McCormick Speaks At Global Capital Markets Conference

by Mike Godfrey, Tax-News.com, Washington

15 February 2008

US Treasury Under Secretary for International Affairs David H. McCormick on Friday spoke at the Tuck Global Capital Markets Conference with regard to open investment and America's prosperity.

He began by observing that:

"Investment flows are one of the most important ways our economy benefits from globalization. As President Bush recognized in his May 2007 Open Economies Policy Statement, "a free and open international investment regime is vital for a stable and growing economy, both here at home and throughout the world."

"The data supporting this assertion are staggering. While the headlines tend to focus on trade in goods and services, these flows are dwarfed by cross-border investment transactions. In 2006, for example, gross cross-border transactions in long-term securities involving US and foreign residents totaled USD52trillion, compared to only USD3.6trillion in US exports and imports of goods and services.

"What holds true for the United States holds true globally. Between 1991 and 2005, the World Bank's measure of global private capital flows increased by 500%, almost twice as fast as trade flows. Looked at another way, daily foreign exchange transactions have increased over 26 years from USD880billion in 1992 to USD3.2trillion today. If we include transactions in financial derivatives, that figure rises to over USD5trillion daily."

On the subject of sovereign wealth funds, the Under Secretary continued:

"Sovereign wealth funds have garnered the most column inches recently, so let me start with them. Current opinion seems divided as to whether sovereign wealth funds are part of the problem or part of the solution to the challenges we face. Not surprisingly, from my vantage point, the answer is "that depends" – it depends on whether government policies and the practices of sovereign wealth fund managers foster openness and market-based decision-making or insularity and investment with ulterior motives."

"While sovereign wealth funds have recently generated significant attention, they have in fact been around for decades. The oldest, in Kuwait and Kiribati, date back to the 1950s. Three of the largest and most respected funds – the Abu Dhabi Investment Authority, Singapore's Government Investment Corporation, and Norway's Government Pension Fund-Global – were founded in 1976, 1981, and 1990, respectively. By 2000, there were about 20 sovereign wealth funds worldwide managing total assets of several hundred billion dollars."

"What is new today is the rapid increase in both the number and size of sovereign wealth funds. Twenty new funds have been created since 2000, more than half of these since 2005, bringing the total number to nearly 40 funds that manage USD1.9-2.9 trillion in assets with some private sector analysts projecting that sovereign wealth fund assets could grow to USD10-15 trillion by 2015."

With foreign investment in mind, McCormick went on to add:

"On this and broader issues, we are working within the Committee on Foreign Investment in the United States, known as CFIUS, to ensure sovereign wealth fund investments do not harm on our national security. CFIUS, which Treasury chairs, reviews certain foreign direct investments that may raise national security considerations."

"National security is paramount, and we take this responsibility very seriously. At the same time, national security must not be used as an excuse for pursuit of protectionist policies, industrial policy, or the creation of national champions. Investment reviews must be strictly limited to genuine national security concerns, not broader economic or national interests. The legal regime governing foreign investments should be predictable, and, when a particular transaction poses genuine risk to national security, the policy response should be fair and proportional to the incremental risk."

In conclusion, the International Affairs Under Secretary explained that:

"Each of the areas I've touched on today – sovereign wealth funds, the CFIUS process, and Bilateral Investment Treaties – is at the forefront of an open investment campaign that must be waged to hold the forces of protectionism at bay. But this campaign is far too big for government alone. We can set the stage, and we can provide the rules. We can cajole and encourage others to take the right steps."

"But we need your help. We need your assistance in telling the story about the benefits of open investment. We need your support in reinforcing the importance of reasoned investment policies in areas like sovereign wealth funds, national security reviews and bilateral investment treaties. We need your enthusiasm for advocating your views on investment with policymakers at home and abroad, within Washington and within your homes states. Together, we must make the case to America that open investment is a competitive advantage."

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