Port debate exposes conflicts between security needs and foreign investment
Port debate exposes conflicts between security needs and foreign investment
By Bernard Wysocki Jr., Michael M. Phillips and Michael Schroeder, The Wall Street Journal
Feb 23, 2006 — A Dubai-owned company’s planned takeover of some operations at five American ports lays bare a growing conflict between the U.S. need for foreign capital and concerns about national security.
The quandary portends future clashes between free-traders and those troubled by the national-security implications of allowing a free flow of investments from places such as China, India and the oil-rich nations of the Middle East.
The problem is evident in the growing outcry against state-owned Dubai Ports World’s $6.8 billion purchase of Britain’s Peninsular & Oriental Steam Navigation Co., which operates terminals at five U.S. ports. Just a few months ago, Cnooc Ltd., a state-owned Chinese company, attempted to buy Unocal Corp., but amid vocal opposition to the proposed Chinese takeover of the U.S. energy company, Cnooc withdrew.
Rep. Sue Myrick, a North Carolina Republican who has been a staunch free-trade advocate in the past, epitomized the post-9/11 security concerns in a 17-word letter she sent yesterday to President Bush: “In regards to selling American ports to the United Arab Emirates, not just NO — but HELL NO,” Rep. Myrick wrote.
Such sentiments are bolstering efforts in Congress to revamp the process for reviewing foreign investments with national-security implications. These deals currently require approval from a 12-member interagency panel called the Committee on Foreign Investment in the U.S., or CFIUS, which is headed by the Treasury secretary.
Senate Banking Committee Chairman Richard Shelby (R., Ala.), who had set his sights on CFIUS last year, has scheduled a hearing on the port controversy for March 2, and members on both sides of the aisle are pushing to give greater weight to national-security concerns.
Senate Majority Leader Bill Frist (R., Tenn.) says Congress should have a role in vetting deals and “possibly voiding them if necessary.” At a minimum, he says, the committee “needs to be more transparent.” Sen. Evan Bayh (D., Ind.) says he plans legislation that would require the director of national intelligence to approve foreign investments in the U.S., so that homeland security is given greater consideration before deals are approved.
A Government Accountability Office report last year offered criticism of the review committee process, including complaints that the process doesn’t allow agencies enough time to fully investigate possible national-security concerns.
The administration is so far resisting such calls. Deputy Treasury Secretary Robert Kimmitt suggested the administration could do a better job of communicating with Congress but said the existing CFIUS process, including the Dubai review, is “working very well.” “While I think that process needs to be more politically attuned, no one wants that process politicized,” Mr. Kimmitt said.
The administration and many economists worry that Congress will overreact at a time when the U.S., which had a $725.75 billion trade deficit last year, has little choice but to welcome foreign money. And the creditor nations — especially such trading states as China and the oil-rich nations of the Middle East — have an incentive to oblige, wanting to recycle the dollars they have acquired from selling clothes, electronics or oil into something other than U.S. Treasury securities.
Foreign investors “want to diversify their assets, and they are looking for more control,” says Raghuram Rajan, economic counselor and director of research at the International Monetary Fund in Washington.
There has been a spate of U.S. acquisitions — and attempted deals — by companies from some of these countries. Aside from Cnooc’s failed bid for Unocal, China’s Lenovo Group Ltd. acquired International Business Machines Corp.’s personal-computer business in 2005, the same year Chinese appliance maker Qingdao Haier Co. made an unsuccessful run at Maytag Corp. In December, after Indian technology company Wipro Ltd. purchased one company in Europe and one in the U.S., a senior Wipro executive said the company is looking to buy more software-services businesses in the U.S., Europe and Asia with its cash reserves of $718 million.
Among emerging markets, the United Arab Emirates, of which Dubai is a part, last year was the second-biggest acquirer of U.S. companies, spending $1.05 billion to buy two companies, including a large apartment portfolio, according to Dealogic.
That led an increase in direct U.S. investment from Arab countries. Excluding Israel, all Middle Eastern countries invested a net $192 million in U.S. hard assets — companies, factories, real estate and the like — in 2004, according to Treasury Department data collected by HSBC. However, Middle East oil exporters held $121.1 billion in U.S. securities that year, signaling the vast potential pool of dollars that could be used to buy hard U.S. assets.
The issue for the Bush administration and lawmakers is whether the country should embrace such capital inflows, especially in light of the huge overseas investments by U.S.-based companies. “If that’s the way the world is moving, do we set up barriers to this process?” Mr. Rajan says.
Resisting foreign investment too fiercely carries huge risks for the U.S., economists say. The economy would likely descend into a deep recession, they say, if foreign investors as a whole lost interest in U.S. factories, companies, stocks and bonds.
The record U.S. trade deficit last year widened more than 17% from the previous year, fueled by a growing American hunger for imports. The only way for the U.S., as a nation, to finance those purchases is by borrowing money from abroad — in other words, by attracting foreign investment.
Despite high-profile cases like Cnooc’s failed bid and Dubai Ports World’s deal, the majority of that investment goes into liquid assets. At the end of 2004, foreigners held $1.9 trillion in U.S. corporate stocks, $2.2 trillion in government securities, $2.1 trillion in private bonds and $2.9 trillion in debt owed to banks and other lenders, according to the Commerce Department’s Bureau of Economic Analysis.
A smaller amount, $2.7 trillion, is invested in hard assets. Economists generally see that kind of direct foreign investment as more stable than stock and bond investments; it is harder to sell a car factory in Alabama than it is to dump U.S. Treasury bills.
So far, emerging-market buyers haven’t focused heavily on hard assets. Chinese interests have largely chosen to put their money into readily tradeable U.S. securities. China barely registers in U.S. government data for direct investment in hard assets. But during the first 11 months of 2005, Chinese investors plowed a net $81 billion into U.S. bonds.
The U.S. now is in the awkward position of telling other countries to loosen up even as it may begin stepping up the use of financial markets and investment sanctions as tools of foreign policy.
For years, the U.S. has been a booster of open global capital markets. In the 1990s, the U.S. opposed efforts by developing countries to impose capital controls. A big issue in the early handling of the Asian financial crisis of the late 1990s was U.S. fear that developing countries, spooked by the vicissitudes of financial markets, would try to clamp down on international capital flows.
These days, Congress seems more inclined to give the U.S. leeway to use its financial-market clout as a foreign-policy lever. The 2002 Sudan Peace Act, for instance, requires the secretary of state to report annually on the conflict in the war-torn African nation, including updates on whether financing of infrastructure or oil exploration was raised in the U.S.
At Congress’s urging, the Securities and Exchange Commission set up an office to monitor whether the documents public companies file with the SEC include disclosure of material information regarding issues related to global security risk.
Such moves signal the rise of a kind of capital-markets diplomacy to supplement traditional trade sanctions.
One problem with such an approach, warn some experts, is that it may not work very well. Back in 2000, a coalition of labor leaders, human-rights advocates and various China hawks in Washington launched a high-profile campaign against PetroChina, a state-owned Chinese oil company whose parent had business dealings with the government of Sudan.
PetroChina was hoping to raise as much as $10 billion in an initial public offering on the New York Stock Exchange. Amid protests, the Chinese had to scale back the issue to $2.89 billion.
The protests, though, have had little effect on the Chinese oil company — and no effect on its booming business with Sudan. Since 2000, Sudan has shipped 85% of its oil to China through PetroChina, making it a big source of oil for China. PetroChina has paid a $4 billion dividend to its parent, China National Petroleum Corp.
Some other Chinese and Russian multinational giants have simply done an end-run around the U.S., snubbing U.S. markets to list in London or Hong Kong.
“The notion that CNPC would have sacrificed its huge Sudan business for an NYSE listing is ludicrous,” says Benn Steil, a senior fellow at the Council on Foreign Relations and author of a new book on the subject.