Another way Iraq hurts the U.S. economy.

Opinions about events beyond our borders.
April 10 2006 6:24 AM

Weak President, Strong Protectionists

Another way Iraq hurts the U.S. economy.

As sectarian violence intensifies in Iraq, the world wonders what effects an eventual civil war might have on the entire region: A widespread Sunni-Shiite conflict could claim thousands of Iraqi lives, send refugees flowing across the country's borders, provoke ethnic conflict elsewhere in the Middle East, empower Iran, and provoke Turkish intervention. But there is another risk not yet included in the equation: Large-scale bloodshed in Iraq could also undermine President George W. Bush's efforts to block an increasingly dangerous trend toward protectionism in the United States—one that could do lasting long-term damage to the U.S. economy.

Why? President Bush has staked his entire presidency on the outcome in Iraq. As conditions there worsen, the violence becomes a permanent drain on his political capital. Certainly, there are many factors driving down Bush's approval ratings, but Iraq is the primary source of declining public confidence in his leadership.

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This is an election year in the United States. Though Bush remains a committed advocate of free trade and foreign investment in the United States, the Iraq war has degraded his influence with Congress—and his ability to promote the international commerce on which U.S. economic vitality and good relations with other states depend. Lawmakers in both parties, well aware of Bush's sinking popularity, are now drawing up protectionist legislation intended to show voters that they will secure the homeland and safeguard the country's economic interests.

For example, the White House faces mounting pressure from Congress to "punish" Beijing for what many lawmakers say are unfair trade practices. Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., have announced they will delay until September consideration of a bill that would impose a 27.5 percent tariff on Chinese goods entering the United States unless China substantially revalues its currency. Though postponed, the proposal is still on the table.

The White House, anxious to avoid such a serious irritant in relations with China, has worked with other lawmakers on a less aggressive approach. Sens. Chuck Grassley, R-Iowa, and Max Baucus, D-Mont., unveiled a bill March 28. Though it would not restrict trade, it would lower the bar for identifying states with "misaligned currencies," mandate punitive steps against those countries, and create a comprehensive monitoring system for other nations' trade and foreign-exchange practices. The Treasury Department is being pressured by congressional and business leaders to brand China a "currency manipulator," a largely symbolic but politically sensitive step. Last summer, the Chinese oil firm CNOOC, 70 percent owned by the Chinese government, launched a bid to acquire the American oil firm Unocal. Congressional outrage forced CNOOC to withdraw its offer.

That dustup paled beside the recent firestorm over efforts by Dubai Ports World, a firm owned by the government of the United Arab Emirates, to take over a British firm's operation of six major U.S. ports. Dozens of lawmakers, unfazed by either expert testimony that the deal posed no security threat or by Bush's veto pledge, publicly committed themselves to killing the deal. In the end, DPW agreed to sell the port operations to an American company. Congress claimed victory, and Bush was left to save face.

Now foreign investment is under unprecedented scrutiny. Merger talks between U.S. telecom equipment-maker Lucent and the French firm Alcatel have been complicated by concerns that Lucent's Bell Labs unit, which has produced remarkable advanced communications innovations for the Pentagon and Homeland Security Department, would come under the control of a foreign firm. Similar concerns forced Check Point Software, an Israeli company, to withdraw in March from a merger with the U.S. firm Sourcefire. Toshiba's $5.4 billion takeover of Westinghouse will soon face scrutiny as well.

These deals raise some legitimate security concerns that should be addressed, but in the current overheated political environment, careful consideration of these questions has taken a back seat to protectionist political pressures and poorly defined fears for U.S. national security. As Congress moves forward, a politically weakened president seems unable to stop the momentum.

The greatest protectionist threat comes from reform of the investment approval process itself. A number of lawmakers have now taken aim at the Committee on Foreign Investments in the United States, the executive branch committee empowered to approve or reject proposed foreign investment in U.S. assets. Chaired by the Treasury secretary, most of its members represent government bodies that favor the active promotion of foreign investment. In its history, CFIUS has considered over 1,600 proposed transactions. Only one has been rejected. Congress has virtually no involvement in the process.

Despite the Bush administration's best efforts, that may be about to change. Two legislative proposals will probably form the basis of CFIUS reform, and both bills would give Congress greater influence in the CFIUS process—at the executive branch's expense. Lawmakers from both sides of the aisle are lining up to attach even more onerous amendments to the proposals.

The bill proposed by Sen. Richard Shelby, R-Ala., is the more restrictive. Approved 20-0 by the Senate Banking Committee on March 30, it would require CFIUS to rank states based on the threats they may pose to U.S. security and to evaluate proposed investments with those rankings in mind. The bill also reportedly mandates heightened scrutiny of any deal involving either a company owned by a foreign government or any foreign investment in U.S. critical infrastructure that raises national security concerns. The former stipulation worries investors from any country where state ownership of major companies is common. The latter frightens those who search in vain for a precise definition of either "critical infrastructure" or "national security."

The stakes are high, because foreign investment plays an enormous role in America's economic vitality. By Shelby's own accounting, foreign direct investment in the United States has exceeded $530 billion over the past three years. The very threat of increased scrutiny can discourage investment as well—as we saw in the CNOOC and DPW cases. If Congress, which is more directly subject than the White House to electoral pressures and public fears, wins a greater role in the CFIUS process and uses it to impose tough restrictions, it could have a chilling effect on foreign investment. Sponsors of both bills say they hope to have the president's signature well before November.

The irony is that Bush has made "security" the centerpiece of his presidency. Throughout his tenure, public approval of the president's handling of these issues has prevented his favorability ratings from dipping further than they already have. But the pressures unleashed by the 9/11 attacks, the outsourcing of American jobs, a growing trade deficit, and China's economic expansion have encouraged lawmakers to more broadly define "national security" to include both homeland and economic concerns.

The political battering the president has taken over Iraq has prevented him from doing much about it. As November's midterm elections approach, Republicans and Democrats will elbow one another to grab the lead in satisfying public demand for tighter security—whatever the result for long-term U.S. economic interests. The United States needs strong presidential leadership to safeguard its interests at home and abroad. With each passing week, it seems the war in Iraq is doing more damage than we thought.

Ian Bremmer is president of the Eurasia Group, a global political risk consultancy, and author of the bookThe J Curve: A New Way To Understand Why Nations Rise and Fall.

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