Speakers:
Edward M. Graham
Senior Fellow, Institute for International Economics
James Andrew Lewis
Senior Fellow, Center for Strategic and International Studies
Don N. De Marino
Chairman, National US-Arab Chamber of Commerce
William A. Reinsch
President, National Foreign Trade Council
Moderator/Discussant
Chas. W. Freeman, Jr.
President, Middle East Policy Council
CSIS
Washington, D.C.
April 7, 2006
Transcript by:
Federal News Service
Washington, DC
CHAS. W. FREEMAN. JR.: I'd like to ask everybody to take a seat. I'm sure there will be others straggling in. This is an unfamiliar location for our events, and we're very grateful to CSIS for making it available for reasons which I will explain in a minute.
First of all, let me introduce myself to those of you who don't me. I'm Chas. Freeman, and it's my honor to be president of the Middle East Policy Council. We are a small organization that does three things: We raise politically incorrect or neglected issues for public discussion, usually on Capitol Hill; we publish the results of those deliberations as the first item in our quarterly, which is by far the most often-cited and widely circulated journal on contemporary Arab-American relations; and finally, throughout the country, we attempt to educate the public by training high school teachers how to teach about Arab civilization and Islam. We have trained some 18,000 teachers and we reach about 1.4 million kids a year. This is a program which we are in the process of radically revamping and updating, and in addition to seeking funds for our normal operations and an endowment, we are now raising money for that curriculum development project. Anyone present who feels inclined to contribute to such worthy efforts would be most well received.
I am just back from the region, as I believe a couple of others here are. I found it full of British, French, German, Chinese, Singaporean, Japanese, and Korean businesspeople. You may notice an absence on that list, as I certainly did. I can report that the fallout from the Dubai Ports World debacle is widespread. For many people in the region who had spent the last several years, as they told me, defending the United States, a country for which they have great affection, this was the last straw. It demonstrated that Arabophobia, a fear of Arabs and Islam, was not simply a regional or elite phenomenon, but was deeply rooted throughout our country, and it demonstrated that passionate prejudice would be exploited with shameless demagoguery by our ruling political class. We are at CSIS rather than on the Hill for the first time because members of Congress on whom we normally rely to provide us with a venue were afraid to do so. All of them stated that they wish to be to the right of the president on this issue; in other words, Arab-bashing rather than defending relations with the Arab world. This is a sign of the times.
It's worth noting that on this issue the president was very much on the correct side, defending the integrity of the deal and looking at it strictly in its security dimensions, which were minimal. This was unlike his performance last summer when the Chinese National Offshore Oil Company attempted to buy Unocal and he was silent and allowed the xenophobia to roll. In the region, therefore, he doesn't get any credit for being on the right side. Rather, he is accused of having pandered to populist prejudice and having engaged in fear mongering, which helped to create the atmosphere we now sit in. Here, of course, the only accusation that has been made against the president is that he failed - get this - or I should say perhaps to use his word - he "misunderestimated" the ugly ignorance of the public and the shameless irresponsibility of the American political class. So the public and the irresponsible people of the political class escape all blame, but the president, having failed to correctly analyze their ignorance and shamelessness is blamed. So be it. I will note finally, with regard to the president, that in the region he is rapidly replacing Arab dictators as the butt of the ever-ingenious Arab joke. I will not tell you some of the jokes that I heard, but this is definitely a first for a leader of the United States.
This ugly image comes on the top, as we know, of other difficulties which have been there for a while: inhibitions on financial transfers from the region to the United States that constrain willingness to do business with American companies, as well as to support organizations like Middle East Policy Council; harassment by lawsuits in the United States - I don't need to go into that; waits for visas and visa procedures that are perceived as onerous in the extreme; fear of humiliation by prejudiced people at border crossings or at airports; and an endless stream of frankly racist commentary on our media, all of which play in the region and add to the difficulties facing our companies. We have had a long-standing difficulty in bringing customers here to see our showrooms, to arrange training for those who buy our products, or delivery where delivery is free onboard or in the case of, for example, aircraft, fly-away from the factory. And this has now been compounded, I'm sorry to say, by an impression that to do business with the United States is to risk a political mugging by xenophobes. In short, the impression is the U.S. doesn't want Arab business or investment anymore.
There are obvious dangers to this kind of impression, given the fact that the United States is by far the largest debtor country in the world, but we're giving foreigners the impression that we don't want to take our currency back in payment for goods and services on our side that they want to buy. I don't think this is an overblown description of the situation in this particular region. Unfortunately, it has its echoes in other regions as well. In politics, perception is reality, and therefore, this is a reality with which we and American business must deal. So the point really is not to bemoan it or lament it. We need to understand it correctly. Perhaps I've misstated it. But the issue is how do we correct the impression? How do we promote our economic and commercial interests with the Arabs? How do we sell our goods and services to them and invite their investments and job creation in the United States under these circumstances? How do we show them that we are open for business, given all that has happened?
And this of course relates to the larger issue of balance between the requirements of national security, which are real, and the requirements of trade promotion, which are equally real. I think we will probably get into some of those tradeoffs. But essentially, to use the language of the American Constitution's preamble, we are forced to balance concerns about our domestic tranquility with concerns about the general welfare. And arguably, at least in this little corner of the world that we're talking about, our performance so far has been somewhat less than ideal.
With these few words I wish to turn to the panel, which will, I hope, tear everything I said to shreds. We have in fact four excellent panelists - except for this guy over here who is laughing. And I will bring them on in the order that is on the program. I think Monty Graham has got to leave us, what, around 11:05, 11:10, unfortunately, for a doctor's appointment, so when we come to the question and answer and comment session, which is always the most interesting, please focus your wrath and derision on Monty because you won't have him to kick around for the full period.
Monty is, of course, a senior fellow at the Institute for International Economics here in Washington, and also an adjunct professor at Columbia. I'm not going to read the bios of everybody, which are on the back of the program, but he is eminently qualified to address this issue. Jim Lewis, he's here at CSIS. And again, Jim, thank you for this use of the facilities. And his specialty really is precisely the one that we are talking about - the balance between homeland security issues and economics, which is a growing field, I imagine. And I look forward to his remarks. Don De Marino probably needs no introduction to people knowledgeable about the Middle East. Don has been involved over many years with business in this part of the world, and is currently chairman of the National U.S.-Arab Chamber of Commerce. And Bill Reinsch, finally, who I very much welcome here, is the president of the National Foreign Trade Council, which is the voice of the business community on many of these issues, that is, political skullduggery and malevolent interference with business are what Bill fights everyday.
WILLIAM REINSCH: Or you can say we were for that.
AMB. FREEMAN: Well, no, we're not. Maybe you are. (Laughter.) Okay, I'm glad to hear that. Anyway, with these few words, I'd like to ask Monty to come up and lead off. Everybody will speak for about 10 minutes, 12 maybe at the outset. And if they run over that, I will get up and haul them off the platform, so watch your watches when you're up here; I'm vicious.
EDWARD M. GRAHAM: Okay, we'll take that into account. It's a real pleasure to be here. I am not really - by any stretch of the imagination, I am not a specialist or an expert on the Middle East. In fact, I actually over the last about 10 years that I've done quite a lot of work in the Far East, but not the Middle East. And I'm here primarily because I'm coauthor with David Marchick of a book that will be out in only about a month. It's called "U.S. National Security and Foreign Direct Investment," and so of course it would pertain to things like the Dubai Ports World crisis and the CNOOC transaction, both of which have been alluded to.
As long as I'm someone who does go to China fairly often, I thought that I might tell you that on the matter that Charles just raised of the visas that I, in fact, gave a lecture - I guess it was in November - at Fudan University. Fudan University is probably the number three university in all of China. It's located in Shanghai and is the premier university in the coastal Chinese area and possibly the school with the best economics department in China, which is where I gave the lecture, and one of the things that I actually said towards the end of my lecture - and it was kind of a throwaway - was that I felt that it was a real shame that students, which is the majority of the audience, were having such difficulty getting visas to come and pursue economics degrees in the United States, and that I felt that, particularly given that as far as I know there was not a single Chinese person involved in 9/11, that it was rather peculiar that the U.S. government had - as it has - has drastically raised the bar for the granting of visas to Chinese students. And what I have to tell you is a got standing ovation, and they got up and they thundered.
This issue is so pertinent in China, let alone the Arabian countries, that it was the only part of my lecture where I got a visible reaction, and when I did it was just thunderous applause. So, no, this whole matter of the xenophobic overreaction of the United States is something that goes way beyond the region that we're addressing today.
A couple of things have already been mentioned that I liked. The main reason I'm here is because in the course of doing this book I had quite a close look at the Dubai Ports World transaction, and this close look I think I detected, well, xenophobia for certain and Arabiaphobia, if that's a word, certainly a lot of politics. I mean, what an opportunity for Hillary to put herself on defense to the right of George Bush. I would like to hope to think that will come back and bite her, personally, because I think that was one of the cheapest shots that any politician could have taken. But demagoguery for the purpose of, shall we say, padding one's political résumé when one is a possible presidential candidate, that certainly seemed to be a big part of the story.
Now, just to be fair, I would have to say that I also, on this whole issue, saw a certain amount, in deed a rather large amount, of out-and-out White House bungling. The way that the White House handled this, and particularly in the early - the first few days after this became a hysterical issue, I don't think that the White House could have acted less competently. And I would be willing to go into some of my observations on that were you to ask me to, but I think I'll just leave it at that for the moment, but, yeah, it's really terrible that we have this demagoguery coming out of both the Senate and the House of Representatives with certain prominent figures playing a prominent role, but the White House reaction couldn't have been less competent. I think of the irony that in the end, when all is said and done, as just indicated, that the White House tried to do the right thing but just somehow couldn't manage it, either here in Washington, nor, as we've just learned, was there any reward that went to Bush from the Middle East, where he I think is - is it to correct to say that those jokes that he wouldn't tell us have to do, as much as anything, with incompetence?
AMB. FREEMAN: That's the central theme - personal, political, sexual incompetence, yes. (Chuckles.)
MR. GRAHAM: Let's put it this way, that I think that in this whole instance that there was a great deal of overt incompetence that was shown, and that that made things vastly worse. What I certainly didn't see was any threat to U.S. security arising were the deal to have been completed. And indeed, when you look in detail, as we did, at the measures that the CFIUS took - I mean, this much-maligned CFIUS that supposedly is a pushover - when you look at what they did, well, I think they pretty much did do the right thing. The only thing they didn't do was what I think might have been something that would have been advisable just on political grounds, and that is to go ahead with the extended 90-day review. But in terms of what you might ask on a technical basis for security arrangements, well, it pretty much was all in place.
Incidentally, I did - in the course of doing this work I talked with quite a number of people who are specialists in port security, and the obvious point that came out of this discussion is something that I hope that I don't have to tell you, but it's simply this, and that is that the - you know, the main threat at the ports, put right down to the bottom line, is that some sort of nuclear device is secreted through the ports, and for that to happen, the device has to get into a container to begin with, and that has nothing to do with the port of entry here in the United States; it has everything to do with the logistics prior to the container being even put on a ship, and the real security issues - the most important security issues are at that end, that in fact - think about it - that if a container ship comes floating under the Verrazano Narrows Bridge or goes right past Annapolis, where on board there is a container with a nuclear device on it with a little remote control device. They can do a nasty amount of damage before the container even arrives at the port. What happens at the U.S. port, it's not irrelevant but - it's about 10 percent of the security story, and really very little threat that could be ascertained pertaining to Dubai Ports World taking over these ports, and that which could be ascertained, if you go and look at the details, was quite well addressed.
What I also see, and what I'll spend the remainder of my time on, is what could be the consequences and the fallout of this particular action, and I think this is where things look, to me, rather bleak. In the first place, I think that the major fallouts are likely to be in what I might call the political and social domain, and these have already been alluded to - the possibility that that there will be extreme caution and suspicion on the part of - particularly the Middle East but also investors around the world. Remember, CNOOC involved a Chinese company, and shall we say that the sort of fallout that has been alluded to in the Middle East also does exist in China. And so the Middle East, China, large part of the world, as it were, where the money is, this is likely to be something quite severe. And it goes way beyond the economics; just the sort of anti-Americanism, the suspicion that the United States is not wholly to be trusted, this sort of reaction is widespread.
Now, getting specifically to economics, we have quite a lot of legislation being proposed. Shelby-Sarbanes I think is the one that probably stands the biggest chance of being passed. A very interesting question is would Shelby-Sarbanes, in itself, create some sort of a chilling effect on foreign investment coming into the United States? And I don't think I need to tell you that the United States needs foreign investment. In fact, the United States requires - by our estimates, in the coming year it will require very close to a trillion dollars of net inward foreign investment just to finance its current account deficit.
And, well, you know, this is speculative, whether Shelby-Sarbanes is going to have a chilling effect or not. If you look at the actual provisions of the bill, I'd have to say that I don't find them all that onerous, particularly given the way the bill has been modified since it was first introduced. We could go into particulars, but maybe not right now because there just simply isn't enough time. What I'm really more worried about is the signal that it sends, that really in terms of the CFIUS process we had in place a process that was working awfully well. People say, well, is it? Has the CFIUS ever blocked a transaction? Well, only once de facto; probably about 20 times de jure, or effectively, transactions have been blocked.
But let me just close by noting one thing, and that is that during the time that the Exxon-Florio CFIUS process has been in place, well, what, there have been something like 600 foreign transactions a year that have occurred, and this is over quite a few years. What I'd like to ask those that say that the CFIUS process doesn't work is what specific instance of a national security threat that was overlooked by the CFIUS has later come back to plague us? Zero. And the CFIUS process has - if there have been national security threats posed by foreign investment, the CFIUS seems to have gotten every single one, and that is without modification.
AMB. FREEMAN: Thank you.
MR. GRAHAM: Sure.
AMB. FREEMAN: Admirable. I'm very grateful to you for putting this in the broader international global context. My son, by the way, is a graduate of the Fudan University economics faculty, so I share your admiration for that institution.
I want to just comment very briefly on two things that you said, just to buttress your points. Whether the White House's performance was adroit or not, Dubai Ports World's performance was superb. They did everything right. They hired the right people. They made the right moves. They even stimulated - for example, you mentioned Senator Clinton - a letter from the president of ZIM, the Israeli state shipping line, to Senator Clinton, advising her please to lay off this issue because Dubai Ports had a superb relationship with them, and they considered Dubai Ports to be the most effective security manager that they'd encountered anywhere in the world. Another ironic element in this was that Senator Clinton, when addressing this issue, cited her visit in Hong Kong to the CSX port facility there as a model for what she thought ought to be done. Well, CSX is owned by Dubai Ports World. So demagoguery is probably not an inaccurate word to apply.
And finally, Sarbanes-Oxley, as you know, is often cited as the biggest single inhibitor of large-scale foreign investment in the United States. The prospect of further legislation inhibiting foreign investment is something Bill Reinsch may want to comment on.
Let me invite Jim Lewis to the podium.
JAMES ANDREW LEWIS: Thank you, and I'm happy to be here. You're going to hear a lot of common themes I think today, but I'm also probably going to say a few things a little bit different, so let me start.
The first is, you know, the Dubai Ports episode was unexpected and it was unfortunate, but we want t put the effect on investment in the U.S. on the larger global context. One of the concerns we ought to have is Congress seems to be continually adding structural impediments to the ability of foreigners to invest in the U.S., but we don't want to lose sight of a couple of key factors. The first is is one way to think about this is of the low-risk economies, the mature, developed economies, the U.S. is the fastest growing. And of the fast-growing economies, the economies like China and India, the U.S. is the lowest risk of the fast-growing economies. So from that perspective, this is still going to be an attractive market for people to invest in, and that hasn't changed.
Second thing to think about is the example of Argentina - largest default in the history of the universe, and a couple of years later investors are flocking back. It's not a perfect example but there is a lot of money in the system and the U.S. is going to remain attractive, despite the efforts of our Congress.
Now, the immediate effect of the Dubai incident, the financial implications are to devalue U.S. assets, including the dollar, without any benefit to security. And if you're curious we can go through the mechanism, but the effect of this is to reduce the value of things American. Fewer foreigners will be willing to big on them. This isn't helpful, and it's probably not what Congress expected, and so I started out by asking myself, why would you do something that's essentially irrational? And I think the answer to that would be politics, as we've heard. Dubai was very much driven by electoral politics, but there's two issues that shaped the discussion. Both of these issues involved negative perceptions held by Americans.
The first is the perception of globalization. This isn't a problem that's unique to the U.S. We don't have students burning cars in the streets of Washington, but it's a problem that many countries share and it's a problem that shapes American thinking. The ironic thing about this is globalization is the result of long-standing U.S. foreign policies. This is the world we have sought to build, right? - to promote free trade, the rule of law, openness, self-determination, democratic rule. These go back more than a century for the United States, and some parts of our plan have worked well - the WTO, the IMF. Other parts - the U.N. - perhaps haven't worked as well as we might have hoped. But overall we've benefited from globalization.
One thing to note, though, is every few decades there is a periodic reaction in America to globalization. And you can see it in the '70s, you can see it in the '50s, you can see it in the period between the world wars where people say, gosh, this is the wrong thing to do; we are losing more than we are getting out of this. And the arguments that openness and integration actually increase our security and wealth, they're kind of counter-intuitive. When you tell people a more open, engaged America makes us safer and wealthier, it doesn't follow a very simple model, and so it's unappealing to many people. Part of that is because openness creates a very complex set of risks. It's hard to measure these risks, it's hard to manage them, and it's always tempting to take the easy solution. Of course, for Congress, this temptation is almost irresistible. So we've got this problem with that perception of globalization.
I'm also worried about a larger problem that troubles me more. It's the question of competence, as you've heard, and perhaps generational change. What if the U.S. is no longer capable of helping to direct the system that it built? The current leadership, really on both sides of the aisle, doesn't inspire confidence. And of course you've seen the performance of the Republican side on the Dubai Ports issue. I note - and Bill Reinsch has heard me complain about this several times - on the Democratic side occasionally I get things from Democrats explaining how CAFTA is threat to the American worker. You know, people are questioning the ability of our current political leadership to manage these complex risks and this complex process of international engagement. You know, it's not clear if this is just a temporary phase, if this is just one of these periodic reactions, or if it's a larger trend, but it is very troubling for the U.S.
The second perception that we ought to think about, though, is the U.S. perception of the Middle East. And sometimes you hear about the Arab street, and you can read Zogby polls about how Arab views of the U.S. are declining. Well, this was the American street, right, and Dubai ran directly into the American street. It was unfortunate that a perfectly benign business arrangement came so close to the Danish cartoon episode because this only reinforced the attitude, and the American street, if you will, does not trust the Middle East.
I was a little surprised by this because I was arguing very strongly that the Dubai proposal posed no risk to the U.S., and should through, and the reaction you got from a range of people was very surprising and very strong. And our politicians of course seized on this distrust - this very real distrust - to gain electoral advantage and to bash the administration. It's an unsophisticated feeling. It's a perception that doesn't take into account the full range of the situation and of the region, but it is sort of a fundamental belief, and it's going to be very difficult to change.
So I think these two perceptions shape the political environment, and they make the environment for openness unappealing. And my question is how do we change that? How do we - in response to the question that prompted this session - how does the U.S. open for business in the Arab world? You know, I think it's easier to affect the first perception, the fear of globalization. This is a recurring internal debate, and because it's internal and because globalization is ultimately in the U.S.'s self-interest, and because we've won it two or three times before, I'm moderately optimistic that we can win it again, all the things said about the current political leadership on both sides. At the end of the day I think Americans will recover and decide they can live with openness.
Affecting the second perception, the perception of the Middle East, is going to be more difficult, in part because it's not purely an internal issue. It will require different actions, external actions, changes in the Middle East, but for the near term I would say focus on winning the debate on globalization, getting people to think about why this is in America's interest to be open, and that should help us get back on course.
Thanks.
AMB. FREEMAN: Thank you - wonderfully brief, and some, I think, very sage and interesting observations, which we'll take to heart. I think - I can't resist your mention of the second objective, which I agree probably is the harder one affecting perceptions of the Middle East. At the very moment when perceptions of the Middle East are worst, the level of effort by people in the Middle East to educate Americans about their realities has never been less. And unfortunately it is a common characteristic of Arab culture that when confronted with difficulties, people fade away rather than come forward and join the battle. The typical response is to disappear. And this is in fact what some American businesses are now experiencing, that they're just not even contacted or aware of opportunities. Rather than people complaining and making a loud noise, they just don't show up. So this is ironic and I think unfortunate because this is a moment when greater rather than lesser efforts ought to be made.
Let me now invite Don De Marino to tell me why Arabs are really doing more than I think and why the National U.S. Arab Chamber of Commerce is going to reverse all of this in the near future - or immediately.
DON DE MARINO: Or immediately.
AMB. FREEMAN: Yeah.
MR. DE MARINO: Thank you, Chas. The collapse of the Dubai port deal sparked fierce outcries on both sides of the issue, as you know. Free trade advocates were up in arms and organizations supporting trade and investment with the Arab world, such as the US-Arab Chamber, where I am chairman, warned of the dire consequences, not just for future investment flows but of various political and diplomatic retaliation.
I know that in Dubai there was considerable surprise. Here was a business transaction that had been in the world press for months, as Singapore and Dubai fought it out for B&O. The U.S. part of the deal had been dutifully submitted to CFIUS and all the T's had been crossed. Dubai was a partner in our Container Security Initiative, and a favored port of call for the U.S. Navy. Americans, after all, would be managing and stevedoring the American operation.
What surprised Dubai was that it got caught in the cross hairs. It had similarly surprised Saudi Arabia five years ago, and now the effect is that it will no longer be surprising to any Arab investor, government or private, who attempts a direct investment in the U.S. Despite how carefully you try to frame the issue with Arabs, few investments require a CFIUS review. Only a few U.S. industries are off-limits to foreigners. There is a firm belief among virtually all Arab investors of my acquaintance that a definite political risk is to be assumed for any direct investment in the United States in any sector for any amount and virtually anywhere in this country. It is not a risk guaranteed to occur, like an exchange conversion problem might be in another country. It is a latent risk, but one that could explode on you suddenly and make the political and cultural context so challenging as to moot the investment.
This sense of the latent political risk was deeply exacerbated by the Dubai Ports World fiasco, but it certainly did not originate there. It has been building for years. It is partly the sorry saga of visas where Arab businessmen with long histories of investing in the U.S. have to wait for weeks for a visa, and their kids are simply unable to attend school here because of consular vagaries. And then there were the subpoenas served at the airport on behalf of class action terrorist suits, but these are mere inconveniences compared with the workings of the Patriot Act. The draconian penalties for failure to, quote, "know your customer," under the act, have given the compliance officers at financial institutions in the United States a nearly impossible task, particularly when the funds transfer is coming from the Middle East and you are expected, as the act states, to report, quote, "any instances of known or suspected illegal activity," end of quote. But there are no precise definitions or guidelines from the United States government.
And on top of all this, there is the culture war where Islam and the Arabs are continuously under the scope of the U.S. media. And while I condemn the treatment of Dubai in the port deal, and I agree that it can only harm our relationships throughout the Arab world, I must respectfully disagree that it will have a chilling effect on Arab-direct investments in the U.S. In my opinion, Arab investors have taken this political risk, the xenophobic factor, if you will, carefully into account. It pretty much goes the same way as our own U.S. investment decisions for overseas investments. They assign it a value, actually a cost, and if the underlying deal still has a sufficiently attractive return and other investment criteria, like diversification by country or sector, et cetera, are satisfied, they will do it. But it does not mean that the financial return has to - but it does mean that the financial return has to be that much higher and other considerations or factors, like tax rates and liquidity, had better be fully competitive.
You might ask, competitive with what? Competitive with the kinds of returns they can get in their own booming markets and in the emerging markets of places like India and China, which are attracting them as they attract to us, but with the definite difference that today Arab investors are far more willing to accept, quote, "The emerging market risks" because they see the high potential returns, and in part, let's be clear, because there is a disenchantment, a political risk, a xenophobic factor, if you will, in the American market that makes it somewhat less competitive.
Arab investment makes up a tiny part of U.S. direct investment. I believe it is something less than 2 percent. Portfolio investment in paper, however, is considerable, but I have not seen, as yet, an appreciable decline in this as a result of the Dubai port deal, and probably because indirect investment is not affected by many of the factors I've mentioned. And we need to remember that many major Arab investors have been at this a long, long time. They remember the hysteria of Arabs buying up America in the 1980s. The recall when Congress opposed investments in the U.S. by the Kuwait Investment Office, and they know that America never really stays xenophobic.
They also know that they are not alone. This has happened to the Japanese - can we forget Rockefeller Center? - or more recently the Chinese when CNOOC had the gall to want to buy Unocal, whose assets were mostly outside the U.S., and many in Asia, a nice fit for the Chinese. So much for the business logic of the deal. Yet Arabs also recognize that while the port deal collapsed, the same Dubai government investor also recently bought the Essex House, smack on Central Park. And to the plaudits of Mayor Bloomberg, patient and sensible, and I believe able to compose their fears and frustrations into a political risk formulation. The Arabs will go on with their direct investments in the U.S. pretty much as before. Ask Rupert Murdoch and Sandy Wild (ph) about the long-term value investors from the Middle East.
Arabs will not retaliate in economic terms against U.S. investors. They recognize that this is still the largest and safest economy. U.S. returns in growth can be tremendous, and no serious international direct investor can afford not to be in the U.S. economy, Arab or otherwise. This is not to defend the idiocy of the so-called debate on the Dubai port deal, and if the Shelby bill on reforming CFIUS passes, I believe it will have a chilling effect on foreign investment, but probably not as much from the Middle East as where we get 75 percent of that foreign direct investment, namely Europe, the law of unintended consequences.
I would not expect, however, in any case, anytime soon, to see a foreign state-owned company try to buy a U.S. operating company in any field remotely connected with national security. But the real price, the real chilling effect, the real cost, will be in the lost opportunities we will pay in the Middle East in the greater reliance by Arabs on non-American companies for oil and gas development, on European companies for defense and security, on investment going to Asia, on kids going to Europe for education and so forth. Which direct investment in the United States will probably remain strong, these costs in the long run will be very high for us as Americans.
AMB. FREEMAN: Thank you. That was a very thoughtful statement which I think made a number of very important points, first that the specific problem of the CFIUS process, or indeed the legislation that's been proposed is in fact a limited one, whatever the perception may be. Second, that investors do factor in political risks and continue to invest where they can make money. And so far the United States is a good place to make money. That will limit the effect of this. And finally, I agree wholeheartedly with your observation that Americans will never really stay xenophobic. It's not our nature. Post-9/11, it seems to me we're suffering from the effects of a national nervous breakdown, from which we will in due course recover.
Bill?
WILLIAM A. REINSCH: First of all, I have a handout for those of you -
AMB. FREEMAN: Maybe someone can help you do that.
MR. REINSCH: (Off mike.) I'm still in the paper generation. I don't do PowerPoint very well, but you might find that useful.
Well, thank you for having me. I had a rant prepared, but the other panelists have preempted me - (laughter) - have already taken the rant points away, so I'm going to try to be a little bit more positive. I would simply say, to pick up on Don's last point, which I think is particularly well taken, the long-term consequences of this I think are the effect it's going to have on our ability to both attract top talent here to make people want to come here, which has commercial consequences as well, and through that to improve mutual understanding.
In this same room - actually on the other side of that wall - I did a conference on visa policy last year, and the Jordanian ambassador was here talking about this, and he put it sort of succinctly when he said Jordan sends a lot of its medical students here to come to medical school in the United States, and they all graduate here. They become doctors, they go back to Jordan to practice, and they buy GE medical equipment. And the point was an important one: They not only form relationships here, which stay with them throughout their lives, they form commercial biases here, and to the extent that we turn that off - and we're really doing that. We're tarnishing the golden door that Emma Lazarus talked about. There are long-term economic consequences of this.
The thing that is particularly distressing right now I think is the point that Jim made about the street, if you will. For a long time, a lot of people in the Middle East could say, well, the American people are benign and friendly; it's the U.S. government that's pursuing the wrong policy, whatever the policy was of the moment. It's harder and harder for people to say that now in the Middle East in the wake of an episode like the DP World because it really is - that one really was from the ground up and bottom up. And you can say, I think correctly, that there were politicians in both parties capitalizing on it, both parties trying to out-tough each other in the Congress. I'm a lot more relaxed about Senator Clinton than Chas. is, but I think that clearly you've got an expression from the public that is hard to refute.
Anyway, that said, let's be positive for a few minutes about what we can do to get ourselves back on the track, and I'm not going to talk about foreign policy - that's a much more extensive and controversial debate - I'm going to talk about business and economic trade policy where I think there are some steps to take in the short term that might help repair some of the damage.
The first thing of course is that we should stop being stupid and not do the strange things that we've been doing. And in that regard I refer you to all the things that the previous speaker just talked about. The second thing we should do is to ensure that the CFIUS process remains a political - (audio break, tape change) - not do the serious damage that is potential.
Looking more specifically at the region - because those two things, of course, transcend the Middle East specifically - one of the other things that we can do, which my organization has been particularly supportive of - hence the commercial - is to redouble our efforts to create a MEFTA, a Middle East free trade area, which can bring economic growth and jobs to the entire region, and which in turn, we believe, will help promote peace and stability. This is a long-term task. Even when the president announced it he said it was 10 years - and my guess is he was optimistic - but there are some specific, concrete steps we can take right now that will keep things moving in a good direction. One of the most immediate, of course, is we can conclude - pass the U.S.-Oman FTA implementing legislation. It had a rocky hearing two days ago, but - that's not I-R-A-Q - R-O-C-K-Y hearing the other day, but I think we can overcome that and get that done along with the - put it up there along with the Bahraini and Moroccan agreements.
We can repair our relationship with the UAE by maintaining momentum to conclude that FTA negotiation. The teams are going to meet in Abu Dhabi at the end of this month. There is a feeling now that both sides understand each other's positions better on most issues and are engaged to creatively find mutually agreeable solutions. Ironically, I'm inclined to think that the DP World case will make it more likely that we will have a successful conclusion to this negotiation that not, frankly because both sides are afraid to fail, because if they do, the DP World case is going to be blamed and nobody wants to have that happen.
So I'm marginally more optimistic. That is also kind of ironic because of all of the various FTAs that we've been involved in the Middle East, there actually are issues with the UAE - legitimate economic and trade issues with the UAE that deserve negotiation and make this negotiation a little bit more complicated than the Bahraini or Omani or even Moroccan negotiations. But we will persevere. We will also focus on educating the Congress on the importance of the economic relationship with the UAE. Over 500 U.S. companies are regionally headquartered there. We actually have a trade surplus with the UAE. There aren't very many countries we can say that about, and I think it's one that we want to nurture.
Another thing we can do is initiate FTA negotiations with Egypt. A viable MEFTA is not possible without a high-quality FTA with Egypt. We need to take into account the economic reforms that Minister Rashid and his team have instituted over the past year, and realize that holding and FTA and further economic reform hostage to a variety of political issues, which are legitimate, is nevertheless, I think, likely to backfire. Everything we do with Egypt seems to be two steps forward, one step backward, and some years it's one step forward, two steps backward, but we need to push harder, I think, to get to closure there. With TPA expiration a year - 14 months from now, we need to get busy if we're going to get this one done.
Third - or fourth, whatever number I'm on - we can work closely and constructively with Saudi Arabia to implement its WTO accession commitments and to further engage it in economic liberalization. It takes some time to filter - for reforms to filter down in a bureaucracy. We're seeing that with the Saudi commitments. I think U.S. engagement is needed more than ever to assure that Saudi WTO commitments on issues such as insurance, telecommunications, the Israeli boycott, certifications and standards issues are all met. We should explore entering into talks on a bilateral investment treaty a bit, which is easier to achieve than an FTA and would serve as a model for investment issues with other Gulf countries, investment being the big issue there. We should invigorate the TIFA, Trade and Investment Framework Agreement, consultations on a regular basis to keep focus on further reform and liberalization. We should also focus on educating the Congress on the importance and diversity of the U.S.-Saudi economic relationship, which is, as you all know, extensive obviously with oil but also in some other areas as well.
Next we should continue basic trade reform work in the region. You can see from the chart that we've got a long way to go with a lot of other countries. We need to work on WTO accession for those countries that are not members, such as Yemen, Algeria and Lebanon. We need to increase capacity building in areas such as harmonizing customs border procedures, increasing capabilities in IP enforcement, technical assistance in upgrading trade laws, tax systems, reducing bureaucracy and red tape. We want to not only integrate Middle Eastern countries into the global trading system, but to increase trade within the region. One of the projects that we're going to be undertaking going forward is trying to develop some numbers that estimate what the potential gains are for intraregional as well as transoceanic trade were a MEFTA to come into being.
We need to resolve the remaining issues concerning Libya's status as a terrorist-supporting nation. This is one of the few relationships - bilateral relationships with the United States in the region that's gotten better rather than worse. We need to continue that trend. There is one more step to take on the terrorist-supporting list. This has been lingering for more than two years, I guess, and it's time to bring that to a conclusion.
Finally, we need to take steps that have already been recommended on the visa access front to reverse the growing isolation of the United States from Middle Eastern students and businessmen. We have a substantial reservoir of goodwill, I think, in the region still, due to the many government officials, rulers - such as King Abdullah of Jordan and the crown prince of Bahrain, as well as many others who have been educated here and have spent substantial amounts of time here. You cannot underestimate the value of those kinds of relationships. If we start to lose that by turning away the people that are the next generation of leaders and the next generation of businessmen, we're going to pay a price for a very long time.
One of the things my organization has spent probably more time than anything else, at least in terms of my time on in the last three years, is visa policy. Improvement is idiosyncratic, might be the best word - some countries better than others. We continue to have serious problems. We're doing a survey right now to try to determine how serious those problems are in relation to a year or two ago and see if can get some guidance as to what in particular can be done to try to improve that. So there is a lot to be done but I wouldn't want this panel to end with saying everything is gloomy. There are in fact some specific steps we can take in the short term which will help at least improve, enhance and expand the economic relationship, but I think from that other things can grow.
Thank you.
AMB. FREEMAN: Thank you, Bill - very useful list of proposed -- if not remedies -- at least measures to mitigate the situation and perhaps over time turn it around. I'm very grateful for that.
I think the key issue here, as you implied throughout, is U.S. market share. It's not the direction of a particular number with respect to imports or exports but whether we remain - whether we continue to have the weight in the region that we have had, and perhaps begin to rebuild a bit from the losses we've seen in recent years.
I have a question before we turn to those of you who are for comments and questions. And I'd like to say, please, when you do make a comment or ask a question, tell us who you are, even if you think we know, or should know, and try to make the comment or question directed to someone up here, although perhaps everyone will want to jump in and respond.
And my question is this, since I think generally it's helpful to have factually based discussions rather than discussions that are based on conjecture and anecdotal material with no real evidence behind them, what is being done to document the economic costs to the United States and the American economy of some of these policies? That is, specifically - and maybe, Monty, you might want to lead off on this - about visa policies which inhibit, for example, medical - VIP medical care, or which inhibit sales efforts, or which make training in the United States impossible, or which, as was my case last summer, lead to my client's renting a river in northern Iceland to do business over the world's best fly fishing rather than trying to come to an inhospitable United States. I'm very grateful to the Homeland Security Department for that opportunity, but still, I think there are costs in terms of tourism. There are certainly costs to the educational community, the university. Universities are impoverished by the absence of the foreign students they might have otherwise had. And as Bill I think very importantly stressed, there are long-term costs from estrangement, withdrawal, and lack of familiarity with the United States that perhaps could be quantified.
And I don't know what is being done in this regard. But I have a feeling, at some point as we come out of our depression, we will want to turn these problems around and there will be congressional hearings about the cost to the economy. I wonder whether the data will then be available to have an intelligent discussion or whether we will still be talking anecdotally.
Bill, d'you want to comment?
MR. REINSCH: Well, I can say one thing. We attempted to quantify the visa cost business and came up with a number that lives on and I think is valid. We did a survey in the spring of '04 asking companies to estimate the direct and indirect costs - indirect costs meaning lawyers, delays, things like that. Direct costs means lost business and people who couldn't get here and therefore didn't buy something.
In the period July '02 through March '04 - that was the time period we were looking at - we produced a result which the statisticians tell us was statistically valid that suggested that the cost number specifically attributable to visa policies was slightly more than $30 billion - that billion with a "B." We are presently undertaking a similar survey now looking at the last year to see if it's more or less than what we've come up with.
That's one piece of data, and I can tell you that when we came out with it, the State Department immediately attacked it, and I then had a very interesting meeting. I was at the DHS and sat next to this guy who announced that he was - he told me he was the department's economist. I didn't know the Department of Homeland Security had one, but there he was. And so I said, you know, making conversation, well, what are you working on? He said, well, funny you should ask; we're doing a survey on how much our policies are costing American business. And I said, oh, really; well, what are you finding? He said, well, about the same as you - except they never released their study.
AMB. FREEMAN: Monty?
MR. GRAHAM: We don't have such a survey or a study, I'd have to say. The question I would have for Bill is you mentioned direct and indirect costs. Is your 30 billion covering - my impression is that was just the direct cost?
MR. REINSCH: No, that was both.
MR. GRAHAM: That was both. Okay. Do you have any sense of a breakdown between those two?
MR. REINSCH: We do. I just can't remember it. I think the direct was between 20 and 25 of that, most of it. That's easier to count, for one reason. It's also, I think, a conservative figure because what we had to do is we had a number of very large companies tell us that there was a cost and that it was substantial, but that it could not or would not, in varying cases, tell us what it was, and we had to count all that as zero.
MR. GRAHAM: Yeah. The one thing I'd add then is I suspect the indirect costs are really bigger than the direct costs, that the - generally when you have a transactions cost associated with a trade or some other - a type of transaction that the - those transactional costs prove to be a small fraction. The real costs come in the foregone benefits, and those are very hard to measure. But I would guess that you're probably talking three times what you're directly measuring.
MR. DE MARINO: More than three times, but I think easily three times. I agree, Bill, this was the figure and Bill's shop had an enormous amount to do with it. I will say that there is great difficulty in this issue. American business is getting better at this. But nobody wants to argue this on cost because - and I'm sure you got hit with this, Bill - you know, you go over to DHS and State and, oh, so national security equates to 30 billion you guys lost as a result of our doing our job and keeping America safe. No American business wants to get into that. And they don't want to estimate the true loss cost because they look like ogres: You cost us $100 billion over at XYZ Corporation! They run from this issue. You can't win. And this is demagoguery at its best.
And I would just say this is all part, it seems to me, of the great patience the Arabs accord us and the patience and tolerance in their culture as a result of great violation of 9/11. They're waiting patiently for us to return to normality, and they understand this is anguishing, and it is for all of us. It's like a sort of a breakdown after a death in the family. That's how they view us. They actually like us, deep down. They're very happy we won the Cold War and that we're not all speaking Russian. They're very happy that we created the architecture we did post-World War II, and that we're all living in that world, as Jim said, that tremendous foreign policy structure that we created in the world. They just would like us to get back - (inaudible). And in the meantime they're willing to tolerate a lot of this. But they understand that this is all politics, and you cannot win this on the merits. This isn't about dollars and cents and all of this.
But I would just add one more thing and I'll shut up. Jim's point about U.S. perceptions in the Middle East - whether we're competent enough to continue to manage this world architecture I think is a very open question. The fact that we succeeded to this point is one of the great achievements of America, public and private sector, in all of our history. U.S. perceptions of the Middle East, what no one has said is there are active, dynamic, well-financed, extremely creative forces on both sides playing PSYOPS with us, who are vested - vested in seeing that this rapprochement does not take place. And you've got to assign them a value, a cost. This is a battle. There are forces in the U.S. - Chas. has been very outspoken on this - tremendously important statements he's made. There are forces in this country vested in seeing that the American people do not have a good attitude towards the Arabs, as there are on the other side, enormous forces vested.
So as we launch into this problem we have to understand, it isn't just sort of reaching people of goodwill; it's a battle, and we have to take out the various PSYOPS operations that are counter to our interests. And on that I'll shut up.
AMB. FREEMAN: Jim.
MR. LEWIS: I hope we can come back to some of these political points, but the IMF did a study a couple of years ago about the effect of some of the post-September 11th changes on the U.S. economy. And this gets directly to your question. And at that point - I did a little work on this too - they estimated about - not as we've heard the dollar figures, but it's an opportunity cost, it' a long-term erosion, and the effect is that the U.S. didn't grow as fast as it could, and so the assumption is it cost us maybe around 1 percent of GDP growth, which I can't do that math that quickly in my head, but if their number is right - and it struck me at the time it might have been a little high - that's a very significant number when you're talking about a $12 trillion GDP to lose 1 percent of your growth.
So there is some work - at the end of the day we'll probably find that we've done ourselves more damage and we'll have to think how to recover.
AMB. FREEMAN: I want go to Mr. Constanzos here if Maria will give him the mike, but before I do I want to pose a question for us to ponder, perhaps not to answer, and that is whether there are not ways in which the American corporate community, regardless of its unwillingness to address this issue directly because of the national security issue, might not be encouraged to fund some graduate students in economics departments around the country to begin to collect data that make the case on a factual basis and that could perhaps over time help to produce more effective and less onerous balances between national security and trade promotion or national welfare. It would seem to me that some of the institutions represented at this table have members or could be the focal point for such efforts at basically education. I'm not talking about a lobbying effort; I'm talking about acquiring the basic information that is essential to engage in an informed debate.
Is this the sort of thing, Bill, that your organization does, or have you thought about it?
MR. REINSCH: It's not something we do; it's something our members might do, but you'd have to talk to them one by one.
AMB. FREEMAN: Right.
Andy, tell us who you are please.
Q: Yeah, Andy Constanzos, independent consultant. We've lived quite a bit in the Arab world. My conclusion from the presentation is that again we have a long list of action items, but nobody - no group to take action about them. And I think that I have to go back to my experience and say that the only people that could take action on these items are the AmChams in these countries. And this is where the U.S.-Arab Chamber of Commerce could be very helpful at talking about the cost of sub-prohibition that Ambassador Freeman just mentioned.
I would like to give you an example from my own experience. When the Jewish lobby was blocking the F-16 sales to Saudi Arabia, we had a friend in the department -
AMB. FREEMAN: F-15, I believe.
Q: F-15, whatever. We had a friend in the Department of Commerce - and actually it was David Hamod was our consultant, and he's the one who did the targeting. He found through the Chamber of Commerce and Boeing which states were going to benefit, how many jobs would that order be creating, and then we targeted the congressmen with these numbers and we said, are you willing to turn it down and refuse so many jobs to your constituents? And they all voted yes, and that is how the deal went through.
This is the action required to overcome the list of negativism that we got, and I think that, as Mr. Reinsch mentioned, we should go on the positive rather than the negative side.
AMB. FREEMAN: Thank you for that observation. The point that I was driving at in raising the issue of collecting data and information is exactly related to this. Arguments for or against something are vastly more effective if one has access to the facts at your command which have concrete consequences for those to whom one is making the argument.
But I wonder, and I'd like to ask Don to comment on your comment, whether it's really fair to ask the dwindling AmChams - meaning the American Chambers of Commerce in these countries - to take on the seven tasks that Bill Reinsch I think very intelligently laid out. How can they stop Americans from being stupid or keep the CFIUS process apolitical, or build a Middle East free trade area - that's a government function, it seems to me - or negotiate a bilateral investment treaty with Saudi Arabia or promote trade reform and investment reform in countries like Egypt, which have been engaged in this process for the last 5,000 years and have yet to complete it, or to establish a firm new relationship with Libya, or persuade the U.S. government that it should alter - it should change its evil ways with regard to visas and access.
I think that's pretty hard, and I think it has to be done - a great deal of it has to be done back here, and maybe the role of the AmCham is for companies who belong to the AmCham to bring these matters to the attention of corporate headquarters in the United States and hope that people will have the courage and the energy to take these issues on.
But, Don, this is really your bread and butter.
MR. DE MARINO: Yeah, and I think, Chas., the problem really comes down to funds, but not to interest in this. I am incredibly impressed by the chambers overseas and the role they have. The irony is when the ball really gets rolling - you mentioned Egypt and its 5,000-year history in reform - the actual irony is that I think Egypt is almost there now. That is to say -
(Cross talk.)
AMB. FREEMAN: It's Zeno's paradox, isn't it, that Egypt never quite makes it.
MR. DE MARINO: Well, there is a very - not to get into Egypt, but there is a very interesting nexus of extremely creative ministers right now. They seem to have the ear of the prime minister, who is sort of the head of their team and -
AMB. FREEMAN: This was Bill's point, I think.
MR. DE MARINO: But at any rate, there is a critical mass, and I think they are now going to start attracting the kind of investment - even U.S. investment funds - we're thinking of taking offices there. And, you know, the Cairo stock exchange was probably the most successful one in the world, if you're a punter, last year.
So, at any rate, the American Chamber in Egypt has had a lot to do with that. When various ministers wanted to be buttressed in their - you know, their desire to reform, and they were going to the parliament and they needed a physician paper, and they needed quickly some thinking on this or that. It became an adjunct to this reform process. Same thing in Bahrain - actually, the same thing in Saudi, and I think over the years in the UAE. It's a bit of a battering ram at times, a shoulder to cry on at other times, but it's a participant - a very big participant in this process of reform. And I always watched these doorknocker things become very successful because it seemed that the Congress loved to talk to these guys. It was like the circus is coming to town: Well, these are the guys on the front line; they're really out there and living in these countries; let's hear what they have to say. And I think there is a useful - it's a useful service, and they get their arguments and points through. I've seen it many times with staffers and stuff when they're not living here.
Having said all that, there is 101 things that I know we have on a laundry list at the U.S.-Arab Chamber, and we get to them, but Chas. is an expert on this. It's a funding issue. It's not for want of ideas or people or talent. We don't have any money.
Q: May I - (off mike).
AMB. FREEMAN: Yeah, but you need to have the microphone. Otherwise your immortal comment will not be immortalized.
(Laughter.)
Q: When we faced the problem of money, we contacted in Jeddah the Saudis' businesspeople. And I remember Sheikh - (unintelligible) - for example, gave us 50,000. Another gave us 10,000, and so forth. We built up something like $100,000, which we put on an escrow account that is producing interest so that the American business - (unintelligible) - group can continue. So there is interest by the business - the local businesses to do that. All we need is someone like the U.S.-Arab Chamber of Commerce to make a process out of it so that we can move forward with an action group that would take action on all these important action items.
MR. DE MARINO: I think it's a great idea. I think we need to fund it ourselves because if we go to that source today in the climate in which we live, that source of capital will significantly work against us. So then we have to dig into our own pocket, and this gets very difficult. And what we're very reluctant to do, since there is a very small pool of money interested in this subject in America, at least that I could discern, that we don't start stealing each other's sheep, okay, and so the very pot that Les goes to and Chas. goes to -
AMB. FREEMAN: Oh, he's giving me a great idea.
(Cross talk.)
MR. DE MARINO: - I go to, see, and - so this gets to be a poachers issue. Okay? I mean, this is the nitty-gritty. You asked for it. I'm down in the weeds on this subject, okay?
AMB. FREEMAN: Bill, is your experience that the interest is limited in this issue?
MR. REINSCH: Well, my perspective would be from the American side, the companies here.
AMB. FREEMAN: Right.
MR. REINSCH: We work with AmChams, but the coalitions that we've developed are coalitions of American companies who support these FTAs who support the progress you're talking about. And we deliberately have not included representatives of the other countries' governments or those companies. And I guess I'd say two things. First of all, in response to one of Chas.'s comments earlier, it's the government that negotiates these things. There's no question about that. In many respects it's the American business community that gets them through the Congress because what the Congress wants to know is there's Americans who care about them, and, you know, on a pragmatic level, it's a lot more important, for the same reason that you just mentioned on the jobs issue, for a congressman or a senator to be told that there are four companies in his state or district that think this is important then for him to be told that the government of Oman thinks that this is important. I mean, the latter is very nice but the former is votes.
So the coalitions that we've put together have, I think, made a huge difference in getting the thing implemented and approved after it's negotiated. And, yes, there is substantial business community interest in this, but it's not all the same. If you look at our coalition on Bahrain, for example, there were probably more than 100 companies - U.S. companies - specifically involved in that. There were probably a half-dozen that were actually on the ground in Bahrain in a significant way at that particular point in time, and three of them were mad at the Bahraini government for one thing or another - (chuckles) - and were not necessarily ones you could count on to support the agreement because they had a short-term grievance.
Nevertheless, the other, you know, 94 or whatever it was, climbed aboard the train and were very useful, for multiple reasons - some because they anticipated being there in the future, some because they had been there in the past and were going back, some because they simply support open trade with anybody, or almost anybody, at most anytime, but the largest number because they bought into the concept of a MEFTA and believe that the regional economic block is an important one for them over the long term in an area where they wanted to show growth, and that even though they not only might not be in Bahrain today and won't be in Bahrain next year, they understand the concept of building blocks and realize that if you want to get to a regional agreement that would significantly expand trade and investment between the United States and those countries, you need to do it piece by piece. And maybe you start with not the most important piece from that company's perspective, but you need to support that piece because if you don't do that you're not going to get to the pieces that do matter for that company.
So I think the companies have been, I think, impressive in their ability to take the longer view here and hand in there. And this, by the way, is a contrast with what they often do, which is focused on short-term returns, and this is an area where they've been able to take the longer view and participate in these coalitions even though they may or may not see a substantial short-term advantage.
MR. GRAHAM: I don't have a whole lot to add except a question, and that is throughout this discussion we've heard a lot about the regional agreements and the bilaterals and so forth, and yet what may be most at jeopardy in the immediate term, at least in the international trade area, is the Doha Round, of course, which is supposed to bring a new meaning to WTO. So my question really is, what is the interest of the region in a successful completion of the Doha Round? Is it something that would be accorded a high priority?
And then maybe particularly to Bill Reinsch - one of the things that really strikes one is that whereas there was tremendous support and even pressure from the U.S. business community to get done the previous round, that similar sort of support and pressure seems to be quite lacking in terms of the Doha Round. Is that a correct perception, and if so, what might be the explanation for that?
AMB. FREEMAN: Don, would you like to start on Arab - or regional interests in Doha?
MR. DE MARINO: I don't know much about that subject. My hunch is if you never hear it brought up - at least I never hear it brought up - I don't think - I could be quite wrong, but I don't think they feel they have a dog in that fight. Most of them are concentrating on, I think, bringing investment into their country to a greater degree than before, intraregional trade, which is now becoming far more important to them. And I think that they view it as something that mature economies, together with the large, emerging economies, have a lot of issues and tradeoffs that they're trying to achieve. And they are interested in it but they're not active participants is my sense of it. I could be quite -
AMB. FREEMAN: I think you're right, but I would note that this is in fact characteristic of Arab approaches to international issues generally. They're very passive. They seldom take the initiative. They wait for others to do that, and even then may not weigh in. So in this case I think also many of the countries in the region, and certainly the most important economy in the region, Saudi Arabia, is in the early stages of trying to implement WTO as it was without trying to redefine it.
Bill.
MR. REINSCH: I don't entirely agree with that. The round was launched in Doha. It's not irrelevant to the region, and I think there is some interest in it. The intensity of interest is variable, in part by size of economy. The Gulf states have not generally been very active. The Saudis, as Chas. just said, are too new to the WTO, having acceded only in December to play a role. There is always sort of a feeling-out process when you join an organization like this one. I think they'll have a more significant role to play, but probably after this round, but a more significant role at the next one.
Egypt, in contrast, has played a very active role, not only in this round but in most of the preceding rounds - not always a constructive one, from our standpoint, but a very active one, both on its own behalf and as a spokesman for developing countries overall. Now, in the last year or so they probably have been eclipsed a little bit by the Indians and the Brazilians, but Egypt has always been an active participant in all the rounds and also is one in this one as well. And that is also the case for Morocco. You might say they're more - they might both be more diplomatically mature economies might be a good way to put it. They've got more experience operating in international fora. They also have a lot of diplomatic missions all over the world and diplomatic experience. But they're active - Morocco, I think in general, has played a very constructive role as a facilitator. You'll recall the Uruguay Round was actually signed, I think at the end, in Marrakech.
But these countries don't only just play host; they play a substantive role as well. Half of them or so of course don't even belong to the WTO and are sort of irrelevant to the process, as the chart indicates, but I'm a little bit more optimistic about their involvement than the last two speakers.
AMB. FREEMAN: And U.S. business interest, which was the other part of the question.
MR. REINSCH: Oh, yes, thank you. I think it is - what's the right word? - a little bit more - I can't - the right word escapes me; I'll have to do it kind of differently. The business community supports the round. I think they are, like everybody else, including Ambassador Portman right now, frustrated at the lack of progress. We're in one of these Alphonse & Gaston routines where everybody is waiting for - everybody is saying, you know, I've got something really nifty in my back pocket and I'll show you mine if you'll show me yours, but you have to go first, and nobody wants to go first, so here we are. That said, I think the issue is not so much business community support for the round, because they will support the round and they'll, in all likelihood, support an outcome; the question is how hard they'll work for the outcome and getting it through the Congress, which is likely to be difficult. An unambitious de minimus outcome I think will produce token support and very little effort on the part of the business community, as opposed to an ambitious outcome, which will achieve a lot of support.
We continue to do a lot of things - a lot of them behind the scenes - to try to facilitate an ambitious outcome. My organization, for example, has hired representation in Geneva. We probably spend more time lobbying other delegations than we do lobbying our own, and we're spending a lot of time trying to produce and ambitious outcome. You need to keep in mind that, as Monty well knows from watching the previous ones, these things crash and burn several times before the final process. I can't tell you with confidence that we're just engaged right now in crashing and burning again and that we will ultimately succeed, but there is a track record of doing exactly what's happening now and then pulling the whole thing together at the very end. That may not be this year, but I continue to be, you know, optimistic about a conclusion - a significant conclusion at some point.
AMB. FREEMAN: Jim?
MR. LEWIS: You know, the big trade - we're in the crash and burn mode, at least for this year. The big trade in the round is the Europeans and the U.S. opening agriculture, but then the developing countries, particularly Egypt, Brazil, India, they have to - what are they going to give in exchange? And so far their position has been, it's the right thing for you to do; it's help for the noble, suffering poor. That's a hard one to sell, especially when you're talking about an issue that's so politically involved for - certainly for the Europeans and probably here too.
So I don't - until you see the other side ready to make that big trade - we'll open for services and we'll take away more of the impediments to manufacturing - I don't think you're going to get the deal. Concessions from us on agriculture, what's the concession on their side? That part needs to be filled in. And in that regard I'd say that for many Middle Eastern countries it would strike me that it would be in their interest to see, you know, this relaxation on services in particular. So they might have an interest in the outcome that they would benefit from expressing.
AMB. FREEMAN: Thank you.
MR. GRAHAM: Chas.?
AMB. FREEMAN: Yes, please.
MR. GRAHAM: Having asked a question, if I could just do two follow-ups. One dynamic that shouldn't be underestimated is that on this whole matter of agriculture being at the centerpiece of Doha, a significant number of developing countries actually benefit from the current policies that are in practice. In particular, as we know, the Europeans subsidize the production of a number of agricultural commodities and essentially dump these on world markets, and quite a number of developing countries actually accrued net benefits from this practice. So this is a greatly complicated thing. See, the initial assumption would be that most of the developing world would be on the side of agricultural reform, but it turns out that isn't strictly the case.
But the second thing, and where I personally I've have to say turn a little bit pessimistic, yes, Bill is absolutely right that these things crash and burn several times, and in the end succeed, but somebody put it very well the other day that whereas in the Uruguay Round, at the end of the day, the U.S. business community had intellectual property to gain, and they were passionate about wanting that. And so at the end of the day you had the U.S. business community really, really behind it, and particularly every time it crashed the business community would be there to say that we - we just can't let this happen this way.
There doesn't seem to be an equivalent interest at stake in this one. And in fact, the speaker put it very nicely. He said that what is the USTR offering the U.S.? Well, we're offering some farmers the chance to lose their subsidies, and that doesn't always create the most desirable political dynamic. So this aspect does, I'll have to say, worry me. It seems to me that we do not have an issue about which a major constituency is passionately wanting the round to go forward, but we do have some issues where there are U.S. constituencies that even if the U.S. gets demonstrably net benefits are going to oppose the whole thing.
So, Bill, I'll have to admit to being - I hear you on crash and burn, but I'm still a little worried.
MR. DE MARINO: Can I say -
AMB. FREEMAN: Please, you may.
MR. DE MARINO: - not that we get completely tangled up in the Doha Round because I'd like to come back to something we haven't addressed, except very briefly, and that is this pending legislation for foreign investment in the United States because while it's quite correct to say - and I think these are your figures - that there was one de facto rejection by CFIUS of an investment deal, and 16 or so others, or 20, I'm sorry, that were in effect de jure not accepted. And people would say, well, gee, this is - they must rubber stamp everything because there were thousands of deals that went through. Like tax courts and like our tax code, you don't want a confrontation with the IRS. You don't want to go in and talk with them, so your behavior is modeled around the code. If you know how CFIUS thinks and what they do, you don't even consider certain transactions that you know won't fly. So we don't go there at all, and we cannot gauge how many of those didn't even get pondered because of that.
What scares me is I think CFIUS has worked, and it's been around for 20 years. When we had this hysteria in the '80s and we passed Exxon-Florio, again it was a foreign-investor hysteria, Arab-bashing, Japanese-bashing exercise. We got something rather good and apolitical out of this very professional way of handing foreign investment. If we're not careful, we're going to get something to replace it, which, given the political will and how it works around this town, we're going to have for the next 20 years. And it doesn't, right now, look like it's going to be as good. And it's got all kinds, in my opinion, of crazy features in it. We're going to classify countries according to whether they're friends or enemies.
And forget about secretiveness. You know, state officials, at least under the Shelby bill, are going to get notified of all of this. Your competitors, everybody is going to know, and you could have the deal tied up for four months of tire kicking. It's not how business gets done. I'm looking at it and saying, we don't want to buy that company. What are you telling me; we're going to have four months of tire kicking? Everybody is going to know our figures, all our proprietary stuff is going to leak, all the terms of the deal? Forget about it. Numbers are fabulous - makes a lot of business sense - ain't going to go there. Ain't going to happen, okay? And there is a lot of money that's come in here in direct investment. It's not Arab money we're talking about; it's European money and it's Asian money. Those are the big numbers.
AMB. FREEMAN: Well, some of the European money may well be Arab money.
MR. DE MARINO: Absolutely, but Alcatel is looking at this right now, and if we continue with this critical infrastructure thing where we've got 11 industries that are critical infrastructure: food - food investments are going to go to CFIUS. What, the Department of Agriculture is going to weigh in now? Okay. Forget about it. This is the stupid stuff the French are trying to do right now. Villepin's 11 strategic - you know, no yogurt; don't go near the yogurt.
Okay, let's just hope all this hysteria calms down and we don't get this kind of legislation, but it's out there right now. I'm just speaking as a businessman; I'm not an economist. I don't understand what economists say when they're - you know, I flunked economics. But it ain't going to happen as business investments.
AMB. FREEMAN: I guess we really ought to hear from an economist.
MR. LEWIS: I'm also not an economist, but I've studied it. More importantly, though, I've studied CFIUS, and the CFIUS process is broken, okay? It's broken, and people have known it's been broken for about four or five years. The Chinese probably do some things we don't like. The Middle East was always the secondary or a tertiary concern, but CFIUS is broken. The bad news now is that because the government was slow in fixing it, because the executive branch was slow in fixing it, Congress will fix it, and that's a very frightening outcome.
I ought to tell you that one of the things that we did as part of the CFIUS effort was look at the effect of foreign ownership and decide it was largely irrelevant to security concerns, particularly for infrastructure. I have to admit we didn't look at agriculture, so, perhaps no. But it's - you know, this is where we are and the bad news is, I think - to bring it back to one of my themes - you have this perception and this unhappiness in America about the Middle East, and you're going to be affected even though you aren't - you know, everyone is thinking China but you're going to get it as well.
AMB. FREEMAN: No, in fact I think it's fair to say - and you've spoke of the American street, and that is a very appropriate phrase - I think it's fair to say that there is broad xenophobia, but on top of that there is specific Arabophobia and Islamophobia that make this a particularly difficult set of issues.
Monty's got to go, so maybe one last comment.
MR. GRAHAM: Well, thank you very much for having me. I have to have the doctor look at this rash on my face, which incidentally is an allergic reaction and hence non-contagious, so don't worry about having that - (cross talk) - being in the same room as me.
(Laughter.)
MR. LEWIS: It's actually the bird flu.
MR. GRAHAM: Yeah.
MR. LEWIS: Scratching already
MR. GRAHAM: Yeah, scratching already.
The only thing I'll say is a little bit self-serving, but as I indicated, I do have a book coming out on this, and we do have a specific chapter to the China issue. We think that there are some issues there that are actually worth addressing. We wholly agree with the analysis of the Shelby bill that it's unnecessary; it won't provide any additional national security. I think the only good news is that as I watch the process, it seems to be getting, as it were, watered down step-by-step, and that's entirely good. This friendly/unfriendly country - if that stays, that's terrible.
On the critical industries list, the one good thing that they've done is that they've now added a criteria - it's not just an investment that's in these sectors but it has to be designated as a security-related issue. I think that's very good because I think that would knock out most of these food - it probably takes yogurt off the list.
MR. LEWIS: Right.
MR. GRAHAM: At least one would hope so. I'll run to the doctor. I'll just say I thank you very much for having me here.
AMB. FREEMAN: Thank you for being with us.
I think we are actually - we are reaching a logical conclusion to the discussion, and I would like to invite - oh, Les, you have a point you want to raise.
Q: (Coughs.) Yeah, excuse me. I'm Les Janka - been in the independent consulting business for 10 years, taking American companies to the region. And you're right; we have a lot of barriers to Arab investment, Arab business coming here, but what I've been running into is our travel advisory problem.
AMB. FREEMAN: Yes
Q: That when I go to an American company, middle-sized, from the Middle-West saying, good opportunity; please come with me to Saudi Arabia -
MR. ?: Kuwait.
Q: - Egypt, oh, well, the street ignorance comes in, but then they say, well, oh, we just went to the State Department's website and they say don't travel, so we're not going, and that is - that's a real barrier. We've got to find a better way, I think, as we look at all these issues, visas and others, also looking at travel advisory problem.
AMB. FREEMAN: Well, this is -
Q: Just one last point too is even when I did get people to go with me, and I took them, and then trying to get them into the American Embassy in Riyadh, so we could go to the commercial counselor's office, these guys just panicked and said -
MR. ?: Meet him at the hotel.
Q: Exactly, because we don't even want to come near the place.
MR. ?: It's not worth it.
LES JENKINS: It must be so dangerous to have armored cars and camouflaged nets and -
AMB. FREEMAN: Yes.
LES JENKINS: - and sandbags all stacked around it.
AMB. FREEMAN: Yes, I think there is an inherent and probably, at present, unfixable problem with travel advisories, for the simple reason that we live in a society which is determined to affix blame for anything that happens, regardless of whether there is or is not a valid reason for affixing blame, and since the ambassador of the embassy is held accountable for everything that might conceivably happen to an American citizen in that country, the natural path of least resistance is simply to accede to whatever absurd level of warning the security people - who also will be held responsible - wish to impose. And so we are striving for a standard of zero risk, which is essentially unattainable. For what it's worth, I ignore those warnings myself and I am still here, even though perhaps as a former ambassador during the Gulf War I'm a more attractive target then even you, Les.
So I think you're right to point to this issue, and it does show the other side of the problem, which is that it's not only very difficult to get people a visa to come here or to persuade them that they should even apply for a visa or come here if they get one, it's also extremely difficult now to persuade American companies - over the objections of their corporate counsel, who look at the State Department warning and attribute, correctly, liability to that - it's also very hard to get to come out and do things on the ground, with the ironic result that we end up doing our meetings in Paris and London where they somehow manage homeland security without insulting Arab visitors and don't impose barriers to Americans. We are probably less safe in those - certainly in Paris these days - than we would be in virtually any city in the Middle East, but these things are not noticed and I don't know what the answer to the problem is. If anybody on the panel has an answer to this issue, I invite you to speak.
MR. LEWIS: Okay. You should never do that. But we are in a phase now where the security people - the diplomatic security service and the policemen - have gained considerable influence. We've been through these phases before, perhaps in the 1950s, perhaps in other periods, so the real question for me is when will it go away? We'll pass all these laws and eventually, being Americans, we will start to ignore them. And will that take 10 years, will it take 15 years, will it take five years? I vote for sooner rather than later, but we're in a phase now where the security people are enjoying the limelight.
AMB. FREEMAN: I certainly hope that it's sooner rather than later.
MR. DE MARINO: I'd just say, you know - once again the lawyers are running everything so it's a liability issue. So the State lawyers put that language in and then general counsel at Corporation X says, well, geez, State is not going to let him go; I can't have - a CEO guy can't sign off on this. It's a zero-risk deal. And I couldn't agree more - that's nothing that's going to change. It's going to be the degree to which - I don't find capital to be a coward at all anymore. I think you have to get knocked around to make a buck. I think it's very hard to make money. And so this capital is a coward thing I think is untrue. Capital tries to minimize the incoming, the hits it takes, but it knows it is going to take hits. And so I find businessmen who are perfectly willing to go to Riyadh and other places. I grant you that it's not the average guy but there are - because they see a competitive advantage: Everybody's scared; I'm going to go now. So I rely on American entrepreneurship to get us through, but it is really a climate of zero risk right now.
AMB. FREEMAN: Well, I think we've probably said all we can say on this particular issue, but I'm glad you raised it because it is - it is a major factor driving our market share down, and that is, I think, terribly unfortunate.
I am going to ask the rest of the panel for some final comments, but I want to note that the region that we're talking about is in fact in the midst of an amazing boom. Oil prices are at historically high levels, money is floating into the region, it's undergoing a construction boom, Saudi accession to WTO promises the relocation of the world's petrochemical industries to the region, hundreds of billions of dollars of investment over the coming decade, and associated projects. Infrastructure projects and others in the region are going ahead at a great rate. The danger is that Americans will entirely miss out on this - on this business both because Arabs don't invite us to bid, given the factors we mentioned earlier, and because despite the entrepreneurship of small business, large corporate bureaucracies are very risk averse and are unlikely to do what is required to get in there. I also note with some alarm, not having previously focused on the proposed legislation - Shelby and Sarbanes legislation - that there is the possibility, as Jim Lewis put it, of congressional actions that further devalue U.S. assets without any corresponding benefit to our national security.
Finally, I think it has to be said that at stake in all of this is the re-circulation of petrodollars, and something which we've take for granted, but which, when it first burst on the world in the 1970s, was correctly a major concern. There is no law of nature that says that people have to accept little green portraits of dead presidents and assign them any value at all. Certainly when Americans begin to say that our acceptance of those little green portraits of dead presidents in return for assets is conditional on political and moral judgments, we risk our own currency's standing. But I am reassured by Don De Marino's observation that if we undergo an Argentine-style collapse, that - you know, the old phrase that they use in Argentina, which is "Diós rearregla de noche lo que hacen los argentinos de día" - that God fixes it during the night the mess that the Argentines make during the day, perhaps will apply to us and we will once again see Kaizer Wilhelm's observation that "God takes care of idiots, cripples, and the United States of America" in action on the historical stage.
I would like to ask each of you for a concluding thought, even if it is only a grunt, and we will then put this conference to an end, noting that it will appear on our website - a transcript, unedited unfortunately, will appear probably in a few days, and it will then be published as part of Middle East Policy in the next issue, along with the proceeds of our next program, which will be April 21st and which will deal with - and will be on Capitol Hill, where we have found a brave member of Congress to sponsor us. It will deal with alternative strategies for a responsible withdrawal from Iraq.
So, please, I think we should start in the order that we had. So, Jim, you are first.
MR. LEWIS: Great. Thank you, and I'll be very brief. We've heard a lot about the cost to the U.S. These are real costs. My sense is that, you know - my hope is this is only a temporary phase and that we'll emerge from it, and the U.S. will stop taking actions that tend to cut it off from the rest of the world. On the other side, though, Arab economies might want to think about the costs of being cut off from the United States.
AMB. FREEMAN: Exactly.
MR. LEWIS: This is still the technological leader, the leader in services, the leader in innovation, and being cut off from the American economy, is - it's bad for the U.S. but it's worse for the other guys. So there's room for both sides to play in making improvement.
AMB. FREEMAN: Thank you very much.
Don.
MR. DE MARINO: I'll just add, I couldn't agree more with what Jim said, and to prove the point, there's a Saudi outreach program in the United States. Businessmen come here quite frequently to talk to American business about joining them in this tremendous number of projects going on in Saudi Arabia. There's a very keen interest in having the United States as a partner in all of this and Saudis and other Arab companies are reaching out to us and continue to do that through all of these debates and problems that we have at the political level.
AMB. FREEMAN: Bill.
MR. REINSCH: Don't do anything stupid.
(Laughter.)
AMB. FREEMAN: Yup. Thank you. That's a sage observation -
MR. ?: I'm going to quote you.
AMB. FREEMAN: - and I am sure the Congress will follow your advice. (Laughter.) Thank you all for coming. Thanks to the panel. Great Discussion.
(Applause.)
(END)
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