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Free-Trade Free-Fall?

Globalization may be falling out of political fashion.

11:00 PM, Mar 20, 2006 • By IRWIN M. STELZER
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CHINA'S PREMIER, Wen Jiabao holds a rare news conference to announce, among other things, that his government would do nothing to increase the value of the yuan. America's Commerce secretary, Carlos Gutierrez responds with a warning that such a policy "will have consequences. . . .The American people may be forced to reassess our bilateral economic relationship." And he wants more than only a currency reevaluation. Congress, he says, is prepared to act unless China opens its telecoms, IT, and state procurement sectors, and takes steps to protect intellectual property. Gutierrez made these demands knowing full well that the Chinese legislature only days before refused to back a plan to increase private property rights, and that the leadership is under pressure from rural areas to slow market reforms unless something is done to reduce urban-rural inequality.

All of this comes on the heels of the spectacular public spat between the president, who favored allowing Dubai Ports World to acquire the management contracts for six of our ports, and Democrats and members of his own party who forced DPW to back away from the deal. That was not the first deal to be scuppered by public concerns about foreign acquisition of what are seen as strategic assets: A Chinese oil company abandoned efforts to acquire Unocal after Congress demanded that it drop any such plans, in part because of a reluctance to see gas reserves vital to Japan pass into the hands of increasingly belligerent China.

And the battle escalates: Representative Duncan Hunter, Republican chairman of the House Armed Services Committee, is demanding that all of America's "critical infrastructure" remain in American hands. He probably doesn't have as broad a definition of "critical infrastructure" as do the French, who include yogurt-maker Danone in that category, but his Democratic colleagues might.

Meanwhile, New York Senator Chuck Schumer has legislation pending that would impose a 27.5 percent import duty on Chinese goods to make up for the undervaluation of the yuan. And recent polls show that for the first time about as many Americans see globalization as a threat as see it as an opportunity. The rising opposition to globalization was sensed by Congress some months ago, which is why President Bush had to twist arms to the breaking point to get a one-vote Senate margin in favor of ratification of the relatively minor Central American Free Trade Agreement.

Then there is the stalled Doha round of trade talks. British Prime Minister Tony Blair tried, but failed, to break the impasse during the London visit of Brazilian president Luiz Inácio Lula. Blair doesn't have much support for his free-trade stance in Europe, where E.U. trade commissioner Peter Mandelson faces demands that he toughen his proposed restrictions on imports of made-in-China footwear.

But the E.U. will be the E.U.: No one expects its members to lead a fight for free trade. It is American policy since the ports debacle which has free traders worried. So it was no surprise that a recent grilling of America's new ambassador to Britain, Robert Tuttle, was dominated by accusations that America has gone protectionist. Tuttle assured an audience of top London executives and policymakers that the killing of the DPW deal and the recent hesitation by America to share certain technology with our British allies are merely "bumps in the road" to freer trade.

He might just be right. For one thing, every day, America buys about $2.5 billion more in goods and services than it sells to the rest of world, which is why its trade deficit is running at 7 percent of GDP. If the United States intends to be protectionist, it is certainly failing miserably.

Equally important, America has to attract that much in foreign investment to cover its deficit--which it does. So if America is trying to prevent foreigners from buying its assets--shares, property, and government bonds--it is failing at that task as well.

The fact is that American policy remains decidedly in favor of freer trade, despite the "bumps in the road" cited by Ambassador Tuttle. Trade Representative Robert Portman continues Bob Zoellick's policy of negotiating bilateral trade-opening agreements. Congress has not passed Schumer's proposed tariff, and the president has tried to break the Doha logjam by offering to eliminate all trade-distorting American agricultural subsidies.

So we are not seeing a resurgent protectionism as much as a new concern about national security. The process for reviewing foreign acquisitions in America is opaque and ineffective. During the Clinton administration, control of some ports was turned over to a Chinese company, and another deal left the Chinese in control of a company that produces 80 percent of the magnets used in the military's "smart bombs," according to Senator Evan Bayh, a Democrat with eyes on a presidential run in 2008. Indeed, it is because so many politicians on both sides of the aisle have their sights set on the White House that the issue of foreign investment lends itself to political posturing. Hillary Clinton led the charge against the Dubai ports deal, followed closely by a number of Republican senators contemplating the juicy prospect of a wide-open fight for the nomination.

But just because there are demagogues abroad in the land does not mean there is not a worrying issue. The board set up to review the national security implications of foreign takeovers has turned down only 1 of more than 1,500 deals that came before it--the planned acquisition of Mamco Manufacturing, a maker of aircraft parts, by China National Aero-Technology in 1990. It is so insensitive to the post-9/11 security concerns of Americans that it did not think it necessary to advise the president that it was approving the management of ports by a state-owned Arab company.

Clearly, a new balance will have to be struck between the economic advantages and the security problems created by free trade in goods and in companies. That has nothing to do with protectionism. Rather, it has to do with legitimate security concerns in a world in which we are engaged in a life-and-death struggle against Muslim terrorists, and in which the Defense Department said only last week that China is gearing up its military to challenge American supremacy. Committed free trading nations such as Australia will have their work out for them in seeing to it that security does not become a cover for protectionism.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.