A Double Dose of Aussie-fied Protectionism

♠ Posted by Emmanuel in , at 2/13/2009 02:37:00 PM
The forest is not the only thing on fire in the Land Down Under. Here is a quick take on two stories. The first is about the Chinese state-owned company Chinalco buying a hefty 18% stake in the world's third largest mining firm, Rio Tinto. Previously, I've discussed how China was keen on breaking up a mooted BHP Billiton takeover of Rio [1, 2]. The PRC feared that such an entity could exercise monopoly power on it. Now that the Billiton bid is history, China (and Chinalco) are probably delighted to be able to stretch their investment money a whole lot more after the commodity boom petered out. Rio Tinto certainly isn't coping too well in the downturn, having laid off 14,000 workers late last year. Not only are they getting a sweet deal on a company badly in need of cash due to its ill-advised acquisitions, but they're also fulfilling a blocking function so prized by the apparatchiks.

Or are they? The Sydney Morning Herald warns us about Aussie protectionism rearing its ugly head. It's not entirely certain that the government will let this deal through on those "national security" grounds so beloved by protectionists the world over. Certainly, you can say this is a case of "strategic" investing on China's part. That is, its motives are not entirely to do with simply getting shareholder's returns:
Chinalco yesterday agreed to invest $US19.5 billion ($30 billion) in debt-laden Rio in a deal which will eventually see the Chinese company controlling 18% of the world's third largest miner and gives it stakes in a suite of iron ore, copper and aluminium assets.

Rio, which rejected BHP Billiton's $US66 billion hostile bid last year, will use the money to cut its $US38.9 billion of debt incurred after buying Alcan in 2007. Rio shares lost $1, or 1.9%, to close at $51, after hitting an intra-day low of $49.59.

Analysts have mixed feelings about the alliance, which will be scrutinised carefully by the Federal Government - with Treasurer Wayne Swan announcing on Thursday a tightening of foreign investment rules. Rio said on Friday it was confident of winning Federal Government support for the deal.

But CMC Markets senior dealer Dominic Vaughan said there were doubts about whether the deal would get government or shareholder approval. "With Rio, they're sitting there digesting what has gone through,'' Mr Vaughan said. "We're not really sure whether the deal put together with Chinalco will actually go through.''

Goldman Sachs JBWere analysts said Rio was now in a weak position after selling its assets to Chinalco of China at the bottom of the commodity cycle. "We think Rio is at a strategic and marketing disadvantage versus its peers going forward,'' analysts led by Neil Goodwill said in a report dated yesterday. "Even with the cash injection of $US19.5 billion, Rio is still in a weak position in terms of its balance sheet and would be unable to easily participate in expansions, acquisitions or increase dividend payments for some time."

Goldman Sachs JBWere, the Australian affiliate of the US broking firm, has a "hold'' recommendation on Rio Tinto, saying "there is value in the asset base even if the strategic position of the company is irreversibly damaged in its current form.
And speaking of commodities, Prime Minister Kevin Rudd is keen on fending off American-style pleas of, well, buy Australian. Just as the American bill favors the purchase of American steel in government procurement, so too have been calls for the proposed Australian one:
Prime Minister Kevin Rudd has resisted calls from the steel industry for the inclusion of a ''Buy Australian'' clause in the Federal Government's [AU]$42 billion stimulus plan, in a move that may have averted the start of an "economic war''. Steel firms and the Australian Manufacturing Workers Union requested the Federal Government insert a clause requiring the use of locally produced steel for infrastructure projects earmarked in the spending package to maximise the creation or preservation of Australian jobs.

The spending bill passed the Senate this afternoon without such a clause after independent Senator Nick Xenophon switched his vote. ''We're not against free trade,'' said Ian Cairns, national manager for industry development at the Australian Steel Institute, trade body representing steel manufacturers and distributors. ''We're not calling for a ban in imports.'' Mr Cairns said Australian steelmakers weren't seeking a new trade policy for the nation but an exception to strict free trade principals was worth considering.

Critics, however, claim the would have been the first step in unravelling Australia's free trade position, helping to set off a flurry of retaliatory trade measures around the world. NAB head of economics Jeff Oughton said using preferential sourcing at the expense of free trade amounted to "war''. "It's economic war,'' he said.

During a slowdown of this magnitude, the "last thing you want is geopolitical tensions to exacerbate the situation,'' he said, conceding governments are under "extreme domestic pressure ... given the global shocks that have emerged unexpectedly.''

Economists have taught governments there are major benefits from trade and liberalisation of markets and finance, said Mr Oughton. "It's well accepted,'' he said. "Except in times of tension when you ... tend to see people do protectionist things.''

The Australian steel industry's request came in response to a proposed "Buy American'' requirement considered for the planned $US789 billion ($1.2 trillion) stimulus package in the US. If passed in the US, the provision would threaten about $500 million in Australian steel exports each year. Last week, the International Monetary Fund warned the US against including a ''buy American'' clause in its stimulus package, saying those policies would slow the global recovery.

Trade Minister Simon Crean, writing before the vote, said the inclusion of a ''Buy Australian'' clause could trigger a round of further ''buy local'' provisions by Australia's trade partners, as governments around the world scramble to protect their local industries. The World Trade Organisation, the global body overseeing trade agreements, requires member countries such as Australia to keep trade barriers low and eschew protectionist measures that give priority to local industry.

Mr Cairns questioned the honesty of "free trade'', which has dominated global economics in the past two decades. "There's certainly ways that many countries have certain targets and tariffs on a range of goods,'' said Mr Cairns. "If you look deeply into how countries do business, then complete free trade is a bit of a furphy" [Aussie slang for a fanciful tale].
Gosh, I sometimes feel this blog should be renamed the International Protectionism Zone. Here's a free idea from me for any budding blogger. Certainly, there is no lack of such news during this day and age. In any event, Kevin Rudd seems to be a sensible chap. A fluent speaker of Mandarin, he ain't your average Great White Protectionist. I hope he gives these rent-seekers no shelter. You know, the land of Oz has a xenophobic, isolationist party appropriately called the Australian Protectionist Party.