Patriotism, protectionism and AstraZeneca

Patriotism, protectionism and AstraZeneca

15 May 2014

Boswell attributed to Dr Johnson these well-known words:

“Patriotism is the last refuge of a scoundrel.”

I suppose there is some merit in this view if you accept that the great tyrants of history have tended to claim to be patriots (though “scoundrel” seems a mild word to apply to the men responsible for the Holocaust, Collectivisation and The Great Leap Forward).

Johnson actually wrote at length on the subject of patriotism, specifically in opposition to American independence.

“He that wishes to see his country robbed of its rights cannot be a patriot.

That man, therefore, is no patriot, who justifies the ridiculous claims of American usurpation; who endeavours to deprive the nation of its natural and lawful authority over its own colonies; those colonies, which were settled under English protection; were constituted by an English charter; and have been defended by English arms.”

I think the key sentence here is the first. It raises the interesting but complicated notion that a nation can have rights, beyond the aggregated individual rights of its citizens. It is a potentially dangerous idea and has been the cause of many international disputes, some farcical, others calamitous.

After a couple of world wars and a widespread if not ubiquitous international consensus in favour of eliminating racial discrimination, patriotism is a trickier position to hold than it once was. Patriots use their support for sport as a way of expressing themselves. I found the chauvinism during the 2012 London Olympics somewhat distasteful (being of the opinion that hosts have the obligation to put the interests of their guests first) but certainly not dangerous or harmful. If crowd behaviour limits itself to sport, we should be thankful.

In 2014, financial patriotism has started to feature in political debates. We have become accustomed to being told that e.g. Romanian families will travel 2000 kilometres in order to claim state benefits in the UK. (I find this hard to believe. How many Britons would emigrate to Romania on the promise of living in poverty for free?) Now, somewhat bizarrely, some people object to foreigners bringing too much wealth to the UK. They are supposedly buying our trophy assets, aided by the fact that we are prepared to sell them.

The offer by Pfizer to buy AstraZeneca has provoked an outburst of random protectionist comment. It is very un-British. The history and prosperity of the UK are based on the fact that the executive respects the laws of property and ownership and that these apply to all-comers. The British state does not appropriate assets or make retrospective or discriminatory laws.

By contrast, the French government makes up rules as it goes along. Last week, General Electric of the US made a bid for Alstom’s energy business. This week, the French government awarded itself the power of veto over bids for energy, water, telecoms, transport and health companies. According to the FT, one official described the new rule as a “nuclear weapon”.

This is a patriotic but autocratic decision by a left-wing government. But that kind of xenophobic patriotism has also fuelled the rise of the right-wing National Front. You can be sure that foreign investors are wary of France.

In the UK, mergers between large companies can be blocked on competition grounds. The Monopolies and Restrictive Practices Commission was set up by the Labour government in 1949.It is now called the Competition Commission but its central role is still to block mergers that are against the public interest because they will lead to a lessening of competition. I remember attending a lecture at university where the left-wing economist and former Monopolies Commission member Roger Opie argued that the public interest clause should be interpreted much more robustly and that all mergers should be blocked unless they could demonstrate that they were actually promoting the public interest.

Opie’s view now appears to be making a comeback. No one has, as far as I know, suggested that a combination of Pfizer and AstraZeneca would have a dangerously dominant position in the pharmaceutical drug industry. But they have suggested a whole heap of other stuff: that Britain’s place in scientific R&D will be jeopardised; that Pfizer is motivated by the UK’s low corporate tax rate; that AstraZeneca will be distracted and a life-saving treatment could slip through the net; that financial advisers are going to make a fortune from the deal (whether it goes through or not).

I have been a shareholder of AstraZeneca for some years and my immediate reaction to the bid was to give thanks that I might be put out of my misery. My impression has been that the company’s in-house drug research has performed poorly. According to a Reuters article from last weekend:

“Only one of the 13 experimental medicines in the pipeline that AstraZeneca management highlighted when it laid out its defense was invented in-house.”

Many of the most promising new treatments come from MedImmune, a $15 billion acquisition made in 2007. Medimmune is or was a US company, based in Maryland. How droll!

AstraZeneca itself is the product of a 1999 merger between a Swedish company, Astra, founded 100 years ago, and Zeneca, which was the pharmaceutical rump of ICI.

It is an uncomfortable stretch to describe AstraZeneca as British. Eighty seven percent of its employees are located outside Britain. Its CEO is French. The most British fact about the company is that it is registered in the UK and pays group taxes (if any) here.  It is acknowledged that Pfizer is attracted by the fact that corporate profit is taxed at 21% in the UK compared to 40% in the US. As pointed out above, Britain is also generally a friendly place for foreign investment and foreign workers. If the tax rate alone were the deciding factor, US companies would be moving to the Ukraine (18% – ok, maybe not right now) or Ireland (12.5% – ok, they already are).

When the UK corporate tax rate was set at 21% (falling to 20% next year), I assume that one of the intentions was to encourage foreign investment. Well, hurrah, here it is!

Unsurprisingly, some politicians and commentators in the US are unhappy about what they see as a tax dodging move. US corporate tax law has a history of trying to keep profits out of the hands of shareholders. It is estimated that US corporations are holding $362 billion cash in foreign subsidiaries. Any money repatriated to the US is taxed to make up the difference between the rate that the company actually paid in whatever foreign country the subsidiary resides and the US rate of 40%. According to KPMG, the average global tax rate is below 24%.

In 2004, there was a repatriation tax holiday in which foreign profits were taxed at an extraordinary low rate of 5%. As it happens, Pfizer was the company that indulged itself the most (repatriating $35 billion) but the policy overall was seen by tax campaigners as a failure because the companies tended to distribute the money to their shareholders. The horror! This so appalled many commentators that the current consensus appears to be that the money is best left where it is than risk the repeat of such a disgraceful outcome. And that in turn means that Pfizer has oodles of off-shore cash for which it would like to find a use – buying AstraZeneca, for instance. So the stubborn wish to tax Pfizer in the US has had the result that it is making an acquisition that will further minimise the tax that it pays in the US. Genius.

I will address the claim that AstraZeneca will be distracted and delay life-saving drugs when the company has published data on how many deaths resulted from its takeovers in the last ten years of KuDOS, Cambridge Antibody Technology, Arrow Therapeutics, MedImmune, Ardea and Spirogen. Though if this is the idea of a bid defence by Astra’s CEO, I suspect that, politicians notwithstanding, the company’s independent days are numbered.

The bitter accusation that financial advisers are going to make a fortune from this deal, whether it happens or not, is sadly true. It will be interesting to watch for signs that they are lobbying for politicians to step back and let capitalism take its course. In truth, it shouldn’t be too difficult because all the grandstanding about protecting British jobs is probably contrary to European law. Unlike, say, the French, British politicians seem to be wary of European law.

British people seem to fail to realise that the UK has set many standards of probity and integrity that the rest of the world would do well to follow. Interference from politicians who try to show off by demonizing foreigners is a very poor show and extremely damaging to a reputation for fair play that has taken hundreds of years to establish. Protectionism is the last refuge of a scoundrel.

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