Scuttled Ports Deal May Ship Out Dollars
Notion that U.S. markets `more trouble than they're worth' could hurt foreign investment, economic experts say
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By Michael Oneal and Stephen Franklin
Published March 10, 2006
The decision by Dubai Ports World to divest its U.S. holdings may have defused a potentially explosive clash between President Bush and members of his own party.
But it is also likely to keep the heat on a simmering belief abroad that U.S. markets can sometimes be more trouble than they're worth, economists and foreign trade experts said Thursday.
"People are making decisions to invest elsewhere than in the U.S.," said Rachel Bronson, a Mideast expert at the Council on Foreign Relations. "Gulf money is being invested in Europe and Asia. This furthers that trend."
In the wake of last year's uproar over Chinese interest in Unocal and Maytag, companies from controversial countries may be inclined to search for less complicated investments when deciding where to park their assets. And in a global economy, there are plenty of options.
To some that may be a reasonable tradeoff if scrutiny of such deals enhances national security. But economists said if too much money drifts away from U.S. investments, economic security could be at stake.
"The U.S. is dependent on foreign investment," said Ben Carliner, of the Economic Strategy Institute. "This sends out a worrying message, and foreign investors are going to hear it."
Austan Goolsbee, a University of Chicago Graduate School of Business economist, explained that foreign investment in American assets and securities is funding the yawning U.S. budget deficit and propping up the dollar. Without this investment it would be impossible for U.S. consumers to spend more than they save and that trend, in the face of anemic job growth and business spending, is largely responsible for the robust U.S. economic growth over the past several years.
"We're spending high and saving low," he said. "It has to come from somewhere."
The controversy over Dubai Ports World came to a head this week when the government-owned company closed on a $6.8 billion deal with London-based Peninsular & Oriental Steam Navigation Co. to purchase assets that included control of commercial operations at five U.S. ports.
In response to a congressional measure to block the deal, and despite a veto threat from the Bush administration, the company agreed Thursday to divest the U.S. assets to a "United States entity."
Economists pointed out that this is a small deal when compared to the current flood of foreign investment in U.S. assets. But it is symbolic of what Marshall Bouton, president of the Chicago Council on Foreign Relations, calls "a sense of withdrawing" by the U.S. electorate.
Bouton disputes that this withdrawal is xenophobic or bigoted. Rather, he said, it reflects a sense of "disillusionment with the efforts to deal with the terrorist threats."
Surveys by his organization and others show that soon after the Sept. 11 terrorist attacks, Americans were in the mood to go out into the world and fix problems proactively. But gradually, as the war in Iraq drags on, surveys have shown people turning inward and trying to protect themselves.
They are also confused by the message coming from the Bush administration that we need both open markets and closed borders.
"It's hard to have it both ways," Bouton said.
The brouhaha over Dubai Ports World might also be disruptive to U.S. efforts to bolster free trade abroad, experts said.
"They will not stop doing business with us, but on the margins, they will be less likely to do things that are not in their interests," said David Mack, a former U.S. ambassador to the United Arab Emirates.
Arab oil producers, for example, might not pump up oil production as a way to stabilize prices and ease the already heavy economic burden on the U.S. economy.
The UAE might also slow free-trade talks with the U.S.
"They don't need [an agreement]," Mack said. "Everybody in the world is beating a path to their door."
Ned Walker, another former U.S. ambassador to the UAE, agreed, adding, "As countries start to have questions about whether we can be counted on in a business deal, they will go elsewhere," he said.
Not everybody was so glum about the prospects for Mideast trade.
Catherine Novelli, a former Bush administration trade official for Europe and the Middle East, predicted the conflict might offer "an excuse" to countries bent on keeping their markets closed.
But she insisted it would be easy to argue against such a stance since the U.S. market remains a beacon of free trade.
Likewise, she doubted Arab nations would back off from doing business given free-trade agreements with Morocco, Jordan and Bahrain. An agreement with Oman is pending.
"These trade agreements have been popular because there is a desire to trade with the U.S.," Novelli said.
Nevertheless, "there is a double standard being applied here," said David Hamod, head of the National U.S.-Arab Chamber of Commerce. "Danish, Chinese and Japanese and others who run port operations are not subject to the same scrutiny."
Samer Khanachet, head of United Gulf Management Inc., the Boston-based arm of a large Kuwaiti investment holding firm, said Arab businesses are likely to see the incident as "just another milestone" in the strained relations between the U.S. and the Arab and Muslim worlds.
Describing the incident as a "slap in the face," he said Arab firms might be more inclined to keep their money in the Middle East where real estate and the stock markets are booming.