The New Protectionists (March 10, 2006; Page A18)
Dubai Ports World finally threw in the kaffiyah on its American operations yesterday, agreeing to sell them "to a U.S. entity." We hope that entity turns out to be Halliburton, if only for the torment that would cause certain eminences on Capitol Hill.
Dubai Ports was susceptible to this political stampede because it was an Arab-owned company buying port operations, which Democrats have played up as uniquely vulnerable. But this is also the second such mugging of a foreign investor in recent months, following last year's demagoguery against a Chinese company's bid to buy Unocal, a middling American oil company. If Members of Congress want a real security crisis -- a financial security crisis -- they'll keep this up.
What's especially dangerous here is that we're seeing the re-emergence of the "national security" protectionists. They were last seen in the late 1980s, when Japan in particular was the target of a political foreign-investment panic. The Japanese were buying Pebble Beach and Rockefeller Center, and so America was soon going to be a colony of Tokyo. A Japanese bid for Fairchild Semiconductor of Silicon Valley was seen as a threat to American defense. Those fears seem laughable now. But here we go again, with new targets of anxiety.
Going well beyond Dubai, House Armed Services Chairman Duncan Hunter (R., Calif.) says he wants Congressional oversight of all foreign purchases of "critical infrastructure." Mull over that one for a minute. If you think corruption on Capitol Hill is bad now, wait until foreigners need approval from Congress for every multi-billion-dollar investment. The current investment review process was designed by the Reagan Administration to be discreet, and to keep Congress out, precisely to avoid such politicization.
In recent weeks Members of Congress have suggested that the foreign-ownership ban should apply to: roads, telecommunications, airlines, broadcasting, shipping, technology firms, water facilities, buildings, real estate, and even U.S. Treasury securities. If this keeps up, we'll soon arrive at France, where even food and music are "protected" from foreign influences as a matter of national survival.
The larger truth is that the flow of foreign investment into the U.S. is a sign of economic strength, not weakness. For 25 years pro-growth economic policies including monetary stability, steep tax-rate reductions on capital and freer trade have created a giant in-sucking sound of some $4 trillion of global investment into America. Economist David Malpass of Bear Stearns recently calculated that U.S. GDP grew by 100% between 1992 and 2005 while world GDP growth measured in dollars grew by only 70%. Over that same period, the U.S. created four times the number of new jobs as Europe and Japan combined.
To be sure, these capital inflows mean that the U.S. is also running a trade deficit of equal magnitude. But all of that has contributed to a rising standard of living. As the attached chart shows, the increase in America's current account deficit (the flip side of a capital investment surplus) has coincided with an unprecedented increase in U.S. net wealth that was $51 trillion by last September and is now closer to $55 trillion. If a capital deficit were virtuous, meanwhile, Argentina would be the promised land.
Another term for this foreign investment is "insourcing." Foreign capital creates wealth and jobs here, rather than in India, China or Japan. Thanks to net foreign investment, about one-in-twelve American manufacturing workers are now employed by a foreign-owned firm. Toyota recently invested $800 million in a new plant in San Antonio that will employ 2,000 workers.
A study by the Organization for International Investment finds that about 5.3 million Americans are directly employed by foreign-owned firms with wages averaging $63,000 a year, or about 50% more than the average U.S. wage. Foreigners are not buying up America's stock of wealth; they are investing in ways that add to it.
More broadly, U.S. economic and defense security are intertwined. Imagine the threat to American well being if investment capital were trying to flee the U.S. because it believed opportunities were better elsewhere. Meanwhile, the interdependence that comes with foreign investment also gives those investors a stake in both American success and security. Are the Gulf emirates more, or less, reliable as U.S. allies because they invest their petrodollars in American assets? We'd say more. And, of course, foreigners who invest in the U.S. also help finance the military that keeps us safe.
The Dubai episode has been a debacle of the first order, and while the Beltway is toting up winners and losers, the rest of the world is shaking its head and wondering what's going on. The world's largest economy and its ostensible political leader seems to be sneering at the very foreign investment that has been crucial to its prosperity. Let's hope it was a momentary hallucination, and not the start of a larger protectionist binge.