Rejection of Dubai Port Deal: Bringing Back Smoot Hawley?

by Scott B. MacDonald

NEW YORK (KWR) March 20, 2006 -- Although Smoot-Hawley Tariff Act of 1930 cannot take the blame for the Great Depression, it certainly made it worse as it provoked a storm of retaliatory measures, helping to kill international trade and investment in the run-up to World War II.  Although major strides were taken to create a more liberal global trade environment (i.e. World Trade Organization), there is a very real risk of slipping backwards. 

In the United States “national security protectionists”, last active in the late 1980s when Japanese investors were perceived to be making the United States a Tokyo colony, have re-appeared in force over the Dubai Port deal.  Although the attack on the deal was launched by Democrats (such as presidential hopeful Hillary Clinton), a number of Republicans jumped on the bandwagon to help keep U.S. port management from slipping into foreign hands. With both political parties looking to the November mid-term elections, the opportunity to head off the “threat” from Dubai is designed to show how tough Congressmen are in handling foreign dangers. 

The sad fact is that U.S. port management is already largely in foreign hands (i.e. Danish, Chinese and British).  There is no major U.S. company in the business.  Nor did it matter that the home country of Dubai Ports is the United Arab Emirates (UAE), one of the closest U.S. allies in the Arab world.  Indeed, the UAE provides the main base to service U.S. warships in the Persian Gulf and Indian Ocean.  As former White House economic advisor Lawrence Lindsey noted: “In fact, the UAE is reported to be the largest servicer of our naval vessels in the world outside the US.  In the case of the U.S. Navy, the UAE not only manages the ports, but is citizens staff the concession that provision the fleet, and UAE nationals provide the port’s security.”

While the Dubai Ports deal uproar has an anti-Arab tone, it must be seen as part of the rise of national security protectionism in Congress.  After all, CNOCC’s attempted takeover of Unocal came under intense pressure by Congress as part of the “Chinese threat.”  But Arabs and Chinese (who run a number of the U.S. ports) should not feel left out – Members of Congress are now suggesting foreign-ownership bans should apply to roads, telecommunications, airlines, broadcasting, shipping, technology firms, water facilities, buildings, real estate and even U.S. Treasury securities.

Considering the overwhelming importance of outside capital flows into the U.S. (and the fact that the U.S. consumer runs on next-to-zero savings), this approach to protecting fortress America could well be counter-productive – as it was in the 1930s.  This view is reinforced by data from the Organization for International Investments that close to 5.3 million Americans are directly employed by foreign-owned companies with wages averaging $63,000 a year (about 50% more than the average U.S. wage). We fully concur with a recent Wall Street Journal editorial: “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.” 

The global economy is highly dependent on the free flow of trade and investment. This means that capital from one country has the option of being invested in another.  The U.S. is one of the major investors in other economies around the world.  Rising American protectionist actions are not a positive development.  Hopefully it does not put us back to the road toward Smoot-Hawley. 

KWR Viewpoint articles reflect the personal views of KWR consultants or ourside contributors.  They do not necessarily reflect the view of KWR International, Inc.