March 13, 2006
The Dubai Ports World Fiasco
The Dubai Ports World Fiasco--Posner
Last August, Becker and I blogged about the effort of a Chinese oil company to buy the American oil company Unocal. That effort failed because of fears that China would use control of the company to the detriment of the United States. Becker and I thought those fears chimerical. In effect, by purchasing Unocal, the Chinese would have been giving us a hostage. Moreover, if as feared (groundlessly) they ordered Unocal to sell all its oil to China, the only consequence would be that whatever supplier of oil to China Unocal would be replacing would now have unsold oil to sell to the United States. Our oil supply, and oil prices, would not be affected.
Defenders of the thwarted transaction by which Dubai Ports World, a company owned by the government of Dubai, one of the United Arab Emirates, would (through its purchase of the British port operating company Peninsula & Oriental Steam Navigation Company (P&O)) have obtained control over loading and unloading ships at a half-dozen major U.S. ports argued that the opposition to the transaction was as blatant and misguided a display of xenophobia as the opposition to China's acquiring Unocal. But the two cases are not symmetrical. The opposition to the Dubai deal had nothing to do with fears that Dubai Ports World would deprive the United States of access to an essential raw material or otherwise harm the United States economically. Nor, I think, had the opposition much to do with fears of foreign investment in general, since the transaction was between two foreign companies (P&O and DP World). Protectionism is not a compelling explanation for opposition to the sale of assets by one foreign company to another even if some of the assets are located in the United States. Toyota has factories in the United States, but if BMW bought Toyota, who would care? The defeat of the DP World transaction was the result of a groundswell of American popular opinion (though egged on by politicians and the media) that is more plausibly interpreted as anti-Muslim and anti-terrorist than as protectionist. Dubai is an Arab nation with pre-9/11 links to al Qaeda, and U.S. port security is notoriously lax. No serious person thinks that Dubai would actually connive in a terrorist attack on the United States. The fear is rather that an Arab company is more easily penetrated by Islamic terrorists than a non-Arab one.
The fear may be exaggerated, but many of the arguments made in defense of the Dubai deal seem dubious. For example, it was argued that since British, Singapore, Chinese, and other foreign companies already control some port operations in the United States (P&O being one), the cat is out of the bag. But the companies of non-Islamic nations are no more likely to be penetrated by terrorists than a U.S. company is. It is not, as some defenders argue, "racist" for Americans to differentiate Islamic nations and peoples from other nations and peoples with regard to security precautions. It is merely realistic. (Many of those defenders in fact support racial and ethnic profiling as a rational police and counterterrorism practice.) Nor is it a complete answer to the opposition to point out that the employees at the ports that Dubai Ports World would have operated are Americans and would be unlikely to be replaced by Arabs or other foreigners, or that the security of U.S. ports is the responsibility of the Coast Guard and of U.S. Customs and Border Protection (both components of the Department of Homeland Security) rather than of the port operator. The local managers of DP World doubtless provide a stream of information to the company's headquarters in Dubai concerning various aspects of their port operations (including personnel), and this information might be valuable to anyone contemplating a terrorist attack on the United States who might have access to the company's files. And doubtless personnel from headquarters visit the ports from time to time on business. Apparently the investigation made by the U.S. government before approving the transaction was superficial.
I would have to know a lot more than I do about port security to be able to evaluate the risk that allowing DP World to control U.S. port operations would create to national security. The risk may be slight; but even so, running a slight risk of catastrophic loss is worthwhile only if the benefits of the risk-taking are considerable. The benefits would have been slight had the government handled the matter more adroitly. Apparently DP World, in buying P&O, was not particularly interested in the latter's U.S. operations. So when the proposed acquisition was first submitted to the U.S. government for approval, our government might quietly have suggested (maybe it did, though there is no indication of this) that DP World spin off the U.S. operations that it was acquiring to an American company. Because this was not done, and DP World is being depicted as having backed off from acquiring the U.S. port operations because of fierce grass-roots American opposition, concern has been expressed that we are poisoning our relations with the Islamic world in general and Dubai in particular, and even discouraging foreign investment in the United States by non-Islamic countries.
This concern seems overblown. Take the last point first. Because of our large budget deficit, the world is awash in dollars. The companies holding those dollars are avid to invest in the United States, either by helping to finance our deficit or by acquiring U.S. assets. They are not likely to be deterred by a security concern focused on an Islamic nation. Some Islamic nations may be angry with us; but those nations do not invest heavily in the United States. Tiny Dubai can hardly afford to retaliate against the United States, to which it looks for protection against the stronger nations in its region, such as Iran. Nor for that matter can Saudi Arabia. Between us and the Islamic world (outside of frankly hostile nations such as Iran and Syria) the economic and security dependence is mutual. Moreover, the ruling and business classes in these nations understand that the United States is a democracy, that our government must therefore be responsive to public opinion, and that Islamic terrorism and fanaticism, the French riots, and the riots over the Danish cartoons, have increased the hostility of Western populations to Muslims. Demonstrations of the indignation of the American people over Muslim misconduct may even cause some Muslim leaders to rein in their followers.
Western hostility to radical Islam was one of several factors that made the government's defense of the DP World acquisition a distinctly uphill struggle quite apart from legitimate security concerns. Another such "extraneeous" factor was our government's surprising neglect of port security, which has made our ports seem the weakest link in our defense against terrorist attack by means of weapons of mass destruction, weapons that could probably be brought to the United States only by sea. Another factor was the poor reputation of the Department of Homeland Security, which is responsible for port security; the Department's assurances that the DP World acquisition would not undermine national security were bound to fall on deaf ears. Then too there is suspicion, based on our lucrative commerce with Dubai and on our failure to require strong counterterrorist measures by our chemical industry, that our government trades off terrorist risks against business interests on terms too favorable to the latter.
I have expressed concern before in this blog and in other media about what seems a crisis of competence in U.S. government. For reasons probably rooted in the sheer complexity of modern society, to which our governmental structure may not be well adapted, we have experienced in recent years a series of policy fiascoes, many of which seem to reflect an inability to plan ahead. In the case of the DP World deal, this inability was expressed in the failure to foresee the public reaction to the deal.
Comment on the Dubai Ports World Fiasco--BECKER
Posner rightly distinguishes the attempted purchase last year of the American oil company Unocal by the Chinese government-owned company, CNOOC, from the proposed operation of six American ports by Dubai Ports World, a company owned by the Dubai government. The case against the takeover of Unical by SNOOC was extremely weak for the various reasons we gave in our blog discussion last August.
The case against allowing this Dubai company to be in charge of loading and unloading ships at several ports is stronger, perhaps much stronger, but in my judgment not strong enough. So I do support the decision of the Bush administration to allow the transaction to go through, and regret the Congressional and media opposition that torpedoed it.
Posner too readily dismisses the degree of opposition in some American circles to the takeover by foreign companies of certain types of American assets. Such protectionism not only blocked the Unocal takeover, for reasons he agrees are flimsy, but also prevents foreign airlines, even those as innocent as British Airways, from owning American airlines, and from flying from one American city to another. Protectionism is the only reason for the pressure on China to control the rate of increase in its textile exports to the United States. American protectionist sentiment arises whenever it can be disguised as concern over national security, terrorism, health, and other legitimate issues.
Protectionism was also manifest when Japanese companies in the 1980's and 1990's took ownership of certain assets, like Rockefeller Center, considered to be American jewels. Anti-Japanese attitudes allowed protectionists to create opposition to these transactions that would not have been possible if British or say Italian companies were involved. In the same way, although the operation of these ports was being simply transferred from one foreign company (British) to another one, dislike of Muslims by many Americans enabled protectionism to be disguised under the cloak of concern over Islamic terrorism.
I instinctively am dubious about the legitimacy of the opposition to the Dubai Ports World transaction when it is led by the new Lou Dobbs, the CNN business commentator, who saved his sinking ratings by discovering that he never met any imports to the United States that he likes, whether of goods, services, or people. He may by accident be right in the Dubai ports situation, but his opposition makes me suspicious of the motives behind much of the more vocal opposition.
How serious is the risk that this government-owned Dubai company, headed by an American, would either intentionally or through lax management of the ports, have allowed terrorists or major weapons to enter America through the ports they would have operated? This risk is not zero, but I do not believe it is strong enough to justify blocking the transaction. It is doubtful that any information provided to headquarters of the company by American dockworkers, or even by any of the very few Muslim managers of the company, would be of greater value to terrorists than information about port security that can be picked up from media reports, surveillance, and the internet. Furthermore, the major terrorist attacks in recent years, such as 9/11 and those in other countries, did not (as far as I know) depend on information passed to the terrorists by sympathetic companies operating trains, ports, airports, airlines, or other vital sectors.
I have expressed my support of appropriate ethnic and other profiling in prior blog discussions and elsewhere, but the risk has to be sufficiently large to justify taking actions that inevitably arouse antagonism. Several airlines from Muslim nations, such as Kuwait Airlines, Biman Bangladesh Airlines, Emirates Airlines, and Saudi Arabian Airlines, fly into the United States every day. Should they be banned because someone in these companies might connive to allow terrorists on board who plan to hijack a plane and then fly it into a major building in New York, Washington, or elsewhere? Should all citizens from Saudi Arabia be banned from entering this country because a few might turn out to be dangerous terrorists?
Terrorist profiling means that extra attention is paid to members of groups that are likely to commit terrorist acts, not in most cases that they are completely excluded from entering. For this reason, applicants from a country like Saudi Arabia who want to enter this country to study or as tourists should be scrutinized much more carefully than applicants from say Sweden. Extra scrutiny should be given to the activities of airlines with access to American air space that may pose greater risks than airlines like BA.
Extra scrutiny should have been the way to handle any terrorist risk posed by the Dubai Ports World management of the ports under their control. The extra cost of an intensive inspection of cargoes entering these ports would have been worth furthering the belief that the US does not simply plead the case for globalization when confronted by restrictions placed by other nations on American exports. Such an action would have sent a message that while the US takes terrorism very seriously, it would not use that concern as a cover for opposition to foreign ownership of American assets.
As Posner indicates, part of the concern arises from the apparent laxity in protecting against terrorist threats entering through ports. That has been noted many times as a defect that deserves high priority. I am no expert on this, but I would be easily convinced that this country is not doing a good job of inspecting containers entering American ports, and personnel on ships that dock at these ports. These concerns should be addressed, and exposure and correction of lax port enforcement should have high priority. However, blocking the operation of several ports by this Dubai company at best trivially help overall enforcement. Worse still, it could create complacency about protection of entry of terrorists and weapons through American ports that would be far more damaging to US security that allowing the Dubai transaction to go through.
Perhaps as Posner argues, not much harm will result from opposing the Dubai Ports World management of a few American ports. Yet it gives still another signal to the world that when conditions are ripe, protectionist sentiment in the US will gain the upper hand. This is presented as anti-Islam or anti-terrorist, but is I believe at heart anti-free trade and anti-globalization. To me that is the main cost of the Dubai Ports World fiasco.