The escalating interest in resource investment worldwide is driven by the appetite for resources in the rapidly growing Chinese and Indian markets. These economies have now emerged as major players in overseas resource investment and development. The problem, suggests Thirlwell, is that these countries give the state a large role in their economies and a big share of their outward investment is funnelled through state-owned enterprises, state-owned banks and sovereign wealth funds.

Australia and other developed countries, Thirlwell’s argument runs, have spent the past couple of decades convincing their voters that the private sector, not government, should take the lead in managing most businesses at the same time as they have stressed the important benefits that come from openness to foreign investment.

‘When confronted by government-controlled foreign investment, one of these propositions has to give. A key question now facing politicians, from Washington to Canberra, is: which one (my italics)?’

Thirlwell cites four good reasons why it is not the appropriate response in Australia to make dramatic change in Australia’s foreign investment policy framework in response to this policy dilemma.

First, the majority of FDI in Australia does not threaten Australian national interests in any way, by virtue of its scale or its strategic location and state involvement is not relevant in most of the relevant cases. Second, the current policy settings allow us to deal with any national strategic interest that may be involved. Third, if state ownership appears a problem in any sector, the current policy framework allows us to deal with that. Fourth, there is opportunity to press for reciprocal treatment, for example in the FTA negotiations with China.

And that’s the right story but it’s only half the right story. There are other considerations that recommend not compromising our FDI policy settings and disturbing Chinese, Indian and global investor confidence in our resource sector.

The policy dilemma we face has more dimensions to it than Thirlwell’s simple proposition suggests. Are state owned-enterprises government controlled enterprises? It all depends, Control is clearly constrained by the market, especially where international involvement is large. Witness the problems of Chinese investors in the Indonesian electricity industry or the Chinese oil companies on price control (as Dominic Meagher explains in a previous post). Is that a static or a dynamic circumstance? It is clearly changing by the day. Australia’s interest is in reinforcing the Chinese drive towards the disciplines of the market, including through contestable ownership. This is the high-stakes strategic game we are now participants in whether we aware of or not.

None of these considerations much affects the good sense of Thirwell’s four-point defence of the FDI regime. But they do affect the strategic importance of the Australia government’s not boxing us into a choice based on an increasingly false dilemma, repeating some of the mistakes we made on Japan a few decades ago.

And in this context, on Thirlwell ’s fourth point: there’d hardly seem any good reason to make our global FDI regime hostage to the outcome of a bilateral trade negotiation with China. It’s in our interest to do what we do on FDI and it’s in China’s interest to do likewise, so let’s start from there.