Report to the Association of the Bar of the City of New York
The Ramifications of the Port Security Legislation on Trade and National Security
Maritime trade is vital to the U.S. economy. Thirty-five percent of the U.S. gross domestic product (GDP) is derived from trade. Ninety-five percent of American overseas trade passes through 361 ports. Approximately 9 million containers transit through U.S. ports every year. The amount of international container traffic will double over the next 20 years. Currently, according to the American Association of Port Authorities, $1.3 billion worth of U.S. goods moves in and out of U.S. ports every day. Maritime shippers increasingly concentrate their traffic through major cargo hubs because of their superior infrastructure.
As a result, in the United States, fifty ports account for approximately 90 percent of all cargo tonnage. Their specialized equipment is essential for the loading and off-loading of container ships, which constitute a growing and profitable segment of maritime commerce. The rising use of container shipping and major cargo hubs has lowered costs and improved the reliability and cargo security of maritime commerce.
The important position that U.S. ports hold both as cargo hubs and as critical infrastructure to national security was highlighted in March of this year by the purchase by Dubai Ports World (“DP-World”), a United Arab Emirates (“U.A.E.”) owned company, of the British-owned Peninsular and Oriental Steam Navigation Company (P&O). The purchase gave DP-World control over twenty-four terminals in six major U.S. ports in New York, New Jersey, Philadelphia, Miami, Baltimore and New Orleans. DP-World is already one of the largest firms in the international ports sector. Had the P&O deal been successful, it would have added two more terminals in Chinese ports, as well as terminals in Indonesia, Thailand and the Philippines, four Australian ports and berths in northern and southern Europe to the holdings of DP-World.
In January of this year, the possibility of the U.A.E.-owned company managing U.S. ports produced strong opposition in the U.S. Congress, based on the fear that critical U.S. infrastructure was being sold off to an Arab government. As a result, legislation has been proposed to prevent such future bids for American port terminals. DP-World ultimately agreed, under political pressure, to sell its U.S. ports division.
Last year a political backlash helped to quash a bid by China’s CNOC to acquire Unocal, a Los Angeles-based oil and gas producer. Now, in the wake of the DP-World purchase of P&O, the Senate and House have passed different port security bills; S.3549 and H.R. 5337, which would reform the process by which the Committee on Foreign Investments in the United States reviews acquisitions of American companies by foreign companies, with a focus on national security concerns.
Clearly, the thrust of these bills is to deal with concerns about threats to national security exemplified in the outcry over port security and the DP-World acquisition. In addressing those concerns, Congress should consider both the immediate and far-reaching consequences for foreign investment in the United States and provide a practical solution to foreign ownership of sensitive commercial facilities and infrastructure. In particular, the legislation must address the application of “National Treatment” of foreign companies. National Treatment is a principle embodied in all three of the principal World Trade Organization (“WTO”) agreements: the General Agreement on Tariffs and Trade (“GATT”, Article 3), General Agreement on Trade in Services (“GATS”, Article 17) and Trade-Related aspects of Intellectual Property Rights (“TRIPS”, Article 3). The principle of National Treatment is simply that signatories to the agreement must give other signatories (i.e. companies from that country) the same treatment as they give their own nationals.
In this paper, we examine the provisions that should be incorporated into any port security legislation and frame them in the context of the applicable WTO Agreements (GATT and GATS). We identify the potential consequences for foreign direct investment (FDI) and national security and urge Congress to consider these factors in enacting any port security legislation.