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12/15/2006

Foreign Trade

[Next WSH...12/31, after yearend data comes in]

This has been an interesting week on the foreign trade front.
First we had Dubai’s port company, DP World, sell its U.S.
holdings to a unit of insurance giant American International
Group, ending a contentious chapter that left many Middle East
investors with a bitter taste. At the same time Treasury Secretary
Hank Paulson is dragging Federal Reserve Chairman Ben
Bernanke to China, along with scores of other U.S. government
officials, for high-level trade talks there.

You’ll recall last February there was an uproar in Congress when
it was learned that as part of DP World’s acquisition of a British
company, Peninsular and Oriental Holdings, DP World was
acquiring an interest in cargo-handling businesses in 16 Eastern
and Gulf of Mexico ports. Thanks to the fact the Bush
administration did an incredibly poor job of giving Congress a
heads-up on the deal, politicians from both parties, fueled by the
talk shows, leapt on the issue and forced DP World to seek a sale
of the U.S. entity. It’s this transaction that was just
consummated.

Both DP officials and political figures, such as New York’s Sen.
Charles Schumer who had initially opposed the deal, are now
taking the high road and claiming no long-term damage was
done to the U.S.-Dubai relationship.

So I thought it would be interesting to cite the views of Stephen
Roach, chief economist for Morgan Stanley, in an essay for The
National Interest (summer 2006) that I have been saving for this
moment, including Roach’s musings on the overall trade
environment these days.

“In the end, the repercussions of America’s newfound
protectionist bent go well beyond economics. The risks to cross-
border flows of goods, services and financial capital can hardly
be minimized. But equally disconcerting is a new sense of
distrust that is being injected into America’s relationships with
the international community. There is nothing easy about coping
with the trials and tribulations of globalization. But the United
States is now at risk of squandering what could well be the
greatest opportunities of global economic integration – the trust
that comes from working together with strategic partners. By
transforming China into the ‘competitive enemy’ or by
characterizing the United Arab Emirates (owner of Dubai Ports
World) as a national security threat, Washington runs the risk of
tainting some of its most important strategic relationships.

“I saw this first hand on recent visits to Beijing and Dubai. In
both cities I detected a growing undercurrent of economic anti-
Americanism creeping into the climate. The irony of it all is
truly extraordinary. The United States has the largest external
deficit in the history of the world and is now sending
increasingly negative signals to two of its most generous
providers of foreign capital – China and the Middle East. So far,
the United States has been extraordinarily lucky to finance its
massive current-account deficit on extremely attractive terms. If
America’s creditors suddenly feel threatened, it would be logical
for them to demand a change in those terms – with adverse
consequences for the dollar, real long-term U.S. interest rates and
overly indebted American consumers. The slope is getting
slipperier, and Washington seems all but oblivious to the
mounting risks.

“In Dubai I was met by a palpable sense of consternation. Fresh
from the wounds of the rejected Dubai Ports World transaction,
several major private equity investors in the UAE were quite
blunt in expressing their sudden loss of appetite for U.S. assets.
As one seasoned investor in U.S. companies and properties put it
to me, ‘As practitioners, as investors, we have become very shy
of the United States – we just turned down a recent deal for that
very reason.’ Another added, ‘For us, foreign direct investment
into the United States has become far less palatable due to recent
developments. The bulk of our dedicated offshore money is now
going elsewhere.’ The comment from the Middle East
investment community that unnerved me the most took this
exasperation to an even deeper level. One investor asked, ‘What
can we do to push back, to send a signal?’

“I certainly don’t want to make too much out of an unscientific
survey of a few private equity investors in Dubai. But up until
recently, this was one of the Middle East’s most pro-American
investment communities. The individuals I met with are
seasoned participants of many cross-border transactions into the
United States. For them, the political shockwaves from
Washington have come from out of the blue, and they now see
little reason to go back to the same well – especially given the
wide menu of less contentious alternatives available elsewhere in
the world. In the broad scheme of things, Dubai is a small player
in the world of international finance. But to the extent that the
Dubai backlash is emblematic of similar distaste from other
Middle East investors – hardly idle conjecture, in my view – the
repercussions cannot be minimized.

“For free traders like myself, the words of Dubai investors are
extremely troubling. Yet to the protectionists who seem to be
dominating both political parties at the moment, this must be
music to their ears. On grounds of ‘national security’ they are
getting precisely what they want – a warning to America’s
trading partners that they must play by rules made in
Washington .

“Within Congress, support for action is bipartisan and deep – and
momentum is building by the day. U.S. politicians are finding
there is little to be gained by taking a soft line on trade – they run
the risk of being characterized as unsupportive of the plight of
the beleaguered American middle-class wage earner. With the
political fix increasingly at odds with the macroeconomic fix, the
odds of a disruptive outcome for the U.S. and global economy
are high and rising. This could well be a pivotal moment for
globalization.”

--

Along the lines of the above, I also feel compelled to pass on the
musings of one of the best foreign affairs journalists around,
James Fallows of The Atlantic Monthly, after a trip of his to
China. Having been there a few years ago myself to experience
some of the explosive growth that is so much in the news these
days, I particularly liked Fallows’s own observations, as related
in a piece he penned for the December 2006 issue.

“The climate (in China) is that of the frontier, with an erratically
vigilant sheriff showing up from time to time to crack heads.
The untamed energies of individual Chinese have obviously
helped the country grow, but some people have argued to me that
the lack of Japanese-style collective virtues imposes limits on
China. ‘We have a huge economy,’ the founder of a Chinese
software company told me at dinner one night. ‘But we don’t
have any big companies. Why is that?’”

[Only three mainland Chinese companies are among the top 500
in Forbes’s list of international companies, with the largest,
PetroChina, at No. 57.]

“This man’s answer was that scale requires trust, and ‘there is no
trust in China.’ People don’t trust others outside their family, he
said. ‘They don’t trust the Internet. Or doctors. Or the mobile-
phone company to bill them honestly. Or, of course, the
government.’ Building a company beyond the family scale
requires many layers of trust: in accountants, underwriters, the
financial markets, the rule of law .

“ ‘Corruption, corruption, corruption!’ another technology
executive exclaimed to me. ‘You could knock off a hundred
corrupt officials a day and you would not make a dent.’”

Fallows writes of Two Great Mysteries of China on leadership
and its ideals.

“Everyone wants to know how long the Chinese economic boom
can go on. Will an environmental crisis stop it? What about the
gap between rich and poor? And between big shots on the take
and peasants kicked off their land? After all, a nearly
unbelievable 87,000 ‘public order disturbances’ took place in
China last year, according to China’s own Public Security
Ministry, up from an already alarming 58,000 in 2003. What
about the contradiction between a rollicking market system and
an intrusive, controlling, one-party state? And what about a
hundred other concerns amply documented in studies from China
and around the world?

“These are all ways of asking: Can China continue to adapt? In
adaptability, Chinese society as a whole puts the rest of the world
to shame .

“(But) the Communist Party that sits atop this society has been
both adaptable and rigid. In the nearly thirty years since Deng
Xiaoping introduced ‘Socialism with Chinese characteristics,’
aka capitalism under Communist political control, party leaders
have adapted their way around one potentially ruinous difficulty
after another.” [Like Tiananmen Square] .

“China’s continued growth depends on businesses, both
homegrown and foreign – but the conditions for the growth are
still set by the commissars.”

And then there’s pollution.

“How much can they allow without absolutely destroying the
countryside? How much can they prohibit without hurting their
big export businesses? Even if they want to clean up, can they
enforce regulations that restrain polluting activities, when so
many provincial authorities have so much graft to gain by
approving the next freeway, toxic-waste dump, or coal-fired
power plant?”

As for ‘What is the Chinese Dream?’

“Holland has a culture, but it does not have a dream. There is no
Canadian dream, or Finnish dream. If there is a Japanese dream,
the women’s version seems to be to escape their salaryman
husbands, and the men’s is to escape the offices where they toil
for their salaries.

“The two countries whose cultures can plausibly support the idea
of a dream these days are the United States and China. The
American dream covers something so elemental in human
ambition that people from around the world think it applies to
them. The Chinese dream reflects the unprecedented
opportunities now open to at least some of this country’s 1.3
billion people.

“But what exactly will the Chinese dream mean? In three of its
aspects – for the individual, for the growing economy, and for
Chinese culture and influence in the largest sense – the answer is
not yet obvious .

“The question about individuals will be: Do they dream of
anything more than making money? Americans I’ve met here
tend to sound huffy about the total money-mindedness of today’s
rising urban Chinese .Americans might seem the worst-
positioned people on earth to complain about others’
materialism. But I sense that beneath the tut-tutting is a question
about what modern Chinese peoples are supposed to believe in at
all. The years of the Cultural Revolution must have done
something terrible to traditional family loyalties, and after the
switch away from Maoist policies, there can’t still be many true
believers in a socialist ideal. In dramatic contrast to the United
States, China has not been a deeply religious society. This
leaves, for now, material improvement as a proxy for the
meaning of life .

“For the economy as a whole, the question is whether China
dreams of matching the consumer-driven American model – or,
like Japan before it, establishing a different model of long-term
development. America’s policy really boils down to the steady
effort to give consumers more and more for less and less:
deregulation, expanding free trade, embracing Wal-Mart and
other chains. Japan’s policy has boiled down to a steady effort to
develop the country’s manufacturing base, even if that left
consumers paying higher prices and investors getting worse
returns. Different systems, different goals no one who visits
modern Japan will think its people look poor.

“Based on the Maserati dealership around the corner and the
amount of gold I see draped around rich women’s necks, China
is a good long-term candidate for the consumption-driven
American model. But based on the steady flow of new
regulatory orders from Beijing, the central authorities may have
other ideas. For most of recorded history, China was the
strongest and richest country, not simply in Asia but in the world.
Through sheer force of numbers, it seems likely some day to be
the world’s richest again. Another suspiciously common slogan
is that all China really wants is to achieve a ‘Peaceful Rise in the
World.’ We will see.”

---

I’m taking a week off for the holidays, but next time I’ll have my
annual review of the markets posted around January 1st.

Merry Christmas and Happy Hanukkah.

Brian Trumbore



AddThis Feed Button

 

-12/15/2006-      
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Wall Street History

12/15/2006

Foreign Trade

[Next WSH...12/31, after yearend data comes in]

This has been an interesting week on the foreign trade front.
First we had Dubai’s port company, DP World, sell its U.S.
holdings to a unit of insurance giant American International
Group, ending a contentious chapter that left many Middle East
investors with a bitter taste. At the same time Treasury Secretary
Hank Paulson is dragging Federal Reserve Chairman Ben
Bernanke to China, along with scores of other U.S. government
officials, for high-level trade talks there.

You’ll recall last February there was an uproar in Congress when
it was learned that as part of DP World’s acquisition of a British
company, Peninsular and Oriental Holdings, DP World was
acquiring an interest in cargo-handling businesses in 16 Eastern
and Gulf of Mexico ports. Thanks to the fact the Bush
administration did an incredibly poor job of giving Congress a
heads-up on the deal, politicians from both parties, fueled by the
talk shows, leapt on the issue and forced DP World to seek a sale
of the U.S. entity. It’s this transaction that was just
consummated.

Both DP officials and political figures, such as New York’s Sen.
Charles Schumer who had initially opposed the deal, are now
taking the high road and claiming no long-term damage was
done to the U.S.-Dubai relationship.

So I thought it would be interesting to cite the views of Stephen
Roach, chief economist for Morgan Stanley, in an essay for The
National Interest (summer 2006) that I have been saving for this
moment, including Roach’s musings on the overall trade
environment these days.

“In the end, the repercussions of America’s newfound
protectionist bent go well beyond economics. The risks to cross-
border flows of goods, services and financial capital can hardly
be minimized. But equally disconcerting is a new sense of
distrust that is being injected into America’s relationships with
the international community. There is nothing easy about coping
with the trials and tribulations of globalization. But the United
States is now at risk of squandering what could well be the
greatest opportunities of global economic integration – the trust
that comes from working together with strategic partners. By
transforming China into the ‘competitive enemy’ or by
characterizing the United Arab Emirates (owner of Dubai Ports
World) as a national security threat, Washington runs the risk of
tainting some of its most important strategic relationships.

“I saw this first hand on recent visits to Beijing and Dubai. In
both cities I detected a growing undercurrent of economic anti-
Americanism creeping into the climate. The irony of it all is
truly extraordinary. The United States has the largest external
deficit in the history of the world and is now sending
increasingly negative signals to two of its most generous
providers of foreign capital – China and the Middle East. So far,
the United States has been extraordinarily lucky to finance its
massive current-account deficit on extremely attractive terms. If
America’s creditors suddenly feel threatened, it would be logical
for them to demand a change in those terms – with adverse
consequences for the dollar, real long-term U.S. interest rates and
overly indebted American consumers. The slope is getting
slipperier, and Washington seems all but oblivious to the
mounting risks.

“In Dubai I was met by a palpable sense of consternation. Fresh
from the wounds of the rejected Dubai Ports World transaction,
several major private equity investors in the UAE were quite
blunt in expressing their sudden loss of appetite for U.S. assets.
As one seasoned investor in U.S. companies and properties put it
to me, ‘As practitioners, as investors, we have become very shy
of the United States – we just turned down a recent deal for that
very reason.’ Another added, ‘For us, foreign direct investment
into the United States has become far less palatable due to recent
developments. The bulk of our dedicated offshore money is now
going elsewhere.’ The comment from the Middle East
investment community that unnerved me the most took this
exasperation to an even deeper level. One investor asked, ‘What
can we do to push back, to send a signal?’

“I certainly don’t want to make too much out of an unscientific
survey of a few private equity investors in Dubai. But up until
recently, this was one of the Middle East’s most pro-American
investment communities. The individuals I met with are
seasoned participants of many cross-border transactions into the
United States. For them, the political shockwaves from
Washington have come from out of the blue, and they now see
little reason to go back to the same well – especially given the
wide menu of less contentious alternatives available elsewhere in
the world. In the broad scheme of things, Dubai is a small player
in the world of international finance. But to the extent that the
Dubai backlash is emblematic of similar distaste from other
Middle East investors – hardly idle conjecture, in my view – the
repercussions cannot be minimized.

“For free traders like myself, the words of Dubai investors are
extremely troubling. Yet to the protectionists who seem to be
dominating both political parties at the moment, this must be
music to their ears. On grounds of ‘national security’ they are
getting precisely what they want – a warning to America’s
trading partners that they must play by rules made in
Washington .

“Within Congress, support for action is bipartisan and deep – and
momentum is building by the day. U.S. politicians are finding
there is little to be gained by taking a soft line on trade – they run
the risk of being characterized as unsupportive of the plight of
the beleaguered American middle-class wage earner. With the
political fix increasingly at odds with the macroeconomic fix, the
odds of a disruptive outcome for the U.S. and global economy
are high and rising. This could well be a pivotal moment for
globalization.”

--

Along the lines of the above, I also feel compelled to pass on the
musings of one of the best foreign affairs journalists around,
James Fallows of The Atlantic Monthly, after a trip of his to
China. Having been there a few years ago myself to experience
some of the explosive growth that is so much in the news these
days, I particularly liked Fallows’s own observations, as related
in a piece he penned for the December 2006 issue.

“The climate (in China) is that of the frontier, with an erratically
vigilant sheriff showing up from time to time to crack heads.
The untamed energies of individual Chinese have obviously
helped the country grow, but some people have argued to me that
the lack of Japanese-style collective virtues imposes limits on
China. ‘We have a huge economy,’ the founder of a Chinese
software company told me at dinner one night. ‘But we don’t
have any big companies. Why is that?’”

[Only three mainland Chinese companies are among the top 500
in Forbes’s list of international companies, with the largest,
PetroChina, at No. 57.]

“This man’s answer was that scale requires trust, and ‘there is no
trust in China.’ People don’t trust others outside their family, he
said. ‘They don’t trust the Internet. Or doctors. Or the mobile-
phone company to bill them honestly. Or, of course, the
government.’ Building a company beyond the family scale
requires many layers of trust: in accountants, underwriters, the
financial markets, the rule of law .

“ ‘Corruption, corruption, corruption!’ another technology
executive exclaimed to me. ‘You could knock off a hundred
corrupt officials a day and you would not make a dent.’”

Fallows writes of Two Great Mysteries of China on leadership
and its ideals.

“Everyone wants to know how long the Chinese economic boom
can go on. Will an environmental crisis stop it? What about the
gap between rich and poor? And between big shots on the take
and peasants kicked off their land? After all, a nearly
unbelievable 87,000 ‘public order disturbances’ took place in
China last year, according to China’s own Public Security
Ministry, up from an already alarming 58,000 in 2003. What
about the contradiction between a rollicking market system and
an intrusive, controlling, one-party state? And what about a
hundred other concerns amply documented in studies from China
and around the world?

“These are all ways of asking: Can China continue to adapt? In
adaptability, Chinese society as a whole puts the rest of the world
to shame .

“(But) the Communist Party that sits atop this society has been
both adaptable and rigid. In the nearly thirty years since Deng
Xiaoping introduced ‘Socialism with Chinese characteristics,’
aka capitalism under Communist political control, party leaders
have adapted their way around one potentially ruinous difficulty
after another.” [Like Tiananmen Square] .

“China’s continued growth depends on businesses, both
homegrown and foreign – but the conditions for the growth are
still set by the commissars.”

And then there’s pollution.

“How much can they allow without absolutely destroying the
countryside? How much can they prohibit without hurting their
big export businesses? Even if they want to clean up, can they
enforce regulations that restrain polluting activities, when so
many provincial authorities have so much graft to gain by
approving the next freeway, toxic-waste dump, or coal-fired
power plant?”

As for ‘What is the Chinese Dream?’

“Holland has a culture, but it does not have a dream. There is no
Canadian dream, or Finnish dream. If there is a Japanese dream,
the women’s version seems to be to escape their salaryman
husbands, and the men’s is to escape the offices where they toil
for their salaries.

“The two countries whose cultures can plausibly support the idea
of a dream these days are the United States and China. The
American dream covers something so elemental in human
ambition that people from around the world think it applies to
them. The Chinese dream reflects the unprecedented
opportunities now open to at least some of this country’s 1.3
billion people.

“But what exactly will the Chinese dream mean? In three of its
aspects – for the individual, for the growing economy, and for
Chinese culture and influence in the largest sense – the answer is
not yet obvious .

“The question about individuals will be: Do they dream of
anything more than making money? Americans I’ve met here
tend to sound huffy about the total money-mindedness of today’s
rising urban Chinese .Americans might seem the worst-
positioned people on earth to complain about others’
materialism. But I sense that beneath the tut-tutting is a question
about what modern Chinese peoples are supposed to believe in at
all. The years of the Cultural Revolution must have done
something terrible to traditional family loyalties, and after the
switch away from Maoist policies, there can’t still be many true
believers in a socialist ideal. In dramatic contrast to the United
States, China has not been a deeply religious society. This
leaves, for now, material improvement as a proxy for the
meaning of life .

“For the economy as a whole, the question is whether China
dreams of matching the consumer-driven American model – or,
like Japan before it, establishing a different model of long-term
development. America’s policy really boils down to the steady
effort to give consumers more and more for less and less:
deregulation, expanding free trade, embracing Wal-Mart and
other chains. Japan’s policy has boiled down to a steady effort to
develop the country’s manufacturing base, even if that left
consumers paying higher prices and investors getting worse
returns. Different systems, different goals no one who visits
modern Japan will think its people look poor.

“Based on the Maserati dealership around the corner and the
amount of gold I see draped around rich women’s necks, China
is a good long-term candidate for the consumption-driven
American model. But based on the steady flow of new
regulatory orders from Beijing, the central authorities may have
other ideas. For most of recorded history, China was the
strongest and richest country, not simply in Asia but in the world.
Through sheer force of numbers, it seems likely some day to be
the world’s richest again. Another suspiciously common slogan
is that all China really wants is to achieve a ‘Peaceful Rise in the
World.’ We will see.”

---

I’m taking a week off for the holidays, but next time I’ll have my
annual review of the markets posted around January 1st.

Merry Christmas and Happy Hanukkah.

Brian Trumbore