In a wide-ranging interview with Maria Bartiromo, Mr. Paulson discusses the importance of an open economy in the U.S., the Dubai Ports controversy, Sarbanes-Oxley, taxes, China and global capital markets, among other topics.
MARIA BARTIROMO ,host: Secretary Paulson, thanks for being with us. You're moderating a forum on the importance of an open economy invested in the United States. What are you trying to achieve?
Mr. HENRY PAULSON:Maria, for many, many years, there's been a bipartisan consensus in this country that an open economy is essential to our open--to our strength and our economic strength. And regrettably, I'm seeing signs that this consensus is beginning to erode here and elsewhere in the world. So a big objective of mine is to go on the offense and make it very clear that we're open for foreign investment and we appreciate the benefits of foreign investment to this country.
BARTIROMO:And we've seen a loss of IPOs. Some suggest it is this perception that the US has a reputation for high compliance costs, that's certainly increased litigation risks. To what extent that we--to the extent that we are actually have a problem losing business to international markets. What do you attribute it to?
Mr. PAULSON:Well, it's--first of all, Maria, what I'm really focused on tomorrow and the next day is foreign direct investment in the US and what I've seen is that foreign direct investment peaked in 2000. It's declined a bit, leveled off, it certainly hasn't grown commensurate with out economic growth. And as I've traveled around the world, there are some that in the wake of the Dubai Ports confusion and publicity are questioning whether we'll really welcome investment, whether we're erecting barriers. There are others that are raising questions about the perceived regulatory burdens or legal burdens in the US. I think it's too early to make any judgements whether this tailing off of the growth in foreign investment in the US is a temporary phenomena or it's a trend, but either way, we just want to make it very clear that we welcome foreign investment and it's vital to our economic strength going forward.
BARTIROMO:Well, I'm glad you mentioned the Dubai Ports. That's the one story that so many people talk about as sort of giving us a black eye a bit in America. How can we expect American companies to be welcomed acquiring companies around the world when, in fact, Dubai Ports wasn't allowed to acquire the company here because of a Middle Eastern background?
Mr. PAULSON:Well, Maria, I wasn't here at the time of the Dubai Ports, but I'll make a couple of points. First of all, national security is very important in this country, post 9/11. Very important in every country. We have a CIFIUS process in the US to make sure we're protecting our national security interests. I chair that process. It's my job to make it work. But it is very clear to me that we are open and we need to be open to foreign investment and I would just say to you the vast majority of investments in the US have nothing to do with national security, don't raise national security concerns. We reviewed as part of CIFIUS roughly 10 percent of the foreign investments in the US last year and a vast majority of vacations that we reviewed raised absolutely no controversy. So we're open to investment. We welcome investment from all parts of the world and it's just key to our--to creating jobs and opportunities in the US.
BARTIROMO:So if you were here, you would've allowed the Dubai Port...
Mr. PAULSON:I didn't say that. I said I wasn't here and I said it's my job to make sure that the CIFIUS process runs properly.
BARTIROMO:How much of an issue has been the class action litigation? Should that be legislated?
Mr. PAULSON:Well, Maria, there's also--as the question implies, when foreign investors are looking at the US, there are concerns about, as I said, regulatory burdens, legal burdens. Class actions are a serious concern in--for our country--for our companies and for foreign investors. So that is something we're looking at very carefully and clearly it's a concern.
BARTIROMO:Let's talk about some of the areas that, perhaps, could see change or need to be changed. Accounting. How ought to--how should the accounting business be changed?
Mr. PAULSON:Well, Maria, I will--in the next couple of weeks we're going to be making a number of recommendations relating to accounting, relating to our regulatory structuring system, relating to a number of aspects of competitiveness, but there are a number of things that are being done right now to begin with is, I think your question implies, a lot of the business scandals were accounting scandals and a lot of the problems that have come, you know, in the wake of the business scandals have been related to the accounting industry. So we're seeing Chairman Cox and the people of the PCAOB take very important steps to reduce the burdens of section 404, which focuses on control systems. You are seeing Chairman Cox also make a very strong statement about the acceptance of IFRF standards, international standards in the US by 2009. And there are a number of other things that are on their drawing board and that we're working on today.
BARTIROMO:So that's something that I wanted to touch on, really. The US accounting standards vs. international accounting. It makes sense to have one global standard.
Mr. PAULSON:Yes, I think ultimately it does make sense to have one global standard and clearly we're moving in that direction. But again, a big part of my effort over the next couple of days is going to be focusing on the benefits of investment in the US and attracting investment from outside of the US.
BARTIROMO:So tell us what you're going to be talking about. What are the biggest benefits?
Mr. PAULSON:Well, the--clearly the be--it all comes down to jobs, productivity, growth. When we look at foreign investment in the US, that they're roughly five million jobs in the US directly related to those foreign employers, but then those foreign-owned companies rely on domestic inputs for 80 percent of their production inputs. And that leads to another four or five million jobs. But equally important is that these jobs jobs that are higher paying than the average American job and these foreign-owned companies, which are responsible for about 6 percent of our industrial output, make disproportionate contributions to the rest of our economy. They are responsible for close to 10 percent of our capital investment, roughly 13 percent of R&D spending, and almost 20 percent of our exports. So this is very important to the US economy.
BARTIROMO:Now this is clearly a long-term project that you are sort of launching, not really launching but sort of putting in the forefront right now. What would be progress and what's your timetable in terms...
Mr. PAULSON:Well, let me say we're--and this is something and you're right to say it's a long-term project because as you mentioned, we've been very active. The president's been very active with--in the trade arena and we're--that's very important. We're very active in engaging countries around the world, encouraging them to open up their economies to investment and trade. So that's--that's going to be a big part of the effort. I'm very involved with people, Treasury, working with members of Congress, the House and the Senate on getting good CIFIUS legislation and I'm optimistic there. At our panel tomorrow, where we're going to be talking about the benefits of foreign investment, it's going to be a bipartisan group. We're going to have governor Mark Sanford of South Carolina. We're going to have Tom Friedman. We're going to have Chairman Barney Frank who's done a very good job working on the CIFIUS legislation and we're going to have a couple of CEOs. So the big focus on investment tomorrow.
BARTIROMO:And of course, we talk about Sarbanes-Oxley so much, in particular 404 as being the more burdensome part of Sarb-Ox.
Mr. PAULSON:Yeah.
BARTIROMO:But isn't it true that the world is getting richer.
Mr. PAULSON:Yeah.
BARTIROMO:I mean, you're seeing economies around the world growing and you're going to get...
Mr. PAULSON:I would say I think you're very right in saying that part of what's going on with these trends has to do with the US and part has to do with what's going on elsewhere in the world. And other countries are learning from our experience. They're opening up. They're reforming. They're being very competitive with their taxes. One thing we haven't talked much about is our--is our corporate tax rates are higher than the tax levels in many parts of the world so that's an inducement for investment. So there's no doubt that other parts of the world are becoming relatively more competitive. But we still believe and I still believe that our economy is the very best economy to invest in. It's the broadest, most diverse, very, very healthy economy. And of course, the ultimate vote of confidence in any company in any country can achieve is direct investment, foreign direct investment.
BARTIROMO:You're talking about taxes. Congress is mulling a plan right now to increase taxes on private equity, hedge funds. Where do you stand on this debate on whether or not to tax capital gains as ordinary income for private equity?
Mr. PAULSON:Well, I would just simply say I think we need to be very careful before we impose greater tax burdens on any part of our economy. That is, creating jobs, creating economic value, and--and paying a lot of taxes already. But in terms of the particulars there, this is something we're focused on and I had a conversation earlier today with Max Baucus on it and with our people, so it's something we're thinking through carefully.
BARTIROMO:Are you against it?
Mr. PAULSON:I--I'm not taking a position on it at this time other than to say that--that this is a very important part of our economy. These jobs are very mobile and so I think before we make any changes, we need to look very carefully at the policy and that's one thing we do at Treasury is look at it and say, `Is this the right policy?' And for a long time this has been capital gains and it's been, you know, it's been tax policy. And than I think we need to say what will be the impact in today's world of doing things that might make our economy or our country less competitive?
BARTIROMO:Meanwhile, of course, (unintelligible) in the United States, you face another risk and that is losing value as a result of the weakening dollar. How do you encourage investment in the US when they're facing a weakening position vs. the yen and the euro?
Mr. PAULSON:Well, Maria, again, as you know, I believe very strongly that a strong dollar is in our nation's interest and that our currency rates like all currency values should be set in a competitive marketplace based upon economic fundamentals and that's why you see me advocating policies that are going to enhance confidence in our economy. And because the reason people come to invest in our economy is because it's the biggest economy. It's the most attractive economy overall in the world and I think it gives them the best risk adjusted returns.
BARTIROMO:Perhaps, but it costs two pounds to buy a dollar right and people overseas are facing a weakening value if they're buying US-based facets. Do you need to keep it in a certain range? Let's face it. Most people feel that the dollar's not going up anytime soon and is there really a reason to believe the administration really cares?
Mr. PAULSON:I can't say it any differently, Maria. You know, a strong dollar is in our nation's interest and I'm focused on keeping our economy strong and I don't know how anyone could doubt that this administration cares about keeping our economy strong when you look at the policies we've had, you look at the strength of our economy, you look at the fact that we've created almost eight million jobs since August of 2003, strong labor markets, inflation seems relatively contained, the consumer is still robust. Recent signs of business investment ticking up, so we--this administration, reduced taxes and has definitely got pro-growth policies, which I think are key to maintaining confidence in this economy.
BARTIROMO:Is it as weak as it is partly because China is revaluing its reserves?
Mr. PAULSON:Uh.
BARTIROMO:Readjusting its reserves, rather?
Mr. PAULSON:The, you know, in terms of China, you know, I've made the case for sometime that--that China is--is integrated into the global economy in terms of its trading goods and services, but it's not yet integrated in terms of financial markets and it's currency is not market determined. And the renminbi, the China begin reforming the renminbi in July of 2005, but as much as it needed to move in 2005, there's even more reason to move today when you look at the buildup of reserves and you look at the--at the trade imbalances and you look at what is in China's best interest because China's moving toward a market-driven economy and a key part of getting there is going to be to have a currency that reflects economic value and is market determined.
BARTIROMO:How much of a concern is it, though, for you in that China will readjust its reserves, massive reserves in favor of the yen and the euro over the dollar?
Mr. PAULSON:Let me say that China like all international investors and all investors around the world are going to make investment decisions based upon what's going to give them the best risk adjusted rate of return. And we've always been a magnet for investment and I'm talking largely about direct investment today, but in terms of investment of our--in our securities, they're at record highs. People in China and all around the world investing in our treasuries. And again, as I've said on a number of occasions, I know a lot about government bond markets and we have a very liquid treasury market, trades more than $500 billion of treasuries a day and all of the treasury holdings in China don't total one day's trading volume in US treasuries. They're well below $500 billion.
BARTIROMO:Let me ask you about immigration as far as being an issue in terms of slowing the amount of foreign interest and investment here. This country was the place that everybody, talented people from around the world, wanted to come and wanted to work. Immigration laws and restrictions have made that more difficult. The inability to get a visa for some has been an issue. What can be done?
Mr. PAULSON:Maria, you're right. We've always been open. We're an open economy, we're open to investment, we're open to trade. And we've welcomed people from all around the world and that's been a big strength. As I've traveled around the world and looked at the demographic issues that other nations have, I'm pleased that ours are mitigated by the fact that we've been open and the president is very focused on immigration reform for that--for that--for that very reason. And I think that's a very high priority of the president is--and it's going to be a big bipartisan effort to get--to get immigration reform. And I think that will be very important to the competitiveness of our economy long term.
BARTIROMO:So what will we do?
Mr. PAULSON: We will--I'm not at a point right now in immigration reform. You know, that's Mike Chertoff and Carlos Gutierrez. President's very active and I'm optimistic that we'll have a bipartisan solution to immigration reform.
BARTIROMO:And Alan Greenspan, of course, said this week that demand for skilled workers is driving up US wages. Do you agree with that?
Mr. PAULSON:Listen, the--when we look at our economy, Alan Greenspan is a real expert. One of the things that I'm focused on is how do we get more people to have the skills in our country that are going to let them be successful long-term? And because there's no doubt that--that technology has been a big driver of economic activity in the US. Technology's been a big driver, automation has been a big driver, this has benefitted our country greatly. But one of the impacts of technology has been that those that don't have the skills to lever that or take advantage of it are, you know, are apt to find behind. So I think we need a big focus on how to get--to get more skills to a group of people in the United States.
BARTIROMO:At the end of May you have a large Chinese delegation coming to the United States for your next meeting for the Strategic Economic Dialog. What do you have to show for the meetings you've had already? What has been the progress made from all your trips as well as your meetings with officials from China?
Mr. PAULSON:Well, Maria, to begin with, this will be our--this will be our second dialog, OK? We had our first dialog in December and I thought we made very good progress in December, but I want to remind you that this is--the whole purpose for this dialog is to manage our economic relationship on a long-term basis. And it's also a vehicle that helps both of our countries deal with the obvious tensions that are going to develop as a result of a--of a trading relationship that benefits both countries. And this gives us a vehicle to make our case and speak with one voice at the very top. And so I emphasize to the Chinese repeatedly that this is about the pace of reform. We agree on the principles. We need to agree on priorities and then we need some solid deliverables along the way, sign posts to show that we're making progress. And what we've--we've has some progress and we're thinking in terms of energy efficiency and environmental issues. And we're working very hard in that area because these are areas that are--this is an area that's very important in our country and very important to China. We both care about the health of the environment. We both are going to benefit by major advances in energy efficiency, given that we--we rely to a large extent on oil imports. So there's a good basis for cooperation there. We--there's a lot of discussion about opening up to competition--more competition in trade, in goods and services. As I explain to the Chinese, WTO is a minimal level of what they agreed to during the WTO--coming into the WTO is sort of a minimum level of what they should be doing. And we've got dispute resolution mechanisms for looking at WTO compliance, but what we're focused on is opening up the competition in goods and services. And so we're talking about civil aeronautics, open skies agreements, opening up financial services, because this will be key to I think the biggest issue, which is going to be the long-term structural imbalances. The trade deficit between China and the US. We are growing our exports at a very rapid rate to China, but we still have a very large trade deficit. The biggest driver of that is not currency. Currency is vitally important and it impacts that. Intellectual property is vitally important and it impacts the trade deficit. But the biggest factor in the trade deficit is the fact that China has precautionary grip rates--saving rates of 50 percent and most of their growth is driven by exports and there's not a big enough domestic consumption portion to their growth. And so, again, we're talking about structural changes and having competitive capital markets will make a big difference there.
BARTIROMO:Let's talk about the global capital markets. How linked are the global markets today in your view? A couple of months ago we see Shanghai sell off, the rest of the world followed suit. Of course, we're back from that level on all of the markets. But how concerned should people be inAmerica that the markets are so linked and if we were to see a problem in Shanghai, these markets also fall out of bed. I mean, the central bank head in China just the other day expressed caution that the Shanghai market is global.
Mr. PAULSON:Well, I would say this. The world is increasingly integrated from a global. You know, our economies are increasing integrated. It's--we have a largely a global economy. This benefits the United States and it benefits many of our trading partners. So this--we start from the stand point that this is a--this is a major positive. I then go to the fact that the global economy is as strong and it has been over the last three or four years as I've seen them in my business lifetime. Strong growth around the world, relatively low levels of inflation, high levels of liquidity. That is a big positive. We have had exports growing faster in this country now for a number of quarters and strong economic growth outside of the US is a big benefit to the United States. That's helping our economy. That's helping create jobs. So I look first at the underlying economic fundamentals and I believe that markets are a derivative of the underlying economic fundamentals. There's always going to be volatility, but I think we have a healthy international economy.
BARTIROMO:Secretary Paulson, would you like to add anything else to the CNBC WALL STREET JOURNAL REPORT interview? I'm going to move on to Business Week here.
Mr. PAULSON:When we move on to Business Week.