If US Representative Duncan Hunter has his way, within five years foreign companies would not be able to own infrastructure in the US that has been deemed essential to national security. Under one scenario, foreign companies unfortunate enough to own such facilities would have to divest, in what could be the world’s biggest fire sale.

By comparison, the changes proposed by Senator Richard Shelby are relatively benign, although they would still lead to far longer regulatory delays. He would like to mandate that any acquisition of a US firm by a foreign state-controlled firm that has national security implications would be fully and automatically investigated. These proposals in the US Congress are among the many that followed on the heels of Dubai Port World’s failed attempt to acquire six US port terminals.

Other less extreme, yet still onerous, potential requirements that may be imposed on certain foreign investments in the US include a broadening of the definition of national security to include economic security and energy needs. These would require the Committee of Foreign Investment in the United States (CFIUS) to report to Congress every submitted deal and to rank US companies according to their relevance to national security. Transactions involving firms high on the list would be scrutinised before any approval of acquisition by a foreign company.

Change in law

“After this latest controversy, I think some change to Exon-Florio is likely,” says Christopher Corr, an international trade specialist and partner in law firm White & Case’s Washington, DC, office, who has been tracking the proposals. Exon-Florio, an amendment to the Defense Production Act, states that a foreign company wishing to acquire a US company that may have potential national security implications – a category that can include a ports operator, software company or oil production firm – may voluntarily file notification with CFIUS. The 12-member intra-agency committee then has 30 days to approve the transaction or begin a 45-day investigation if it is warranted.

This is not the first time Exon-Florio, which was enacted in 1988, has come to the fore in recent years. Debate over the law’s perimeters went into overdrive when China’s national oil company made a bid for US oil conglomerate Unocal. After a similar uproar in Congress, China lost its bid for Unocal, which was then acquired by Chevron.

Battered image

However, changes to Exon-Florio are the least of businesses’ concerns, in both the US and abroad. The timing of the DP World furore could not be worse for the US, as it tries to rehabilitate its battered image abroad.

First there was Congress’ melodramatic and empty protests about security. It is widely acknowledged that the US port systems are insecure and protection is under funded. Also, much of the risk is at the point of embarkation, which was not even part of this deal. Then the Administration – which has been accused of using the terror issue in the past to flog its opponents on a variety of topics – was caught flatfooted when it found itself on the receiving end of such tactics. Its response to the uproar in Congress has been widely panned.

DP World pulled out – saving the Administration’s face – when it became clear that public sentiment was overwhelmingly against the transaction for reasons that ranged from a lack of understanding of the mechanics of trade and port operations, to a national dread of another 9/11-style attack and unfortunately, in some cases, to a suspicion of any Arab nation, even one allied with the US.

Permanent damage?

These are images that many fear may have made an indelible impression on potential foreign investors in the US. Now, with Congress poised to emphasise them by tightening CFIUS regulations, some fear that the damage may become permanent.

“If one of the more extreme proposals is adopted, it could send a very negative image,” says Peter Lichtenbaum, partner in the international department of law firm Steptoe & Johnson’s Washington office and former acting deputy undersecretary of commerce for international trade at the US Department of Commerce.

Certainly, Congress is well aware of the importance of FDI to the US economy. It has been steadily growing, reaching $1400bn last year, according to government figures. The vast majority of that – 70% – comes from Europe. Asian companies hold about 15% of FDI assets in the US. The Middle East, by contrast, comprises less than 1% but this is growing as oil prices continue to flood the region with cash. Trade between the US and the United Arab Emirates, for example, registered $10bn last year – making the UAE the US’s third-largest trading partner in the Middle East after Israel and Saudi Arabia.

By contrast, the deals directly affected by CFIUS are minuscule. Since its inception, less than 2000 transactions have been considered by the task force, according to Mr Corr. However, some of the pending regulations could significantly increase the number of transactions that fall under CFIUS’s oversight, such as the expansion of the definition of national security to include economic activity. All of the proposals are bound to increase scrutiny at some level, and hence add further delays.

Some free trade advocates fear that there would be a backlash against US investment overseas if a perception that the country was discriminating against foreign investment began to take hold. A larger and longer-term ramification is that the US will find it much harder to insist on transparent and fair investment policies in other markets.

“It will be very difficult for the US to lead the world in promoting an open investment regime if we are seen to be adopting very restrictive measures,” Mr Lichtenbaum says.

Mr Corr says: “There is already an inherent advantage to a US firm when it engages in a bidding war with a foreign firm to acquire a US company.” As more investment comes into the US from non-Western sources, and falls under the umbrella of CFIUS, the perception that the US discriminates against Arab nations will worsen further, he says.

Waiting game

Not surprisingly, at the moment, some foreign investors are holding back – if only to wait for a more politically opportune time.

Mr Lichtenbaum, for instance, reports that a number of clients have mentioned Dubai and the possible Congressional proposals for reform of Exon-Florio. “They are taking a wait-and-see attitude, not so much on the details about specific legislation but rather on what the broader policy response will be,” he says.

The worst-case scenario would be for protectionists to gain leverage over US investment policy because of this incident. “We simply cannot afford for security to be used as a cover for protectionism,” says Mr Lichtenbaum.

His fears are not unfounded. Mr Hunter, for one, is chairman of the powerful House Armed Services Committee and shows little sign of backing down yet. One soundbite at a recent hearing was: “To those who say my views smack of protectionism, I say: America is worth protecting.”

However, many observers of the US political system speculate that the more onerous regulations will disappear during committee negotiations.

Mr Corr believes that, ultimately, changes to Exon-Florio will be minor, despite the expansive proposals circulating Congress at the moment. “We can assume there will be attempts to put some tough regulations in place but I believe those will be pared back in committee negotiations.”

The US may even be able to repair the damage to its image as a free market advocate. “For what I have heard so far from foreign investors, I think the outcome of the Dubai Ports controversy will have only a marginal impact on foreign investment,” Mr Lichtenbaum says.

A special case

Even after the Unocal incident, he says, there was not a drastic or even noticeable impact from foreign investors. “There are many reasons why companies want to be in the US – the size of our market for one. I think companies saw Unocal as a ‘special case’ unlikely to affect them.”

Companies from Dubai are unlikely to think that – at least for the moment. US investors in foreign markets, as well, are concerned that similar treatment could be applied to them. Other US investors, though, are looking beyond the immediate debacle and thinking about potential long-term developments. One US executive with investments in Dubai goes as far as to say that the incident was a good development for bilateral relations.

“It’s true there has been a knee-jerk reaction in both countries,” says Todd Thiel, CEO of McKinley Reserve. “In the US, there is all sorts of talk of putting further restrictions on these types of investment. And in Dubai – and elsewhere in the Middle East – there is a sentiment that investing in America might be more trouble than it is worth, at least in certain sectors.”

McKinley Reserve is a Wisconsin-based investment firm that develops commercial properties around the world. It has about $500m invested in California, but the bulk of its portfolio, $1bn, has been sunk into office, retail and residential projects in Dubai. Indeed the company is so entrenched in that economy that Mr Thiel has been one of the chief proponents of the ongoing US-UAE bilateral free trade negotiations, which he says are still on track to be completed by this year.

“As strange as it sounds, this may have been one of the best things that could have happened for FDI into the US from the Middle East, or vice versa,” Mr Thiel says.

One result of DP World’s ordeal is that it has inspired interest on the part of some US investors in the Dubai market. “Seeing its wealth, seeing those shopping centres and the ski slopes and so on – it was better than a paid infomercial,” Mr Thiel says. “Now [more US investors] are looking into the market further, and some are contacting us about investment opportunities.”

Even the intense focus on port operations and their vulnerability to attack, he says, was long overdue. “It offended some people, especially the emphasis on an Arab country owning the ports. But in the long term, port security – which has been overlooked until now– is an important discussion to have for the sake of national security. I think we will see more trade a year from now between the US and the UAE precisely because we have gone through this education process.”

Or, some might call it, a trial by fire.