Should we allow Chinalco to buy Rio’s resources assets? Peter Costello made some telling points in yesterday’s SMH comparing his own insistence on keeping BHP’s headquarters in Australia with Paul Keating’s preparedness to let Britain’s Rio effectively take over Australia’s CRA in 1995.
It’s easy for non-economists to object to foreign takeovers. Who’d want “our” assets owned by foreigners? But economists have a tougher time of it. Our discipline says that everything comes at a price — in this case less call on foreign resources and usually less investment in the activity at hand.
Trouble is, in order to try to compare both costs and benefits, economists leave so much out of the picture that we rarely get beyond general principles. As Costello implied in his column, Treasury doesn’t advise Treasurers to block foreign takeovers. Ever.
In a world in which (as is becoming increasingly evident) we are painfully ignorant about how the economy really works and how to manage it, the Treasury approach is at least clear and it may be the best we can manage. But I think Costello’s call was the right one in the circumstances.
The most important question is “how much did Australian BHP shareholders give up — in terms of a lower takeover price — in order to keep BHP’s headquarters here?” Who knows? Not me. Not Treasury or the Treasurer of the time. But . . . I’d guess “not much” if anything.
And the gains? Well I wouldn’t want to prevent all takeovers that would end up seeing a headquarters relocate offshore. Indeed one might want to prevent very few. But if one were going to prevent any, it’s hard to think of a stronger case than one where we’ll have one of the largest firms in the relevant industry where we have a long established, resource rent backed, comparative and competitive advantage. Ditto for two of the largest companies in the same industry. But as Costello pointed out, his predecessor kissed CRA goodbye.
But most of my other guesses strongly favour foreign investment. I can’t see the harm in letting Rio’s Australian resources assets pass to the Chinese (though the fact that Chinalco is state owned gives me pause) and it’s hard to think of a better time to allow foreigners more access to our (inflated?) real estate market.
If we want more investment, any general favours we do investors should be for foreign rather than domestic investors (there are so many more of them so our favours will buy more investment). So we should ditch dividend imputation favours to domestic shareholders and use the $20 billion it costs to cut company tax to 19% putting some desperately needed upward pressure on share prices.
And we’ve had some lousy foreign owners of assets. I’m thinking particularly of Ford Motor Company — going nowhere here or back home in Dearborn, Michigan — focused like Mitsubishi was, on minimising risk and investment all the while panhandling for government handouts until the inevitable day of departure.
Yet their assets — the know-how to design, build and export a complete large, rear wheel drive car — could be seriously valuable to some aspiring, entrepreneurial, investment ready Chinese firm already scoping out its small and medium car offerings to the rest of the world and able to re-badge a large car off the shelf. Assets ready to cherry pick.