FOREIGN INVESTMENT: by Patrick J. ByrneNews Weekly
Sovereign Wealth Funds threaten Australia's independence
, August 2, 2008
Australians are yet to realise that this nation faces, not a military, but an economic threat to its independence, writes Patrick J. Byrne.Given Australia's $616 billion net foreign debt, the huge foreign investment drive into Australia by some sovereign wealth funds is now posing a serious threat to Australia's sovereignty.
The federal Treasurer Wayne Swan recently ordered a 90-day review of the proposed takeover of Murchison Metals by a Chinese state-owned company, Sinosteel, despite putting new rules in place for investment by sovereign wealth funds (SWFs) only six months ago and despite telling Chinese officials earlier this year that Australia welcomed foreign investment.
Australia is finding itself caught between its long history of welcoming foreign investment and the relatively new and rapidly growing investments by SWFs operated by the dictatorial governments of emerging economies.
Clearly, Australia's addiction to debt is making it hard to say "no" to potentially compromising forms of investments from countries like China.
For 200 years after British settlement, foreign investment played a vital role in building the nation's infrastructure and industries.Western alliance
Following World War II, foreign investment flowed in as part of a wider package that tied Australia into the Western alliance with its Cold War strategy of containing Soviet and Chinese communism.
The US ran huge trade surpluses and the US dollar became the world's reserve currency. From this position of economic and military strength, the US offered its allies in the Western alliance preferential trade deals. The US, and key international economic agencies under its aegis, like the International Monetary Fund and the World Bank, were able to underwrite the economies of the developed world.
It was largely from friendly democracies in this alliance that relatively benign foreign investment, driven by market forces, flowed into Australia.
Today, this situation is fundamentally changing. The US is now the biggest debtor nation in history. It is continually running huge trade deficits. Its financial system has been seriously weakened by the disbanding of the very economic safeguards that were put in place after the financial collapse that led to the 1930s Great Depression.
The US can no longer underwrite the Western economic system, let alone the world economy.
Instead, the emerging nations - led by China, India and Russia - are now the main drivers of world economic growth, not the US. According to Albert Keidel of the Carnegie Endowment for International Peace, at its current rate of growth, China's economy will pass that of the US by 2030, and by 2050 will be twice its size, although income per person will still be well below that of the US (Australian Financial Review
, July 10, 2008).
Resource-hungry China has become a major foreign investor, pursuing a mercantilist approach to investment. Its aim is to buy ownership and control of foreign resources as its own private sources of supply, and then to control the trade routes supplying its resources.
This scramble for control of resources stands in stark contrast to how the Western world handled the 1973 oil shock. Western nations found that this sort of zero-sum scramble for oil supplies during a crisis only worsened the problem by reducing market flexibility and efficiency and by intensifying national rivalries over supplies.
This led to the creation of the International Energy Agency to avoid the risk of national competition for supplies. Western policy has focused on promoting diversified sources of oil supplying the world market, letting the market determine the most efficient allocation of supplies.
Instead of relying on market forces, however, China's geopolitical policies are creating a race among the major Asian states - China, India, South Korea, Japan and, increasingly, some other South East Asian nations - for ownership and control of energy and other resources and the transit routes.
Mikkal E. Herberg, of the National Bureau of Asian Research, in his submission to a US Committee on Foreign Relations hearing in 2005, discussed some of the strategic and economic implications of the rise of China.
He said that, for the leadership of China, and consequently other emerging economies, energy policy is "high politics".
China regards energy as being too important to be left to the markets and to be increasingly exposed to the risks of global supply disruptions, chronic instability in energy-exporting regions, and the vagaries of global energy geopolitics.
In communist China, "there is a visceral and profound connection in the minds of the leadership between reliable energy supplies, political and economic stability, and continued Party control".
Herberg told the hearing that China will be:
• 80 per cent dependent on Persian Gulf oil by 2030;
• a net importer of coal by 2015; and
• importing 40 per cent of its natural gas by 2025.
While economic growth and supplies of resources have been its top priorities, the next priority of China's political leaders is to develop strategic defences of the sea-lanes of communications supplying China.
Currently, the US is still the world's only superpower, and its navy dominates in three key strategic areas of concern to China - the Persian Gulf, the Straits of Malacca and the South China Sea.
In response, China is seeking to expand diplomatic relations and gain port facilities among nations along the sea route from the Persian Gulf to China.
Invariably, as economic power shifts from the US and Europe to the Asian region, US domination of various international institutions and its strategic hegemony will be challenged.
How China and other emerging nations regard foreign investment in their own economies also reflects their attitude towards their foreign investment in other nations.Rivals
Originally, China encouraged foreign investment and technology transfer into industry sectors where Chinese firms could obtain the know-how to gain a competitive advantage over their foreign rivals.
China now restricts or prohibits investment in industries China has mastered (like toys, furniture, shoes and clothing) or in industries with high usage of resources or energy (like steel, aluminium, paper, cement and other basic industries).
Beijing also maintains substantial restrictions on publishing, media, market and social research, and an absolute prohibition of investment in real estate and real estate brokerage firms.
Russia, with its new-found oil wealth, recently declared 42 "strategic" sectors - including the nuclear industry, aerospace, armaments industries, oil, gas, fishing and the mass media - in which foreign companies cannot own more than 50 per cent and foreign companies owned by governments (i.e., SWFs) cannot own more than a 25 per cent stake.
Investors now have to seek authorisation from a commission made up of economic and security advisors.
Meanwhile, the international community is visibly concerned at the direction being taken by emerging nation SWFs. Currently, the International Monetary Fund is attempting to persuade SWFs to adopt an investment code of conduct.
However, it is encountering strong resistance and, if the code is adopted, it will almost certainly be voluntary.
Given Australia's changing strategic environment, the magnitude and changing nature of foreign investment now make foreign investment a potential threat to Australia's future independence.
More than three years ago, Access Economics - a major free-market think-tank close to the Liberal Party - warned that the foreign debt was now putting Australia in the "banana republic range" (News Weekly
, February 12, 2005).
Similarly, Warren E. Buffett, the famous American investor and economic commentator, prophetically predicted in Fortune
magazine that a country that goes down the road of excessively depending on foreign investment would become a nation of wage-earners rather than capitalists. He warned that such a nation risks losing its sovereignty, being "colonised by purchase rather than conquest". (Fortune
, October 26, 2003).
After two centuries of depending on the UK and the US for its strategic protection and foreign investment, Australians are yet to realise that this nation faces, not a military, but an economic threat to its independence.
The end of the commodities boom could precipitate a flight of capital from Australia and a collapse of the currency. Neither the UK nor the US, on whom this country has historically depended, could bail us out.
However, China, with its rapidly growing SWF, could come to our rescue. The price may be a demand for Australia to hand Beijing control of our resources and other key sectors.
Australia borders the world's busiest sea-lanes between Darwin and Singapore. China would find drawing Australia strategically into its orbit, and away from the US, utterly irresistible.
Yet Australia has the means within its reach to avert a major crisis. It could mobilise its $1 trillion in superannuation funds and its own SWFs to bring down the nation's dependence on foreign borrowings and to develop its own resource sector, supplying resource-hungry China, India and Japan on our terms, not theirs.
In the meantime, foreign investment in strategic industries should be limited, with special limits from investment by SWFs.
The big question is: do our leaders have the political will to say "no" to certain future foreign investments and to direct the nation's savings in the national interest?- Patrick J. Byrne is national vice-president of the National Civic Council.