Ports Debate Reawakens Foreign-Investment Jitters
Proposed Takeover Pits Security Against Economic Fears

By Paul Blustein
Washington Post Staff Writer
Thursday, February 23, 2006

Once again, the specter of foreigners gaining control over strategic American assets is sparking an uproar in Congress. And that is reigniting a debate about whether the United States is too open to foreign investors -- or whether it is prone to self-destructive fits of xenophobia.

Lawmakers are now up in arms over the prospect that Dubai Ports World, a state-owned company based in the United Arab Emirates, would be allowed to take over the operations of terminals in six major East Coast ports, including Baltimore and New York. Members from both parties are voicing worries about terrorists using U.S.-bound containers to sneak "dirty bombs" or other weapons into the country -- even though many shipping and port-security experts contend that the proposed takeover would have little bearing on those risks.

The controversy follows the flap last summer over the proposed purchase by Cnooc Ltd., a Chinese state-owned firm, of Unocal Corp., the California-based oil giant. In that case, too, many industry experts dismissed concerns that China's acquisition of additional petroleum reserves would risk depriving the United States of the oil it needs. But congressional opposition forced the Chinese to abandon the deal.

The twin episodes are reminiscent of the late 1980s and early 1990s, when takeovers by Japanese companies of U.S. businesses such as movie studios inflamed American anxieties. The recent ruckus has prompted warnings that the United States could be endangering its economic well-being, and perhaps some foreign-policy interests, by discriminating against investments from some of the world's fastest-growing nations. Bush administration officials, who approved the ports takeover after what they called an extensive review of the security issues, have been among the most vocal in sounding the alarm.

"The implication of failing to approve this would be to tell the world that investments in the United States from certain parts of the world aren't welcome," Treasury Secretary John W. Snow told reporters yesterday. His words echoed those of President Bush, who noted Tuesday that the terminals in question are currently operated by a British firm and that the UAE has been Washington's partner in the war on terror. "It would send a terrible signal to friends and allies not to let this transaction go through," the president said.

The potential for diplomatic damage concerns some foreign-policy heavyweights, notably Sen. John W. Warner (R-Va.), who said in an interview that "if the United Arab Emirates feels they're not being treated fairly, it could result in their pulling back some of the support they've given us," which includes allowing U.S. naval vessels to dock in the country's ports.

But the economic risks of a blocked transaction are probably modest, experts say -- even those who strongly favor free-market rules for multinational investors.

"Would it chill foreign investment if this deal were to go down? I'm not sure it would," said Edward M. Graham, a scholar at the Institute for International Economics who has written extensively on direct investment -- the kind of purchases involving the takeover of firms or construction of facilities overseas, as opposed to investments in U.S. stocks and bonds.

"Most direct investment in the United States comes from places like Europe, Canada and Japan, with a very small amount from other countries," Graham said. "Nobody in Europe is going to react to this by saying, 'Gee, we'd better watch out.' It may chill further direct investment from the Middle East, but I don't think it would go much further than that."

Todd M. Malan, president of the Organization for International Investment, agreed, calling the reaction to the ports takeover "an anomaly of Congress's view about foreign investment in the United States." Malan, whose group represents the U.S. subsidiaries of foreign multinationals, observed that Toshiba Corp. of Japan is on the verge of buying Westinghouse Electric Co., a builder of nuclear power plants -- "and there hasn't been a peep about that."

The lawmakers who are objecting to the Dubai Ports World transaction "aren't being knee-jerk; some of them are people who have impeccable free-trade, open-investment voting records," Malan said. "They have some real misgivings" about Dubai Ports World because they understand that Dubai -- one of the UAE's seven emirates -- has been a hotbed of money laundering for terrorist groups and also served as a transshipment point for a Pakistani scientist who helped countries such as Libya obtain nuclear-related materials and technology.

The dispute has focused fresh attention on a secretive interagency panel, the Committee on Foreign Investment in the United States, which scrutinizes foreign purchases of U.S. companies for potential national-security problems. The committee includes representatives from 12 agencies, including the departments of Defense, Treasury, State, and Homeland Security, as well as White House offices such as the National Security Council. Having vetted the Dubai Ports World takeover of the British terminal operator, Peninsular and Oriental Steam Navigation Co., the panel's members unanimously agreed that the deal could go ahead. Had any of them dissented, an additional 45-day investigation would have been required.

The failure to insist on the extra investigation has drawn some of the harshest criticism. CFIUS has a bias in favor of approving deals, stemming from the fact that the Treasury chairs the panel, said Patrick A. Mulloy, an attorney who as a Senate aide helped draft the legislation governing foreign investment more than 15 years ago.

"Treasury has a view that we have to keep our market open to foreign investment, to help finance the trade deficit," Mulloy said. "They say that the Defense Department and others are in the meetings -- well, sure, but when you chair the meetings, and have the staff that implements the statute, you have tremendous influence."

Officials involved in the review countered that the Homeland Security Department took the lead on the review of the ports takeover because of its expertise and jurisdiction. The officials said in a briefing that the department's security experts had a positive view of Dubai Ports World because the company participates in a U.S. program to screen containers before they are put on U.S.-bound ships. Moreover, they knew that at terminals managed by the firm, vital security functions would continue to be performed by Customs and Border Protection employees and the Coast Guard and that longshoremen's unions would continue to supply other security personnel.

But asked whether the panel could have handled the issue better, Stewart A. Baker, the assistant secretary for policy at the Homeland Security Department, said: "Obviously, given all the firestorm on this one, I would think that we probably could have."

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