What will our Prime Minister say about Chinese investment in Australia when he visits China later this week? Of course he will give his version of 'open for business': that we welcome foreign investment. After all, we have run a current account deficit almost every year for well over two centuries, funded by foreigners. But it's more complicated than that.
As the Chinese know well, we don't welcome every proposal. The Australian authorities were ready to knock back Chinalco's attempt to buy a larger share of Rio Tinto in 2009. The recent bid for the Kidman cattle properties was rejected because part of the property overlapped the Woomera Weapons Testing Range.
It's not as if we reject only Chinese bids. Singapore's attempt to take over the Australian Securities Exchange was rejected. Shell was not allowed to buy Woodside. Even our closest allies sometimes get knock-backs too: an American firm was denied Graincorp. Some areas are predesignated as off-limits: foreigners might, perhaps, be able to take over one of the big four banks, but not more than one.
That said, we don't treat all foreigners quite equally. If history has resulted in an economy with many state-owner-enterprises (SOEs) — which is the case with China — these SOEs will be treated with greater circumspection than privately-owned foreign firms.
Nor do we treat all Australian industries as equally open. Around 80% of Australian mining is foreign owned, while agriculture (with only a little more than 10% foreign owned) seems especially sensitive. When foreigners buy up housing, we feel ambivalent about higher house prices (depending on whether we are already owners) and see them as crowding out our children's ownership dreams. [fold]
What principles emerge from this history? What nefarious activity would SOEs carry out that foreign investors like tax-avoiding reclusive Zug-based Glencore (sole owner of Xstrata) wouldn't do in its own market-oriented self-interest? The outrageously successful effort to torpedo the resources super-profit tax in 2009-10 was orchestrated and fronted by Aussies. When we have second thoughts about allowing China to have a lease of Darwin's port, what exactly did we think that the Chinese might do that could harm our security? None of this is transparent in the present system.
That said, letting foreigners own essential services has legitimate sensitivities. To disallow Chinese-maintained equipment into vital areas of our telecommunications might make sense, given their reputation for eaves-dropping. And yet, we don't mind Singapore owning one of the key telecoms companies, despite its reputation for official intrusiveness. Would these issues restrict China from owning key services like electricity? We've already sold off quite a bit of this utility to foreigners. Might the Hong Kong owners of the Latrobe Valley power stations be pressured into turning off the lights at some dark moment in the future? Might the Canadians who have a long-term lease on Sydney's desalination plant try to blackmail us into paying more for their water when we have a serious drought?
There seem to be some fanciful elements in some of these security-based arguments. The foreign-owned assets are physically here in Australia, subject to Australian regulation and law. Surely we can protect our own interests in these circumstances?
The starting point for policy might be to sort out some of the ambivalence:
- Yes, we want foreign investment, but since the float of the dollar in 1983 removed the external constraint, we should not have to beg or offer special incentives to foreigners to fill the nation's saving/investment gap. Our openness to foreign investment is an opportunity given to foreigners to join with us in taking up the many profitable opportunities which our resource-rich, well-governed, secure country offers – a benefit we are bestowing on the foreigners as much as it is a favour they are doing for us.
- In exchange, the foreigners should make an explicit undertaking to be good corporate citizens. This means paying a fair amount of tax in Australia, not arranging their affairs to have the profits accrue in tax-avoidance centres like Ireland or Singapore. Australian shareholders make such a contribution through income tax, so it is not only fair. It is also economically efficient (competitively neutral) to expect foreigners to pay the same. Foreigner's profits come, to large degree, from the benefit of being able to exploit Australia's natural endowment and to sell into this well-functioning market with intellectual property protected and legal rights enforceable through due process. We don't want companies that are unwilling to contribute to the cost of running this governance infrastructure.
- Sensitive areas should be either clearly off-limits or subject to negotiated safeguards. In most cases, the owners of vital service sectors can't do us much harm without doing more harm to themselves. Let's try to put a bit of realism into these nebulous security arguments.
- Perhaps the greatest opportunity for a change in the mindset would be if we stopped thinking of the Foreign Investment Review Board's job in terms of allowing foreign investment unless a problem can be identified (a negative focus). Instead, we should ask the foreigners to set out why their proposal is positively good for us. This might actually change the nature of the proposals. Rather than tweaking them to get around the downside objections, foreigners could make proposals more inclusive and beneficial for Australia. Does the proposal open up markets in the foreign investor's home country? This should be particularly relevant for China, which needs to set up supply-side security in basic commodities – minerals, energy and food. How can they help us break into their huge market? It might be beneficial to have a substantial Australian partner. Don't try to take over our icons or national champions.
- The trickiest issue is to articulate why we might want to discriminate between different foreigners on the basis of 'community concerns'. This has something to do with not wanting to be dominated by overly-powerful foreigners. The issue for China is that they are huge relative to us, and even modest proposals will easily overwhelm us: the 'elephant in the canoe'. This might be hard to explain to the Chinese, but the Prime Minister might begin the task.
Of course the Prime Minister has a winning rejoinder in the unlikely event that he is backed into a corner on this topic: the Chinese don't allow open investment in their own country, so any restrictions we apply are just reciprocity – tit for tat. But a better long-term answer is to develop some principles.
Photo: Lowy Institute/Peter Morris.