One of the reasons I was opposed to the blocking of the Dubai ports deal was the signal it sent of protectionism to our trading partners. We see a little bit of that today with the announcement that the UAE will shift some of its reserves from US dollars to euros.

The United Arab Emirates, which includes Dubai, said it was looking to move one-tenth of its dollar reserves into euros, while the governor of the Saudi Arabian central bank condemned the US move as "discrimination".

...The governor of the UAE central bank, Sultan Nasser al-Suweidi, said the bank was looking to convert 10 per cent of its reserves, which stand at $23bn (�13.5bn), from dollars to euros. "They are contravening their own principles," he said. "Investors are going to take this into consideration [and] will look at investment opportunities through new binoculars."

Hamad Saud al-Sayyari, the governor of the Saudi Arabian monetary authority, said: "Is it protection or discrimination? Is it okay for US companies to buy everywhere but it is not okay for other companies to buy the US?"

I was lecturing last night on international capital flows and saving and finance. There's a very simple story one tells in your intermediate (or even principles) macro course where you ask "what happens if the government of a large, open economy discourages foreign investment?" Students draw their savings and investment curves and learn interest rates go up, savings and investment go up, and the dollar to depreciate. Exactly how is this good for the United States?

Of course, you will answer, the UAE is a minor player, but in terms of buying US firms it's not.

�America�s trade deficit hit an all-time high for 2005, and the country is not in the position to start dictating where foreigners can invest,� says financial expert and Daily Reckoning columnist Chris Mayer. �The only way the United States is able to sustain such a deficit is by getting money from abroad, by attracting investment dollars.�

Categories: economics