[Congressional Record Volume 152, Number 37 (Wednesday, March 29, 2006)]
[Extensions of Remarks]
[Page E444]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                      DEFINING PROTECTIONISM DOWN

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                           HON. BARNEY FRANK

                            of massachusetts

                    in the house of representatives

                       Wednesday, March 29, 2006

  Mr. FRANK of Massachusetts. Mr. Speaker, one of the most disturbing 
trends that we have seen recently is that of those who would adopt 
rules abolishing any restrictions on the untrammelled flow of capital 
around the world, taking away from countries their sovereign rights to 
impose restrictions that serve legitimate national interests. This 
applies both to direct foreign investment, and even more to the notion 
that short-term purely financial investments must be allowed under any 
circumstances whatsoever. As Daniel Davies notes in a British 
newspaper, the Guardian, while it is true that the general rule should 
be to allow cross-border purchases of companies, ``there are, quite 
feasibly, a lot of uncommon but not impossible situations in which a 
democratic government might want to pass a law about the operations of 
a company, and not want to find itself being taken to a WTO tribunal 
for doing so.'' He correctly says in closing, ``Of course, there is not 
really all that much to be said for local ownership restrictions in 
most cases . . . But on the other hand, nor is it `protectionism.' The 
case for capital market openness is very much weaker than the case for 
goods market openness and we should all resist the attempt to define 
down protectionism.''

                   [From the Guardian, Mar. 20, 2006]

                      Defining Protectionism Down

                           (By Daniel Davies)

       Economic ``protectionism'' is back in the news with a 
     vengeance, with France objecting to takeovers in the steel 
     sector, Spain putting together national champion utilities 
     and the USA crying blue murder over Dubai Ports World's 
     proposed acquisition of P&O. James Surowiecki had an article 
     in the Saturday Guardian painstakingly setting out the 
     conventional wisdom on this subject (ie, that it's very bad). 
     Trouble is, this isn't really what ``protectionism'' means.
       Basically and historically, ``protectionism'' (and 
     ``mercantilism'' and related terms) always used to refer to 
     tariff policy, with respect to goods markets and trade 
     between buyers and sellers. The use of the terms to refer to 
     policies about capital markets and ownership of companies is 
     a new one; I spotted it beginning to arise in the FT and 
     Economist around the beginning of the 1990s and have been 
     writing Mr Angry letters on the subject ever since. Because 
     capital markets ``protectionism'' is much less bad than the 
     goods market type and might not even be bad at all.
       It's easy to explain why tariffs are bad. They're a tax on 
     a particular economic activity--trade. Because of this, they 
     cause people to do things that they wouldn't otherwise do in 
     order to avoid the tariff, or not to do things they otherwise 
     would do because the cost of the tariff means it isn't worth 
     their while. There is a deadweight loss associated with this, 
     and empirically it turns out that this deadweight cost is 
     substantial. That's why tariffs are bad, and why we have a 
     WTO dedicated to removing them.
       On the other hand, ownership of a company isn't an economic 
     activity at all (because ``ownership'' isn't an activity, 
     it's something you can do while sleeping, in a coma or even 
     dead). So it is much harder to see how any deadweight loss 
     can be created by placing taxes or other kinds of barriers on 
     overseas investment in domestic companies. The very fact that 
     James Surowiecki in his article has to appeal to ``the 
     discipline of the takeover market on inefficient 
     managements'' ought to raise eyebrows here. If there is one 
     thing we do know about the discipline of the stock market, 
     it's that it's a very weak force for good indeed, if it's a 
     force for good at all. And the empirical evidence bears this 
     out as well; while the gains from goods markets 
     liberalisation are big and definitely there, the gains from 
     capital account liberalisation are small and frustratingly 
     difficult to detect, no matter what econometric techniques 
     you bring to bear.
       Set against this, there are on occasion quite legitimate 
     reasons why one might want to put curbs on the foreign 
     ownership of domestic industries. Most particularly, you 
     might want to be absolutely sure that you can govern them via 
     domestic national laws. There is a lot of ill-founded 
     paranoia about ``multinationals'', but it is true that a 
     company with multinational operations has a lot more 
     wriggle room when it comes to regulations it doesn't like. 
     Furthermore, you can keep a lot more control over the tax 
     base, and over things like shipping records and accounts 
     which are usually stored in head office. Even the Thatcher 
     governments recognised this, which is why the government 
     used to have a ``golden share'' in a lot of privatisation 
     companies. There are, quite feasibly, a lot of uncommon 
     but not impossible situations in which a democratic 
     government might want to pass a law about the operations 
     of a company, and not want to find itself being taken to a 
     WTO tribunal for doing so.
       And this is what the root of the problem is, I think. The 
     rise of cross-border ownership of companies has gone hand in 
     hand with the rise of a lot of bogus WTO cases trumped up by 
     multinational companies which don't like the way in which 
     they are being regulated in one of their countries of 
     operation, and have managed to convince someone that it is a 
     restraint of international trade. At about the time that the 
     new usage of the word ``protectionism'' was being 
     popularised, the international civil service was trying to 
     negotiate something called the Multilateral Agreement on 
     Investment (MAI). If it had been passed, this would have more 
     or less guaranteed to foreign investors in any country that 
     they would be able to carry out business in the same way in 
     which they did in their own country. The fact that this would 
     lead to a lowest-common-denominator effect pretty quickly 
     was, of course, not an unintended consequence--this was the 
     grand high era of neoliberalism, after all. However, more or 
     less for this reason, the MAI was incredibly unpopular 
     (particularly in the USA, where there are all sorts of local 
     regulations and industry sweetheart deals which everyone 
     wanted to preserve) and it died the death of a thousand 
     committees.
       Ever since the death of the MAI, global civil servants at 
     places like the EU and the WTO have been trying to resurrect 
     it. They've been doing this, as far as I can see, by 
     attempting to blur the distinction between goods market and 
     capital market protection. I've mentioned that the WTO is 
     chock full of bogus cases where regulations on a local 
     subsidiary of a large company have been portrayed as a 
     restraint of trade, but the EU is if anything worse; the 
     office of Charlie McCreevy and the Single Market Directorate 
     Generale of the EU have a really nasty habit of claiming that 
     the ``right of establishment'' of the Treaty of Rome gives 
     them the power to force through any cross-border merger in 
     Europe in the face of government opposition. So the 
     linguistic confusion between ``protectionism'' in the sense 
     of tariffs and ``protectionism'' in the sense of local 
     ownership restrictions is not really all that innocent.
       Of course, there is not really all that much to be said for 
     local ownership restrictions in most cases. If someone wants 
     to buy shares in a company, the fact that he comes from 
     overseas is usually not a very good reason to stop him. But 
     on the other hand, nor is it ``protectionism''. Even Adam 
     Smith had very different opinions on free trade in goods 
     markets, versus international investment. The case for 
     capital market openness is very much weaker than the case for 
     goods market openness and we should all resist the attempt to 
     define down protectionism.




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