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Manufacturing is still critical to the economy United States. Clyde Prestowitz, says it's time to start realizing the positive spillovers that manufacturing creates... Read more  

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Stephen Olson at Chinese Development Institute Conference


 Clyde Prestowitz giving presentation to CDI...


Steve Olson teaching trade negotiations at the Mekong Institute...


Stephen Olson to speak at upcoming workshop organized by the International Institute for Trade and Development on 

"Economics of GMS Agricultural trade in goods and services towards the world market"

Chiangmai, Thailand Sep 8-12.

(03/14/2006) Prestowitz Quoted In USA Today

Click Here to Read the Article at USA Today

Some Would Like to Build a Wall Around U.S. Economy

By David J. Lynch

Can the United States run a war and an open economy at the same time?

In the wake of the Dubai ports imbroglio, some lawmakers are saying the U.S. needs to rethink its openness. Rep. Duncan Hunter, R-Calif., chairman of the House Armed Services Committee, for example, is demanding that all of the USA's "critical infrastructure" be owned and managed by American citizens.

While there is no across-the-board move to erect walls around the U.S. economy yet, some analysts worry that the combination of national security and industry-specific economic fears could spiral.

Hunter's legislation would require foreign companies that own anything deemed "critical" to national security, economic security or public health to sell within five years. Sen. Charles Schumer, D-N.Y., reacting to the surging U.S. trade deficit, has proposed imposing a blanket 27.5% tariff on Chinese imports if Beijing doesn't allow its currency to appreciate.

"Today, it's the Middle East. Last summer ... it was China. Next it could be Russia," frets Nouriel Roubini, an economist who operates the rgemonitor.com global economy website.

A combustible mix of security and economic dangers has left Americans increasingly unsettled about their engagement with the rest of the world. Color-coded terror alerts and the persistence of the global al-Qaeda network mean danger is a fact of daily life. Compounding public unease is the relentless economic rise of China and India, which seems to imperil many Americans' financial futures.

From 1994 until last year, a solid plurality of Americans saw foreign trade as an opportunity rather than a threat, according to USA TODAY polling. In May 2000, for example, trade was backed 56% to 36%. But in a June 2005 survey, by a 48% to 44% margin, more respondents judged it a threat.

"Globalization creates vulnerabilities. There's no question about it," says Mira Wilkins, an expert on foreign investment at Florida International University in Miami.

The USA isn't alone in getting cold feet over globalization. Europe, too, is witnessing a renewed concern. In France, Spain and Poland, governments are blocking foreign firms from acquiring companies even in seemingly benign consumer industries.

Global ties grow

If the concerns suddenly seem acute, it may be because in recent years the globalization era that began with the collapse of communism in 1989 has intensified dramatically. Example: Cross-border mergers and acquisitions totaled a staggering $3.2 trillion last year, almost three times the level just five years earlier, according to the Bank for International Settlements in Basel, Switzerland.

The U.S. certainly is much more intertwined with other economies than ever. In 1971, when President Nixon cut the link between the dollar and gold, U.S. imports were equivalent to 5.5% of the economy. Last year, they hit 16.2%.

The furor over the DP World ports takeover may have surprised the White House. But it didn't come out of nowhere. Last summer, it took enormous political arm-twisting to get a very modest Central American trade deal through Congress. Then, in the fall, a Chinese enterprise was forced to abandon its planned acquisition of Unocal, a second-tier American oil company, after Congress heatedly objected. And now an Arab firm has been told it can't be trusted to operate cargo terminals at American ports.

"I think we're riding a wave of xenophobia," says William Reinsch, president of the National Foreign Trade Council, a pro-trade group.

Still, the reaction to date against foreign investment — whether for national security or economic reasons — has been limited. Both the ports controversy and last year's Unocal dust-up involved foreign companies that were government-controlled. Moves to limit Chinese imports have been confined to specific industries, notably textiles and apparel.

"It's not competitive concerns like the 1980s. GM and Ford are in rough shape, but there's not much sympathy for helping them" with import limits, says Todd Malan, president of the Organization for International Investment.

The ports furor catalyzed the debate over security and globalization, though the immediate prospect of an Arab company operating terminals at several U.S. ports appears to have faded. On March 9, Dubai Ports World announced it would spin off its newly acquired American operations so long as it could do so without losing money.

More complicated times

This isn't the first time the U.S. has faced the issue. An earlier age of global economic integration in the decades before World War I ended with the guns of August 1914. After the war, trade recovered in fits and starts. But then the 1930 Smoot-Hawley Tariff triggered a protectionist frenzy that by 1934 had slashed international trade by two-thirds.

During the Cold War, the relationship between national security and commerce seemed clear. Buttressing the economies of Western Europe helped knit together an anti-Soviet alliance. There was no question about who the enemy was and no question of trading with him. Today, life isn't so simple. Instead of a government like the Soviet Union, the enemy in the war on terror is a stateless network of Islamic extremists.

"We're now in an era where the national security interests of the United States are a lot more ambiguous, and there's more disagreement about them," says Jeffry Frieden of Harvard University. "Even if there's agreement on fighting terrorism, it's not clear what the economic implications of that are."

Those who argue for changing the rules of the game target the inter-agency Committee on Foreign Investment in the United States (CFIUS), which approved the ill-fated ports deal. The committee gathers representatives of 12 agencies to balance foreign investments' gains against potential security threats.

Hunter, who helped kill the ports deal, wants to tighten the government's method of reviewing proposed foreign acquisitions of U.S. companies. Currently, "Economic or commercial implications apparently supersede national security considerations," the lawmaker wrote in a March 6 letter to colleagues.

A Government Accountability Office investigation last year also concluded that the panel "narrowly defines what constitutes a threat to national security." Since 1988, CFIUS has rejected only one of more than 1,500 proposed foreign acquisitions of U.S. companies: China National Aero-Technology Import & Export's 1990 attempt to acquire a Seattle aircraft parts maker.

Among those approved was a deal that left another Chinese firm producing 80% of the magnets used in the Pentagon's "smart bombs," according to Sen. Evan Bayh, D-Ind.

If any security worries are found in the panel's standard 30-day review, an additional 45-day probe can be launched. But the GAO report said that the committee, which is chaired by the Treasury Department, is reluctant to order such investigations for fear of discouraging foreign investment. Of 470 proposed deals from 1997 to 2004, CFIUS initiated only eight investigations, the report said.

Hunter's proposed legislation would mandate 45-day probes for "transactions that may have national security implications." Treasury Secretary John Snow on Tuesday backed increased scrutiny for deals involving state-owned foreign companies but warned against "isolationist" moves.

Others say the criticisms are overstated. Phillip Swagel, who was chief of staff for the White House Council of Economic Advisers in President Bush's first term, says the Pentagon representatives on the panel had a myopic focus on security. "They just didn't understand the value of foreign investment in the United States," says Swagel, now a fellow at the American Enterprise Institute. "They'd rather foreigners not be here at all."

Edward Graham of the Institute for International Economics, author of a forthcoming book on national security and foreign investment, says CFIUS has been more effective than the statistics suggest. Although the panel formally rejected only one deal, it effectively blocked 20 others, he says. Many others were modified by compelling the foreign acquirer to accept changes in how it would operate the American asset.

"What major security failure has happened in the U.S.? None that we know of," Graham says.

U.S. dependent on foreign investment

As Congress rethinks foreign investment, Clyde Prestowitz, president of the Economic Strategy Institute, thinks the new focus on security ignores the U.S. economy's dependence upon foreign investment. The USA requires about $3 billion in foreign capital every working day to finance the huge gap between its consumption of foreign goods and its exports. The country just doesn't have the luxury of walling itself off, Prestowitz says: "We're shooting ourselves in the foot here. People don't realize this, but our economy is on life support from foreign lenders and investors."

Questions over foreign investment aren't going away. Next month, Chinese President Hu Jintao is scheduled to meet with President Bush at the White House even as the Treasury Department nears a decision on formally stating that China manipulates its currency for trade advantage.

Likewise, thanks to high oil prices, the Dubai Ports deal won't be the last Arab investment here. Since 1998, members of the OPEC oil cartel have earned $1.3 trillion in petrodollars, according to the Bank for International Settlements. Much of it is staying home, helping fuel enormous increases in regional stock markets. But tens of billions of petrodollars have surged into U.S. corporate bonds, equities and direct investment. And more are probably coming.

"Foreigners have a whole pile of dollars," says Reinsch. "I don't know what we expect them to do with them."

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