Foreign Trade
Brian Trumbore
President/Editor, StocksandNews.com

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."

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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."

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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

BUYandHOLD does not recommend any securities. The securities mentioned above are being used for illustrative and informational purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy.