Companies, Countries Weigh Fallout from Dubai Ports Deal

MARGARET WARNER:

Foreign investment in the United States has been growing in recent years, and is larger than ever before.

Foreign direct investment in the U.S., in American companies, real estate and other assets is about $1.4 trillion according to the Congressional Research Service. The overwhelming share of that, about 70 percent, is held by Europeans. Asia's share is about 15 percent.

Investment from the Middle East remains small, less than 1 percent, but it has been growing.

In addition, foreigners hold roughly half of all U.S. government-issued debt in the form of Treasury bills.

So what impact will the collapse of the Dubai Ports World deal have on further foreign investment in the U.S.?

We get two views.

Paula Stern, a member of the U.S. International Trade Commission in the Carter administration and its chairman during the Reagan administration. She now runs her own trade consulting firm in Washington.

And Robert Hormats, vice chairman of Goldman Sachs International and a former economics official in the Reagan and Carter administrations.

Welcome to you both.

So, Paula Stern, do you think that the scuttling of the Dubai deal -- what do you think that's going to do to foreigners' inclination to invest in the U.S.?

PAULA STERN, Former Chair, International Trade Commission:

Well, I think it's going to make them hesitate. I think it's going to make them look at what they had thought they wanted to buy here in the United States and think again, go and see what their portfolio of future investments are and say is this going to be too sensitive? Is there going to be some political fallout that will embarrass me as it has embarrassed those who invested in the -- from Dubai in the ports here in the U.S.?

MARGARET WARNER:

Paula Stern, why wouldn't foreign investors say, well, Dubai, this was a special case, this is a post-9/11 world?

PAULA STERN:

Well, because it comes actually on the heels of something that occurred last year and that was when the Chinese national oil company wanted to acquire Unocal and it was scuttled as well. So this is not just a special case.

There are sensitive industries, there are countries to which there is a sensitivity here politically in this country. There is a sense of unrest, if you will, and ill at ease about the outside world which permeates some of our thinking and which has manifest itself, I think, in this debate over the Dubai and the previous debate just last year.

MARGARET WARNER:

And are foreign companies an interest that you deal with, are they talking to you about this? Are they sensing this?

PAULA STERN:

Well, I think that there is a concern.

There's certainly concern by those businesses, for example, who are concerned about retaliation against American companies who invest overseas, those who provide services in financial services, insurance services.

We're in negotiations in the multilateral trade negotiations right now in order to try to open up other countries to our own provision of services. That's where our comparative advantage is. So I think it is of concern both to U.S. companies, as well as to those overseas companies who are looking to invest in the United States.

MARGARET WARNER:

What about that point, Bob Hormats? Could you see a retaliation effect that in Muslim majority countries, certainly, which is a lot more than just the Arab world, as we well know, that you could see a reluctance to open up -- either let U.S. companies buy foreign companies or let U.S. companies sell there?

ROBERT HORMATS:

I think that, that is a big risk, because if you look at the example of China and UNOCAL and this current example, if you're a foreign government and you want to justify restricting American investors coming into your country, you can easily cite those as a pretext for imposing such restrictions. So it could backfire and make it more difficult for American companies to invest abroad.

The other part of this is that there is a very ugly xenophobic tone that has crept into this debate. And I think that tone itself, quite apart from the actual decision that was made, will be very negative in terms of public opinion. And public opinion in many of these countries may force governments who otherwise would like American investment to come or would like to buy American goods to be more willing to interrupt.

So the tone is part of the problem that worries me, as well as the individual act.

The great irony is that the United States depends more on foreign capital than any other country in the world. We should not be the ones that even suggest imposing restrictions on large amounts of foreign investment coming into this country because we need the capital.

MARGARET WARNER:

Mr. Hormats, when the CONOC (ph) deal was essentially quashed by Congress - I mean, that is, the company withdrew after there was all this outcry about the Chinese company wanting to buy an American oil company. What, in fact -- do we know what impact that had on other Chinese investment here?

ROBERT HORMATS:

Well, it didn't really have much of an impact and that's why I don't think this particular case in itself will necessarily have a broad impact on foreign investment with the possible exception of some from the Middle East, which is not a big provider anyway.

In fact, in China, even after the UNOCAL deal there has been a lot of Chinese buying of American products, airplanes and a lot of other things, so it really has not had an effect.

My broader worry is that now the Congress is suggesting getting involved in restricting or imposing oversight requirements on a great many kinds of investments, in roads and technology companies and financial institutions. If this notion catches on that the Congress is going to create a restrictive or an uninviting environment, then it will be very harmful, then you will see broader repercussions that transcend and go well beyond what's going to happen as a result of this particular problem.

MARGARET WARNER:

Paula Stern, pick up on what Mr. Hormats said earlier about the U.S. being dependent on foreign investment.

To what degree does the U.S. economy depend on foreign investment of some nature? And why?

PAULA STERN:

Oh, very much so. Very much so.

I completely agree with Bob on this.

We are the world's largest debtor. There's never been a debtor bigger than us.

MARGARET WARNER:

Meaning we have to finance our U.S. government debt.

PAULA STERN:

Our -- and American consumers' spending habits.

If we want to buy the Japanese automobile, if we want to buy the Chinese shirts and shoes, we basically are giving those countries paper, our dollars or -- which they then invest in our treasuries and our T-bills.

We get the goods, but we still owe them. We've got to pay back for that and we have amassed enormous debt. And we are acting, frankly, in this Dubai signal that the president said was such a bad signal to the world, we're acting as if we don't need the rest of the world's money, nor do we need the rest of the world to trade or invest with us. And right now we need it more than ever.

MARGARET WARNER:

Bob Hormats, what would foreign countries that have either bought U.S. Treasury bills or rather loaned us the money, I guess is a better way of putting it, or bought American goods, and so they have all these dollars, whether it's from petro (pH) dollars or any other kind, where else would they put them if not by coming to the U.S. and investing?

ROBERT HORMATS:

Well, certainly the U.S. is still going to be a dominant place where they put their money, a repository of large amounts of reserves of foreign central banks. But they do have other options.

The Euro is a very strong second currency to the dollar as a reserve and then there's smaller countries. And what they could do is temporarily buy things like gold or currencies of other countries, park the money in those for a period of time, the dollar would go down precipitously and interest rates would go up and then they could buy back the dollar at a lower price.

There are lots of things that could be done. I don't think that they're intentionally going to dump the dollar or intentionally stop buying dollars because they don't want the dollar to depreciate dramatically, because that undermines their sales to the United States.

But I do think even small changes in the acquisition of dollars could push the currency down and could be very disruptive. So there are other alternatives to the dollar, but I don't see a dramatic dumping of the currency.

But it's not a healthy thing if they decide they've lost confidence in the American direct investment market because that would also deprive us of capital that we need. Paula is right, we need foreign capital. It's not something that we can do without at this point because our savings are so low.

MARGARET WARNER:

And so you're saying, Paula Stern, that the U.S. needs these foreign entities not just to finance the debt but actually also to buy U.S. assets?

PAULA STERN:

Oh, absolutely. Assets and services.

When I think of assets, I don't think of just goods but I think of services. I mean, obviously Boeing, for example, must be concerned of whether they're going to be able to make those future sales in the Gulf states or in the Arab world or in the greater Muslim world. And Airbus must be just thrilled about this.

MARGARET WARNER:

And so, briefly, do you agree with Bob Hormats that if-- and I know this is a big if and I know that he doesn't think it's going to happen - but if you were to see a sudden pullback in foreign direct investment in the U.S. or foreign investment, period, that it would have a big impact?

PAULA STERN:

Absolutely.

If that happened and you had that pullback, you would see pressure to raise interest rates which means our mortgages would be more expensive. You would have pressure on jobs because there would be less, if you will, dollars that you could buy with goods overseas and there would be less trade and there would just be less of that virtuous circle that we have in trade and investment now.

MARGARET WARNER:

All right, Paula Stern, Bob Hormats, thank you both.

STERN:

Thank you.