The declining ethos of economic nationalism

The debate in Canada over foreign takeovers reached rock-bottom last week when politicians raised the ire of economic nationalist by suggesting that our national sovereignty was being compromised by the interests of international big business.

Though some would suggest that free market globalization has eroded the power of nation-states, there are others that suggest otherwise. In fact, the rise of government interventionist in the media [lately] over Alcoa's Inc's $33 billion (USD) bid to take over Alcan Inc. is a sure-fire sign of how far liberalization of markets and the single market have advanced. As international corporations restructure, the scope of national authorities becomes far more narrow, in that, their attempt to impose barriers on trade in goods, services, and people, issues of corporate control are viewed as one last area where national authorities still wield some power. Thus, it can be seriously argued that recent actions to stop foreign takeovers represent the end of the battle, not the beginning.

Intertwined with the upsurge in economic nationalism is the notion that the nationality of ownership matters in the overall management of the world economy. Thus the merger of Canadian firms with other global competitors is acceptable but the takeover and aquisition of Canadian firms by an outside global competitor is not. However, as Andrew Coyne explains, where the arguement by economic nationalist comes up short is when they assume that private ownership is linked to the democratic deficit of government institutions and their power to legislate. [i.e. a threat to national sovereignty]

But then, this is par for the course. Economic nationalists never get around to explaining just how Canada’s sovereignty -- the right of our governments to make laws for the public good -- is tied up in the ownership of a private corporation. It’s just sort of assumed. But in fact a foreign-owned company may as easily be taxed or regulated as a Canadian, as a moment’s thought will reveal. Or if sovereignty is synonymous with ownership, how is either preserved by depriving Canadians of one of the most elementary rights of ownership, the right to sell?

But back to the dollar. It cannot have escaped notice that the dollar has been rising steadily, from 85 cents to over 90 cents, over the past seven weeks -- coinciding with the latest wave of foreign takeovers. First thought: so much for the notion, popular a while back, that foreign takeovers were driven by a low dollar -- the “fire sale” theory. Second thought: so far as the dollar is a factor, then Canadian firms are rather less exposed to foreign takeover than they were before. The same high-profile sales of our “corporate icons” that excite such nationalist passion, by sucking in capital and driving up the dollar, make other Canadian companies less attractive to foreign buyers.

As is so often the case in these matters, the debate over foreign investment pits the interests, not of Canadians against foreigners, but of some Canadians against other Canadians. By preventing or inhibiting the sale of Alcan, we would not only be depriving Alcan’s Canadian owners of the capital gain to which they are entitled, but also shareholders in those other Canadian firms in which the newly liquid Alcan shareholders might choose to reinvest -- not to mention Canadian consumers, who might otherwise benefit from the lower prices associated with a higher dollar.

Industries vital to Canada’s future? Alcan’s owners would only sell if they thought they could earn higher returns elsewhere -- in other firms, and other industries -- than by holding onto their shares. I suggest they are better placed to make these judgments than the Globe’s editors.

Very true, indeed. And even if we did have thriving special industries in Canada, limiting their ability to attract smart, innovative and aggressive new owners from other foreign countries would be extremely counterproductive in a global society. Case in point: consider the fact that there were a total of 790 deals in which Canadian companies acquired foreign firms in 2005-06. This was 20 per cent higher than the 660 deals in which Canadian companies were taken over by foreign firms in the same time frame. So despite the constant fear mongering by economic nationalist, Canadian firms have been the benefactors of a wider and more liberalized global market, not the opposite as Toronto Star financial writer, David Olive, would suggest.

Furthermore, there is no question that an irresponsible resurgence of economic nationalism, which discriminates against foreign ownership, could also provoke other markets, in foreign countries, to retaliate in response. Such a reaction could undermine the mutual economic benefits, including millions of jobs, that are derived from the robust two-way flow of foreign trade and investment.

Take McCain Foods Ltd. located Florenceville, New Brunswick as an example. Much of their success and business growth was derived from their aggressive expansion into foreign markets whereby they acquired Alpine Foods Ltd in New Zealand, Safries Pty. Ltd. in Penola, Australia, Heinz Frozen Foods (SA) (Pty.) Ltd. of Viljoenskroon, South Africa and Goodman Fielder International (Taiwan) Limited to name a few. So the fallout from possible economic nationalist policies would be dire for firms competing in a global market. In other words, globally competitive firms, like McCains, would suffer enormously if free market principles were compromised in favour of state economic protectionism.