Currency Flow and Trade: Implications of the Port Debate

Originally published in The Washington Times, March 26, 2006. Used with permission of Michael R. Czinkota and The Washington Times.

The policy eclat over the acquisition of selected U.S. port operations by Dubai appears to be over. There were threats by Congress to pass legislation prohibiting such ownership, countered by statements that President Bush would veto any such legislation. Now, the Dubai owners have decided to spin off the U.S. operations from the global conglomerate which they have purchased. Yet, there may be significant long-term consequences for currency values and trade practices. Most of the public discussion of this sordid affair has reflected the growing sensitivity in the United States to ownership and control of assets by non-domestic entities. The debate has focused heavily on possible discrimination against Muslim investors, protection against terrorism in U.S. ports and retaliation against U.S. investors abroad.

What appears to be not yet widely understood are the potential effects that these and similar policy decisions (such as the Unocal walk-away by China) can have on the value of global currencies and on trade flows. Congress’ law of unintended consequences may strike again: The short-term direct effects of this action are likely to be far outweighed by the long-run indirect effects.

The United States has experienced more than 20 years of current-account deficits. It imports more than it exports. In past years, every month has brought more news about growing trade deficits, now up to $68.5 billion per month. It is hard to remember that President Nixon decided to abandon the fixed-exchange rate system for the Western world because of an annual imbalance of $5 billion. But we do see in more recent times that, typically, nations with a current-account deficit above 5 percent of gross domestic product (GDP) have experienced grave domestic and international consequences.

Even though the current imbalance is approaching 6 percent of GDP, these harsh consequences have not occurred in the United States. the conditions are special: They are influenced by a high willingness of other countries to hold U.S. dollars, a substantial ability of foreign individuals and institutions to lend those dollars to the United States and a high U.S. capability to embed the dollar as a global currency. As a result, there is a surface picture of tranquility which has abounded in global trade and currency markets.

However, we know that this trend will have to change. Eventually, the United States will have to export more and import less. The key questions are how to achieve such change, how long to wait for such change and whether it should occur through market forces or through government intervention. It does appear that in addition to growing international competitiveness of U.S. firms, changes in the value of the U.S. dollar are needed to reverse the astounding trade imbalances.

The Dubai withdrawal may well be the watershed that triggers shifts in exchange rates now. The congressional debate, the national posture and the global repercussions may well form the basis of new Plaza Agreement-type conditions, which will gradually drive down the value of the dollar for the long term.

The pronouncements by Congress, the growing public debate and the withdrawal plans of the foreign investors directly play to the emotions of investors. The message is clear: Investments and ownership by foreign capital holders will be scrutinized with new rules, and may well be attacked, rejected or publicly scorned. This will be done regardless of plans made by the administration or commitments made to global agreements.

In other words, confidence in the U.S. dollar has been challenged by the U.S. itself. We know that money is just a piece of paper. What matters most in setting its value is the psychology behind it—the trust, outlook and confidence in the government that has issued the money. Investors may be shaken by the public response to the port-acquisition plans, but Mr. Bush’s steadfast embrace of foreign funds is an important counterpoint which reduces the urgency of the concerns, lets any shift come slowly and results in a soft landing.

The uncertainty and therefore the risk for anyone holding dollars or dollar-based assets has now increased. Such a change influences the perceptions of investors and their actions. Fewer investments from abroad into the United States and a decrease in dollar holdings will depreciate the price of the dollar, making imports more expensive and exports cheaper. In addition, continued discussions may affect U.S. public opinion and eventually change the views, brand preferences and country-of-origin sensitivity of American buyers.

This almost kabuki-like political interaction on port ownership may well presage a long-delayed and necessary shift in trade outcomes. What appears to be an unfulfilled policy debate on foreign investment may yet stimulate important changes in trade patterns which are based on market forces rather than government intervention.