Paulson's pragmatism on SWFs
In Abu Dhabi yesterday, he came across as a wholly reasonable, ultra-diplomatic character, both persuasive and persuadable, especially on the big issue facing Gulf investors today – the creeping protectionism that seems to increasingly permeate US economic and financial policy.
"We will keep our markets open to investment from private firms and sovereign wealth funds," he pledged. "Rather than answer a period of turmoil by building protectionist barriers, we should recognise that trade and investment are vital to our future." Those are fine words, and I am sure than Paulson found a receptive audience in the capital when he evoked such sound free-trade principles.
In the Gulf, after a prolonged period of uncertainty about – and even hostility towards – investment by regional companies into the United States, we should be pleased that a senior member of the American Government is willing to publicly embrace such sentiments. It is a welcome change from the protectionist sentiments we have come to expect from US politicians since the scandal of DP World's enforced sale of American ports in 2006, as well as the sheer xenophobia that greeted Gulf investments in the US financial sector from many quarters last year. Paulson's views on the issue of sovereign wealth fund investment were especially important given his pedigree. As a former head of Goldman Sachs, he is as well-informed and well-connected as it is possible to be on the subject. The firm is well plugged in to the Washington power nexus, with its previous three chief executives also having gone off to serve the administration.
Before moving to the Treasury two years ago, Paulson was at the centre of global developments in finance and investment, and must have had endless briefing papers prepared for him on the growing power and influence of sovereign wealth funds. As a former investment banker, you would expect him to take the pragmatic and commercially sensible view that the US has to come to terms with SWFs, or miss out on one of the biggest financial trends of the century.
The Goldman connection is important in another sense. Just last month the firm produced perhaps the most sensible policy statement on the SWF issue to appear under the auspices of any American institution, public or private. Welcoming the new era of sovereign wealth fund influence, Goldman urged the US to accept the new realities of the global financial structure, and get on with business. It also called for a broader debate on the world's economic and financial environment, which could clarify and codify the rules governing trade and investment between nations. If Paulson goes along with that idea too, all well and good.
But a couple of things bother me about the general euphoria and self-congratulation, which has accompanied his tour of the region. As his views on the environment illustrate, Paulson is an experienced internationalist, with decades of travel and exposure to other cultures and commercial environments. You would expect such an enlightened cosmopolite to appreciate and understand the subtleties of the SWF debate. But will his view prevail among the "golden generation" of Florida, where he was born, or among the red-neck farmers of Illinois, where he was raised? Or even among the vote-driven members of the Committee on Foreign Investment in the United States? Paulson's view will be a lot harder to sell to the American heartlands than to an audience in Doha or Abu Dhabi.
The other reservation is he will probably not be in the policy-deciding position he currently occupies for much longer. His tenure as Treasury Secretary ends with the presidency of George W Bush next January, and I have not seen either leading candidate for the White House adopt as clear and principled a stance as Paulson on the SWF issue. In the hothouse politics of a presidential election, it could just surface as a serious point of contention, with all the emotive implications it has for national security and employment.
Paulson's willingness to embrace the principles of free trade and reject damaging commercial chauvinism is welcome and appropriate. But I think we will have to await the new presidency, and evaluate the views of his successor, before we can finally declare US protectionism dead.