The folly of economic nationalism

01.05.07 Publication:

In democracies, it is said, politicians running for election try to bribe us with our own money. In other words, they make promises that will cost taxpayers a lot of money, and the voters are the people who end up providing the taxes to pay for the promises. Now, though, there is a new game that politicians are playing. It is called economic nationalism. It consists of promises by politicians that they will block foreigners from making takeovers of national companies. Such nationalism appeals to national pride and to fear or suspicion of foreigners, all at the same time.

            This political game is more cunning than the old one. It has become popular among politicians thanks to two things: first, the fact that in today’s world, government budget deficits make it hard to increase public spending, especially as voters do not like taxes to rise; second, the fact that globalisation has led to more companies trying to buy companies in other countries, so they offer easy and frequent targets for political attack. Foreigners are an attractive target for politicians for a simple reason: they don’t vote, so there is no danger in offending them.

            In one respect, economic nationalism is better than the old sort of political bribery. It is cheaper. Blocking foreign takeovers costs nothing for either the politicians or the taxpayer, at least there are no direct costs involved. If foreign takeovers are prevented from happening, all the costs will be born by two groups of people: by the companies’ shareholders and by their customers.

            One recent example has been in France, where the leading candidate in the presidential election campaign, Nicolas Sarkozy, has complained about last year’s sale of the Franco-Luxembourg steel company, Arcelor, to Mittal Steel, which is based in Europe but controlled by an Indian. He said that it had been a “mistake” to allow the sale. Yet the sale was made by one set of private shareholders to another set. So in truth it wasn’t the government’s business at all.  Nevertheless, it gave Mr Sarkozy an easy and popular way to bash the government, a government in which he was a minister, but not the minister responsible for industry.

            Then, it was Italy’s turn to use economic nationalism, when two foreign telecoms firms, AT&T of America and a Mexican firm, America Movil, made a bid to buy a controlling stake in Telecom Italia, the privatised Italian telephones firm. The Italian telecommunications minister responded by saying that a “national asset” like Telecom Italia should not be sold to foreigners in this way: he hoped that an Italian bidder could be found.

            These European examples followed two major cases of economic nationalism in the United States in 2005-06: the blocking by Congress of the purchase of some American ports by an Arab company, Dubai Ports World; and the failure of a bid by the Chinese National Overseas Oil Corporation to buy an American oil firm, Unocal.

            And of course economic nationalism can frequently be heard in the Japanese Diet. Measures to permit foreign companies to make takeover bids in Japan using their own shares as currency have been delayed by more than a year. The reason is simple: a fear that if foreign bids are made easier, then there will be a flood of them, buying up all sorts of Japanese “national assets”, to borrow the Italian telecoms minister’s term.

            What is wrong with trying to keep Japanese companies in Japanese ownership, you might ask? It may be nationalistic, but it sounds a good idea, in principle. But does it, really? Think about it a bit more deeply. Did Mitsubishi Estate cause damage to America when it bought the iconic Rockefeller Centre in New York in the 1980s? Or did Bridgestone Corporation hurt American interests when it purchased the Firestone tyre company at the same time? Or Sony with Columbia Pictures?

            The answer to all those questions is no. In all those three cases, if anyone was hurt it was the Japanese buyer, as they learned later that they had all paid too much for their acquisitions. But in no sense was America itself hurt. After all, the foreign buyer did not pack up the “national asset” and take it away: the businesses are all still there, employing American workers and serving American customers. The new foreign owners were not able to break any American laws or rules: they were all subject to the same labour laws and other regulations as any domestic buyer.

            It would be the same for a foreign company buying a Japanese firm, or indeed a French or Italian firm. It would not take the national asset away. It would still be subject to Japanese labour laws and other government regulations. It would bring in new capital, new management, new ideas and perhaps new technology.  It might not succeed, of course. But that is true of any manager or owner, whether they are local or foreign. If the foreign buyer were to fail, then an opportunity would probably emerge for a Japanese firm to buy the company again, more cheaply.

            So, although economic nationalism appeals to politicians because it is cheap, it does in fact cost something. It is costly to shareholders in companies that might be bought by foreigners, because they lose an opportunity to sell their shares. With fewer potential buyers, their shares become less valuable. It is also costly to local consumers, because by restricting competition and the arrival of new capital and technology, firms are made less efficient and innovative than they might have been.

            Since I live in the country, Britain, that has made famous the analogy of the “Wimbledon effect”, in which foreign ownership of British companies has been likened to the fact that we host a great tennis tournament but never win it ourselves, you might conclude that my attitude is predictable and complacent. But that is wrong. Britain has benefited hugely over the past 20 years by welcoming foreign investment and foreign takeovers. This has made us richer, has made our economy healthier, and has made our own companies better. The one country where politicians nowadays never resort to economic nationalism is Britain. They know it will not be popular.