Australians and Foreign Investment

Australia’s economy has been built on the back of foreign capital – alone among nations advanced or emerging, we have been able to run deficits with the world throughout our history precisely because foreigners are so keen to invest here. In his just published Takeover – Foreign Investment and the Australian Psyche, Economics editor of The Australian David Uren asks, “Did the Chiko Roll change Australian history?” And his answer is yes. David Uren addressed The Sydney Institute on Tuesday 1 September, 2015 to explain why.

AUSTRALIANS AND FOREIGN INVESTMENT

DAVID UREN

The inspiration for a book on foreign investment came during the 2013 election campaign.  The message during the coalition’s official campaign launch was that under Tony Abbott, Australia would be open for business, the carbon and mining taxes gone, infrastructure built and excess regulation stripped away.  But mid way through the speech of Nationals leader Warren Truss, there was a jarring note.  A coalition government would “create foreign-owned farmland and agribusiness registers, lower the threshold for Foreign Investment Review Board scrutiny of proposals and broaden the membership of the FIRB – which, so far, has never said no to a foreign farmland or agribusiness purchase.”

Labor’s trade minister Craig Emerson attacked the Coalition’s planned tightening of the rules around foreign investment in the rural sector and rural industry, saying that erecting barriers would deprive one of Australia’s real growth industries of the capital needed to fulfill its promise.  Labor stood for a commitment to free trade and investment.   But then, as often occurs during election campaigns, there was a twist.

A debate was arranged between Abbott and Kevin Rudd – not in a TV studio or at the National Press Club but at the RSL Club in Rooty Hill – a venue chosen for its small-town parochialism – here was everyman’s Australia.

A questioner – a local small businesswoman – asked what each leader would do to control foreign investment in land. Abbott, perhaps defensive about the protectionist nature of his policy, conceded that in some circumstances, foreign investment in land could actually be good for Australia saying “I think we’ve got to do what is in Australia’s national interest.”

Notwithstanding Labor’s public position as articulated by Emerson, Rudd saw an opportunity to win favour with the local crowd in Abbott’s willingness to entertain the possibility that foreign investment might do some good. “I am a bit old fashioned on these questions and I’m not quite as free market as Tony on this stuff. I am a bit nervous, a bit anxious, frankly, about simply an open slather on this,” he said. “I am looking very carefully at how this affects the overall balance of ownership in Australia.”

The Greens chimed in, with its leader Christine Milne nominating the Coalition’s plan to curb foreign investment in the rural sector as one area she believed she could work cooperatively with a Coalition government led by Tony Abbott.

“The Greens take a stronger position than the Coalition does, however, we would work with them to strengthen what is there already,” she told the National Press Club ahead of the 2013 election.

To an economics writer, this focus on foreign investment in the 2013 election campaign seemed odd – there were no particular waves of foreign investment sweeping the country as, for example, had been the case five years previously when Chinese investors sought equity positions in the resource sector. By 2013, resource prices were falling, several Chinese investors had been severely burnt and there were few new projects on the drawing boards.  There was a takeover bid from the US grain distributor ADM for Australia’s GrainCorp, which the Nationals wanted stopped, but it was far from obvious that the rural sector was “under siege”.  There was no obvious problem.

Foreign investment is ultimately about the regulation of business – why should the public care?  We’re all happy enough to be driving Toyotas, drinking Coca Cola, eating at McDonalds and watching the Simsons.  What is it about the nationality of shareholders in the ownership of a business that we get so troubled about?

It was also odd to see the alliances between the Nationals on the protectionist right and the Greens on the anti-globalisation left, the obvious attraction this position held for Kevin Rudd and the apparent sympathy for it from Tony Abbott, not withstanding the official deregulatory stances of both major political parties.

I started to trace the story. The first decision to bar a foreign investment was Prime Minister John Gorton’s ban on a British insurance company lifting its holding in the local insurer, MLC, in 1968. The first formal policy on controlling foreign investment was in the dying days of the McMahon government in 1972 and the foreign acquisitions and takeovers act was pushed through parliament in the last few sitting days of the Whitlam government.

The late 1960s and early 1970s were, of course, a time when the left was flourishing around the world, galvanised by opposition to the US led war in Vietnam which was seen as a manifestation of US imperialism of which the activities of US multinationals abroad was the commercial arm. Sydney University’s Professor Ted Wheelwright drew together the strands of an influential critique of the US multinational – it limited the activities of its local Australian subsidiary to stop it exporting to third markets and buying from local suppliers, it avoided Australian tax by charging inflated prices for intellectual property and supplies and it set monopoly prices wherever it could.

On the right, the protectionists were also pushing against the incursions of the US multinational. The towering figure of Country Party leader John McEwan established a beach-head for economic nationalism within the Menzies government, but as I researched, it was apparent that business leaders were also pressing for barriers to be raised against foreign investment. Stockbrokers Ian Potter and Staniforth Ricketson, the chairman of the AMP Gordon Crane and pioneering merchant banker Sir John Marks all sought for foreign investment in Australian companies to be restricted to passive holdings.

So there are three strands to the debate on foreign investment – the left anti-imperialists, the right protectionists and the third group, the free traders. Each of these three forces stretches deeply back into Australia’s history and political culture.

Protection coexisted happily enough with foreign investment until the 1950s.  The high tariff barriers made manufacturing in Australia a profitable enterprise, despite the small size of the market. Consumers were left paying 50 to 100 per cent more for their fridges, cars and shirts than anyone else, but their local makers could turn a profit. Kodak started making film in Australia in 1908 and Kellogg’s was selling packaged breakfast cereal from 1925, around the same time Ford set up in Geelong, while Coca Cola and Heinz both arrived in the 1930s. Chicago-based Kraft bought out Vegemite after the death in 1935 of its Australian agent, an Australian entrepreneur Frank Walker, who developed the spread as an accompaniment to Kraft processed cheddar.

But the 1950s brought a wave of foreign investment from the United States that started to breed resentment. General Motors’ Holden – at the time the largest business in the country – made annual dividend payments back to its headquarters that became headline news – so controversial that General Motors bought out the minority shareholders left over from Holden Bodyworks, so that, as a wholly owned subsidiary, it would no longer have to report its dividend. Public outcry forced the disclosure law on profit reports to be changed.

Menzies and his treasurer Harold Holt held the line against the Labor Left and the Country Party, preserving an open-door policy to foreign investment, but the hostility was growing. John Gorton’s brief tenure as prime minister from 1968 marked a change in attitude, which he expressed in a speech saying: “It has seemed to me that the posture of Australia in seeking overseas capital has been the posture of a puppy lying on its back with all legs in the air and its stomach exposed, and saying, “Please, please, please, give us capital. Tickle my tummy on any conditions”

His treasurer Billy McMahon resisted pressure to regulate but, replacing Gorton as Prime Minister, eventually found it irresistible. The straw that broke the McMahon Government’s resistance to regulation of foreign investment was a takeover bid for the manufacturer of the Chiko Roll, one of the first fast-food brands based on a deep-fried pastry wrapped cabbage roll. Dozens of corporate takeovers had gone through without rousing the government, but the 1972 bid by US conglomerate, IT&T for Frozen Foods – the maker of the celebrated Chiko Roll – forced a reluctant Prime Minister Billy McMahon to bring the issue of foreign investment to the cabinet table. IT&T was embroiled in a deeper controversy at home, with revelations that it had collaborated with the CIA in a failed effort to prevent the election of Salvador Allende in Chile and had bribed the Republican Party in the lead up to the election of Richard Nixon to halt an anti-trust action.

The discussion was sufficiently heated and the issue of how to control the wave of foreign takeovers so vexed that a special cabinet meeting had to be called for the following day to conclude the debate.

The Age’s finance editor Les Carlyon found it hard to credit. “The threat to Chiko is relayed in black headlines; TV interviewers furrow their brows at the gravity of it all. Federal cabinet, bless its collective heart, puts aside trivialities like electoral survival to agonise over the Chiko affair and hardly leaks a word.”

Diplomatic representations led to the IT&T bid being withdrawn, but as the 1972 election approached, McMahon was compelled to act, announcing the creation of a new authority to vet foreign takeovers of Australian corporations.

Successive waves of foreign investment – the opening of the Queensland coal industry in the 1970s and 1980s by the US company Utah, Japan’s discovery of Queensland as a destination for honeymooners in the early 1980s and the Chinese appetite for Australian minerals over the last decade – have all met fierce resistance from the same combinations of the left and the protectionist right.

The hostility to Japanese development of Australia’s tourism industry appears bizarre in hindsight. Yeppoon, the first Japanese development on the Queensland coast, was bombed while it was under construction. Queensland Labor leader Tom Burns sought the reintroduction of the wartime Aliens Act to prevent foreign ownership of land. Grass roots groups, Australian Citizens against Foreign Ownership and Heart of the Nation,  comprising many of the people who later showed up in Pauline Hanson’s  One Nation, were formed to resist the development of a tourist industry, although it was generating employment for more than a hundred of thousand people, and had, by the end of the 1980s, become Australia’s biggest export industry, overtaking wool. The left’s Ted Wheelwright said the benefits were being siphoned away from Australia by the foreigners.

It was unexpectedly the Hawke and Keating Governments which called a halt to the rising tide of nationalism and brought to life the third strand of Australia’s political economy culture – free-trade.  Keating was steeped in Labor’s traditional contempt for the banks having been mentored in the early years by Jack Lang, and but he saw competition, including from foreign banks, as a way of forcing them to become more responsive. He gradually took on the task of breaking down Deakin’s settlement – the protection, regulation and central wage fixing. While Labor maintained a corporatist vision of unions, business and the state working together, the arguments for breaking down the regulatory and tariff barriers were articulated by a small group of parliamentarians, academics, businessmen, journalists and Greg Lindsay’s Centre for Independent Studies whose manifesto was a book Australia at the Crossroads, of which ANU academic Wolfgang Kaspar was the primary author.   The Hawke and Keating Governments raised the thresholds before foreign investment approval was required, removed requirements for 50 per cent local ownership of resource and forestry businesses and slashed tariff protection.

In these days of political timidity, it is worth reflecting upon the courage of Hawke and Keating who, in March 1991, announced that tariffs on cars and textiles would be roughly halved, while tariffs on everything else would be cut to 5 per cent. Remember, 1991 was the low point of Australia’s last recession: unemployment was at 9.2 per cent with 400,000 having lost their jobs in the space of the previous18 months.

While the benefits of globalisation have been broadly embraced by the leadership of both political parties ever since, its critics have not gone away.   There were 160 speeches and interventions referring to foreign investment in the parliamentary debates of the Abbott government’s first year.  Foreign investment in Qantas, agricultural land, GrainCorp and Warrnambool Cheese, along with the foreign investment policy implications of free trade agreements, state-owned enterprises and the motor industry engaged politicians from all sides in both the House of Representatives and the Senate.

There are a number of hot points in the debate. Foreign investment in farm land has been a sensitive issue from the very beginning – the very early editions of the first independent newspaper, The Australian, edited and published by William Wentworth from 1824, devoted acres of space to the denunciation of the land grant to the British controlled Australian Agricultural Company, which was the first private sector foreign investment in Australia and which remains Australia’s largest landholder almost 200 years later.

Ostensibly the objection to foreign investment in agriculture is that it endangers Australia’s food security – the fear being that foreign investors will ship Australian food off to their home market, and we will be left without.   The fact that Australia exports about 80 per cent of its agricultural production and that foreign investors control less than 5 per cent of this does not appear to carry much weight in what is an essentially emotional argument.

I spoke to Barnaby Joyce about this. He says, “If you just talk pure dry economics, it would be superior to have a single large organisation own all the farm land, but it just wouldn’t be a nation.” Joyce recalls that when he was young, he used to get irritated with hunters coming onto his father’s property because it limited what he could do. His father told him to make allowances. “As a returned serviceman, he would say it is very hard to get someone to love their nation if you never let them set foot on it. It’s just as hard to get someone to love their nation if they don’t have any ownership of it.”

The origins of the Country Party were the small farmer settlers. They wanted state provision of infrastructure, such as grain silos and rail, and government support for marketing. The large land-holders, in the early twentieth century, were and always have been, allied with the free-traders.

A striking feature of the current government’s stance on foreign investment is its tightening of thresholds for foreign investment in agribusiness and the food industry. The lowering of the thresholds on foreign investment in agribusiness covers around half the food industry.

Treasurer Joe Hockey exercised the FIRB’s veto on a takeover of Graincorp – the monopoly grain distributor on the east coast – from the US-owned ADM group.  Both Graincorp and many farmers argued that the breadth of networks is the key to success in a distribution business and ADM’s networks were several times the size of Graincorp’s, however strong lobbying by the National Party prevailed.

Hockey argued that as the grain industry had only recently been deregulated, it was not yet ready for global competition, repeating almost verbatim the argument used 150 years earlier to erect the first tariffs to protect domestic flour millers.  Hockey also argued: “A further significant consideration was that this proposal has attracted a high level of concern from stakeholders and the broader community. I therefore judged that allowing it to proceed could risk undermining public support for the foreign investment regime and ongoing foreign investment more generally.”  In other words, an individual foreign investment proposal that was unpopular could be rejected because it would make foreign investment in general unpopular.

Foreign investment in housing has been another area of regulatory action by the government. Again, there is a timeless quality to this debate. Asian, and particularly Japanese, investment in residential housing sparked similar hostility in the mid-1980s. Asia was becoming a part of the Australian world for the first time. Asian migration had risen from about 5 per cent of the annual intake in the mid-1970s to about a third by the mid-1980s and half by the end of the decade. Japan’s global influence was at its zenith and the yen was trading at an all-time high.

The Sydney Morning Herald’s Max Walsh wrote that, “The feared yellow hordes of Asia are not flooding southward – but their capital is”. Both historian Geoffrey Blainey and the then opposition leader John Howard voiced concerns that the level of Asian immigration was excessive. The grizzled president of the Returned Services League Bruce Ruxton did not want anyone let go of wartime enmity. Speaking of the Japanese, he wrote, ”Their buying of Australian real estate can be equated to the plundering of the Spanish Main by British pirates, centuries ago.”

The current guidelines date from that time, allowing foreign investment in new property but barring it from investment in established real estate other by temporary residents, who must sell when they leave.  In early 2009, as the global financial crisis sent house prices plunging in the United States, Britain, Spain and Ireland, the rules were relaxed. Sydney academic Steve Keen was warning a 40 per cent price plunge was in prospect. The then assistant treasurer, Chris Bowen, announced that the requirement for temporary residents to notify the FIRB of their purchases would be dropped, as would the rule requiring developers of apartment blocks to sell at least half the units to Australian citizens. But interest rate cuts, a very generous first-home-buyer grant scheme soon and the realisation that, at least as far as Australia was concerned, the crisis was not the end of the world, saw house prices rising again and the relaxation was reversed.

Soon the vilification of foreign buying was back, although it was plainly the rate cuts and the first home-buyer grants that were sending prices soaring again. Talkback radio was filled with complaints about Chinese buyers outbidding Anglo-Australians. The chair of the FIRB Brian Wilson noted that one in ten Australians now has an Asian parent, while there are 450,000 temporary residents in Australia with an entitlement to buy a home so it was unsurprising that some of them did.

Joe Hockey commissioned a parliamentary inquiry. Figures presented to it showed there had only been 5100 applications for FIRB approval to buy established housing in 2012-13, against total of 363,000 sales of established housing in that year – just 1.4 per cent. The committee accepted in its conclusions that the number was too small to cause distortions in the market, but inquiry chair Kelly O’Dwyer, nonetheless, introduced the report to parliament saying it was responding to the reality that “many Australians now worry that home ownership may be out of reach for them, their children, or their grandchildren.”

The crackdown, including Hockey fingering his own neighbour as a suspected illegal purchaser, includes big fines for anyone connected with an illegal purchase and an application fee that is essentially a tax on foreign investors.  To the extent that this deters foreign buying, it may be welcome while prices are rising as rapidly as they have been in Sydney of late. There is a concern at board level of the major banks that we may come to rue this when the market turns.

The big issue right now is the investment provisions of the China Free Trade Agreement which allow Chinese companies investing over $150 million to bring in Chinese workers to undertake the construction, provided they are paid Australian wages.  There are debates about the extent to which the side-letter to the agreement and accompanying policy require that jobs be offered to Australian workers first, before Chinese workers are recruited.  The CFMEU and the ETU clearly see this provision as a threat to their coverage.

However, the left is deeply sceptical about free trade agreements of any sort.   Former metalworkers national secretary, Senator Doug Cameron comments: “History has shown that the benefits of so-called free trade agreements are massively exaggerated by governments and their economic advisers and the negative consequences are minimized and/or ignored.”  The issue is deeply troubling for Labor which, on the one hand, feels it owns the China relationship begun by Whitlam and fostered by Hawke. Wong, as Labor trade and investment spokesperson, has promised a more liberal approach to foreign investment than the government, urging that the thresholds for all foreign investment be raised to from around $235 million to the $1.1billion that applies to free trade agreement counterparties. However, Wong is also from the left and is under strong pressure to reject the China FTA if there is no shift on the issue of Chinese workers being recruited to Australian construction projects.

The leadership of both political parties endorses the foreign investment framework that has been handed to them from the 1970s. The Abbott Government is revamping the legislation to bring it into line with developments in corporate law, but leaving the structure in place. The argument runs that by showing the government has a concern for the national interest, the public is satisfied and foreign investment is allowed in with only the mildest  inconvenience. It is noted that few foreign purchases are blocked outright, although many more have conditions applied.

I think the history, including the recent tightening of requirements on foreign investors in the food and agriculture industries, provides a different lesson:  the presence of the framework acts as a lightning rod for the protectionists and anti-globalisation forces who do not see Australia’s engagement with the world as the source of its prosperity, legitimizing their grievance.

Australia is unusual in having such a formal system of vetting foreign investment.   A few other advanced countries do – Canada, New Zealand and Iceland – but most do not. It is striking that the United Kingdom imposes no restrictions beyond a requirement that a foreign company in Britain must have a British director on its board.

Alone among the advanced nations, Australia has run a current account deficit throughout its history, reflecting the fact that there are more opportunities for investment here than our savings can finance.  Those deficits must be covered either by foreign investment or foreign debt.  Investment has come to Australia and delivered its citizens faster growth in their living standards than any other comparable country through the past three decades.  But we take it for granted to our cost.