Commentary: Investment protectionism benefits no one

by Chinese media writer Xu Duo

BEIJING, March 16 (Chinese media) -- As the whole world is in the grip of a sweeping financial crisis, protectionism of various forms is rearing its ugly head.

While people say trade protectionism is not a solution to the financial crisis, but a poison to the solution, investment protectionism is equally harmful with similar "toxic side effects," which calls for vigilance and anticipation.

In a recent case in point, Australia's Foreign Investment Board decided on Monday to extend its review of the Aluminum Corporation of China's 19.5-billion-dollar investment in debt-saddled global miner Rio Tinto after an initial 30-day review period ended over the weekend.

The decision was made after Australia's parliament voted overwhelmingly to defeat a motion aimed at sinking China's proposed investment last Thursday. The motion was backed by only five Greens senators in the 76-seat Senate after the ruling Labor party and the main opposition voted against the move.

The investment bid is not an isolated case. Over the last two years, merger proposals have been turned down in many parts of the world. Acquisition deals have been blocked and laws on closer government scrutiny of foreign direct investment (FDI) passed.

The latest wave of investment protectionism may have been related to some people's concerns about national security and economically sensitive sectors of their countries. But first and foremost, it reveals these people's outmoded way of thinking as well as their attempts to politicize economic issues and pursue investment protectionism in the name of maintaining national security.

History shows that investment protectionism benefits no one. Itharms others without benefiting the practicing states themselves and quite often it could backfire.

The "toxic side effects" of investment protectionism are self-evident.

First, tougher FDI restrictions would deter prospective investors, harming both the recipient country and the investor.

Second, more FDI restrictions would incur extra costs for financing current account imbalances.

Apart from selling portfolio assets such as government securities, countries can finance their current account deficits through cross-border mergers and acquisitions. More FDI restrictions would undoubtedly increase the costs, and do no good to financial stability.

Third, excessive FDI restrictions would lead to retaliatory measures from other countries, dragging the world into a vicious circle.

A subsequent drop in investment flows would hamper trade flows, which in turn would do great harm to the world's eventual recovery from the current crisis.

"Protectionism would be a surefire way of turning recession into depression," commented British Business Secretary Peter Mandelson.

To stem the trend of investment protectionism, both the recipient and investor countries should play their due role.

For the recipient, it is important to accurately define the scale and scope of national security and refrain from intentionally expanding sensitive and critical sectors. Different SWFs should be treated with an equal footing and the practice of labeling countries according to their political systems must be abandoned.

For the investor, making thorough research and study of the recipient's investment policies always comes first. It should operate SWFs strictly in accordance to international regulations and the recipient country's laws, and launch effective dialogue and exchanges at all levels to enhance mutual trust.

Equally important, international organizations should play an active role in efforts to settle investment disputes, thus creating an environment where all parties are ready to play by the rules.

Amidst the worldwide economic slump, it is more urgent than ever to think globally rather than locally. Only through demolishing trade barriers and encouraging foreign investment could the ailing world economy be brought back on the track of healthy development.