Prosperity And Peace In The Middle East

It would be easy to overlook the economic importance of President Bush's weeklong excursion through the Middle East, which begins Wednesday.

When he touches down in Israel, his first stop on the tour, the first order of business will be to continue negotiations for Palestinian statehood. For the well rehersed security reasons, the president is also looking to reaffirm ties with strategic allies in the region, as well as playing the international statesman.

But make no mistake--"from an economic standpoint, [the trip] is extremely important," says Daeman Harris, who oversees the U.S. Chamber of Commerce's Middle East and Africa division. As the U.S. economy stumbles, crude oil fetches $100 a barrel and battered American banks sell billion-dollar stakes to foreign governments, the Bush administration wants to make sure the U.S. is engaged in the pockets of the Middle East that are flourishing financially.

The president has plenty of those destinations on his itinerary, including Kuwait, Bahrain, the United Arab Emirates and Saudi Arabia, each of which has uniquely affected U.S. business in recent years. Kuwait and Abu Dhabi (in the UAE) operate two of the world's largest government-owned investment funds. Bahrain has a newish free trade agreement with the U.S. Dubai (also in the UAE) and has a sizeable stake in the Nasdaq Stock Market. And Saudi Arabia is the world's largest oil producer.

Three economic issues are likely to grab headlines. First will be trade and foreign investment. While new free trade agreements are a dead issue until at least 2009 (Congress will get in the way), the Middle East is increasingly becoming the U.S. export and investment destination. In 2003, the administration began an initiative to boost trade in the region. It has brokered deals with Bahrain and Oman and started negotiations with UAE, a hotspot for U.S. exports.

Bush wants to make sure these ties are binding, and he'll look to build upon recent progress. Last month, Bahrain hosted a first-ever forum between the U.S. and the Gulf Cooperation Council, a group of six countries on the Arabian Peninsula, to promote investment in the region, where, according to the Treasury Department, U.S. foreign direct investment increased by 57% to $25.9 billion from 2000 to 2006.

James Godec, chairman and chief executive of the U.S.-Bahrain Business Council, says the idea is for the forum to become a Davos-like economic summit for the Gulf region.

Another issue is the growing influence of "sovereign wealth funds" that are becoming a hallmark of foreign government investment from countries in Asia and the Middle East. Just six weeks ago, the largest of these funds, the $900 billion Abu Dhabi Investment Authority, purchased a $7.5 billion stake in Citigroup, still reeling from exposure to the subprime mess in the U.S.

Kuwait has a fund worth an estimated $213 billion, and Saudi Arabia is reportedly launching a fund that would be larger than Abu Dhabi's.

The opaqueness of such funds has led suspicious souls in the U.S. to speculate the foreign governments will use this newfound economic muscle for political leverage. Nonetheless, don't expect Bush to try to discourage it, says Edwin Truman, a senior fellow at the Peterson Institute for International Economics and a former assistant secretary for international affairs in the Treasury Department.

"Politicians like to say 'yes.' They don't like to say 'no,' " he says. Because it is U.S. policy to welcome foreign investment, expect the president to encourage Kuwait, Abu Dhabi and Saudi Arabia to develop a set of best investment practices under the guise of the International Monetary Fund.

Truman says it might behoove Bush to educate his counterparts about the realities of U.S. politics--Congress also has a say in foreign investment, as evidenced by the outrage produced on Capitol Hill after the administration approved the Dubai Port Authority's takeover of operations at some U.S. ports two years ago, a deal subsequently scuttled by Congress.

The third issue is the rising price of oil--but don't look for the president to do anything about it. The Organization of Petroleum Exporting Countries next meets Feb. 1, when the group will decide whether to boost supply to lower prices.

It would be politically foolish for Bush to push the issue with OPEC members, which include Kuwait, Saudia Arabia and the UAE. For one thing, he would not want to appear to bear any responsibility for the price of oil. In addition, he doesn't want to be seen going hat in hand to OPEC, asking for price cuts. Markets, the president maintained as recently as Friday, control oil prices.

He is, though, likely to hear from his hosts about the market's control over the price of the dollar, to which oil producers in the region peg their currencies, and whose 30% trade-weighted decline in the past five years is putting inflationary pressure on domestic economies.

Bush returns from his whirlwind tour Jan. 16. He's then got less than two weeks to prepare for his final State of the Union address on Jan. 28. He'll try to reassure the country that the current economic malaise is not as bad as it seems. He'll say that the weak dollar is boosting exports and that the administration is trying to encourage trade, despite the efforts of protectionists in Congress. And with a visit to the Middle East just behind him, he'll have some fresh examples upon which to build his case.