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The Philadelphia Inquirer The Economy Column: Ports Fuss Leads to 2 Nightmares

Posted on: Friday, 24 February 2006, 09:00 CST

By Andrew Cassel, The Philadelphia Inquirer

Feb. 24--You tell me your nightmare, and I'll tell you mine.

Yours -- from what I hear on the talk shows and glean from reader e-mails of the last few days -- goes something like this:

That now-infamous Middle Eastern company is allowed to take over contracts at Philadelphia and five other major U.S. ports.

Controlled by the government of the United Arab Emirates, the new firm makes subtle changes in the operations of the ports -- changes that make it easier for Islamist jihadi terrorists to execute a devastating attack on the scale of 9/11, or worse.

My nightmare is a bit different. In it, the current uproar about the ports deal doesn't die down, but grows.

Pent-up fears are fanned by ratings-hungry talk shows and cheap election-year demagoguery. The Bush administration's own rhetoric about national security leaves it unable to defend or even discuss the deal in rational terms.

Politicians of both parties smell blood, and can't resist piling on.

Within a few weeks, Congress passes legislation that, while questionable in constitutional terms, effectively prevents the port deal from going through.

In speeches from the floor, legislators take turns bashing foreigners in general, and Arabs in particular, to great applause.

Owners of U.S. assets take note

All this is duly noted by the foreigners who own nearly $12 trillion in U.S. stocks, bonds and other assets.

They remember that, only a few months ago, a similar outbreak of U.S. jingoism killed a Chinese bid to buy the American oil company Unocal Corp.

And the idea grows that, while the United States may be the largest and most stable economy in the world, it's no longer such an attractive place in which to invest.

That notion doesn't have to spread very far to have an effect. America's large and continuing trade deficit means we need more than $2 billion in new foreign investment every day. Even a modest reduction in the flow of capital here could change life in some dramatic ways.

Remember, there are only two reasons people outside the United States hold dollars: to purchase American goods or invest in American assets.

If trade or investment opportunities here shrink, the world's appetite for dollars is liable to shrink as well.

The upshot could be a steep fall in the dollar's foreign-exchange value, a sharp rise in interest rates, or both.

Since this is a fantasy, let's imagine what comes next. The Dow takes a dive. Real estate markets tank. Job growth ends; recession begins.

At the same time, you can easily see a trade backlash developing against U.S. firms and products.

No order for Boeing

Dubai's state airline (one of the largest in the Middle East) decides to place its next aircraft order with Airbus S.A.S. rather than Boeing Co.

Requests for patent-protection help from U.S. technology or pharmaceutical firms go unanswered.

American firms seeking to expand in Asia or the Middle East run into thickets of red tape.

And that's all in addition to the geopolitical damage -- to our alliances, to international cooperation, to America's credibility abroad.

I'm not predicting any of this will actually happen, mind you. Indeed, one expert I spoke with -- Edward Graham of the Institute for International Economics in Washington, thinks the economy will survive the Dubai-ports brouhaha just fine.

Financial markets are receiving "terrible signals," Graham told me, "but they know noise and bluster when they see it."

On the other hand, if Congress passes "silly legislation" to block the Dubai deal, he thinks all bets are off.

So call it a nightmare -- a worst-case scenario. Just like the one that has Arab terrorists infiltrating our ports.

Neither is probable; both are worrisome.

But which to worry about today? The bloodthirsty foreign terrorists we don't know, or the homegrown demagogues we do?

At this point, I'd call it a toss-up.

-----

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Source: The Philadelphia Inquirer

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