Wednesday, October 10, 2012


Posted by Professor John Conybeare

The US House Intelligence Committee just released a report suggesting that both public and private buyers should avoid purchasing telecommunications equipment from two Chinese companies, Huawei and ZTE.  Its concern is that the Chinese government might use these companies to engage in espionage in the US.  President Obama recently followed the recommendation of the inter-agency Committee on Foreign Investment in the US, and blocked a Chinese company from acquiring a wind farm in the US, on the grounds that the farm is close to a military base.  During the Bush Administration, the Chinese oil company CNOOC was dissuaded from buying UNOCAL and Dubai Ports World (owned by the government of Dubai) forced to divest itself of its acquisition of US port operations.
Foreign investors were welcome contributors to US economic development in the 19th century, but since the Second World War, attitudes to foreign companies have been ambivalent.  As European and Japanese companies began coming to America in large numbers during the 1970s, reactions in the US were varied. When Honda built its first car factory in Ohio in 1983, xenophobic newspaper articles invoked Pearl Harbor and “yellow peril” rhetoric to suggest that Japan was beginning to take over the US by stealth.   Yet when Renault rescued American Motors from bankruptcy in 1987, the media cheered the French savior of American jobs.  Is there no more to this than discriminatory chauvinism?

The EU and other countries have been doing the same thing. Leaders of the EU (especially Chancellor Merkel) have long called for the EU to block "politically motivated” investments in the EU’s “strategic industries.”  Canada, Russia and Australia have announced that they are monitoring foreign investments for adverse political implications. The Australian government blocked a Chinese aluminium company from buying a 20% equity share of the Australian mining company BHP.  Last month the EU announced that it was investigating a Russian state controlled oil company, Gazprom, for allegedly conspiring to restrain competition in the European energy market. Gazprom supplies 25% of the EU’s gas.
There may well be legitimate concerns about foreign companies.  Monitoring foreign investment in a country’s defense industries is understandable and to be expected, though there is disagreement over what qualifies as defense related activity.   The term “strategic industry” seems to have expanded to include any industry where the government does not want foreigners to compete.  The US, for example, restricts foreign ownership of TV stations and fishing vessels. Similar concerns are expressed over the global reach of "sovereign wealth funds" (state owned firms that invest a country’s wealth outside its borders), especially the possibility that such funds might pursue political objectives that go beyond getting a good mixture of risk and return.  Finally, foreign companies might reduce competition and cause consumers to pay higher prices. When Daimler took over Chrysler in 1998, the US Justice Department and the EU’s Competition Commission had to agree that the merger would not reduce competition in the auto market.

Although these may all be legitimate concerns about foreign investment, we need to be careful that these arguments are not used to achieve less worthy goals that may not be in the national interest.  First of all, the specter of “barbarians at the gates” may be used by vote seeking politicians who see no downside to presenting themselves as “strong” on national defense and blaming foreigners for whatever problems ail us.  A second reason for restraint is that these strident condemnations of foreign investment often seem to be encouraged by US firms that are in competition with the foreign firms.  The Dubai Ports World case was initiated by complaints from a US firm that was competing with DPW for port operation contracts.   The decision by the House Intelligence Committee to investigate Huawei and ZTE was partly motivated by complaints that these firms undercut US firms when bidding for telecommunications contracts.  Third, action taken against foreign firms will provoke retaliation. When Congress passed a law in 1996 to punish foreign firms that do business with Cuba, the EU persuaded President Clinton not to enforce the act by threatening retaliation against US firms.
All this is part of the anti-globalization rhetoric pushed by people who see our national sovereignty threatened and our national economy weakened by globalization. Beware of anti-globalists bringing apocalyptic messages of economic Armageddon. They are fixated on a zero sum view of the world in which international investment cannot benefit both sides of the transaction, because only one side can gain and the other side gets exploited.  Perhaps we need to remind ourselves of the simple benefits of voluntary exchange: if I sell you something for more than it is worth to me, and you buy it at a price less than you would be willing to pay, we both gain. The same goes for the senders and recipients of foreign investment.

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