New Financial Challenges on the Horizon Spring 2008: Policy makers must come to terms with both sovereign wealth and subsidized takeovers

By Peter M. Robinson

Peter Robinson
Peter Robinson

Government-controlled investors – including sovereign wealth funds and state-owned enterprises – have gained a sizeable influence in international business and finance. The total value of sovereign wealth worldwide already amounts to several trillions of dollars, and it is expected to multiply many times over during the coming decade.

This raises unique public policy issues: sovereign investors may provoke national security concerns, spur fears of market volatility and financial instability, or generate protectionist pressure on governments. What to do? In recent months, USCIB has been an important forum for discussion of this and related issues.

A two-pronged approach

In February, at the Bank of New York Mellon’s Wall Street headquarters, Deputy U.S. Trade Representative John Veroneau spelled out for a USCIB audience how the United States is working closely with other countries, both those that make and those that receive sovereign investments, to anticipate and manage concerns over sovereign wealth funds.

Ambassador Veroneau explained that the U.S is working with major multilateral institutions – including the IMF and the OECD – to develop best practices for sovereign wealth funds, promote strong international standards of transparency and corporate governance, and maintain open, transparent, and non-discriminatory investment policies among all countries.

A new OECD report, prepared at the request of G-8 finance ministers, provides policy guidance for recipient countries. A complementary effort in the IMF aims to develop best practices of transparency and accountability for sovereign wealth funds. Together, these two projects are designed to build confidence in sovereign investment as a source of much-needed capital, to keep markets open and to resist financial and investment protectionism.

As I write this, we look forward to May 8, when Deputy Treasury Secretary Robert Kimmitt is scheduled to review progress on these and related issues with USCIB members in New York.

A related challenge

At the same time, the attention of policy makers is likely to turn to a related, but under-appreciated, issue: subsidized foreign takeovers of U.S. companies. What are the implications when a foreign company, backed by financial support from its home government, purchases a U.S. firm? And what actions should be taken to ensure a level playing field while maintaining fundamental market openness?

A new study from the United States Council Foundation, USCIB’s research and educational arm, investigates several recent cases of subsidized finance in cross-border M&A transactions, and suggests corrective measures that should be taken to head off the possibility of protectionist overreaction to subsidized investments. The paper, “Investment Subsidies for Cross-Border M&A: Trends and Policy Implications,” is authored by Gary Hufbauer and Thomas Moll of the Peterson Institute for International Economic, and Luca Rubini of the Birmingham Law School (UK).

According to Dr. Hufbauer, who detailed the report’s findings at the National Press Club in April, while subsidized M&A or non-transparent sovereign wealth dealings do not pose a “clear and present danger,” they merit thoughtful consideration well before a political confrontation occurs.

The study examines three recent instances where subsidized finance was seen or alleged to have played a significant role in an M&A transaction: the Chinese state-owned oil firm CNOOC’s bid for Unocal, the purchase of several Ingersoll-Rand divisions by Korea’s Doosan Infracore and moves by Electricité de France to expand into a number of new markets abroad.

Dr. Hufbauer and his co-authors contend that subsidized M&A, if not restrained by agreed international rules, might breed costly, wasteful emulation as well as protectionist sentiment in major markets – not least the United States – especially when viewed against the sensitivities raised by the growth in sovereign wealth funds.

Moving toward a new treaty

The appropriate response, they say, is to move toward a multilateral compact on M&A subsidies. Such a pact would be designed to increase government transparency, while drawing a line around what types of subsidies would spur review and limiting the types of retaliatory actions governments could use to counter subsidies. The authors suggest this year’s Group of Eight summit in Japan as an appropriate forum to begin discussions of such a multilateral agreement.

We believe this new study highlights an important issue for future consideration by USCIB members and the policy community. Together with our recent programs on sovereign investment, it is yet another example of the way USCIB can serve as your advance-warning mechanism, anticipating tomorrow’s issues today.

For more information or to get involved, please contact USCIB’s Rob Mulligan at (202) 682-7375 or rmulligan@uscib.org.

 

Mr. Robinson’s bio and contact information

More on USCIB’s Trade and Investment Committee

More on USCIB’s Financial Services Committee

Previous postings from Mr. Robinson:

Trade Can Save the Climate (Winter 2007-2008)

From E-Commerce to the “Internet Economy” (Autumn 2007)

Business and Human Rights, Revisited (Spring 2007)

The Internet’s Continued Growth Requires Careful Choices (Autumn 2006)

Securing the Promise of Nanotechnology (Summer 2006)

Making Progress in the Fight Against Fakes (Spring 2006)

Staff Contact:   Peter Robinson

President and CEO
Tel: 212.703.5046

Peter Robinson is USCIB’s 15th president. USCIB, founded in 1945, is a policy advocacy and trade services organization dedicated to promoting open markets, competitiveness and innovation, sustainable development and corporate responsibility, supported by international engagement and regulatory coherence.
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