Friday, February 24, 2006


The current American debate over whether or not Dubai Ports World (DPW) should be allowed to purchase the American holdings of Pacific and Orient Steamship Holdings (P&O) would have thrilled Mencken to no end. Nothing entertained him more than seeing Americans making asses of themselves. We’re doing so on several levels, and it is an extremely amusing spectacle for those of us who laugh at human folly.

First, a substantial portion of us can’t even get the basic facts right. Last night (22 Feb. 2006) Fox News radio headlined it as “Bush’s plan to give American ports to Dubai.” We shouldn’t expect great accuracy from this extension of the Republican party, but come on, this is utterly wrong on at least three counts. First, this isn’t a Bush administration plan. This is a transaction between two private firms, occurring outside of the U.S. Second, this doesn’t concern the ownership of U.S. ports, nor the guarding of them, both of which remain in U.S. hands. It concerns ownership of the company that manages day-to-day operations of six major U.S. ports, not ownership of the ports. Third, this is not the government of Dubai taking over anything. It is a private company doing so. The government of Dubai is the owner of DPW, but that’s a different thing. DPW is a profit-maximizing company with a strong record as one of the most competent port managers worldwide. DPW is not the UAE government.

Second, much of America’s debate is centering around whether A-rabs/Muslims/UAE can be trusted. All of this misses the point. The real question is, is DPW competent and trustworthy? So far as I can tell, the answer is yes. DPW has a worldwide presence, and operates numerous ports in China, two in Europe, one in Australia, a few in Latin America, and seems to have an excellent track record. (None of the ports have blown up yet, for one thing.) By all appearances, DPW is a competent company that does good work. But I have no particular opinion on DPW. I don’t know for sure whether they are god’s gift to port management, or maybe al Qaeda thugs. The former seems more likely, but it is beyond my ability to determine this. This does seem like one of the few possibly legitimate roles for the CIA, FBI, etc. though. Apparently they have thoroughly vetted DPW. (Now, if only we could get CIA and FBI thoroughly vetted. Is there any reason we should trust them?)

Third…here’s the real issue everyone is ignoring. Given us Americans’ proclivities for irresponsible finance, the United States have little choice but to accept foreign investment in our country. The case at hand case isn’t the best example of this, since it is simply a changing of foreign hands, not a new transfer from American hands. Still, the point is being raised, “why are we selling our country to foreigners?” To put it simply, we’ve decided to do this. Americans are not savers, on net. We borrow like crazy so that we can consume more than we earn. Some of us save, though, and these savings are about equal to what we borrow, so on net, we’re not saving, we’re even.

But on top of that, our federal government is not saving either, nor breaking even. It is borrowing like crazy. We aren’t asking them to cut spending or raise taxes, and spending exceeds taxes, so they borrow. But from whom? It can’t be from Americans. who aren’t net savers. The only people left are foreigners, who are thus investing heavily in our country, in debt and equity. The U.S. has a net capital inflow. It’s not inherently a bad thing, but in our current case it is driven by our own profligate spending, and this fiscal irresponsibility is a bad thing…particularly our government spending, which blows resources on activities of highly questionable value, such as adventures in Iraq, agricultural subsidies, Homeland Security bureaucracy creation, etc. Foreigners have been covering our debts for us by buying low-yield U.S. government bonds. (Ironic, isn’t it, that China and other East Asian central banks, plus Middle Easterners, are financing our Iraq misadventure?)

To understand this issue requires some thinking, as opposed to judging a company on the basis of the skin color or religion of the owners. Since condemning people on the basis of race and religion is a popular pastime, and understanding economics is not, I expect that the debate on this issue will remain incoherent and irrelevant. But here are the facts. Much of the “third world” is finally starting to experience booming economic growth. These non-white non-Christian people are going to be diversifying into the developed world. America’s financial irresponsibility makes us dependent on their investments, whether we know it or not. And while foreigners have been happy buying U.S. gov’t bonds for a while now, these are, as G.W. Bush puts it in the Social Security context, just paper IOUs. So foreigners will increasingly purchase assets in the U.S. Americans do not currently have the self-discipline needed to face the government spending cuts, tax increases, and net household saving that could reverse the trend. So we continue to sell our assets to pay for our spending, all the while whining about the dreaded A-rabs and Chinamen to whom we’re selling them. Mencken would have loved this show.

Since this story first hit the news services getting the real story has been like trying to decipher hieroglyphs before the Rosetta Stone. At first the story was about port security. Most of the news agencies said that this company would be taking over port security at six major United States ports. Finally it has come around to managing operations at certain ports, not port security.

Still my objection is why are we rushing into a decision. Even with the delay proposed by Dubai Ports World, the Bush administration said that this is a done deal. Certainly Bush must realize that this is a political mistake if nothing else.
With the 2006 elections looming, Republicans are not going to support this deal.

Already the courts are getting involved. In a lawsuit in Florida circuit court, the Miami subsidiary said that under the sale it will become an "involuntary partner" with Dubai's government and it may seek more than $10 million in damages.

This has been mishandled since the beginning.
Thanks for your comments.

I first heard the story on NPR, which reported the nature of the deal correctly from the outset. I have the idea that other U.S. news desks are more interested in maximizing market share than getting facts right, unfortunately.

Why rush in? Now it appears that Dept. Homeland Security had orginally objected to this deal. It would be very interesting to know the details of why, and why the Bush admin disregarded this.

In one sense this is clearly a done deal -- one foreign firm has sold one of its subsidiaries to another foreign firm -- the deal didn't even occur in the U.S. But is raises all sorts of serious issues, plus non-serious ones raised by xenophobes and protectionists.

If nothing else, it demonstrates the ineptitude of Bush and his if we needed further evidence.

Here is an article by H.R. Ron Paul
about why he oppose the Dubai Port deal. My opinion is pretty much aligned with his.

"Many Americans are upset by the thought of a Dubai-based corporation running port operations in several major American cities. The company involved now has agreed to delay taking over those operations while the Bush administration and Congress settle their differences and address the ire of the American people.

There’s nothing necessarily wrong with a company from the United Arab Emirates being involved in U.S. port operations. After all, Islamic terrorists have lived in many European countries, and nobody suggests that E.U. corporations should be similarly disqualified.

But this is not a matter of one foreign company buying another and taking over existing operations in the United States. The Dubai company, DP World, is owned by the government of the United Arab Emirates. It is in essence an agent of a foreign government, which raises questions: Does DP World truly operate like any corporation, answering to a board of directors, serving shareholders, and working to boost profitability? Or does it serve the foreign policy and economic goals of the United Arab Emirates?

This is not a true free market transaction, but rather a marriage of multinational corporate and state interests. And surely the American people should have a say over foreign governments doing business here, especially when that business affects port security.

It's important to note the administration did not bother to consult with Congress or the state governors involved. The Treasury department approved the purchase with no congressional oversight whatsoever. While many applaud unchecked presidential authority when it comes to war in Iraq, wiretapping, and other national security matters, they now demand that Congress overturn a unilateral administration decision. The lesson learned is that everybody likes presidential power when they agree with how it’s used. When they don’t, they rediscover that the Constitution authorizes Congress to make policy after all.

There also is an important states’ rights issue involved in this controversy. Why are Treasury department bureaucrats in Washington making decisions about port security? Most American ports are owned by U.S. states, cities, or local port authorities, not the federal government. Do Treasury department personnel 1500 miles away really know what’s best for the ports of Galveston or Freeport?

I strongly support those governors who have indicated they do not intend to allow the federal government to dictate who will run their ports. I hope Texas state officials display the same determination and resist a potentially dangerous federal dictate regarding the operation of our ports."

H.R. Ron Paul's article has some merit about the demand to scrutinize this deal. The other politicians may have had bogus reasons to oppose this deal, however, I believe H.R. Ron Paul's opposition is legitimate. This deal is mercantile and it should be debated.
Anon- thanks for the Paul statement.

I think Paul misses the mark on two points.

First, a firm can be owned partially or wholly by a government and yet behave as a profit-maximizing entity. What is required is that the government (i) tell the firm's management that profit maximization is the objective, and then (ii) not meddle in the running of the firm, either by directly influencing decision making or by providing a soft budget (subsidies). I know it is hard to believe, but there are many examples around the world of this happening successfully (e.g. the Chinese firm COSCO, which manages a number of U.S. ports).

Second, I don't believe it's all accurate to say the Feds imposed anything on the States. What actually happened was that a firm in the UAE purchased, in the UK, assets (including contracts)belonging to a UK firm. The Feds then debated whether they wanted to block the transaction, and eventually decided against.

It's apparently moot now since DPW has agreed to spinoff its U.S. assets. There are two obvious downsides here...(1) American port security still stinks, and nothing is being done about it, and (2) foreign investors are going to become increasiningly leery about being hurt by our standards of political correctness.

I remain doubtful that DPW posed a real threat, but still recognize that I don't have sufficient info to reach a conclusion I'd be willing to defend.
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