Limiting foreign ownership of companies – not protectionism?

Daniel Davies in the new Guardian blog thing writes that limiting foreign ownership of companies is not the same as forms of protectionism that restrict trade in goods and services:

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. …

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 multi-national 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.

Davies is right that the case for liberalising capital market ownership is different from, and possibly weaker than, the case for liberalisation of trade in goods and services.

Nonetheless, the onus of proof is on those who advocate government restrictions on foreign ownership to explain what benefits such restrictions might bring.  On the whole, there need to be good reasons to intervene to prevent a voluntary economic transaction between adults (which, almost by definition, must make both parties to the exchange better off.)  Davies does not offer any explanation of a market failure that such restrictions would correct (and which could not be more efficiently corrected in some other way). 

Davies rightly says that the growth of cross-border investment makes it more difficult for countries to maintain local regulations and tax systems, because companies with multi-national operations can move their operations elsewhere.  But that is true as well of free trade in goods and services (which Davies says he favours) – any country that creates regulations that makes firms in that country less productive will see a decline in their incomes, whether or not they restrict ownership.

All in all, Davies makes a good point in highlighting the theoretical distinction between protection of trade in goods and service, and restrictions on foreign ownership.  But he offers no convincing case for restricting either.

There is a discussion at Crooked Timber – much richer and more interesting than at Comment is Free.

1 thought on “Limiting foreign ownership of companies – not protectionism?”

  1. On the whole, there need to be good reasons to intervene to prevent a voluntary economic transaction between adults (which, almost by definition, must make both parties to the exchange better off.)

    This statement is either alarming or vacuous. It’s alarming if you’re saying that the measurable benefit from a profitable transaction trumps any reference to broader notions of the common good (or is the common good). But I suspect you’re saying that ‘better off’ can be trumped by ‘common good’, but that the argument needs to be made (‘good reasons’) – in which case all you’re really saying is that A may be more important than B, but then again B may be more important than A.

    Owen replies: Phil: what I am saying is that if there is a common good (or harm) that is not reflected in the transaction then that is a market failure (an externality).  When government intervention is proposed, the correct questions are: "a. what is the market failure that it fixes? and b. is there a better way to fix it?".  The article does neither.
     

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