and 2007. Annual IFDI flows into the United States, meanwhile, have reached a scale that none of CFIUS’s original architects probably ever anticipated: while annual IFDI inflows never exceeded $5 billion before 1975, they now reach several hundreds of billions, peaking to an all-time high of $476 billion in 2015.Footnote 1
But the issues confronted by policymakers in this and subsequent meetings also exemplified a broader public policy question that has since become ubiquitous under the contemporary conditions of globalizing capitalism: how to manage the tension between democratic institutions and the project to more deeply integrate global markets for trade and investment?Footnote 2 In practice, deeper integration of worldwide markets for foreign investment has meant breaking down existing domestic “barriers” (e.g., government review mechanisms and regulations), or, in the case of the United States during the 1970s, preventing the creation of new ones. The premise that informed such policies, described succinctly in an internal policy document approved by the Nixon administration in 1974, was that economic growth and development are “best accomplished within an international economic system providing an environment which facilitates international trade and capital flows among nations” and “involves a minimum of governmental interference with international economic transactions while placing maximum reliance on market forces to direct world trade and investment.”Footnote 3 But just as this position was being affirmed, more democratically responsive sites of the state (i.e., Congress) had begun to challenge such premises and even embrace the very idea of experimenting with new forms of “governmental interference.” The “globalization dilemma” that confronted the makers of IFDI policy in the mid-1970s was thus managing democratic pressures to intervene in IFDI cases without drifting too far away from a policy preference for a globalized world of increasingly “open” investment markets.
This article uses newly available archival evidence to reconstruct how high-level appointees and lower-level functionaries managed this dilemma over two phases of the policymaking process. The first phase began when members of Congress (even self-described “internationalists” and “free traders”) started to propose legislation that would create new institutional arrangements to govern IFDI flows, impose new restrictions on certain types of investments, or give the president veto authority over individual investment proposals. The Nixon and Ford administrations opposed these measures, leading to an interbranch conflict that has already been documented in the few existing accounts available on the subject. Where previous accounts have fallen short, however, is by failing to acknowledge the emergence of conflicts within the Executive over how precisely to manage the globalization dilemma they now confronted. Kissinger’s State Department, as noted above, began to support a “very permissive screening procedure” as the solution. Other members of the administration, including Treasury Secretary William Simon and Alan Greenspan, then chairman of the Council of Economic Advisors, opposed this measure. Their preferred solution prevailed and led to the creation of CFIUS by executive order (crucially, not an act of Congress).
The second phase of the policymaking process began as lower-level officials took steps to turn their orders into institutionalized practice. Knowing that they needed to prove to Congress that CFIUS could act as a viable review mechanism, committee members initially decided that they would approach foreign investments informally, require mandatory consultation for certain types of investments, and eschew specific guidelines. But as the Treasury officials chairing the committee soon discovered, such a loose institutional framework risked creating too broad a policy space for the state to become involved in investment decisions. The measures they took, which have also yet to be fully documented in the existing literature, ensured that CFIUS would not drift away from a liberal, “open-door” IFDI policy. They thus managed to solve, at least temporarily, the globalization dilemma they confronted at the time.
The remainder of this article examines in more detail how this was accomplished. But before turning to the historical evidence, I describe further how this article revises existing accounts of this episode in American public policy history and develop further the precise dimensions of the globalization dilemma confronting policymakers during the 1970s.
The Globalization Dilemma and the Making of IFDI Policy During the 1970s
CFIUS’s establishment in 1975 was significant not because it represented a major deviation away from the government’s liberal stance toward IFDI flows, but because it effectively preserved it. In retrospect, such a “negative” outcome—one that resulted in a minor shift in real political authority by executive order rather than by statute—may appear unremarkable. But amid the crisis conditions of the early 1970s, this outcome was far from certain, as issues related to outward and inward foreign direct investment had been growing in political salience for several years. For example, the outward foreign investments practices of American multinationals—and whether steps should be taken to curb or end favorable tax treatments for such investments—had been at the heart of the controversial Burke-Hartke Bill in 1972.Footnote 4 Waves of nationalizations in developing countries and the long-standing use of investment screening mechanisms by the governments of France and Japan, and, more recently, Canada and Australia, seemed not only to anticipate a period of growing “investment wars” but also to stoke congressional interest in adopting similar measures at home.Footnote 5
Previous accounts have done much to reconstruct the politics of IFDI that culminated in CFIUS’s establishment. A former member of the White House’s Council on International Economic Policy (CIEP) provides a unique insider’s account of CIEP’s activities organizing interagency task forces, formulating policy, and managing relations with the administration’s favored congressional committees.Footnote 6 Another account, based on interviews conducted with congressional staffers and select administration officials, provides a comprehensive survey of congressional attitudes toward IFDI during this period, complementing the view from the executive branch.Footnote 7 Robert Pastor synthesized the two perspectives in a comparative study of Congress’s role in the making of foreign economic policy. Briefly, he argued that “the consistent liberalness in the overall structure of U.S. foreign economic policy” could be explained by the interaction between an “internationalist” Executive and a more “protectionist” Congress. CFIUS, in his account, was the direct result of the former managing to prevail over the latter.Footnote 8
As I have argued elsewhere,Footnote 9 while Pastor’s account has much to recommend it, it nevertheless suffers from a lack of access to internal executive branch deliberations that newly available archival evidence has since brought to light. This leads him to neglect the ideological foundations of the administration’s preferred policy course and underestimate the likely influence of financial and business interests on administration thinking. It also, as this article will show in detail, leads him to overlook the globalization dilemma that not only informed the administration’s final decision to establish CFIUS by executive order, but also CFIUS’s activities in the crucial year following its creation (a period not covered in his account at all).
How precisely did the globalization dilemma inform the policymaking process? A good starting point is provided by Pastor’s own conclusion about the Executive’s unwillingness to engage, as Pastor put it, “the real question” that inward foreign investment raised for policymakers during this period: “on what terms [should we allow it] and how can we maximize its positive effects?”Footnote 10 Instead, as Pastor rightly observes, “Throughout the legislative debate, the main question which the Executive repeatedly asked itself seemed not to be what is the best policy, or how can we devise a cooperative strategy with the Congress to formulate the best policy, but simply: how can we exclude the Congress from making policy on this issue?”Footnote 11 Here, Pastor rightly identifies the Executive’s stance that proved to be critical for explaining the policy outcome. Unfortunately, Pastor does not adequately explain the rationale behind it, only making passing references to “institutional prerogatives [e.g., conflicts over turf] . . . the fear that any action might be interpreted by foreigners as restrictive and might induce retaliatory actions, and a Republican belief in limited government.”Footnote 12 While these factors were no doubt relevant to the Ford administration’s position, they cannot fully explain the administration’s unwillingness to debate the question of how best to maximize the positive effects of IFDI, nor the ultimate resort to, as Pastor himself puts it, “Executive fiat rather than legislation” to establish CFIUS.Footnote 13
What Pastor overlooks is the fact that this measure was necessary because the members of the Ford and Nixon administrations who dominated the formulation of IFDI policy were seeking to extend a certain brand of “globalization” (since labeled “neoliberalism”) based on rules that would circumscribe what sovereign governments could do to govern international investment flows. As Peter Flanigan (then director of the Council on International Economic Policy) reported in an April 29, 1974, memo to President Nixon, the agenda here was “to consolidate rules which would strengthen the role of market forces in investment flows, reduce government interference and limit damage resulting from government-induced distortions in the investment system”; bring “greater international discipline by agreement to tighter rules relative to screening”; and “seek more specific commitments to protect investors against special pressures or arbitrary treatment.”Footnote 14 It was this pursuit of global rules that would more deeply integrate markets for IFDI and thereby constrain a state’s responsiveness to domestic political pressures—even from democratically elected legislatures—that also informed the Executive’s uncompromising stance toward Congress.
In other words, had the administration’s official position been more consistent with the regime of “embedded liberalism” that had typified global capitalism after World War II,Footnote 15 neither Congress’s interest in passing new review legislation, nor even Kissinger’s proposed “permissive screening procedure,” would have appeared so threatening or resulted in political conflict. Instead, to borrow a term popularized by Thomas Friedman, the Ford administration sought to fit domestic IFDI policy within a “golden straitjacket” that, as Friedman describes it, narrows “the political and economic policy choices of those in power to relatively tight parameters.”Footnote 16 CFIUS became, in essence, the organizational form of such a “straitjacket,” tailored specifically for IFDI policy. The tension between the political project to further integrate markets for international investment, on the one hand, and democratic resistance to this project, on the other, was central to the policy outcome and thus needs to be incorporated into the analysis. In practice, this meant that high-level officials and low-level functionaries had to manage a “globalization dilemma” with two dimensions: first, the need to keep Congress at arm’s length, and second, the challenge of ensuring that CFIUS would not threaten the desired liberal IFDI agenda.
The first dimension—managing what the administration’s internal documents referred to as “Congressional relations”—had become problematic not so much because there was a conflict over turf but because the administration was committed to preserving an “open door” IFDI policy at home and expanding its international agenda abroad to break down investment barriers. Their solution to this problem was to establish CFIUS in a way that deliberately avoided the participation of the most democratically accountable (alternative framings might call it the most “politicized”) site of the state, the United States Congress. This was to ensure that institutional arrangements that were nonstatutory and created by the Executive alone would be able to operate with as little congressional influence as possible.Footnote 17
This “solution” however, was the source of the second dimension of the globalization dilemma, one that was most acutely felt by the state functionaries working at the staff level after CFIUS was established: How to uphold an “open” IFDI policy within a state organization explicitly tasked with the responsibility, according to the language of the executive order, to “review investments in the United States which, in the judgment of the committee, might have major implications for United States national interests”? By creating CFIUS, the state had expanded in the formal sense and democratic pressure required it to do something. Doing too little would provoke a congressional backlash. Doing too much would constitute an obvious betrayal of the U.S. commitment to a liberal IFDI policy. Thus, state functionaries were left to puzzle over how best to tailor the straitjacket they had been given to work with in a way that was neither too loose nor so tight that Congress would take measures to scrap it altogether.
How to balance the two? The remainder of this article examines how members of the Ford administration arrived at this problem, and how they went about navigating toward a solution.
Congressional Pressure and the Establishment of CFIUS
By the early 1970s, the United States’s deteriorating trade position, the devaluation of the dollar, and surges of IFDI from Europe and Japan had ushered in a new era of inward foreign direct investment. As the debate matured in public hearings over how best to respond to this new trend, several substantive issues were raised. These included the costs and benefits of IFDI, the efficacy of existing disclosure requirements, the safeguards that existed to preserve domestic capabilities to produce advanced technologies, and the overall adequacy of the traditional “open door” policy in a new world featuring footloose multinational corporations, allies such as Japan practicing strategic trade and investment policies, and governments controlling unprecedented levels of surpluses to invest. By early 1974, even reliably “internationalist” senators like Adlai Stevenson III (D-Ill.), who repeatedly confessed his own “bias toward free exchanges of goods, money, and investment” on the Senate Banking Committee, began asking Nixon administration officials uncomfortable questions concerning the beneficial effects of IFDI. Contesting the benign view expressed by CIEP’s Peter Flanigan, Stevenson pointed out that “all investment doesn’t bring with it technology. It comes for a variety of reasons, one of which may be to promote the sales of foreign goods in the United States.” Pressing the issue further with noted MIT economist Charles Kindleberger on another day of testimony, Stevenson asked, “I don’t know what we get. We don’t get capital [when funds are raised domestically], we don’t get necessarily the skill, the ingenuity, the technology that may be present in other cases. Should we differentiate between them?”Footnote 18
For the reasons noted in the previous section, the Nixon administration would not support any legislation that went beyond funding further studies of IFDI and foreign portfolio investment. This stance, combined with the willingness of Senator Stevenson and Senator Daniel Inouye (D-Hawaii) to broker a deal with CIEP (which had taken ownership of the IFDI issue in the White House) produced the Foreign Investment Review Act of 1974 (Public Law 93-479). But even before the bill was signed by President Ford on October 26, 1974, it had already been overtaken by events. OPEC surpluses being recycled into the United States had changed the politics of IFDI and made the administration’s preferred laissez-faire course all but untenable. By September 1974, the Senate Subcommittee on Foreign Commerce and Tourism began holding hearings to establish a Foreign Investment Review Administration in the Commerce Department. Members of the administration had also begun to make a series of potentially conflicting statements on the desirability of IFDI from Arab countries. This confusion, combined with the start of highly publicized negotiations between Iran and Pan-American Airlines, led to the organization of a new interagency task force under the direction of Jack Bennett, then Deputy Undersecretary for Monetary Affairs at Treasury.Footnote 19
It is at this juncture, as the task force began coordinating the administration’s response to this new political and economic context, that a significant split emerged between the task force’s two most powerful participants: State and Treasury.
The Split Between State and Treasury
Task force files reveal that the reason for the split centered on the globalization dilemma that this article argues has been neglected in previous accounts. Essentially, the State Department disagreed with Treasury’s strategy over how best to manage the pressure coming from Congress as well as uphold the administration’s commitment to a liberal, “open door” policy. In a confidential memo to Bennett, Thomas O. Enders, the Assistant Secretary of State for Economic and Business Affairs, wrote:
With regard to covering our Congressional flank, we need to recognize that the Congress is no longer willing to accept—nor should it be—continuing lectures from the Administration on free enterprise theory coupled with an essentially stand pat policy. Unless the Administration now takes the initiative in recognizing that OPEC investment has the potential for creating economic and political problems for the United States and in proposing a program that is clearly responsive to this potential threat, then this Congress will take the matter out of our hands with the result that we will be presented with far more restrictive legislation than anyone in the Administration believes is required or desirable.Footnote 20
Enders here was responding to the Treasury Department’s position paper laying out a strategy to, as the latter put it, “forestall legislative action,” by having the president issue a statement, establish a new office by executive order, and organize briefings with Congress and the press.Footnote 21 In the agency comments attached to the Enders memo, the State Department disagreed with Treasury’s strategy, arguing that “the call for a major public relations buildup involving Congressional, press, and foreign government briefings is not supported by enough of an action program.”Footnote 22 Instead, the State Department calculated that a stronger response was needed to manage the “Congressional flank.”
The State Department’s willingness to consider a stronger approach was due to the fact that it also disagreed with Treasury about the extent to which it was both feasible and desirable to deviate from the liberal status quo. Enders argued that Treasury too quickly “dismissed the idea that valid judgments can be made on the desirability of various kinds of foreign investment before the fact. Such judgments can indeed be made.” He also rejected Treasury’s characterization of a “choice between a ‘wait and see’ approach and ‘an airtight regime of safeguards against all contingencies,’” insisting instead that “there is actually a wide range of options between these two extremes.”Footnote 23 This interest in enabling the government to make “valid judgments” about ex-ante IFDI and to try to structure overall investment flows marked a significant deviation from established policy.
To be clear, State’s position was derived not from doubt about the general wisdom of maximizing “market forces” but from its conclusion that IFDI controlled by foreign governments (e.g., OPEC countries like Saudi Arabia, Iran, and Kuwait) was a potential threat to both free markets and U.S. national interests. The State Department’s dissent was thus far from an embrace of the kind of review mechanism being contemplated in Congress.Footnote 24 But it was still significant enough to require a meeting at the highest levels of the Ford administration to resolve it. Reflecting State’s view that there were many intermediary possibilities that Treasury ignored, the final version of the briefing papers circulated prior to the meeting of February 24, 1975, presented four options. The first two options were to maintain existing policy and establish a new office designed to improve the coordination of federal policy and facilitate consultations with foreign investors either by executive order (option 1) or by statute (option 2). The third option was to impose screening procedures under new legislation, while the fourth was to impose quantitative limits on official foreign government investment.Footnote 25
The Treasury Department favored the first option and vigorously opposed formal screening of any kind, even of foreign government investments. Based on the briefing memo that Bennett (now treasury undersecretary) prepared prior to the February 24 meeting for his boss, Secretary Simon, it is possible to reconstruct their preferred means of navigating both dimensions of the globalization dilemma. First, with respect to managing the problem of congressional pressure, Bennett acknowledged that taking the steps he favored in Option 1 did run the “risk that the Congress might consider them inadequate and pass more restrictive legislation.” But Bennett calculated that it was a risk worth taking because working with the legislature “would play into the hands of the more extreme Congressmen and it would be difficult to avoid a ‘Christmas tree’ bill.” And even if their gamble did not pay off, at least Option 1 would, as Bennett put it, “provide time to get a better feel for the temper of the Congress and the general public.”
Bennett also referred to several reasons why the Treasury Department should support the first option. First, the problem with “restrictions” on foreign investment, which in Bennett’s view included screening, was that “they require judgments on ‘good’ or ‘bad’ investments before the fact” and that “it would be virtually impossible to insulate such judgments from domestic and international political pressures.” For this reason, even though Bennett essentially conceded the point of reformers that “a foreigner can invest in a constructive and mutually beneficial way in a key industry or can invest disruptively in a nonessential industry,” he could not envision a viable alternative. More obvious for Bennett was the potential “market distorting effects” of a regime of screening or restriction, which would not only “deter a substantial amount of beneficial investment from non-OPEC and OPEC countries,” but also would “intrude upon normal buyer-seller relationships.”Footnote 26 On this point, it must be noted that Bennett evidently exempted his own department’s activities from such concerns, as Treasury officials were actively courting and channeling OPEC dollar surpluses through a variety of vehicles.Footnote 27 As such, it is likely that Treasury’s position was informed by the fact that any screening of IFDI, or indeed formal reporting requirements of foreign investment in general (also being debated in Congress), would have complicated Treasury’s agenda to recycle petrodollars on its own secretive terms.Footnote 28
With these stances staked out over how to navigate the globalization dilemma that IFDI posed, it was now left to the participants of a special meeting of Ford’s Economic Policy Board and National Security Council to decide what to do. Participants included the secretaries of State, Treasury, Defense, Commerce, and other cabinet-level departments, Chairman Arthur Burns of the Federal Reserve, Chairman Alan Greenspan of the Council of Economic Advisers, and representatives from the Central Intelligence Agency, NSC, Office of Management and Budget, and CIEP.Footnote 29
The Meeting of February 24, 1975
Before examining the minutes that were recorded for this meeting, it is worth noting that the “problem” for discussion was defined quite narrowly in the briefing materials as “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.”Footnote 30 The concerns raised by private corporate investment (such as control of technology transfer), as well as the underlying relationship between IFDI and the trade surpluses of allies like Germany and Japan, were therefore largely irrelevant to CFIUS’s formation.Footnote 31
According to the meeting minutes, Simon began the discussion by noting that “because of public concern and upcoming hearings in Congress, time was of the essence in developing an Administration position.” Citing existing “safeguards” to deal against “potential abuses,” Simon advocated for Option 1 because “he favored a free and open world trading and investment climate.” Kissinger spoke next, emphasizing “his concern about the large amounts of funds that might be used strategically.” He therefore “saw some merit in a very permissive screening procedure involving a list of strategic companies and/or industries but recognized the problems involved in drawing up such a list.”Footnote 32
With the two key positions staked out, it was now left to the other participants to weigh in. Burns favored the idea of new legislation that would “stress the importance of encouraging foreign investment in the U.S.” but would also “establish restrictions on foreign ownership (or voting of equity interests).” He also favored the “screening of foreign investment in enterprises which clearly had strategic national interest.” This, however, was apparently the extent of Kissinger’s support in the meeting. And even Kissinger, ever the foreign policy mandarin, diverged from Burns by expressing “some reluctance in going to Congress for any legislation which would be directed against foreigners.” All other participants, including Greenspan, Commerce Secretary Dent, and representatives from Defense and the CIA, actively endorsed the first option.Footnote 33 Greenspan argued that the case had not yet been made for any policy action beyond Option 1. For his part, Commerce Secretary Dent added in his “strong” support for the first option that “it was a contradiction in policy to adopt a position that discouraged the free flow of capital while conducting negotiations in Geneva for freer trade.”
The CIA’s endorsement of Option 1 by the end of the meeting appears to have convinced Kissinger that unofficially reaching out to potentially large investors prior to major investments “might be a more effective informal way to accomplish screening than legal requirements.”Footnote 34 With Kissinger backing down, the Treasury Department’s position thus prevailed: Congress would be kept out of further policymaking and no formal screening mechanism would be instituted. As the memo informing President Ford of the decision stated, “the key aspect of the policy . . . is that it does not propose new legislation or formal screening procedures to deal with the potential problems of large foreign government investment [emphasis in the original].”Footnote 35 Further reflecting the narrow framing of the IFDI issue, the memo to Ford explained the policy as being “a result of increasing Congressional concern over potential Arab investment in the U.S.” Ten weeks later, Ford established CFIUS when he signed Executive Order 11858.
Navigating the Globalization Dilemma in Practice
Before President Ford could sign the executive order, members of the Treasury Department needed to find language that was responsive to congressional pressure but remained faithful to its policy preference for maintaining the status quo. As Bennett explained in Senate testimony after the February meeting, the administration’s decision to establish a new interagency committee to review investments and gather more information “represents in no sense a departure from our conviction that free market forces are the best means for directing worldwide investment flows into the most efficient uses.”Footnote 36 But this was easier said than done; committee members even after the executive order was signed still needed to puzzle through how to appease Congress in its handling of actual cases while avoiding the danger of drifting into a de facto screening process. In essence, the “straitjacket” referred to earlier would need careful tailoring, and this was evident from the start of deliberations surrounding the exact wording of the executive order.
Drafting the Executive Order
The Treasury Department took the lead in drafting the executive order and submitted it to the White House and other cabinet-level departments for comments. From the latter, it was evident that the main concern was to eliminate any wording that might suggest that a screening process of any kind was being implemented. Specifically, Treasury’s original draft language saying that the committee would review “individual investments” and “individual investment proposals” was seized upon by several agencies for revision.
The NSC suggested that the words “individual” and “proposals” be stricken from the executive order’s language in order to “eliminate the possibility that the Executive Order could be interpreted as permitting the institution of a screening process for foreign investment in the U.S.”Footnote 37 State called for similar changes, “so as to deemphasize the implication that the Committee is to act as a screening authority for inward investments.”Footnote 38 The Commerce Department, for its part, voiced concerns about including such language on more legal grounds: “If we are contemplating an early warning system that would enable the government to learn of major contemplated foreign investment prior to offer and acceptance, there is currently no federal agency collecting such data and the SEC does not have the authority to require its submission.” For these reasons, references neither to “individual investments” nor “proposals” survived the executive order that eventually awaited Ford’s signature. Instead, the order stated that CFIUS would simply “review investments in the United States which, in the judgment of the committee, might have major implications for United States national interests.”Footnote 39
The next problem arose during CFIUS’s first meeting over the language to be used in the Treasury Department’s press release announcing CFIUS’s formation. The issue here was whether private, nongovernmental investors would be required to notify the committee about major future investments. According to the meeting minutes, the consensus was that “there should be a presumption on the part of private investors that they should consult on major investments.” However, the State Department’s representative, Richard J. Smith, later challenged the minutes’ interpretation of events, writing that that such a presumption that private investors consult “runs exactly contrary not only to the discussion which took place in the meeting on May 20 [the date of CFIUS’s first meeting], but also to the major thrust of our entire interagency review and the Executive Branch decisions which flowed from it.” Noting that the press release’s wording was altered during the first meeting to suggest that private-investor consultation would be voluntary, Smith concluded that “any presumption that private investors would consult undermines this fundamental purpose and moves us a long way towards a generalized screening mechanism which is anathema to us all.”Footnote 40
Smith’s interpretation is supported by the final wording of the press release and consistent with the committee’s overall concern about deviating too far from a liberal investment policy. Footnote 41 Moreover, the cable drafted by the Treasury Department and transmitted to all diplomatic missions failed to mention the issue of private foreign direct investment. Instead, it emphasized that “we want to avoid giving the impression that USG plans a generalized screening procedure. We expect Committee [sic] to concern itself only with a few exceptional cases and thus do not regard our new procedures as a departure from our traditional open-door policy toward foreign investment in this country.” At this stage, the committee members saw voluntary consultation as the best way to limit their discretion; after all, how could it pass judgments on cases that were not brought to their attention for approval?Footnote 42
In addition to embracing voluntary consultation and emphasizing foreign government investment, the committee also decided during the first meeting that it would operate under “no formal guidelines” and “consider investments on a case by case basis.”Footnote 43 In sum, each of these decisions suggests that during this phase in CFIUS’s institutionalization, the committee’s focus appeared to be on the second dimension of the globalization dilemma, namely, avoiding measures that would threaten the “traditional open-door policy.” But as CFIUS members would soon discover to their dismay, the straitjacket they had fashioned was so tight that it threatened their management of the other problem they needed to balance: forestalling further congressional legislation.
CFIUS Reviews Its First Two Cases
The flaw in relying upon voluntary consultation was obvious: What if a foreign government or private investor contemplating a major investment was unwilling to consult? This is precisely what happened when the government of Romania was on the verge of acquiring the Island Creek Coal Company without prior consultation with CFIUS. As internal correspondence between observers at the Federal Reserve noted, this situation became “the first test of the Committee’s effectiveness in carrying out its mandate when the government with which it is supposed to negotiate is recalcitrant.”Footnote 44
Records reveal that CFIUS members did recognize that this was a “test,” but not of its “effectiveness” or the soundness of a policy relying on foreign governments to voluntarily consult about prospective investments. Rather, the Treasury leadership appeared to be most concerned about what Congress’s reaction might be when it found out about it. As the secretary of the Office of International Investment at Treasury wrote to the chairman of CFIUS, Romania’s failure to consult was “getting quite worrisome” because “it would be an indication to the Congress and the public that our new procedures are ineffectual.” The memo added that “in response to some Congressional skepticism we have assured them that the there is no reason to doubt that foreign governments will cooperate in consulting with us in making significant investments the U.S.”Footnote 45 Now that there was reason for doubt, the acting chairman of CFIUS did not use the occasion to call for a potential rethink on policy, but instead insisted at the next meeting that “the Committee must be able to show the Congress that our consultation procedure is viable and that therefore we need to persuade the Rumanians [sic] to consult with us.”Footnote 46 Fortunately for CFIUS, the Romanians eventually proved amenable to consultation and its first crisis was averted.
But the stakes involved in the handling of CFIUS’s second case, the attempted acquisition of the Copperweld Corporation by Société Imetal (a French firm that received financing from the French government), were even higher and proved less easily navigable. Here, the issue was the opposite of ensuring consultation; it was about resisting political pressure to become involved in a case. In a letter sent directly to CFIUS, the president of Copperweld attempted to make clear the “major implications” such an acquisition would have on national interests and requested that the committee review the case. The committee did not share the Copperweld president’s concern, but it did arrange a meeting with the French ambassador to better establish the relationship between the French government and Société Imetal. According to a memorandum from that conversation, the Treasury official handling the case, Gerald R. Parsky, was told that the French government was “neutral,” beyond allowing the company access to the foreign exchange needed to make the acquisition. For his part, Parsky informed the ambassador that “if the case is put before the Committee on the basis that it has major implications for the national interest, the Committee has no choice but to look at it.” Parsky also felt the need to add that “a major purpose of the Committee is to show to the Congress that the Administration is undertaking the necessary monitoring of foreign investment and thus to convince the Congress that new legislation, which we felt would be a mistake, is not necessary.”Footnote 47 In these ways, Parsky made a candid confession to a foreign official: CFIUS’s primary function was to appease Congress, not to seriously monitor or review foreign investments.
For their part, Copperweld’s management and its unionized workforce were not idle and managed to mobilize members of Congress. To resolve the case, CFIUS was called upon to prepare a special memorandum for the Executive Committee of Ford’s Economic Policy Board (EPB) with their recommendation. CFIUS strongly urged that the administration “not call on the Committee to intervene,” arguing that “the language of the Executive Order (‘major implications for United States national interests’) was purposely designed to avoid involvement of the Federal Government in individual transactions except in the most extraordinary cases, cases which are truly of momentous proportions.” Making clear the stakes involved, they cautioned that “if we allow a case like this to be construed as being of this magnitude, we will have opened the floodgates for virtually unlimited screening of foreign investments in the United States.”Footnote 48 CFIUS’s entreaty appeared to be effective: the EPB did not intervene and the acquisition went forward without interference.
Resorting to Formal Guidelines
The Copperweld crisis receded, but the committee’s experience with these two cases convinced the Treasury Department that changes in procedure were required. At its next meeting, Treasury presented a draft set of guidelines that would determine how the Committee would handle all future cases. The draft guidelines acknowledged that this deviated from the original plan to eschew formal guidelines. But this was deemed necessary not only “to avoid misunderstandings and mishandling of cases” but also to manage “Congressional relations.” The draft explained that “if its policies and procedures appear to be confused or if a significant investment takes place without prior consultation, Congress could conclude that the administration’s informal approach to protecting U.S. interests in this area is too unreliable and that stronger legislative measures are necessary.”Footnote 49 There also still remained the long-standing dread of the second dimension of their political dilemma: a drift toward general “screening.” Once again, the guidelines warned that without a sufficiently selective review process, “there will develop a presumption in the public mind that the Committee will review similar investments in the future,” and the committee “will come to be viewed as a general screening mechanism and find it increasingly difficult to avoid reviewing any case brought to its attention.” With these concerns in mind, the committee guidelines sought to prevent such an outcome by making three significant moves.
First, it further enshrined the liberal perspective that “the free inflow of economically motivated investments will be to the economic advantage of the U.S. as well as the rest of the world” (emphasis in the original).Footnote 50 This was contrasted with “politically motivated” investments (i.e., foreign government investments) that were considered more suspect and therefore required “special measures.” These distinctions were interpreted to mean in practice that CFIUS not only “has no obligation to make assessments as to whether or to what extent each investment relates to the national interest,” but also that it “should operate on the assumption that it would be neither feasible nor desirable to establish criteria for determining what kinds of investments might have major implications for the national interests.” The logic behind such guidelines was clear: because “economically motivated investment” were assumed “to be to the economic advantage of the U.S.” and indeed the world, then the committee’s attempts to second-guess markets would be redundant at best or destructive at worst. Hence, CFIUS was, in its own words, to “assume a passive but alert attitude and simply be prepared to select an investment for review from the passing parade whenever major implications for the national interests appear to be involved in it.” But how could such judgments be made in practice when established criteria or assessments of national interests were ruled out as being neither “feasible nor desirable”? The only clear guidance given on this question is that “the Committee should approach each case on the presumption that it does not have ‘major implications’ and in the review process it will be up to individual member agencies and non-member participants to prove the contrary (emphasis added).”Footnote 51
The second move the CFIUS leadership made, consistent with the “passive but alert attitude” called for above, was to affirm voluntary guidelines for advanced consultations from not only private investors but government investors as well. As already noted, it was decided during previous meetings that private investors were not expected, and indeed were to be somewhat discouraged, from contacting the committee about prospective investments. With respect to government investments, however, previous meetings were less ambiguous. It had been decided—and the first draft of the new guidelines clearly advised—that “foreign governments should notify the U.S. Government of any direct investments which they intend to make in this country” (emphasis added).Footnote 52 This policy was considered only appropriate for two reasons. First, the committee had never given any indication of what constitutes a “major” investment. Second, it was noted that imposing a requirement to consult “would simply leave it to the Committee, rather than the foreign government, to make the judgment as to whether the potential investment warrants consultations.” The experience with the Romanian government also supported the need for such a change. Yet despite these commonsense observations, and for reasons that remain unclear in both the meeting minutes and accessible archival sources, the final draft of the guidelines did just the opposite. Instead, the final version expanded voluntary consultation still further by leaving “the responsibility for determining whether a particular investment falls in this category [of a major investment] up to the foreign governments.”Footnote 53
Finally, a solicitousness toward the sensitivities of foreign investors was institutionalized in the committee’s overall approach to reviewing investments. The telling phrase here, which survived both drafts of the guidelines intact, was to suggest that “the mere fact that the Committee has reviewed or is reviewing a particular investment may be interpreted as an implication that the U.S. Government is more than neutral on the investment, with adverse effects on foreign investments in the future.”Footnote 54 This was a remarkable, though perhaps understandable, stance given the globalization dilemma CFIUS faced. A committee that was established for the fundamental purpose of reviewing investments had come to the conclusion that even engaging in such reviews would constitute a violation of the self-declared (yet nonstatutory) policy of “neutrality.”
In sum, by adopting these guidelines, CFIUS further tightened the straitjacket. This time, however, the new fitting was met with some internal dissent. The director of Commerce’s new Office of Foreign Investment warned that “if the essence of the present policy is to be preserved, we must be prepared to administer it flexibly.” If the committee continued in what he referred to as its “too pat and passive stance,” then “the interagency committee’s credibility is bound to erode in time if it never takes its bat off its collective shoulders.”Footnote 55
In fact, the credibility of CFIUS did eventually erode—but not for another decade. That it did not happen sooner can be attributed partly to how CFIUS members had so skillfully navigated the globalization dilemma by limiting their own discretion. They were also aided by another development that made their dilemma less acute: congressional pressure had receded with declines in IFDI flows from OPEC and other sources as well as a change in presidential administration. Political pressure to reform CFIUS’s “passive but alert” stance would only return in the next decade, when renewed surges in IFDI flows were joined by a reform movement once again centered on Congress, but in alliance with dissidents emerging from the Commerce and Defense departments.Footnote 56
Conclusion
As the newly available archival evidence presented in this article suggests, IFDI policymaking during the 1970s involved more than a conflict between an “internationalist” Executive and a “protectionist” Congress, as Pastor originally claimed. But while Pastor’s analysis neglected significant aspects of the policymaking process—namely, the globalization dilemma that I have investigated at length in this article—history has since borne out his prediction that “eventually the U.S. will have a screening process, and the Executive will have the legislative authority to prohibit certain kinds of foreign investments”Footnote 57 In fact, the Ford administration had actually come far closer to installing a “screening process” than Pastor realized, as precisely such a process might have emerged out of the disagreement that divided State and Treasury before CFIUS was established. This division was significant not because Kissinger and Enders at the State Department had become opposed in principle to a liberal IFDI policy or embraced congressional reformers. They had not. Rather, they offered an alternative to established policy that would have given the government more room to maneuver in this policy area. Appreciating the real-world limits of free market ideology and steeped in the norms of foreign policymaking, the path they offered was one that would have been more flexible, adaptable, and would grant broad discretion to state officials to make judgments about the costs and benefits of IFDI flows. Even if their vision was only to focus on foreign government investment, state officials working within a permanent organization with a vague organizational mandate could loosen their focus over time and apply their judgment and knowledge to other categories of investment. In short, the institutional “straitjacket” that Kissinger and Enders proposed was not tight enough given the broader policy agenda to more deeply integrate international markets for investment.
This explains why Kissinger’s “modest screening procedure” had to be resisted and why Congress needed to be left out of policymaking in this area. Moreover, even after Treasury’s preference prevailed and a snugger straitjacket was created with the signing of a new executive order, lower-level members of CFIUS still needed to tailor it further through a process of learning on the job, as this article has shown. Their unreserved embrace of voluntary consultation and adoption of formal guidelines that essentially undercut their organizational mission constituted their main solutions. One significant conclusion to draw from this phase in the policymaking process is that, had lower-level officials been less adept at navigating the globalization dilemma, Pastor’s prediction would have come to pass far sooner.
But this globalization dilemma itself, along with the policy history I cover in this article, suggests a broader conclusion that is more troubling. As Pastor rightly noted, it was far from salutary for a democracy to have executive branch officials so willing to resort to “Executive fiat” rather than engage with Congress on a policy matter clearly within its legislative purview. Though troubled by such a clear case of “imperial drift,” he concluded that “we are in the happy situation of trying to explain why the system worked,” by which he meant that the “system” allowed the government’s liberal “open door” policy to prevail without significant drift toward “restrictionism” or “protectionism” (which was taken for granted as manifestly the best outcome). According to this logic, the straitjacket is, after all, supposed to be a “golden” one.
But what if, as Dani Rodrik and other critics of “neoliberalism” or “hyperglobalization” argue, the faith placed in deepening the integration of national markets and limiting the scope for sovereign governments was misguided on both political and economic grounds? What if some of the marginalized voices in Congress and in the administration’s own State Department had the right idea in attempting to loosen the straitjacket and expand the space for investment decisions to be “politicized” by creating new avenues for public oversight and accountability? One lesson to draw from IFDI policy history during the 1970s is that deepening the integration of international markets at certain historical moments does not come without paying a high democratic cost—one that is no longer as evidently worth paying, if it ever was.
