Strategic Designations Are Unnecessary

Every so often, the pages of the business section will be filled with a story about a foreign company's attempt to buy a domestic asset. That company then fails its acquisition attempt after politicians or a regulatory agency deems that asset as "strategic" and then nixes the deal. The two most prominent examples I can think of is CNOOC's (a state owned oil company of China) attempt to buy Nexen, a Canadian oil company and the Dubai Ports World controversy.

The theory behind strategic assets is that, under normal circumstances, the prices of strategic assets are much lower than what they would be if war broke out. For example, in the Civil War, the price of cotton and wheat skyrocketed in both the Union and the Confederate States because the war disrupted normal trade patterns and reduced the amount of capital stock available for agriculture (a labor intensive task that required able-bodied men who went off to fight in a war instead).

Things like steel factories, heavy industry, oil rigs, nuclear power plants, resource pipelines are all deemed as strategic assets because they become infinitely more valuable in a conflict than in peacetime. So when a foreign company wants to purchase a strategic asset, politicians at home wrap themselves in a flag and demagogue the issue to score political points.

The sale of strategic assets shouldn't be so cumbersome in developed markets. All it does is prevent the peacetime economy from operating at peak efficiency for a misguided sense of insurance in the case of armed conflict. But that misses the broader point in question.

Which is that strategic assets are often appropriated by the national government in wartime regardless of peacetime legality. Again, to go back to the Civil War, the CSA seized the Federal arsenals and coinage deposits in their territory once they seceded. In WWI, the US government seized Merck from the Germans and turned it into an American owned company. And when Argentina suffers an economic crisis, foreign held assets within the country are often seized with little or no reparations offered.

So if CNOOC did buy Nexen and war broke out between Canada and China (for some reason), the Canadian government would just nationalize CNOOC's Canadian holdings anyways. This is the implicit threat for any company doing business overseas. Because strategic assets are often hard to relocate. It's no easy thing for a foreign company to repatriate a steel mill located overseas.*

If the national government wants to regulate companies and assets in a way that makes it easier for the government to take them over in the case of war, there is a legitimate purpose to that regulation and it shouldn't be dismissed as paranoia. But for the government to deny the sale of a strategic asset to a foreign company on some misguided fear of the possibility of going to war, all it does is sours relations between the two countries in question, which makes it more likely that they go to war.

It's generally understood that wartime makes governments and people do things they wouldn't otherwise do. They might be "wrong" and "unjust", but that's for the victors to decide. At least in peacetime we should have the decency to act like it's actually peacetime.

* Stolen from one of Niall Ferguson's books. I think it might have been Colossus.