Perhaps one of the most worrying things about the world today is the crisis of political leadership. The world is currently confronting some of the most challenging questions of the post-war era yet, wherever you look, you see washed-up, lame-duck leaders. Bush, Chirac, Schröder, Berlusconi – and now even Koizumi – are all serving out their terms with little popular support and, often, without even the support of their own parties.
One of the most worrying ways that this crisis of leadership is manifesting itself is in the economic sphere. After more than half a century of steadily rising prosperity, you might think that the case for global free trade had been comprehensively made. Yet in the last few months we have witnessed a string of depressing examples of economic nationalism that have served as a reminder that the battle is never won.
First, the entire French political establishment whipped itself up into a self-righteous nationalist fervour to frighten off a bid by PepsiCo for the food group Danone. Then US politicians ganged up to force CNOOC, the Chinese oil company, to withdraw its bid for Unocal, an American oil exploration group. Finally, and most comically, the Italian press has been publishing lurid telephone transcripts that appear to show Antonio Fazio, the head of the Italian central bank, conspiring with domestic Italian bank chiefs and shadowy property tycoons to block the foreign takeover of two Italian banks.
Is yoghurt really a ‘strategic industry’? What a joke!
Part of what makes this narrow protectionism so depressing is the shamelessness of the arguments advanced to justify it. France has a long and ignoble history of promoting its national champions in so-called ‘strategic industries’ such as defence, energy and pharmaceuticals. But even a politician as brazen as President Chirac would surely have trouble explaining in what way Danone, a manufacturer of yoghurt, might be deemed strategic. Indeed, it’s not clear in what sense the company is actually French. Only a third of its profits and less than half of its shareholders come from France.
The US deployed similarly bogus arguments to justify its disgraceful jingoism towards the Chinese. Unocal supplies just 1% of America’s oil and gas and almost all its oil fields are in Asia. In no way can it be called a strategic asset. Yet US senators decided to subject CNOOC’s bid to a lengthy Congressional investigation, effectively making a takeover all but impossible. Meanwhile, Fazio has tried to justify blocking foreign takeovers of Italian banks by claiming that the fragmented domestic bank sector needs to consolidate before it can be exposed to the full force of international competition. More likely, what the Italian political establishment really fears is that any foreign buyers would expose the cosy backroom deals that sustain so much Italian business life.
Interference from protectionist governments serves no purpose at all
However, the most serious objection to this insidious new protectionism is that it is economically illiterate. There is always something sinister about politicians who claim the right to tell shareholders in private companies what they can and can’t do with their investments. Not only does it constitute unwarranted interference in the market, it costs shareholders money, as investors in Danone discovered when the value of their shares fell after PepsiCo ruled out making a bid.
More importantly, this behaviour goes against one of the basic tenets of free market capitalism: that the market is the best mechanism for allocating capital to where it can earn the highest return – and thus make everybody richer. True, the financial markets do not always get this right – as it clearly did not during the dotcom bubble. But the market has a far better track record of allocating capital than any government.
What’s more, this protectionism is short-sighted politically. Inevitably, what really lies behind it is a desire to protect jobs. But fighting to keep out foreign investment is a pretty strange way to go about it. If PepsiCo were to buy Danone, for example, its primary aim would be to extend Danone’s range of healthy eating products, such as yoghurt drinks and bottled water, into PepsiCo’s core US markets where Danone is currently weak. That suggests a PepsiCo takeover would actually protect and create jobs for Danone workers.
Compare the stagnant, protectionist French economy with high-growth, free-market Britain
Similarly, will US jobs really be saved by allowing Unocal to be taken over by another US oil giant, ChevronTexaco, rather than China’s CNOOC? Certainly not. Instead, the US has sent out a message to Chinese investors that they are welcome to buy US treasury bonds, but not US companies. America should not be surprised if China decides to take its cash elsewhere. That would spell trouble for America, which relies on Chinese cash to fund its gargantuan trade deficit. Without these inflows, the US could face higher interest rates, a plummeting dollar, falling living standards – and a big rise in joblessness.
The good news is that the UK, almost alone in the world, has so far refused to succumb to such knee-jerk protectionism. Nobody in Britain complained when Pernod Ricard bought the UK spirits group Allied Domecq earlier this year. Nor did they complain when Rover was sold to a Chinese company. Meanwhile, the French group, Saint Gobain, has launched a hostile bid for the UK plasterboard group BPB. Saint Gobain will not be treated any differently just because it is French. That is why Britain has among the highest growth and lowest unemployment rates in Europe – and the French economy is stuck in the mire.
This tide of economic nationalism is a reflection of the current weakness of the world’s political leaders. Faced with their own political failures, whether in the Middle East, over the EU constitution, over reform of welfare spending, or their own fiscal recklessness, they are cynically pandering to popular prejudices to boost their crumbling reputations. In doing so, they are putting at stake the greatest achievement of the post-war world: global free trade. They should be ashamed of themselves.
Simon Nixon is Executive Editor of Breakingviews.com
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