In October, The Economist included an interesting special feature entitled “The Gated Globe.” The feature noted that less than one third remains of the eleven trillion dollar international capital flow that existed prior to 2007. To explain this development, the magazine cited myriad regulatory and protectionist policies cropping up in countries around the world.
Among these policies, the article identified last December’s decision by the Government of Canada to ring fence the oil sands from further state-owned enterprise (SOE)—in particular, Chinese—investment. On one level, the government was said to be merely applying a level of reciprocity on China’s own restrictions on foreign investors. Yet the new restrictions were also a response to the public’s concern about rising Chinese investment, and to Canadian oil sands executives who were lobbying to restrict competition from state-owned companies who, they fear, have a lower cost of capital.
This type of protectionism helped the government justify the approval of the CNOOC-Nexen deal politically. But in the end, these restrictions will impede the development of the oil sands, choking off capital to a resource that in fifty years may face so many environmental restrictions that it will be difficult to sell. Any time capital is restricted, costs go up and development falls off. If China wants to invest in the oil sands, it’s hard to see how Canadian sovereignty is affected. After all, we still retain ownership of the resource and regulate its extraction.
The government’s decision in October to reject the sale of MTS Allstream to Accelero, using the national security test in the Investment Canada process, can also be seen as part of the “gated capital” trend. With cyber wars and spying among countries becoming this decade’s method of conducting subterfuge, espionage, and even war, sensitivities are running high around foreign purchases of Canadian companies whose communications technology is sold to the Canadian government. This is a real and complicating security issue. Perhaps in anticipation of a potential sale of BlackBerry, MTS Allstream’s government enterprise business appeared to prohibit the company from selling off this critical business unit to a firm located in a country that wasn’t part of the i5 (Canada, the US, the UK, Australia, and New Zealand) intelligence network. Indeed, news reports in today’s Globe and Mail suggest that Ottawa made it clear in high-level discussions with BlackBerry that it would not approve a Chinese company buying a Canadian company so deeply tied into Canada’s telecommunications infrastructure.
It’s understandable that the Canadian government would have security concerns, but it also appears to have little appetite for exploring ways that security risks can be mitigated. MTS Allstream has, for example, claimed it was willing to sell off its government enterprise business to complete the sale.
Let’s think of the implications of this trend for a moment. Any Canadian company that does business with the government can theoretically be ring-fenced from foreign acquisition—from Bell and Telus to service companies like CGI. Is all of this protection really healthy for the Canadian market? Is the national security review now becoming another “gate” for capital? It’s starting to look that way. One of the interesting aspects of the national security review is that its rules do not require it to give reasons for not approving a transaction. One can see the expediency of this “gate” for a government interested in avoiding the comparative transparency of the net benefit test in the Investment Canada Act.
But let’s be careful with what we’re doing here. Rather than fencing capital as a policy response, why not invest in advance security technology to protect government and Canadian citizen interest? Mobility of capital is a central tenet of our free enterprise system. Too many restrictions will choke off the creation of wealth.