MAC Economic Commentary

Will Canada stay the course as a free trader?

By Pierre Gratton

In Canada, resource nationalism has typically been framed as something that happens elsewhere. But BHP Billiton’s 2010 blocked bid for PotashCorp shook that perception. Now, with China National Offshore Oil Company’s (CNOOC) $15.1-billion bid for Calgary-based Nexen Inc. at the centre stage of discussion, many are speculating whether similar protectionist measures will prevail in this and future foreign take­over bids.

To determine the validity of concerns over resource nationalism in Canada, we need to assess our trade, foreign direct investment (FDI) and taxation regimes for competitiveness and consistency. This will provide a clearer picture of how open Canada is to doing business with the rest of the world.

By and large, Canada’s resource taxation regime is very stable. A mixture of income and production taxes, with royalties at the federal and provincial levels, Canada’s taxation policy is tailored to promote resource development. Tax credits, Canada’s “flow through share” mechanism, accelerated deductions for exploration, development or equipment purchase and a federal corporate income tax rate of 15 per cent (the lowest rate in the G7), all contribute to the competitiveness and stability of Canada’s resource taxation regime.

What is more, Canada is currently embarking on the most aggressive trade agenda in its history. Twice as many free trade agreements are in negotiation (or have been concluded but not yet implemented) as are currently in force. Further, there are 24 active Foreign Investment Protection Agreements and another 19 in negotiation. The last World Trade Organization report on Canada’s trade policy praises our strong economic performance in weathering the global recession without resorting to protectionist trade measures.

FDI in Canada must successfully navigate the Investment Canada Act (ICA). Under the ICA, the minister of industry can block any transaction valued at $299 million and above if the deal does not provide a demonstrable “net benefit” to the country, based on factors such as output and employment levels. Since the ICA was implemented in 1985, Industry Canada has reviewed over 1,600 foreign acquisitions worth almost $600 billion, and has approved all but two.

Given the above, it seems concerns about Canada exerting control over the extractive process by constraining profits are unfounded. With respect to blocking FDI, the approval numbers dwarf the blockages. However, since both blockages occurred under the current government, this concern may be exaggerated but is perhaps not entirely uncalled for.

A recent report by the Conference Board of Canada claims that “the failure of BHP Billiton’s acquisition of the Potash Corporation of Saskatchewan clearly shows that significant investments [in Canada] can be easily scuttled through short-term political calculations.” Perhaps when the business community considers the CNOOC/Nexen deal, the ghost of BHP Billiton past rears its head.

A key link between FDI in Canada and the federal government’s aggressive trade expansion is that both require an “open for business” attitude, reputation and track record. Given projected trends in the global economy, the maintenance of this reputation backed by the establishment of new markets and trading partners – particularly in Asia – is a high priority of the federal government. Inconsistencies between the government’s stated goals and some of its actions – such as what occurred during the BHP bid – could have unintended consequences that extend well beyond the CNOOC/Nexen Inc. transaction.

Between 2000 and 2010, China saw massive increases in the production of aluminum (442 per cent), cement (220 per cent) and steel (396 per cent). Simultaneously, the value of China’s imports of certain minerals increased significantly: iron ore by 42.5 times, thermal coal by 248 times and copper by 16.2 times. China is now responsible for consuming approximately 40 per cent of the world’s base metals, and its demand outstrips its supply by a wide margin – a trend that is likely to continue going forward.

In the CNOOC/Nexen deal, the stakes are even higher because of the value of the takeover (it would be China’s largest overseas energy acquisition) and the strategic importance of China as a trading partner to Canada going forward.

When applying the net benefit to Canada, Ottawa should carefully consider what is at stake. Given Canada’s global leadership position as a mining powerhouse, the application of the “net benefit” to the Canada provision should include the longer term view of a positive trading relationship with the world’s largest consumer of minerals. It should also consider the downside risk of blocking a third deal while aggressively pursuing new trading partners.

Pierre Gratton is president and CEO of The Mining Association of Canada.

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