Free markets, or protectionism-lite

Posted on 3 Mar 2010 by The Manufacturer

When Cadbury finally succumbed to a hostile takeover by US food group Kraft in January, there were more than a few murmurs of discontent that another quintessentially British brand had fallen. Does the UK’s insistence on open market values leave it disadvantaged compared with more protectionist countries? Mark Young reports.

The key principle supporting an open market — one that is free from government intervention — is that it best serves markets because it allows markets to benefit reciprocally from each others’ advantages. Through competitive markets, countries naturally find their niche and develop expertise in certain markets. Innovation leading to growth in GDP and employment occurs simply because it is allowed to. This is a key concept of capitalism and one of the leading attractions of membership of the European Union, where standardised laws ensure the free movement of people, goods, services, and capital between member states.

In a more interventionist economy, there is a role for government in providing corrective measures, such as the use of fiscal policy for economic stimulus, in times of recession. Protectionism, which restricts trade between states through import tariffs, thus protecting domestic producers, thwarts free markets. On face value it can hit the right note with the public because it seems like the ‘proper’ thing to do in tough times. The immediate flipside of those actions is often overlooked, though, let alone the long term consequences. In some cases it brings quick wins — borrow now, pay later — but we’re all aware of the dangers of maxing out credit.

While in times of recession, it can seem an attractive policy to stimulate domestic growth, protectionism stifles innovation, competition and new ideas. Tom Lawton, head of manufacturing at business advisers BDO, points to China’s close approach until around 30 years ago: “They could do a lot for themselves, but not a lot well.”

Problems arise because not everybody operates on a level playing field. France, for one, is notoriously protectionist. Germany also has form here, and the US, although it claims to be a fierce advocate of free markets, has exercised protectionist measures since the financial crisis of late 2008. Being a member of the European Union technically entails a commitment to maintaining open markets, but these rules can be sidestepped if the subject of a takeover approach is deemed to be a strategic interest in the national interest of its country. The fact that the French term for ‘national interest’ — raison d’État — is well ingratiated into the global political lexicon tells its own story.

In 2005, with rumours circulating that drinks giant PepsiCo was to make a move for French yoghurt maker Danone, the French Government acted with haste in declaring 11 sectors that it defined as raison d’État. According to Michael White, assistant editor of The Guardian, the French government effectively vetoed the deal. White said there are only two UK companies likely to be protected by government against falling into foreign ownership: Rolls-Royce and BAE Systems. This is because it is actually is in our national interest to keep them British; they are intrinsically linked to national security owing to the defence contracts they have with the Ministry of Defence. Danone has no role in national security in France, as far as we are aware.

All of this creates an air of injustice — one rule for one, one for another. But are protectionist countries actually doing themselves any favours? The basic principles of free markets described above would suggest possibly not.

Still, Tom Lawton at BDO says we could in fact learn a lot from the French and German governments and add elements of protectionism while maintaining the benefits that come with being committed to open market values. “A lot of the time it’s just a nudge and a wink,” he says. “They let foreign suitors know they do not approve of the takeover and usually that’s enough. People add one and one and make two. If a company really wants to take over another it will be able to one way or another most of the time. But when you’re fighting a government, shareholders and a nation’s public you have to ask whether it’s worth it.”

He suggests that the UK government should perhaps employ a few more subtle instruments similar to our continental peers. “Just monitor what’s going on and be prepared to step in to make things difficult if you need to,” he says.

Changing the rules
Others have suggested making changes to the City Code to help ward off unattractive advances. One of the key elements of the Code on Mergers and Takeovers is that a timetable is adhered to which sets time limits for each phase of the bid. However, critics say that one party in the takeover can publicly allude to its intentions and effectively use the media to set conditions in its favour months before officially beginning the process. In the case of Cadbury, Kraft stated on multiple occasions that it would do all it could to keep the Somerdale plant open — a promise it seemingly reneged on just a week after sealing the deal by announcing that the factory would indeed close.

Unite national officer, Jennie Formby, accused the company of currying public favour with empty intentions. Stricter rules with regards to takeover timetables have been called for to appease this problem. Former Cadbury chairman, Roger Carr, said: “It is a tactic I believe warrants review under the Takeover Panel rules to ensure the phoney war does not become an unapproved, extended and destructive first round in the real battle that is intended to last only 60 days.”

Carr has also suggested changing the percentage of shareholder votes needed to take over a company from 50% to 60%. In addition, he suggests introducing a rule that the voting rights which are naturally bought with shares be suspended on any purchase made while the company is under offer until the matter is concluded. These measures would give greater power to those “prepared to forgo short term gain for longer term prosperity”.

Lawton’s view is that we should be careful not to tinker too much. If you change the rules, you don’t quite know what the knock-on effect will be.

He points to the automotive sector as an example of how open market principles have served the UK well in recent years. “From our heyday in making cars with Leyland, our motor industry was in sharp decline 15 to 20 years ago and we couldn’t support it anymore,” he says. “If we hadn’t allowed the Japanese car companies to come in it would have been a lost industry for us. It was old and tired but the Japanese came in with new ideas, new machinery and the jobs they have provided have been substantial.

“By being open to the world we are now producing more cars in this country than we were when we considered ourselves a major world car manufacturer —and let’s not forget that a massive supply chain has built up in the UK around the industry.”

It comes back to the cautious overseer role, with guiding nudges, that might suit the UK best, rather than wholesale, protectionist changes administered by a heavy hand.

After all, particularly in a World Cup year, we would do well to remember that because it’s British doesn’t mean its best. Had the UK government had both the ability and inclination to prevent Cadbury from being bought by a foreign company, it would have effectively sealed the Somerdale plant’s fate anyway. Cadbury announced back in October 2007 than it was going to mothball the factory itself and transfer operations to Poland; the move would have been carried out this year. The fact that, to use the words of Unite officer Jenny Formby, “the warm words [Kraft] produced in order to gain support for a very unpopular takeover are not going to be honoured before the ink is even dry” is besides the point.

Government’s efforts are better placed making the UK an attractive place for large businesses to base themselves — as Chancellor Alistair Darling committed to doing last week when he launched a consultation for a new corporate tax regime — and creating a business infrastructure which allows Britain to gain a lead in new and advanced manufacturing areas.

“We’ve got some tremendous foreign businesses in the UK,” says Lawton. “If we can still deliver what the world wants in terms of the innovation, research and quality, and we’ve got a massive market place in Europe then why wouldn’t foreign companies want to have a manufacturing base in the UK?”

Sometimes attack is the best form of defence. Instead of protectionism, let’s concentrate on the open market approach that has served us so well in the past. When it comes to South Africa and the World Cup, patriotism will help us. When it comes to business it could well hinder us. Protectionism can perform the job on the tin — saving jobs and keeping operations where they are. But without free trade there might not be much worth protecting.

There are certainly steps that Britain can take to keep a level playing field with our continental neighbours. But protectionist instruments are not where we should focus to compete with them. It’s better to concentrate on making the UK a place which allows new ideas and innovation to flourish and create a more dynamic manufacturing sector that works because it is good, not because it is British.