America waives the rules

The US constantly proclaims the superiority of free markets, but does it really believe in them? A couple of recent examples suggest not.

Let's start with the "open skies" agreement between the US and Europe, recently concluded after many years of difficult negotiations, and due to take effect in early 2008. Europe consented to allow US carriers free access to European airports, with Heathrow the big prize: prior to this deal, only four airlines were allowed to operate transatlantic flights from the airport. Is return for this, the US conceded....well, not much, actually. Restrictions on foreign ownership of US airlines remain intact, and European carriers have not been given much in the way of "cabotage" rights, which would allow them to carry passengers within the US.

So it wasn't much of a deal for Europe anyway, though anything that helps to curb the ripoff pricing of business class flights from Heathrow can't be entirely bad. But now it emerges that the FAA is going to cut back on the number of flights allowed at JFK in New York during peak times. This will put paid to BA's plans to fly there from mainland Europe, and may even force it to cut back its existing schedule of US-UK flights. In the meantime, US airlines can make space for themselves at JFK by shifting flights to other NY-area airports, and are busily lining up slots at Heathrow.

The FAA has in effect turned an agreement that had already few benefits for the UK into one that could prove seriously negative for British carriers. You can imagine the outcry from Washington if the UK had done something similar, but so far I haven't heard a peep out of Whitehall.

There's a second example: the US, with some support from EU countries, is starting to get very worried about "sovereign investment funds". These are pools of cash held by non-US governments that are now being used on an increasing scale to buy assets in rich countries. Some of these funds are owned by "friendly" countries (such as Singapore or Canada), but many more are owned by countries the US is a bit more leery of, including China and several of the OPEC nations.

The US was happy to allow these funds to buy US assets as long as they stuck mainly to bonds -- in fact, without buying from China and Japan, the US Treasury's borrowing programme would have been in big trouble years ago. But now the funds are starting to invest more broadly, buying real estate and taking over whole companies. This makes sense from their standpoint -- you don't want to have all your eggs in one basket, especially one as ropey as the US debt market -- but it's got the Americans crying foul.

What's Uncle Sam's problem? Well, the official line is that these funds may not invest on purely economic (expected return) grounds. Because they are not "transparent", they could make investment decisions based on extraneous (i.e political) factors, and that could destabilise markets.

I see several flaws in this argument. Although the sovereign funds are getting pretty big, they are dwarfed by the huge US-based investment pools, predominantly state pension funds such as CalPERS. Although subject to regulation, these funds are hardly beacons of transparency. Nor are the hedge funds and private equity funds that have become huge players in US financial markets over the past decade. The fact is that public equity markets have become less significant players in the US economy in recent years. The emergence of sovereign funds is far from being the biggest contributor to this trend away from transparency.

Foreign ownership of US assets is only going to increase. The soaring oil price will keep bloating the sovereign pools and the collapsing US dollar will make US assets cheap for foreign buyers. Years of overconsumption are finally taking their toll. It's an uncomfortable time for US policymakers, and it looks as if the country's commitment to free markets will be one of the first victims.