Concerns about Chinese influence over the Australian government have become a political issue in recent weeks. But it is the influence of Australian politicians over foreign investment we should be more worried about.

The Foreign Acquisitions and Takeovers Act affords the Treasurer enormous discretion over foreign direct investment (FDI) in Australia. This discretion is bound to attract influence-peddling from foreign as well as domestic interests.

Chinese attempts at influencing the exercise of this discretion are little different from the intense domestic lobbying that preceded the Howard government’s rejection of the proposed Royal Dutch Shell-Woodside merger in 2001.

China may well have the world’s most restrictive FDI regime, but Australia has the fifth most restrictive regime, based on one OECD measure. Australia’s highly politicised FDI controls more closely resemble those found in China and Russia than comparable countries like the United Kingdom and the United States. Is it any wonder that Chinese politicians find themselves on familiar ground when lobbying Australian politicians over potential acquisitions?

If Australians are really concerned about the potential for Chinese influence over foreign investment policy, they should support making Australia’s regulatory regime for FDI less like China’s and more like the United Kingdom’s.

The priority for any reform should be removing ministerial discretion from the FDI approval process. This is the main source of the politicisation of foreign investment in Australia and the nexus for potential influence-peddling by sectional interests, including by foreign firms and governments.

The de-politicisation of foreign investment in Australia could be achieved by putting the Foreign Investment Review Board on an independent statutory footing, with its own resources independent of the Treasury. Its decisions could then be made binding on the Treasurer.

Even this is a second-best reform compared to abandoning the attempt to regulate foreign direct investment at the border.

Australia has a robust regulatory framework for business investment, regardless of ownership. Foreign firms operating in Australia cannot engage in behaviour that is not available to domestic firms.

The Foreign Investment Review Board already defers to the Australian Competition and Consumer Commission on key economic issues. What does the Foreign Acquisitions and Takeovers Act add to this regulatory scrutiny, other than providing a vehicle for the Treasurer to override domestic regulatory agencies on purely political grounds?

Like Treasurer Costello’s decision on Woodside in 2001, Wayne Swan’s rejection of Minmetals’ acquisition of OZ Minerals can only bring Australia’s reputation as a destination for much-needed foreign investment into disrepute.

According to the Treasurer, Minmetals’ bid was rejected because OZ Minerals’ Prominent Hill operations ‘are situated in the Woomera Prohibited Area.’

The Woomera Prohibited Area is a bit of a misnomer. The Stuart Highway runs right through it. A Chinese spy visiting Woomera could learn a lot about sensitive Western weapons technology – from the 1950s and 60s. Woomera has a handy museum for the purpose.

The South Australian and federal governments have previously promoted Woomera as a potential space launch facility to local and foreign firms, including Russian space agency, STC Complex MIHT.

If the Prominent Hill site were really so sensitive, surely no mining operations should be permitted there, regardless of ownership?

Buying foreign equity is an inefficient way of going about espionage. The millions spent on foreign acquisitions by Chinese state-owned enterprises could directly buy much more intelligence from unscrupulous Western sources than could ever be obtained from the South Australian desert. Chinese espionage in the US has frequently taken this form.

The official rationale offered for the government’s decision on OZ Minerals is so weak, it is little wonder that analysts are pointing to the political motivation behind the decision.

Rightly or wrongly, the perception is that the Minmetals’ bid was rejected so that the federal government would appear to be less of a push-over in relation to Chinese investment more generally. OZ Minerals was sacrificed to the politics surrounding the proposed increased stake in Rio by Chinalco.

Despite the Rudd government’s earlier efforts to clarify Australia’s policy in relation to foreign direct investment, that policy now appears more confused than ever. The confusion is inevitable, because no one can predict how the Treasurer will exercise his considerable discretion under the Foreign Acquisitions and Takeovers Act, given the politicisation of the FDI approval process.

The real scandal is not the potential for Chinese influence over Australian politicians. It is the Whitlam-era, Chinese-style foreign investment regulatory regime we have inflicted on ourselves.

Dr Stephen Kirchner is a Research Fellow at The Centre for Independent Studies and the author of Capital Xenophobia II.