The following is an edited transcript of the forty-third in a series of Capitol Hill conferences convened by the Middle East Policy Council. The meeting was held on April 7, 2006, at the Center for Strategic and International Studies (CSIS), with Chas. W. Freeman, Jr., presiding.
Chas W. Freeman, Jr., president, Middle East Policy Council
I am just back from the Gulf 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 [CNOOC] attempted to buy Unocal; 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 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 –– or I should say, perhaps, to use his word –– “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. This is definitely a first for a leader of the United States.
This ugly image comes on top of other difficulties that 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 the Middle East Policy Council; harassment by lawsuits in the United States; 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 in our media. All of these add to the difficulties facing our companies in the region. We have had longstanding problems in bringing customers here to see our showrooms, in arranging training for those who buy our products, or delivering them where delivery is free onboard or in the case of, for example, aircraft, fly-away from the factory. 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 that the United States 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. 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 echoes in other regions as well. In politics, perception is reality, and this is a reality with which we and American business must deal. 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?
This 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. 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.
Edward M. Graham, senior fellow, Institute for International Economics
It’s a real pleasure to be here. I am not a specialist or an expert on the Middle East. In fact, over the last about 10 years 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 about a month called U.S. National Security and Foreign Direct Investment. It would pertain to things like the Dubai Ports World crisis and the CNOOC transaction, both of which have been alluded to.
I go to China fairly often, and on the matter that Chas. just raised, difficulties that foreigners now have in obtaining visas to come to the United States, I gave a lecture in November at Fudan University, 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. One of the things that I said towards the end of my lecture, and something of a throwaway line, was that it is a real shame that Chinese students (a majority of that audience) were having such difficulty obtaining visas to come and pursue economics graduate degrees in the United States. I felt that, particularly given that, as far as I know, there was not a single Chinese person involved in 9/11, it was rather peculiar that the U.S. government has drastically raised the bar for the granting of visas to Chinese students for this purpose. I got a standing ovation; the Chinese students got up and they thundered.
This issue is so pertinent in China that it was the only part of my lecture where I got a visible reaction, let alone thunderous applause. Thus the whole matter of the xenophobic overreaction of the United States is something that goes way beyond the Middle Eastern region that we’re addressing today.
I agree with a couple of things that have already been mentioned. The main reason I’m here is that I had quite a close look at the Dubai Ports World transaction in the course of doing my new book. In trying to explain the Congressional reaction to the transaction, I detected not only xenophobia and Arabophobia in particular but also a lot of politics. What an opportunity, for example, this was for Hillary Clinton to put herself on matters of defense, to the right of George Bush. I suspect that her efforts in this matter will come back and bite her because I think that to demagogue Dubai Ports World was to take one of the cheapest shots that any politician could have taken. However, Senator Clinton was not, in this matter, the only guilty party by any means. Indeed, for many members of Congress, this case seemed to represent a huge opportunity to use demagoguery for the purpose of, shall we say, padding one’s political résumé.
To be fair, I would have to say that, on the matter of Dubai Ports World, I also saw a rather large amount of out-and-out White House bungling. The way that the White House handled this case, particularly in the first few days after it began to become a hysterical issue, could not have been more incompetent. I think of the irony that in the end, when all is said and done, as just indicated, the White House tried to do the right thing but somehow couldn’t manage it. Neither here in Washington nor, as we’ve just learned, in the Middle East itself was there any reward to the Bush Administration for trying to do the right thing with respect to this deal, but the Administration to a large extent has itself to blame for this outcome.
But what I certainly didn’t see with respect to Dubai Ports World was any threat to U.S. security if the deal were to have been completed. Indeed, when you look in detail, as we did, at the measures taken by the much-maligned Committee for Foreign Investment in the United States (CFIUS), the measures they took were the correct ones. That is, the CFIUS approved the deal on condition that the investor offer certain assurances pertaining to security issues. They investigated security aspects of the deal in some depth, and concluded that there really was no threat of impairment of U.S. security created by Dubai Ports World taking over P&O’s contracts to run container handling facilities at a number of U.S. Ports. The only thing CFIUS didn’t do was something that, with hindsight, would have been advisable just on political grounds: to go ahead with the extended 90-day review. But in terms of what was needed to assure that this deal would not threaten U.S. security, it was all in place.
Incidentally, in the course of investigating the Dubai Ports World deal, I talked with quite a number of people who are specialists in port security. The obvious point that came out of these discussions is that the main threat at the ports, when all is said and done, is that some sort of nuclear device could be secreted through the ports. For that to happen, the device has to be placed into a container to begin with, and to stop this from happening has nothing to do with who operates the port of entry here in the United States. Rather, it has everything to do with the security arrangements prior to the container being put on a ship at the point of embarkation. The most important security issues are at that end: if a container ship passes under the Verrazano Narrows Bridge in New York harbor or sails right past Annapolis, and there is a container onboard with a nuclear bomb outfitted with a miniature remote-control detonation device, a nasty amount of damage can be done before the container even arrives at the port. What happens at the U.S. port is not irrelevant; but it’s only about 10 percent of the security story. Even so, there was very little threat that could be ascertained pertaining to Dubai Ports World taking over these terminals, and the extent that any threat could be ascertained, if you go and look at the details of the assurances received by CFIUS, this threat was quite well addressed.
What could be the consequences of this particular reaction of Congress to this deal? This is where things look rather bleak to me. In the first place, I think that the major fallout is likely to be in the political and social rather than the economic domain. These fallouts have already been alluded to –– the possibility that that there will now be extreme caution and suspicion, on the part of investors that might seek to make investments in the United States, particularly investors in the Middle East, but also investors around the world. Remember, last summer’s CNOOC/Unocal brouha involved a Chinese company. Like Dubai Ports World, CNOOC pulled out of a US investment, and the sort of fallout that has been alluded to in the Middle East likely also will be felt in China. Indeed, in the Middle East and China, a large part of the world, where, as it were, the money is, the fallout is likely to be quite severe. And, as noted, the fallout likely will go way beyond economics; in particular, anti-Americanism, and, in particular, the suspicion that the United States is not wholly to be trusted, will become widespread and have a multiplicity of consequences.
Even so, and getting specifically to economics, there is quite a lot of legislation being proposed to “reform” the CFIUS process. A bill being introduced in the Senate by Richard Shelby and in the House by Michael Oxley is the one that probably stands the biggest chance of being passed. A very interesting question is whether Shelby-Oxley, in itself, would create some sort of chilling effect on foreign investment coming into the United States? I don’t think I need to tell you that the United States needs foreign investment. In fact, the United States, by our estimates, will require very close to a trillion dollars of net inward foreign investment in the coming year just to finance its current-account deficit.
Whether Shelby-Oxley likely would have a chilling effect or not is speculative. Looking at the actual provisions of the Senate version of the bill, I don’t find any of them all that onerous, particularly given the way the bill has been modified since it was first introduced. Collectively, however, they are likely to make the CFIUS much more cautious and much more likely to block specific transactions, even where these present little or no security threat to the United States. But what I’m really more worried about is the signal
that the bill sends to foreign investors. In fact, the CFIUS process we have had in place, is one that has been working awfully well. Critics of CFIUS tend to ask whether the CFIUS has ever blocked a transaction? De facto, only one transactions has been blocked, but de jure, at least transactions have been blocked where in fact CFIUS or its constituent agencies did identify a security threat. But most transactions that have been considered by CFIUS have been cleared and allowed to proceed.
Now during the time that the CFIUS process has been in place, something like 600 foreign transactions a year have occurred. Moreover, this has been going on for over quite a few years. What I’d like to ask those that say that the CFIUS process doesn’t work is this: has there been a specific instance of a national security threat created by one of these cleared transactions, where the threat was overlooked by CFIUS but has later come back to plague us? As far as I know, there are zero such cases. So, if there have been national security threats posed by foreign investment, CFIUS seems to have caught every single one of these, without exception.
Thus, the signal that the new legislation sends to foreign investors is this: here in the United States we have a process in place to screen foreign takeovers of U.S. companies on security grounds that has worked very well indeed. But, even so, we are now going to “reform” this process to make it much more likely that a transaction will be blocked. We are not doing so, however, because the existing process has failed to block transactions that do create a threat. Rather, we are doing this for purely political, nationalistic, and even xenophobic reasons. Bottom line: the United States is no longer going to be an open and friendly place in which a foreign person can do business.
Would this signal have a chilling effect on foreign investment in the United States? My answer is that you can bet on it.
AMB. FREEMAN: I want to comment very briefly on two things that you said, just to buttress your points. Whether the White House 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 a letter from the president of ZIM, the Israeli state shipping line, to Senator Clinton advising her to please 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. 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.
James Andrew Lewis, senior fellow, Center for Strategic and International Studies
The Dubai Ports World episode was unexpected and unfortunate, but we want to put the effect on investment in the United States in the larger global context. One of the concerns we ought to have is that Congress seems to be continually adding structural impediments to the ability of foreigners to invest in the United States, but we don’t want to lose sight of a couple of key factors. One way to think about this is that of the low-risk economies , the mature, developed economies, the United States is the fastest growing, and of the fast-growing economies, like China and India, the United States is the lowest risk economy. So this is still going to be an attractive market for people to invest in; that hasn’t changed. Second is the example of Argentina. It had the largest default in the history of the universe, and a couple of years later investors are flocking back. Argentina is not a perfect example, but there is a lot of money in the global financial system, and the United States is going to remain attractive despite the efforts of our Congress.
The immediate effect of the Dubai incident –– the financial implications –– was to devalue U.S. assets, including the dollar, without any benefit to security. The effect of this is to reduce the value of things, American. Fewer foreigners will be willing to bid on them. This isn’t helpful, and it’s probably not what Congress expected, so I asked myself, why would you do something that’s essentially irrational? I think the answer to that would be politics, as we’ve heard. Dubai was very much driven by electoral politics, but there are two issues that shaped the discussion. Both involved negative perceptions held by Americans.
The first is the perception of globalization. This isn’t a problem that’s unique to the United States — we don’t have students burning cars in the streets of Washington — but it’s a problem that America shares with many countries and it’s a problem that shapes American thinking. The ironic thing about this is that globalization is the result of longstanding U.S. foreign policies. This is the world we have sought to build –– to promote free trade, the rule of law, openness, self-determination, democratic rule. These policy objectives go back more than a century for the United States, and some parts of our plan — the WTO, the IMF –– have worked well. Other parts –– the United Nations –– perhaps haven’t worked as well as we might have hoped. But, overall, we’ve benefited from globalization.
One thing to note, though, is that every few decades, there is a periodic reaction in America to globalization. You can see it in the ‘70s, in the ‘50s. You can see it in the period between the World Wars. People say, this is the wrong thing to do; we are losing more than we are getting out of this. The arguments that openness and integration actually increase our security and wealth are kind of counterintuitive. When you tell people a more open, engaged America makes us safer and wealthier, it doesn’t follow a simple model, 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 the perception of globalization.
A larger problem troubles me more. It’s the question of competence, as you’ve heard, and perhaps generational change. What if the United States is no longer capable of helping to direct the system that it built? The current leadership, 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. On the Democratic side, I occasionally get things from Democrats explaining how CAFTA [Central American Free Trade Agreement] is a threat to the American worker. People are questioning the ability of our current political leadership to manage these complex risks and this complex process of international engagement. It’s not clear if this is just a temporary phase, one of those periodic reactions, or if it’s a larger trend. But it is very troubling for the United States.
The second perception that we ought to think about is the U.S. perception of the Middle East.Sometimes you hear about the “Arab street,” and you can read Zogby polls about how positive Arab views of the United States are declining. Well, Dubai ran directly into the American street. It was unfortunate that a perfectly benign business arrangement came so close to the Danish cartoon episode; this only reinforced negative attitudes. The American street, if you will, does not trust the Middle East and it has some credible reasons for this distrust.
I was a little surprised by this because I was arguing very strongly that the Dubai proposal posed no risk to the United States and should go through. The reaction from a range of people was very surprising and very strong. And our politicians, of course, seized on this very real distrust to gain electoral advantage and to bash the administration. It’s an unsophisticated reaction. It’s a perception that doesn’t take into account the full range of the situation and of the region, but it is a sort of fundamental belief, and it’s going to be very difficult to change.
These two perceptions — concern over globalization and distrust of the Middle East — shape the political environment and make openness unappealing. In response to the question that prompted this session — how does the United States reopen for business in the Arab world? — my question is: How do we change that? I think it’s easier to affect the first perception, the fear of globalization. This is a recurring internal debate, and because globalization is ultimately in the U.S. self-interest, and because we’ve won it two or three times before, I’m moderately optimistic that we can win it again. Even conceding 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 perception of the Middle East is going to be more difficult, in part because it’s not purely an internal issue. It will require external actions, positive changes in the Middle East. For the near term, I would say we should focus on winning the debate on globalization, getting people to think about why it is in America’s best interest to be open. That should help us get back on course.
AMB. FREEMAN: 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 lower. 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. This is, in fact, what some American businesses are now experiencing; they’re just not even contacted or aware of opportunities. Rather than complaining and making a loud noise, people just don’t show up. This is ironic and unfortunate, because this is a moment when greater rather than lesser efforts ought to be made.
Don De Marino, chairman, National U.S.-Arab Chamber of Commerce
The collapse of the Dubai Ports 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 U.S.-Arab Chamber, where I am chairman, warned of the dire consequences, regarding not just future investment flows, but various political and diplomatic retaliation. 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 [the British Company] 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 crosshairs. Saudi Arabia was similarly surprised five years ago. Now it will no longer be surprising to any Arab government or private company that attempts a direct investment in the United States. 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 suddenly and make the political and “cultural” context so challenging as to moot the investment.
This sense of latent political risk was deeply exacerbated by the Dubai Ports World fiasco, but it certainly did not originate there. It has been building for several years. It is partly the sorry saga of visas. Arab businessmen with long histories of investing in the United States have had to wait for weeks for a visa, and their kids are simply unable to attend school here because of consular vagaries. 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 “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 “any instances of known or suspected illegal activity.” But there are no precise definitions or guidelines from the U.S. government. On top of all this, there is the “culture” war in which Islam and the Arabs are continuously under the scope of the U.S. media.
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 United States. In my opinion, Arab investors have taken this “political risk”, the xenophobic factor, if you will, carefully into account. It goes the same way as our own U.S. 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 goals, like diversification by country or sector, are satisfied, they will do it. But it does mean that the financial return has to be that much higher, and other factors, such as tax rates and liquidity, had better be fully competitive. You may rightly 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 us. But Arab investors are far more willing to accept the “emerging-market risks.” They see high potential returns, and in part, let’s be clear, there is disenchantment, a “political risk,” a xenophobic factor, as I have called it, in the American market that makes it less competitive.
Arab investment makes up a tiny part of U.S. direct investment — something less than 2 percent or less. Portfolio investment in paper, however, is considerable, and I have not seen, as yet, an appreciable decline in this as a result of this “political risk,” probably because indirect investment is not affected by the factors I’ve mentioned. We need to remember that many major Arab investors have been at this a long time. They remember the hysteria of “Arabs buying up America” in the 1980s. They recall when Congress opposed investments in the United States 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; remember Rockefeller Center? Or more recently the Chinese, when CNOOC had the gall to want to buy Unocal, whose assets were mostly outside the United States, 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 Ports deal collapsed, the same Dubai government investor also recently bought the Essex House, smack on Central Park, to the plaudits of Mayor Bloomberg.
Patient and sensible and able to compose their fears and frustrations into a political-risk formulation, the Arabs will go on with their direct investments in the United States pretty much as before. Ask Rupert Murdoch and Sandy Weill 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, Arab or otherwise, can afford not to be in the U.S. economy.
This is not to defend the idiocy of the so-called “debate” on the Dubai Ports deal. And if the Shelby bill on “reforming” CFIUS passes, it could have a chilling effect on foreign investment. I would not expect 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,” let alone the all-embracing category of “critical infrastructure.”
But the real price, the real chilling effect, will be in the lost-opportunity costs 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. While direct investment in the United States will probably remain strong, these costs in the long run will be very high for Americans.
AMB. FREEMAN: That was a very thoughtful statement that 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. 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.
William A. Reinsch, president, National Foreign Aid Trade Council
I had a rant prepared, but the other panelists have preempted me, have taken the rant points away, so I’m going to try to be a little more positive. To pick up on Don’s last point, which I think is particularly well taken, the long-term consequence of this is the effect it’s going to have on our ability both to attract top talent, to make people want to come here, which has commercial consequences as well, and through that to improve mutual understanding.
In this same room, I did a conference on visa policy last year. The Jordanian ambassador was here talking about this, and he put it succinctly when he said, Jordan sends a lot of its students 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. The point was an important one: They not only form relationships here that stay with them throughout their lives; they form commercial biases here, and we are turning that off. We’re tarnishing the golden door that Emma Lazarus talked about. There are long-term economic consequences of this.
Particularly distressing right now 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, the American people are benign and friendly; it’s the U.S. government that’s pursuing the wrong policy, whatever the policy was at the moment. It’s harder and harder for people to say that now in the Middle East in the wake of an episode like DP World. That one really involved public opinion, from the bottom up. And there were politicians in both parties capitalizing on it, trying to out-tough each other in the Congress. But, clearly, there was an expression from the public that is hard to deny.
That said, let’s be positive about what we can do to get ourselves back on track. I’m not going to talk about foreign policy –– that’s a much more extensive and controversial debate –– but about business and economic trade policy, where there are some steps to take in the short term that might help repair some of the damage. First, of course, we should stop being stupid and not do the strange things that we’ve been doing. In that regard, I refer you to all the things that the previous speaker talked about. The second thing we should do is to ensure that the CFIUS process remains apolitical. Some of the proposed changes would create significant deterrents to incoming investment and could prompt mirror-image laws in other countries.
Looking more specifically at the region, one of the other things that we can do, which my organization has been particularly supportive of, is to redouble our efforts to create a MEFTA — a Middle East Free-Trade Area. This could bring economic growth and jobs to the entire region, and in turn, we believe, would help promote peace and stability. This is a long-term task. Even when the president announced it –– he said it would take 10 years –– my guess is that he was optimistic. But there are some concrete steps we can take right now that will keep things moving in a positive direction. One of the most immediate, of course, is to pass the U.S.-Oman Free Trade Agreement [FTA] implementing legislation. It had a rocky hearing two days ago, but I think we can overcome that and 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 each side understands the other’s positions better on most issues and that both are engaged to 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 than not. 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.
I’m marginally more optimistic. This is also ironic because, of all of the various FTAs in which we’ve been involved in the Middle East, there actually are legitimate economic and trade issues with the UAE that make this negotiation a 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 we want to nurture the relationship.
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 an FTA and further economic reform hostage to a variety of political issues –– which are legitimate –– is likely to backfire. Everything we do with Egypt seems to be two steps forward, one step backward. Some years it’s one step forward, two steps backward. But we need to push harder to get to closure there. With TPA expiration 14 months from now, we need to get busy.
We can also 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 for reforms to filter down in a bureaucracy. I think U.S. engagement is needed more than ever to assure that Saudi WTO commitments on issues such as insurance, telecommunications, the Israel boycott certifications, and standards, are all met. We should explore entering into talks on a bilateral investment treaty, which is easier to achieve than an FTA and would serve as a model for investment issues with other Gulf countries. Investment is the big issue there. We should invigorate the Trade and Investment Framework Agreement [TIFA] consultations on a regular basis to promote 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 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 procedures, increasing capabilities in intellectual-property enforcement, technical assistance in upgrading trade laws and tax systems, and reducing bureaucracy and red tape. We want not only to 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 is to try 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 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, and it’s time to bring it 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 in the region still due to the many government officials and 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 them 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 more time on than anything else, in the last three years, is visa policy. Improvement is idiosyncratic. 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, to see if we can get some guidance as to what in particular can be done. I wouldn’t want this panel to end with my saying everything is gloomy. There are, in fact, some specific steps we can take in the short term that will at least help improve, enhance and expand the economic relationship, and from these, other things can grow.
AMB. FREEMAN: 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 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. Since I think it’s generally helpful to have factually based discussions rather than discussions that are based on conjecture and anecdotal material with no real evidence behind them, it should be asked: What is being done to document the economic costs to the United States and the American economy of some of these policies? For example, the costs of visa policies that inhibit VIP medical care or sales efforts, or make training in the United States impossible: As an example, last summer, a client of mine rented a river in northern Iceland to do business over the world’s best fly fishing rather than try to come to an inhospitable United States. I’m very grateful to the Department of Homeland Security [DHS] for that opportunity, but there are costs in terms of U.S. tourism. There are certainly costs to the educational community. Universities are impoverished by the absence of the foreign students they might have otherwise had. As Bill very importantly stressed, there are long-term costs from estrangement, withdrawal and lack of familiarity with the United States that perhaps could be quantified. I don’t know what is being done in this regard. But I have a feeling that, 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.
MR. REINSCH: We attempted to quantify the visa costs and came up with a number that lives on and I think is valid. We did a survey in the spring of 2004 that asked companies to estimate the direct and indirect costs –– lawyers, delays, things like that. Direct costs mean lost business and people who couldn’t get here and therefore didn’t buy something. In the period July 2002 through March 2004, we produced a result that the statisticians tell us was statistically valid, suggesting that the cost number specifically attributable to visa policies was slightly more than $30 billion –– that’s billion with a “b.” We are 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 earlier.
That’s one piece of data, and when we came out with it, the State Department immediately attacked it. I then had a very interesting meeting. I was at the DHS and sat next to a guy who told me he was the department’s economist. I didn’t know the Department of Homeland Security had one, but there he was. So I said, making conversation, What are you working on? He said, Funny you should ask; we’re doing a survey on how much our policies are costing American business. I said, Oh, really? What are you finding? He said, About the same as you. But I don’t think they will ever release their study.
DR. GRAHAM: We don’t have such a survey or a study. The question I would have for Bill is that you mentioned direct and indirect costs. Does your $30 billion cover just the direct cost?
MR. REINSCH: No, that was both.
DR. GRAHAM: Do you have any sense of a breakdown between the two?
MR. REINSCH: We do. I think the direct costs were between $20 and $25 billion of the $30 billion. It’s a conservative figure because we had a number of very large companies tell us that there was an indirect cost and that it was substantial, but they could not or would not, in varying cases, tell us what it was. So we had to count all that as zero.
DR. GRAHAM: The one thing I’d add, then, is that I suspect the indirect costs are really bigger than the direct costs. Generally, when you have a transactions cost associated with a trade or some other type of transaction, those transactional costs prove to be a small fraction. The real costs come in the forgone benefits, and those are very hard to measure. I would guess that you’re probably talking three times what you’re directly measuring.
MR. DE MARINO: I think, easily, three times. There is great difficulty in this issue. American business is getting better at this, but nobody wants to argue this on cost. You go over to DHS and State and they say, 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. 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; they can’t win. This is demagoguery at its best.
The Arabs accord us great patience and tolerance as a result of the great violation of 9/11. They’re waiting patiently for us to return to normality. They understand this is anguishing. It’s like a breakdown after a death in the family. 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, as Jim said, that tremendous foreign-policy structure that we created in the world. They just would like us to get back to normal. In the meantime, they’re willing to tolerate a lot. They understand that this is all politics and that you cannot win this on the merits. It isn’t about dollars and cents.
Jim’s point about U.S. perceptions in the Middle East and whether we’re competent enough to continue to manage this world architecture is a very open question. The fact that we have succeeded to this point is one of the great achievements of the American public and private sectors. What no one has said is that there are active, dynamic, well-financed, extremely creative forces on both sides playing PSYOPS [psychological operations] with us, who are 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 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.
So as we launch into this problem, we have to understand that it isn’t just a matter of reaching people of goodwill. We have to take out the various PSYOPS that are counter to our interests.
DR. LEWIS: The IMF did a study a couple of years ago about the effect of some of the post September 11 changes on the U.S. economy that gets directly to your question. They didn’t give dollar figures, but there’s an opportunity cost, a long-term erosion. The effect is that the U.S. economy didn’t grow as fast as it could have. The assumption is that it cost us around 1 percent of GDP growth. If their figure is right –– and it struck me at the time it might have been a little high –– it’s very significant, when you’re talking about a $12 trillion GDP, to lose 1 percent of your growth, [$120 billion]. At the end of the day, we’ll probably find that we’ve done ourselves more damage, and we’ll have to think of how to recover.
AMB. FREEMAN: I want to pose a question for us to ponder, perhaps not to answer. Are there ways in which the American corporate community, regardless of its unwillingness to address this issue directly because of the national security issue, might be encouraged to fund some graduate students in economics to begin to collect data that make the case on a factual basis and 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 could be the focal point for such efforts at 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.
Q & A
Q: My conclusion from the presentation is that we have a long list of action items, but no group to take action on them. The only people who could take action on these items are the American Chambers of Commerce in these countries. When the Israel lobby was blocking the F-15 sales to Saudi Arabia, we had a friend in the Department of Commerce. He found out through the Chamber of Commerce and Boeing which states were going to benefit, how many jobs that order would be creating. Then we targeted the congressmen with these numbers and asked, Are you willing to turn it down and refuse so many jobs to your constituents? They all voted yes, and that is how the deal went through. This is the action required to overcome the negativism.
AMB. FREEMAN: The point that I was driving at in raising the issue of collecting data and information is related to this. Arguments for or against something are vastly more effective if one has access to the facts that have concrete consequences for those to whom one is making the argument.
But I wonder whether it’s really fair to ask the dwindling American Chambers of Commerce in these countries to take on the seven tasks that Bill Reinsch 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. How can they negotiate a bilateral investment treaty with Saudi Arabia or promote trade reform and investment reform in countries like Egypt –– which has been engaged in this process for the last 5,000 years and has yet to complete it –– or establish a firm new relationship with Libya, or persuade the U.S. government that it should change its evil ways with regard to visas and access? That’s pretty hard. I think a great deal of it has to be done back here. Maybe the role of the AmChams 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 energy to take these issues on.
MR. DE MARINO: The problem really comes down to funds, not to interest in this. I am incredibly impressed by the chambers overseas. You mentioned Egypt and its 5,000-year history of reform. Egypt is almost there now.
There is a very interesting nexus of extremely creative ministers in Egypt right now. They seem to have the ear of the prime minister, who is sort of the head of their team. There is a critical mass, and I think they are now going to start attracting real investment –– even U.S. investment funds. The Cairo stock exchange was probably the most successful one in the world, if you’re a punter, last year. The American Chamber in Egypt has had a lot to do with that. When various ministers wanted to be buttressed in their desire to reform, and they were going to the parliament and needed a position paper or some thinking on this or that, the AmCham became an adjunct to the reform process. The same thing is true in Bahrain, in Saudi Arabia and, 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 very big participant in this process of reform. I have watched these congressional door knocks become very successful; it seemed that the Congress loved to talk to these guys. These are the people on the frontline, living in these countries. Let’s hear what they have to say. It’s a useful service, and they get their arguments and points through.
Having said all that, there are 101 things on a laundry list at the U.S.-Arab Chamber, and we will get to them. It’s a funding issue; it’s not for want of ideas or people or talent.
Q: When we faced the problem of money, we contacted Saudi businesspeople in Jeddah, who gave us money that we put in an escrow account that is producing interest so that the American business group can continue. There is interest among 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 a group that would take action on all these important items.
MR. DE MARINO: I think we need to fund it ourselves. If we go to that source of capital today in the climate in which we live, it will significantly work against us. We have to dig into our own pocket, and this gets very difficult. There is a very small pool of money interested in this subject in America, at least that I could discern.
MR. REINSCH: We work with AmChams, but the coalitions that we’ve developed are coalitions of American companies that support the progress you’re talking about. We deliberately have not included representatives of the other countries’ governments or those companies. 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 that there are Americans who care about them. 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 than for him to be told that the government of Oman thinks that this is important. The latter is very nice, but the former represents 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. 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 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 time, and three of them were mad at the Bahraini government for one thing or another and were not necessarily ones you could count on to support the agreement because they had a short-term grievance.
Nevertheless, the other 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 almost anybody anytime. But the largest number had bought into the concept of a MEFTA and believe that the regional economic bloc is an important one for them over the long term in an area where they wanted to show growth. 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. Maybe you don’t start with the most important piece from your company’s perspective, but you need to support that piece. If you don’t do that, you’re not going to get to the pieces that do matter for your company.
I think the companies have been impressive in their ability to take the longer view here and hang in there. This, by the way, is in contrast to what they often do, which is focus on short-term returns. 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.
DR. GRAHAM: Throughout this discussion we’ve heard a lot about the regional agreements and the bilaterals and so forth, yet what may be most in jeopardy in the immediate term, at least in the international trade area, is the Doha Round, which is supposed to bring a new meaning to the WTO. 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? There was tremendous support and even pressure from the U.S. business community to finish 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?
MR. DE MARINO: I don’t think the countries in the region feel they have a dog in that fight. Most of them are concentrating on bringing investment into their country to a greater degree than before. Intraregional trade is now becoming far more important to them. I think 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. They are interested in it, but they’re not active participants.
AMB. FREEMAN: I think you’re right, but I would note that this is 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. I also think many of the countries in the region, and certainly the most important economy in the region, Saudi Arabia, are in the early stages of trying to implement WTO as it is, without trying to redefine it.
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, 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. 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. That is also the case for Morocco. They might both be more diplomatically mature economies. They’ve got more experience operating in international fora. They also have a lot of diplomatic missions all over the world and diplomatic experience. Morocco, I think, has in general played a very constructive role as a facilitator. You’ll recall the Uruguay Round was actually signed in Marrakech. But these countries don’t just play host; they play a substantive role as well. Half of them, 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 more optimistic about their involvement than the last two speakers.
The U.S. business community supports the Doha Round. I think they are, like everybody else, including the U.S. Trade Representative Ambassador Portman right now, frustrated at the lack of progress. We’re in one of these Alphonse and Gaston routines where everybody is saying, 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. Nobody wants to go first, so here we are. I think the issue is not so much business-community support for the round –– they will support it and they will, 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 minimis outcome will produce token support and very little effort on the part of the business community. An ambitious outcome will obtain a lot of support.
We continue to do many 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 an ambitious outcome. You need to keep in mind that, as Monty well knows from watching the previous rounds, these things crash and burn several times before the final process. I can’t tell you with confidence that we’re 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 optimistic about a significant conclusion at some point.
DR. LEWIS: 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 what are the developing countries –– particularly Egypt, Brazil and India –– going to give in exchange? So far, our 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 loaded, certainly for the Europeans and probably here too.
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 will come from us on agriculture, but what’s the concession on their side? That part needs to be filled in. For many Middle Eastern countries, it would be in their interest to see this relaxation on services, in particular. So they might have an interest in the outcome that they would benefit from expressing.
DR. GRAHAM: On this 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. 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 accrue net benefits from this practice. 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.
Bill is absolutely right that these things crash and burn several times and in the end succeed, but, in the Uruguay Round, at the end of the day, the U.S. business community had intellectual property to gain, and they passionately wanted that. So, that ultimately you had the U.S. business community really behind it. Every time it crashed, the business community would be there to say, We just can’t let this happen. There doesn’t seem to be an equivalent interest at stake in this one. What is the United States Trade Representative offering the United States? We’re offering some farmers the chance to lose their subsidies, and that doesn’t always create the most desirable political dynamic. It seems to me that we do not have an issue about which a major constituency passionately wants the round to go forward. But we do have some issues where there are U.S. constituencies that are going to oppose the whole thing even if the United States gets demonstrable net benefits.
MR. DE MARINO: 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. It’s quite correct to say –– and I think these are your figures –– that there was one de facto rejection of an investment deal by CFIUS, and 20 or so others that were in effect de jure not accepted. And people would say, 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 that I think CFIUS has worked, and it’s been around for 20 years. When we had this hysteria in the 1980s, and we passed Exon-Florio, again it was a foreign-investor hysteria, an Arab-bashing, Japanese-bashing exercise. We got something rather good and apolitical out of this very professional way of handling 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. It doesn’t, right now, look as if it’s going to be as good. It’s got all kinds of crazy features in it, in my opinion. We’re going to classify countries according to whether they’re friends or enemies.
And forget about secrecy. 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. This is not how business gets done. I’m looking at it and saying, we don’t want to buy that company. Everybody is going to know our figures; all our proprietary stuff is going to leak, all the terms of the deal. Forget about it. There is a lot of money that has come 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: 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, we’ll have 11 industries that are “critical infrastructure”: food investments are going to go to CFIUS. The Department of Agriculture is going to weigh in now? Forget about it. This is the stupid stuff the French are trying to do right now –– Villepin’s 11 strategic commodities. Let’s hope 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.
DR. LEWIS: I’m also not an economist, but I’ve studied it. More important, though, I’ve studied CFIUS, and the CFIUS process is broken. 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 a secondary or tertiary concern. But CFIUS is broken. The bad news now is that, because the executive branch was slow in fixing it, Congress will fix it, and that’s a very frightening outcome.
One of the things 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. The bad news is, to bring it back to one of my themes, that you have this unhappiness in America about the Middle East, and you’re going to be affected even though everyone is thinking China, but you’re going to get it as well.
AMB. FREEMAN: You spoke of the American street — a very appropriate phrase –– and 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.
DR. GRAHAM: As I indicated, I do have a book coming out on this, and we devote a specific chapter to the China issue. We think that there are some issues that are actually worth addressing. We wholly agree with the analysis of the Shelby bill –– that it’s unnecessary and 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 watered down step by step, and that’s entirely to the good. This friendly/unfriendly country distinction –– if that stays, it’s terrible.
On the critical-industries list, the one good thing that they’ve done is to add a criterion. It’s not just an investment in these sectors; it has to be designated as a security-related issue. I think that’s very good because it would knock out most of these foods.
Q: We have a lot of barriers to Arab investment and Arab business coming here, but what I’ve been running into is our travel-advisory problem. When I go to a medium-sized American company from the Middle West saying, Here’s a good opportunity, please come with me to Saudi Arabia or Egypt, they say, We just went to the State Department’s website and it says, “don’t travel,” so we’re not going. That’s a real barrier. We’ve got to find a better way of looking at the travel advisory problem. Even when I did get people to go with me, it was impossible to get them into the American embassy in Riyadh so we could go to the commercial counselor’s office. These guys panicked and said they’d meet them at the hotel — the embassy being surrounded by sandbags, armored cars and camouflaged nets.
AMB. FREEMAN: I think there is an inherent and probably, at present, unfixable problem with travel advisories. We live in a society that is determined to affix blame for anything that happens, regardless of whether there is or is not a valid reason for affixing blame. Since the ambassador 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. We are striving for a standard of zero risk, which is essentially unattainable.
This issue shows the other side of the problem. It’s 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 to come out and do things on the ground –– over the objections of their corporate counsel, who look at the State Department warning and attribute, correctly, liability to that. The ironic result is 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 –– 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.
DR. LEWIS: We are in a phase now in which the diplomatic security service and the policemen have gained considerable influence. We’ve been through these phases before, in the 1950s and in other periods, so the real question is, when will it go away? We’ll pass all these laws and eventually, being Americans, we will start to ignore them. Will that take 10 years; will it take 15 years; will it take five years? I vote for sooner rather than later.
MR. DE MARINO: Once again the lawyers are running everything, so it’s a liability issue. State Department lawyers put that language in, and then general counsel at Corporation X says, State is not going to let him go. A CEO can’t sign off on this. It’s a zero-risk deal. And nothing that is going to change. I don’t find capital to be a coward at all anymore. You have to get knocked around to make a buck; it’s very hard to make money. Capital tries to minimize the hits it takes, but it knows it is going to take hits. I find businessmen who are perfectly willing to go to Riyadh and other places. They’re not the average guy, but they see a competitive advantage: Everybody’s scared, so I’m going to go now. I rely on American entrepreneurship to get us through, but it is really a climate of zero risk right now.
AMB. FREEMAN: I would like 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 the midst of an amazing boom. Oil prices are at historically high levels. Money is floating into the region, which is undergoing a construction boom. Saudi accession to the WTO promises the relocation of the world’s petrochemical industries and associated projects to the region –– hundreds of billions of dollars of investment over the coming decade. 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 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 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, at stake in all of this is the recirculation of petrodollars, something which we’ve taken 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 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 pieces of paper 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, “Diós rearregla de noche lo que hacen los argentinos de día”––“God fixes during the night the mess that the Argentines make during the day.” Perhaps this will apply to us, and once again, as Kaiser Wilhelm observed, “God takes care of idiots, cripples and the United States of America.”
DR. LEWIS: We’ve heard a lot about the cost to the United States. These are real costs. My hope is that this is only a temporary phase, that we’ll emerge from it, and the United States 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. This is still the technological leader, the leader in services, the leader in innovation. Being cut off from the American economy is bad for the United States, but worse for the others. So there’s a role for both sides to play in making improvements.
MR. DE MARINO: There’s a Saudi outreach program in the United States. Businessmen come here quite frequently to talk to American business about joining them in the tremendous number of projects going on in Saudi Arabia. There’s a very keen interest in having the United States as a partner, and Saudis and other Arab companies continue to reach out to us through all of these problems that we have at the political level.
MR. REINSCH: Don’t do anything stupid.
AMB. FREEMAN: That’s a sage observation. I am sure the Congress will follow your advice.