try's leading state of the art_manufacturer of advanced grinding equipment, Moore Special Tool Company.

Moore is the sole U.S. owned supplier of high precision grinding equipment to our nuclear weapons program. Last week after our subcommittee's announcement that we would consider the takeover of Moore at this hearing, Fanuc announced it was withdrawing its offer to buy Moore Special Tool. As a result, we will never know what the President might have done in this case.

But this case raises important questions that we must now consider. Are we willing to be dependent on foreign suppliers for the capability to build nuclear weapons? Should our Government work more closely and more aggressively with companies like Moore that serve important defense purposes to find American solutions to the business problems they face?

If an American solution to problems like Moore's cannot be found, should the President be authorized to require that foreign purchasers provide assurances that firms they may buy will continue to supply our defense program with the technology and equipment it needs?

We look forward to hearing the views of our witnesses. Mr. McMillan.

Mr. MCMILLAN. Thank you, Madam Chairwoman. The subcommittee meets today to consider a very important issue, foreign investment and the effectiveness of the Exon-Florio provision of the Defense Production Act.

Last year, the Congress failed to reauthorize the Defense Production Act. Section 721 of the Act, commonly known as the ExonFlorio, provides that the President may investigate and, if necessary, prohibit a foreign acquisition of an American company.

If there is credible evidence that the proposed transaction impairs or threatens to impair the national security, implementation of Exon-Florio provision, therefore, involves balancing the obvious need for national security with this Nation's traditional policy of open investment.

The United States has always welcomed foreign direct investment. As Assistant Secretary Dallara stated last year before this subcommittee, "This policy based on both sound theoretical principles and 200 years of experience, has demonstrated that foreign direct investment is beneficial to the United States." I know personally because I have 280 foreign firms operating in my district. Our open foreign investment policy has been a feature of republican and democratic administrations because foreign investment creates jobs, enhances productivity, and stimulates competition. While current data is hard to come by, the Bureau of Economic Affairs reports that at years end, 1987, non-bank U.S. affiliates of foreign firms employed 3.2 million Americans, had payrolls of $94 billion and spent $6.2 billion in research and development. As a businessman by profession, I find these numbers quite impressive.

At this same time, I fully recognize the need to firmly protect the national security from those who would improperly obtain security related high technology through the acquisition of U.S. firms under the authority of Exon-Florio.

The Committee on Foreign Investment, or CFIUS, has been charged by the President with responsibility for reviewing and

when necessary investigating foreign acquisitions to safeguard against this possibility. I believe that CFIUS has done its job and done it well. There are those who criticize our open investment policy and seek to expand the definition of national security to include economic and industry specific considerations. I would remind them that such efforts were rejected by the Congress when we deliberated the Omnibus Trade and Competitiveness Act of 1988.

We will hear testimony regarding the proposed investment by Fanuc, a Japanese corporation and the Moore Special Tool Company of Bridgeport, Conn. The deal has since fallen through, which I think is unfortunate. Moore is a manufacturer of dual use machine tools. Moore machines are used by our Department of Energy and by camera and watchmakers around the world. After being approached by Moore, Fanuc agreed to a passive investment of $10 million. Fanuc and Moore have historically enjoyed good working relationships. Fanuc's infusion of capital would have allowed Moore to expand research and development operations, without which the company's future might be in doubt.

After much criticism by Members of Congress and in the press, the parties have left the table. Many unsubstantiated charges were leveled and results were detrimental to Moore and its employers as well as to the United States.

This case illustrates that national security consideration of a proposed business transaction must be based on fact and reviewed, not politically or emotionally, but rationally. Madam Chairwoman, my record on issues of national security speaks for itself. I believe in a strong and secure America.

I also believe that in an increasingly global economy. We harm ourselves when we close our markets to the world. This administration has done a commendable job of protecting the Nation's security while preserving a liberal investment policy. I hope that we on this committee will continue to support those efforts. Thank you. Mrs. COLLINS. Our first witness listed this morning is Congressman Gephardt. But it seems that every time we have a hearing at this subcommittee our witnesses are called to the White House. That, indeed, is where Mr. Gephardt is at this time, so, he will be coming later in the day. Therefore, we are going to start with our first panel, which is Mr. Charles H. Dallara, who is the Assistant Secretary for International Affairs, Department of Treasury; and Dr. Barbara L. McLennan, who is the Deputy Assistant Secretary for Trade Information and Analysis for the Department of Commerce. As you already know, we operate under a 5 minute rule on this subcommittee as in the House of Representatives and we will be guided by that with the knowledge that your full and entire testimony will be made a part of the record. Why do we not begin with you, Mr. Secretary.

STATEMENTS OF CHARLES H. DALLARA, ASSISTANT SECRETARY, INTERNATIONAL AFFAIRS, DEPARTMENT OF TREASURY; AND BARBARA N. MCLENNAN, DEPUTY ASSISTANT SECRETARY, TRADE INFORMATION AND ANALYSIS, DEPARTMENT OF COMMERCE

Mr. DALLARA. Thank you, Madam Chair, Mr. McMillan, other members of the subcommittee and staff. It is a pleasure to be back before this subcommittee again this year and to have the opportunity to exchange views with you on important issues relating to our investment policy and particular issues related to the implementation of the Exon-Florio.

By way of background, Madam Chair, let me say that we approach our policy with regard to foreign direct investment against the backdrop of a policy which, as Mr. McMillan himself has recalled this morning, has been in place without fundamental change for over two centuries. This policy has evolved over two tenets.

First, that we welcome foreign direct investment. Second, that we seek to liberalize investment regimes abroad. At the same time, I would underscore, as you yourself noted in your opening statement, Madam Chair, that it is important that we ensure that our open investment policy does not compromise in any way our national security concerns.

The rationale for our policy is plain. It fosters efficiency, stimulates growth, enhances competitiveness, and creates jobs. In the end, it comes down to just those key factors, growth and jobs. Mr. McMillan has reminded us this morning of the importance of foreign investment and creating jobs in his district. I am from another part of the Piedmont in South Carolina, just across the border from Charlotte, where foreign investment also is critical. But foreign investment in its central role of job creation is certainly not just limited to the southeast.

In your home State, Madam Chair, that of Illinois, indeed, foreign investment equals approximately $16 billion and in total ranking is fifth in the United States. Between 1980 and 1987 those foreign investors were responsible for the creation of approximately one fourth of all the new jobs created in your home State.

As of 1988, estimates suggest that over 200,000 jobs in Illinois alone are attributed to foreign investors. I underscore this employment picture because our commitment to foreign investment is not simply a matter of theology or ideology or some vague notions of what is right and what is wrong. It is a commitment based on what we believe is quite a lengthy history of evidence that foreign investment is healthy and critical for job creation and for the vitality of our economy.

The data on our investment, Madam Chairwoman, is outlined in detail in our written testimony. Let me cite just a few brief figures, if I may. As of the third quarter of 1990, the total book value of foreign direct investment was approximately $420 billion. Having increased during 1990 some $20 billion, these figures are large but put in perspective, total investment in our industrial sector represents only 4 percent of the total gross product.

We do not see the foreign presence in our economy as an overwhelming phenomenon. Indeed, it is proportionally much less in

our economy than in many other major industrial economies with the glaring exception of Japan. For example, as a percent of total assets in the manufacturing sector, foreign investors in our country own, roughly, 10 percent; in France, 27 percent, and in the United Kingdom, 20 percent.

Many of the concerns which we hear concerning foreign investment relate to the absence of a level playing field for our investors overseas. I want you, Madam Chair, and the subcommittee to fully understand that we share these concerns. We are not simply here today arguing for maintenance of an open direct investment policy while at the same time closing our eyes to the discrimination that exists abroad against our investors.

Indeed, we are engaging on a number of fronts to try to deal with this problem, a problem which does inhibit the ability of our firms to invest overseas. In the discussions relating to the Uruguay Round of the GATT, we are seeking a binding legally enforceable obligation on the part of all governments to prohibit certain government measures which are imposed by governments as a matter of investment. Matters which tend to make it difficult, sometimes unreasonably difficult, to engage in foreign investment such as local content requirements, which require our investors when they go into a foreign country to use local parts instead of importing parts from the United States.

In the OECD, we are pressing for similar commitments. Bilaterally, we have negotiated a number of bilateral investment treaties which provide our industry with certain protection assurances and commitments when they invest overseas.

We are also engaged in a rather intense dialogue with the Japanese with something called the Structural Impediments Initiative where we are seeking firm commitments and definitive actions to open that country up more genuinely to our investors.

The Exon-Florio provision, Madam Chair, authorizes the President or his designee to investigate foreign acquisitions to determine their affects on national security. It also authorizes the President under certain conditions to take action as he deems appropriate. As you have noted, the authority under Exon-Florio lapsed this past October 20 and we have been operating for, approximately, 4 months without this authority.

After consulting, however, with the congressional staff, with Members of Congress, with the business community and the legal community, we decided in the administration that we would continue to operate our committee, the so called CFIUS, on an informal basis, but in accordance with the basic provisions of ExonFlorio as they have existed for, roughly, 2 years prior to the lapsing of this law.

This period has been longer than we have hoped. It has created certain difficulties since the President does not have some of the legal authority that he earlier had. Nevertheless, we have made our best efforts to implement the policies that had previously been guided by Exon-Florio. We would hope, however, that Congress would not allow this uncertainty to persist.

During the period since Exon-Florio was initially passed, we received over 530 notices. Of those, all have been reviewed. Twelve have moved to a more formal 45 day investigation. In 7 of those 12

transactions, the President chose not to interfere. And one of them, as you noted, the President chose to prohibit the transaction. And in the other four, the notifications were withdrawn.

You have expressed particular interest in the transaction which was just withdrawn last week between Fanuc and Moore. I have outlined some of the basic facts regarding that transaction in the written testimony. I would be glad to try to respond to any questions you have this morning, Madam Chair, but there are certain issues which we will not, regrettably, be in a position to discuss in detail here today.

In concluding, let me simply underscore the importance that we see for maintaining an open investment economy, if we wish to sustain economic growth and job creation in our economy. At the same time, we stand ready to do our best to ensure that we protect national security. We believe that an investment climate is an inherently fragile phenomenon and that it is important that we sustain on a long term basis, this commitment to open flows of capital. Thank you. Madam Chair, I would be glad to answer any questions you or your colleagues would have.

[Testimony resumes on p. 20.]

[The prepared statement and attachments of Mr. Dallara follow:] STATEMENT OF CHARLES H. DAllara, AssistaNT SECRETARY, INTERNATIONAL Affairs, DEPARTMENT OF TREASURY

Madam Chair and Members of the Subcommittee: I welcome the opportunity to appear before the subcommittee to discuss U.S. investment policy and issues related to the implementation of the Exon-Florio provision.

Decisions with regard to foreign direct investment in the United States are made against the backdrop of an investment policy which has been in place without fundamental change for 200 years. U.S. policy towards foreign direct investment is centered on two key tenets: (1) the U.S. welcomes foreign direct investment and (2) we seek to liberalize investment regimes abroad. At the same time, it is important that we ensure that our open investment policy does not compromise our national security.

The rationale for our investment policy is plain: It fosters economic efficiency, stimulates economic growth, enhances our international competitiveness, and increases employment. This international investment policy reflects the reliance on market forces which underlies all of the administration's economic policies. In this regard, the 1990 "Economic Report of the President" said: "Increases in direct investment by U.S. and foreign firms reflect the increasing integration of the global economy and benefit both host and investor nations."

Foreign investment brings in capital which provides more jobs for American workers. What is important are the jobs and job skills resulting from investment, not the nationality of the investor. For example, Madam Chair, between 1980 and 1987, foreign direct investment in Illinois accounted for roughly one-fourth of the total new jobs generated in Illinois, according to estimates to the Illinois Office of Research and Analysis. In fact as of 1988, Illinois ranked fifth in the United States in terms of foreign investment ($16.2 billion) and fourth in employees of foreignowned firms (207,000). Foreign-owned firms in the top 14 States provided jobs for 2.5 million American workers.

The complement to our open investment policy is liberalizing the investment regimes of our trading and investment partners. This also can contribute to job creation in the United States. There is no question that we are living in a global economy. Firms compete in a global marketplace. In 1988, exports of U.S. companies to their foreign subsidiaries accounted for 30 percent of U.S. merchandise exports. In these circumstances, freedom to invest other countries' markets may be a vital contribution to the viability of U.S. companies. As these companies gain greater access to markets abroad, exports from U.S. parents to their foreign subsidiaries translate into more jobs in the United States.

As of the third quarter of 1990, the book value of foreign direct investment in the United States was $421 billion, an increase of some $20 billion during 1990. Through