China: Update on Rio Tinto Corruption Case

Australian Mining Co., Rio Tinto  Source:  www.newsdaily.com/photos/2009-07-09T060018Z_0...
Australian Mining Co., Rio Tinto Source: http://www.newsdaily.com/photos/2009-07-09T060018Z_0…

Australian mining giant Rio Tinto knows that when it does business with a sovereign government, it is dealing with an entity that writes, executes and adjudicates laws on its territory.  Read about the China-Rio Tinto issue in a previous post

Every multinational knows, especially those in industries such as mining and energy that operate in funky locales, that the sovereign can seize your assets, throw your officers in prison, and undertake other such mischief as it pursues its interests, whether economic or political.

So, as the Chinese goverment has orchestrated an assault on Rio Tinto in recent weeks, claiming corruption and over-invoicing, it is sending a message to Rio Tinto, its backers in the Australian government, and the wider world — you can make money over here, but do not cross us.  A NYTimes article today suggests that the Chinese government is easing its pressure on Rio Tinto as negotiations over a mining contract resume, which became acrimonious in late June.  

Lest we forget, all sovereigns, even liberal democracies, have the power to encroach on private property.  A libertarian paradise exists nowhere on Planet Earth.  “Eminent domain” is a concept in the United States, whereby the state has the inherent right to seize private property for its purposes, be it a public highway, utility, a military facility.  Financial compensation by the goverment is due the private owner of the seized asset.  You would feel like you were up against the Chinese government, if your local mayor decided he needed to build a road across your lawn.  Hence the American phrase, “You can’t fight City Hall.” 

With the retreat of colonialism after World War II, a wave of nationalizations and expropriations by sovereigns in former colonial lands changed the landscape of international commerce.  Does anyone remember the Oil Embargo of the 1970s?  With the arrival of the Washington Consensus in the 1990s, which despite what naysayers say is still largely the consensus, most reforming emerging market sovereigns resist nationalization and expropriation because this destroys a country’s business climate and limits the inflow of capital.  Almost everyone knows this, unless you’re Hugo Chavez or Evo Morales.  Note the fact that the Brazilian government under President Lula, an icon of the Latin American left, was on the receiving end of an expropriation threat, when Bolivia’s Evo Morales called for the nationalization of natural gas refineries owned and operated by Petrobras, Brazil’s energy behemoth, a few years ago.

So, shed no tears for Rio Tinto…

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