Talk about bad timing. As part of the Bush administration's efforts to promote democracy and economic freedom in the Middle East, U.S. officials have been trying to negotiate a trade pact that would lower tariffs and open the doors wider for U.S. investors.
Congress, citing security concerns, is threatening to torpedo a bid by Dubai Ports World to take over port operations in six U.S. cities. DP World, owned by the government of Dubai, which is a member of the United Arab Emirates, offered late Thursday to delay taking control of any U.S. port facilities as it works to quell the controversy.
This tug of war reflects the escalating tensions between America's push for economic openness and concerns about national security.
Critics of the deal contend that the Bush administration failed to thoroughly investigate the ramifications of allowing a Middle Eastern country, with ties to the Sept. 11 hijackers, to control vulnerable U.S. ports. They said officials let their free-market agenda and America's dependence on imported oil and money cloud their judgment.
The United Arab Emirates "is a government that has been ambivalent about supporting American values from a part of the world that engenders terrorism," said Peter Morici, a University of Maryland business professor.
Defenders of the $6.8-billion deal, who include President Bush, business groups and trade experts, say the escalating controversy will further strain relations with the Middle East and scare off badly needed foreign investment. Before a meeting Thursday with UAE officials, Secretary of State Condoleezza Rice called the transaction "a thoroughly vetted deal" by a multi-agency panel that "does not presume that a country in the Middle East should not be capable of doing a deal like this."
The controversy stems from DP World's acquisition of Peninsular & Oriental Steam Navigation Co., a British company that manages cargo terminals in New Jersey, Philadelphia, Baltimore, Miami and New Orleans and a cruise ship terminal in Manhattan. The port fracas comes months after Congress helped derail a bid by a state-owned Chinese oil company to purchase El Segundo-based Unocal Corp.
"On the one hand, we're saying we strongly want the UAE and other countries to provide a free flow of goods, services, capital and ideas across borders," said David Hamod, president of the National U.S.-Arab Chamber of Commerce. "And yet, when it comes to the United States, we've raised this protectionist issue in the ugliest possible way."
Unless America takes steps to address the growing tensions between open economic borders and national security, trade experts predict that there will be more of these conflicts, given the emergence of new players from the Middle East and China and the growing internationalization of the U.S. economy. And that could be dangerous for a country that needs roughly $4 billion a day in foreign capital to cover its budget and trade deficits.
"We're not competing for jobs; we're competing for paychecks, and that means capital," said John Rutledge, chairman of Rutledge Capital, a private investment company. "Whoever gets their mitts on the capital wins the game."
Congressional critics want to stop the transaction so that it could be investigated more thoroughly, and Sen. Hillary Clinton (D-N.Y.) said she would introduce a bill that would outlaw foreign control of U.S. port operations. Lawsuits have been filed in New Jersey and Florida to block the takeover of port operations.
USC professor James E. Moore II said a ban on foreign port ownership was unlikely. Foreigners already control a large share of the U.S. port business, including seven of the eight container terminals at the Port of Los Angeles.
"There is nothing inherently dangerous about doing business with Arab countries, any more than with Chinese and Brazilian countries," said Moore, with USC's Center for Risk and Economic Analysis of Terrorism Events. "We cannot allow our reactions to extremists to dictate our business choices."
The UAE has been a strong U.S. ally and has a close relationship with the U.S. Navy, whose aircraft carriers dock at the deep-water port in Dubai. But critics point out that two of the 9/11 hijackers came from the UAE and that banks in the region were used to funnel funds.
Bush, who has threatened to veto any congressional action to halt the Dubai deal, warned that such a move against a key U.S. ally in the Middle East could have far-reaching consequences. Bush administration officials fear their campaign to help restore America's battered image in the Islamic world could suffer.
U.S. Trade Representative Rob Portman warned Wednesday that "canceling this port deal would be contrary" to the U.S. belief that fighting terrorism means promoting policies that create "opportunities for people to improve their lives and the lives of their families."
Portman said negotiations on a bilateral trade pact with the United Arab Emirates would go on. But trade experts said Thursday that the escalating controversy over DP World's purchase would make that difficult because it is feeding sentiments in the region that U.S. policies are anti-Arab and hypocritical.
"The basic message is, 'Americans want to invest here, but they don't want us to invest there,' " said Gary Hufbauer, a trade specialist at the Institute for International Economics.
Given the high emotions surrounding the Dubai transaction, even some U.S. business leaders say the U.S. should revisit how open its economy should be.
Todd Malan, executive director of the Organization for International Investment, opposes blanket restrictions on foreign ownership in any sector. But he agreed policymakers might want to treat investment by government-owned companies differently from commercial entities.
"Some of this stuff is red herrings and demagoguery," he said. "But at its core, there are some very legitimate issues we have to deal with."
Times staff writer Ronald D. White contributed to this article.