The Wall Street Journal Asia
By Tom Switzer
In recent years, a wave of protectionism has stymied foreign investment deals all over the world. We all remember the U.S. Congress's rejection of bids by China National Offshore Oil Corporation and the United Arab Emirates' Dubai Ports World to acquire American oil and port interests in 2005 and 2006. The antiglobalization hysteria has been so intense in parts of Western Europe that even food and music are "protected" from foreign influences as a matter of national survival.
Now that protectionist wave is set to hit Australia, a medium-sized, commodity-exporting nation that has greatly benefited from exposure to the global economy. The spur is the proposed 26 billion Australian dollar (US$20.1 billion) investment by the state-owned Aluminum Corporation of China (Chinalco) in Rio Tinto, Australia's second-largest resource company. Next month, Treasurer Wayne Swan will decide whether to support the Foreign Investment Review Board's presumptive approval of the deal. The aluminum company hopes to lift its stake in the Aussie mining giant to 18% from 9%. But with current shareholders restive over the terms of the deal and political pressure mounting in opposition, the signs are not looking good that the deal will go forward.
Never mind that China is one of the few sources of investment cash; and given that Rio's options to improve its balance sheet are confined to slashing jobs and selling off assets, it needs vital capital to reduce part of its enormous debt load. A new wave of protectionism, moreover, would raise a red flag to markets about Australia's openness to foreign capital. As former prime minister John Howard said last week, "we have to be very careful not to reject investment unless we have good reason."
The problem is that public opinion is a double-edged sword. Polls here consistently show that foreign investment taps deep feelings of identity and violation in the community. They also reveal that Australians know that investment has been crucial to the nation's prosperity.
We have witnessed the emotive force of foreign investment in the reaction to Royal Dutch Shell's takeover bid of Woodside Petroleum in 2001 as well as the Japanese investment in the resources industry in the 1970s. Whether it has been Kraft's decision to move jobs to low-cost India or businessman Dick Smith's warnings about food icons falling into foreign hands, the message is consistent: Aussies are very uneasy whenever a well-known local brand, or a large stake of that local company, is sold to foreigners.
In the Sydney-based Lowy Institute's annual foreign policy survey in October, 90% of respondents said the federal government has "a responsibility to ensure major Australian companies are kept in majority Australian control" and "a majority of Australians oppose major foreign investments by companies, banks or investment funds controlled by governments." Yet more than 75% of Australians recognize that foreign investment leads to job growth and wealth creation. In other words, we sneer at the very foreign investment we know has been crucial to our prosperity.
Australians are especially two-faced about Chinese foreign investment. We're very uneasy about Chinese state-run companies that are increasingly investing in our raw materials; 78% are opposed to a state-run company, bank or investment fund that bids for a controlling stake in a major local company. Yet 62% also think China's economic growth is a good thing, because it has helped underpin the nation's 17-year growth cycle and may enable Australia to weather the worst effects of the global financial storm.
In recent months, several high-profile conservative political figures -- such as Liberal leader and former investment banker Malcolm Turnbull and former treasurer Peter Costello -- have opposed the Chinalco deal. They insist Canberra should be vigilant about monitoring Chinese state-run investment bids, especially where issues of energy and resource security emerge. Fair enough. After all, China remains a communist one-party state and state-owned companies may still be subject to direction from Beijing bureaucrats.
But firms -- regardless of the source of ownership -- still need to obey the laws of the nations in which they are investing. Australia should recognize that Beijing is in the process of making a transition from communism to capitalism, that its state-run companies are becoming more independent and that foreign investment helps build a Chinese middle class that will demand more political freedom.
Public unease about globalization is hardly an Australian peculiarity. Nonetheless, the onus falls on political leaders and policy makers to try to bridge the divide between elite and public opinion by explaining more clearly the benefits of capital flows. Ultimately, Australia is deeply integrated into the global economy. We have more to gain from relaxing barriers to foreign investment than from searching for hidden perils.