Takeover:  Foreign Investment and the Australian Psyche

By David Uren

Black Inc 2015



RRP – $29.99

Reviewed by Geoff Carmody


David Uren’s book, Takeover: Foreign Investment and the Australian Psyche, is an interesting and easy to read historical account,[1] ostensibly about foreign investment in Australia.

Directly or indirectly, foreign investment indeed is the subject of most of the book, but, appropriately, Uren has placed that topic within a more general historical account of Australian attitudes to controlling a variety of markets, how these attitudes have fluctuated, and have come in cycles. In my opinion, an alternative title that would also be accurate is:  A brief history of Australian protectionism – a “policy” attracting strange bedfellows and pervading most markets, physical and financial.

The common thread running through Uren’s historical account is a case study-specific summary of Australian attitudes to market protection over time, whether affected by discriminatory border pricing, quotas, subsidies or by discriminatory regulation between Australian residents and foreign interests.

The book starts by looking at the strange alliances between political opponents on the left and right, with both often opposing foreign investment from whatever source, and looking at similar attitudes to product market protectionism that have evolved from as far back as the nineteenth century.

Since then, attitudes to product market protectionism (usually discriminatory border pricing via tariffs, quotas, and, more recently, Budget-financed subsidies) have waxed and waned – although, to be fair, especially in relation to tariffs and quotas, there has been a trend to reducing reliance on them and relying on less transparent “behind the border” assistance. However, the political strength of protectionists in the foreign investment context was such in the early 1970s that a regulatory structure vetting foreign investment, including the advisory Foreign Investment Review Board (FIRB), was established.

As with product market protection, foreign investment regulation and restriction has tended to focus on particular foreign investment sources and/or particular product markets at particular times. This reflects political responses to pressure from different interests.

For example, Uren devotes specific chapters to investment from the United States, foreign investment buying interests in “Australian icons” (eg, Vegemite, Qantas), investment in mining and land (both agricultural land and residential real estate). Market protectionism for manufacturing (notably for motor vehicles, which are allocated two chapters, and have “benefited” in the past – at the expense of the Australian consumer – from high tariffs, quotas and Budget financed subsidies under the euphemism “co-investment”) gets plenty of attention as well.

In relation to foreign (but also Australian private) investment returns, Uren presents a flat historical account of the debate about resource “rent” taxes.  This is couched in terms of the broad statement that the Australian community is entitled to a fair return from extraction and sale of its depletable resources (see Chapter 8: Money from rocks).

The Resource Super Profits Tax (RSPT) debacle is summarised in the book. Unlike other measures, the RSPT (and, for that matter, the ill-fated carbon tax) constituted negative protection for Australia, because they were proposed as more or less unilateral policy measures in Australia, but not as cost imposts by our trade competitors.  Uren does not make this point.  He also does not dwell heavily on the merits of the case for or against “rent” taxes, but does conclude the chapter by observing:

 Mining has driven the internationalisation of the Australian economy…  China has now surpassed Japan as trading partner, but minerals into the Asia-Pacific region now account for 60% of Australia’s exports.  Australians wondering about their share of this bounty should reflect on their standards of living, with average incomes and wealth among the highest in the world.

 Indeed so.

David Uren’s own position on policy matters is gently presented, or allowed to unfold implicitly from his citing of particular case studies, throughout the book (and at the end – see below). However, on resource “rent” taxation, the RSPT (and the failed mining tax successor to the RSPT) he might have added that, in several critical respects, the notion of a resources “rent” tax, as embodied in the RSPT, is at best questionable and at worst deeply flawed.  For example:

  • The very notion of “rent” in a competitive resource world where other national competitors do not impose such taxes is a practical impossibility. The current position with resource oversupply (or at least expectations thereof) and consequent large declines in commodity prices underline this point.
  • The need to do a deal with the States (the community’s onshore resource owners currently charging royalties for their extraction) was and is absolutely fundamental. No deal seems to have been done.  Commonwealth financial threats, attempted bullying and bluster seemed to be the approach adopted by previous Labor governments to “negotiations” with the States.
  • The way-overblown assertion by the Labor proponents of the RSPT that the then government was a genuine risk sharer in resource extraction did not convince markets – and properly so. There was no full and immediate loss offset (as would be required by genuine risk sharing), but rather a promise of an IOU plus a bond interest rate at some future time. The mirage of risk-sharing (even in the future) was far outweighed by real and current business concerns, prompted by government behaviour, about increasing “sovereign risk”.

An implicit thread throughout the book is the protectionists’ denial of the fundamental notion of “comparative advantage” on which the case for international trade and investment rests.  In my experience, people seem readily to grasp the notion of absolute advantage, but not comparative advantage. The essence of the latter is that, even if country X can produce all goods and services more cheaply than country Y, it is still better for country X to specialise in the products where its cost advantage is largest, and let country Y specialise in the others, and trade between them to maximise each country’s living standards. Similar arguments apply to foreign investment:  allow scarce financial resources to flow to where they garner the best returns. Consistent with that, Australian investors, including superannuation funds, are increasingly chasing investment opportunities offshore.

The whole reason for supporting free (or more liberal) international trade and investment flows is that these flows maximise returns from use of scarce resources of all kinds and thereby growth in living standards. David notes that, until recently, international trade has grown faster than total growth, and in that sense has been a driver lifting many from poverty.

In my opinion, Chapter 10 is a very interesting look at the future, and a subject worthy of (and likely to receive) much further examination.  In short, it provides an opening salvo about how technology is moving faster than regulators, tax authorities and governments can move.  At present, it seems to be catching flat-footed those who want to regulate, protect and control markets, whether financial (eg, bitcoin), physical products (eg, on-line purchases of goods), or services (eg, Uber).  Technology itself is facilitating more efficient allocation of resources, possibly less transparent use of resources, and, in general, limiting governments’ ability to control markets, the urging of protectionist interests notwithstanding.

A key policy question in relation to Chapter 10 is:  can we define policy end-points where government control of markets, taxation revenue and living standards will be immune from the impacts of technological change?  I suspect the answer is “no”, but the more practical question in that case is:  how can governments and regulators maximise the robustness of their policy regimes in the face of technical change?  Uren does not get into this tricky area.

The concept of the “national interest” receives a chapter towards the end of the book. This is a slippery concept, apt to be defined in terms of preferred outcomes on specific market protection outcomes by lobbyists and politicians of all stripes.  Naturally, interest groups with different agendas often have very different explicit or implicit definitions of the ‘national interest’. Many, probably most, don’t pay much attention to the interests of the Australian consumer, or even maximising Australia-wide living standards. Using specific examples, Uren covers this matter throughout the book, and especially in Chapter 12.

The book concludes with a last chapter called Political Voices – appropriately in my opinion – and the observations that:

…  neither can any side of politics escape the circularity of argument in which the system of [foreign investment] vetting is there to satisfy the public that there is a system of vetting.  The argument that no harm is done while the vast majority of deals are approved misses the deterrence that the system imposes to businesses and investors who simply decide not to look at Australia.  But, more importantly, it gives a legitimate place to nationalists during the periods when there is an upsurge of direct investment, whether it is the Japanese in the 1970s, the Chinese in the 2000s, or indeed, the Americans in the 1950s and 1960s.  During such peaks of foreign investment interest, governments become susceptible to nationalist pressure …

 …  There is less Chinese investment in Australia’s resource industry than there might have been.  While we can look back and wonder at the folly of those who wished to curtail Japanese investment in building Australia’s tourism industry in the 1980s, it is no different in character to the efforts now to restrict foreign investment in Australia’s agricultural industry. That industry will be poorer and less productive as a result. While we maintain a system of vetting which gives legitimacy to these voices we’ll never learn.

 But there’s the rub.  Whether the issue is Japanese, Chinese, American or other investors in Australia, be it in mining, tourism, land or other areas, we cannot prove the benefits of fewer restrictions – the counterfactual case – directly.  By definition, direct Australian evidence does not exist.  We can cite evidence based on other countries’ experiences, but the nationalists can always claim that, in Australia, “it’s different”, and find a constituency to support them – often very vocally.

For those interested in a summary account of the historical twists and turns of protectionist sentiment in Australia in general, and foreign investment in particular, heavily spiced with specific case studies, David Uren’s book is well worth reading.

Geoff Carmody is Director of Geoff Carmody & Associates, co-founder of Access Economics. During his time as a senior officer in the Commonwealth Treasury, Geoff worked in the Foreign Investment Division.

[1]  Takeover:  Foreign Investment and the Australian Psyche, David Uren, Black Inc., 2015, Printed in Australia by Griffin Press.