The government should be combatting protectionist sentiment in all forms

Donald Trumps protective tariff threat in the US, and the trade war it presages has been condemned by almost all commentators on both the political left and right.

However, the same ideas that animate protectionism in the form of tariff barriers also animate behind the border regulatory protectionism. When nationalism and protectionism meet, the result is a toxic cocktail of wealth destruction.

In the UK, we have seen some of this play out in the debate over passports and in the GKN takeover by Melrose. It is interesting that some of the more politically right of centre politicians and media have been calling for trade restrictions and regulatory barriers that will impede competition, and ultimately destroy wealth out of the economy in both of these cases. What we are seeing is a new emerging fault line between those who believe that competition should be allowed to carry the day, and those who believe in intervention to deliver particular outcomes.

In the case of blue passports, the notion that a UK government procurement should be reserved for a UK firm goes against the UKs international obligations (including WTO rules).

In any procurement, the firm that provides that best value bid should win. Domestic firms should not be preferred in any way.

Interestingly, the UK firm that lost the bid, Thomas de la Rue does this sort of business for governments all over the world. What if foreign governments took this approach and restricted de la Rue from their procurements? After all, what is good for the goose is good for the gander.

Read more: Woodford-backed Crystal Amber builds stake in De La Rue after "own goal"

If they can make an argument that their bid was better value, even if at a higher cost, they are of course free to make those claims in the ordinary course of the appeals process, and not seek to lobby for government intervention or mount public campaigns stoking nationalist sentiment. The sort of protectionism being called for here is doubly worrying in a government procurement, because the higher cost is visited on all UK citizens as taxpayers.

The GKN situation is more complex, but arguably even more troubling. Here, government ministers were pressed to intervene to stop the legitimate exercise of the rights of a shareholder. Just because that shareholder is a hedge fund or a so-called “short-term investor” does not mean that different rules should be applied. These sources of capital are crucial to the smooth functioning of the market system. They play a vital disciplining role on the management of companies to ensure that they do not do things that destroy wealth.

A company that seeks global sources of finance must take the consequences of the benefits of accessing such liquidity.

In response to the Melrose bid for GKN, and its approval by shareholders, the business secretary has come under renewed pressure to make it clear that in the future, restrictions would be imposed on certain shareholders based on the length of time they had invested in the company. This is dangerous nonsense. Treating different shareholders differently will limit the ability of funds to play the disciplining role on the management of a company that is so urgently required.

Some have argued the deal should have been blocked on national security grounds and have cited to other countries such as the Committee for Foreign Investment in the US (CFIUS). Too often national security is cited to justify all manner of protectionist policies. The same is true for “public interest” tests. The reality is that CFIUS has blocked very few acquisitions of US firms on national security grounds.

Read more: Butt out of Melrose's GKN takeover, MPs told

But with respect to this transaction, the company is becoming more, not less British, and there are, at best, minimal defence considerations. If there is a defence consideration in a future sale, let it be considered then, when the time is right.

Of course, its not all about maximising short-term shareholder value. But it is about making sure that managers of companies who are financed by global markets dont engage in wealth destruction. No-one should prevent someone wasting his or her own money.

But, modern day managers often pursue all sort of fads, and politically correct policies which actually do destroy wealth out of their own companies which are financed by other peoples money. Since that impacts the national economy, it is particularly damaging because such wealth destruction hurts the poor far more than it does the rich.

Governments must be careful not to interfere with the ordinary market processes that can discipline these pursuits, and they must also be careful not to confuse the desires of management, and the interests of those who actually own the company.

Where there are exceptions to these general principles, they must be very narrowly drawn. Too often what is in the public interest, and what the public are interested in, are confused.

In a world where growth is at a premium, perhaps the most important public interest is that wealth not be destroyed.

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CityAM

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