- The Washington Times - Sunday, September 9, 2007

ANALYSIS/OPINION:

For years one administration after another has advanced the argument that the trillions of dollars America sends abroad does not represent a problem. After all, what can China and oil-producing governments do with these securities? You can’t eat dollars, it was argued. Moreover, these funds likely would flow back to the United States as investments.

Few economists realized these investments can be used to compromise national security. It is one thing for Japanese investors to put capital into Rockefeller Center, Sony or Pebble Beach, but quite another when the Saudi investors buy a foothold in a media company that shapes public opinion or when Dubai tried to take over management of several ports or a Chinese government-owned oil company sought to buy Unocal, which holds advanced drilling technology.

These examples recall the statement often attributed to V.I. Lenin — even though he didn’t make it — that Westerners will sell the rope the communists will use to hang them.

The Abu Dhabi Investment Authority’s investments total more than $800 billion, making it the world’s largest such fund. While fund managers are obviously interested in the best possible return on investments, they are often sensitive to another agenda: the extent to which they may acquire technical secrets and influence American opinion. Even when the possible dangers of these investments are realized, inexhaustible investment capital can be very alluring.

Apparently Treasury Secretary Henry Paulson, sensitive to these foreign investment goals, has called for disclosure of foreign investment practices. In Germany, Chancellor Angela Merkel has warned that purchases by foreign governments could pose a risk. Her comment was prompted by Russia’s purchase of pipelines and energy infrastructure in Europe that could be used for political extortion.

With the emergence of sovereign wealth funds, many analysts are asking whether cross-border investment is evolving into cross-border nationalization, raising the prospect of interference in other nations’ markets.

Suppose, for example, China bought shares in Loral sufficient to control satellite development and use. Suppose, as well, that it had a legal justification for identifying every satellite launch and had the ability to monitor the orbit of every U.S. satellite. Under this scenario, the U.S. forces could be blinded in a Taiwan Straits confrontation by a legal financial entity in the United States.

It is fair to say money will seek a safe harbor and dollar-based assets in foreign lands will naturally gravitate to American shores because of the relative strength of this economy. While there are understandable fears that foreigners are buying up America, I am less concerned about this jingoistic assertion but more concerned about where and under what circumstances investments are made.

It is widely known that Saudi money is deployed in the United States to influence opinion about the Middle East generally and Israel specifically. This is the loud voice of oil money that reverberates through Middle East university programs and in the energy industry.

Similarly, Chinese investment capital has an overarching goal: to obtain technical developments for industrial or military advantage. That too has been well established through dozens of examples. China’s purchase of a nearly 10 percent stake in Blackstone this year is worth watching. What is Blackstone buying on China’s behalf and how much transparency is there in these transactions?

While this issue of foreign investment was on the back burner for economists, it is time to realize there is more at stake than dollars and cents. The very security of the nation can be held hostage by foreign governments who use their economic leverage for malevolent purposes.

The repatriation of dollars may be fine on one level since it adds to the nation’s wealth but when it comes to security it is better, in my judgment, to be less wealthy and more secure.

Herbert London is president of Hudson Institute and professor emeritus of New York University. He is the author of “Decade of Denial” (Lanham, Md.: Lexington Books, 2001).

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