I had thought my comments for Australia’s national interests being best served by rejecting the Rio-Chinalco deal were self-evident. My general argument was that Australia should not give up its monopoly power in the resource sector by transferring resource assets to Chinese firms with monopsony power over the purchase of Australian raw materials. These arguments were set out more fully here.
But obviously not – others have very different views. The ANU’s Peter Drysdale provides an alternative viewpoint on the East Asia forum.
According to Peter the main issue is politics not economics – the Chinese will retaliate for the rejection of the Chinalco bid and we have damaged Chinese ‘generosity’ towards Australia’s many ‘failings’ as a nation, a fact that will impede future relations to the detriment of both countries.
In a private communication Peter rejects my claim that – apart from transport issues – there is any significant monopoly power in these markets and argues that my viewpoint is inconsistent with “Applied International Resource Economics” 101.
I remain however unrepentant in my view that Australia should have a clear ‘national interest’ argument for approving foreign investment proposals and that in this case there was no sensible case for allowing the Chinalco move to proceed. Whether Kevin Rudd skilfully delayed approval until the Chinalco move failed or whether, as Rio stated, it simply changed its mind given a change in market conditions we will not know for 30 years until Cabinet papers are distributed. But the shift was advantageous to Australia.
In response to Peter’s claims I argue as follows.
On the issue of providing evidence for monopoly power. The massive BHP profits for a start ($13.7b in 2007), the annual negotiations over iron ore and coal prices (contract iron ore prices rocketed 85% in 2008/09) and the enormous market share China takes from Australia suggest this is not a price-taking industry where prices are driven to the marginal cost of extraction. There will be additional transport economies in the Pilbara resulting from the merged operations but essentially a Rio-BHP unit in the north-west will have enhanced market power which is the reason their share prices both rose so strongly after the announcement. They rose when they saw the Chinalco deal was not going through.
Immediately too after the announcement – and again in today’s SMH – the Chinese side started moaning about the ‘monopoly power’ of the merged BHP-Rio entity. They saw the monopoly issue clearly and I am surprised that Peter does not. The huge set up costs in terms of providing transport and port infrastructure as well as the massive concentration of iron ore resources in Australia’s north west make it most unlikely these industries are contestable.
Why would Australia transfer ownership of key resources to a foreign monopsonist purchaser of these resources? This is the possible reason Rudd went slow on the Chinalco bid and rightly so.
Having lived in Asia for a decade I constantly experienced attempts by local civil servants and politicians to put Australians ‘on the back foot’ by drawing attention to discriminatory immigration policies and alleged xenophobia. This is pure hypocrisy and should not be taken seriously, and to our national disadvantage, in disputes over foreign investment approvals or trade. The argument is a negotiating tactic by Asian governments that does not reflect reality unless it is misguidedly taken seriously.
China will be disappointed in the failure of the Chinalco deal but this has nothing to do with a failed ‘love affair’ with Australians. The Chinese sought to demolish Rio’s price-setting power in iron ore and coal markets and to thereby deflate any market power BHP-Billiton might have. China is acting in its self-interest and should do so. So was Australia which was not being xenophobic or anti-Chinese at all. It was simply acting in its national self-interest.
On the issue of long-term retaliation by the Chinese against Australia because Australian firms seek to exploit monopoly power in resource markets – it needs to be understood that possible Chinese retaliation is a commercial reality that will need to be internalised by Rio-BHP. The most likely retaliation is that China will seek alternative suppliers. Then Rio-BHP may need to levy ‘entry forestalling’ prices if it is to best capitalise on its market position.