The Canadian government’s interim determination, announced last Friday, that the proposed Petronas takeover of Progress Energy does not provide an as-yet-undefined “net benefit” to the country, has elicited more interest in Canada and internationally than would normally be the case for any other mid-sized and otherwise run-of-the mill foreign-investment transaction. Petronas is not well known in Canada beyond the oil patch. (True, it is a state-owned enterprise, but who’s afraid of Malaysia?) Its failure – so far, that is, as the determination remains subject to appeal – has ramifications beyond whatever shadow it projects on the upcoming decision regarding CNOOC’s Nexen takeover proposal.
The Petronas-Progress and CNOOC-Nexen issues demonstrate the dominant role that resource and energy continue to play in the perception, more than the reality, of the Canadian economy. Statistics Canada has called this “the return of the old economy.”
And not just in Canada. Our approach to foreign direct investment (FDI) in natural resources defines to an important, perhaps overwhelming, extent what foreign interests and governments think of the openness of the Canadian economy, and that well beyond the energy and resources sectors. It shapes views about the seriousness of our commitment to broaden our global footprint beyond North America.
This is a perception that Canada cannot afford.
The profile of our mining and energy sectors in Canada is way beyond their share of our total economy: about 15% of GDP, a third of manufacturing.
But its international profile is much bigger. In 2010, resources, energy and forest products accounted for 46% of our commodity exports. According to a recently released study on resource economies conducted by the Canadian International Council, “the top Canadian merchandise export to every one of [our] major trading partners was a natural resource: ” crude to the U.S., wood pulp to China, coal to Japan and South Korea. Our largest exports to Europe are precious metals and alloys. Every province except P.E.I. is a mining, energy and forest-products producer, and therefore exposed to the global economic winds affecting natural-resource supply and demand.
And while the majority of our exports is still flowing to the U.S., Japan and the European Union, our resource exports are increasingly heading for other parts of the world, primarily to an expanding Asia.
This international dimension is even more pronounced when looking at FDI and various measures of foreign ownership: According to Statistics Canada numbers, total operating profits and shares under foreign control were above 70% of Canadian mining and almost 50% of oil/gas extraction and support. Both have a larger foreign presence than in manufacturing, which is about 40% foreign-owned and controlled.
The importance of the sectors is reinforced by the fact that the TSX and TSX Venture exchanges account for 40% of equity capital raised for mining ventures throughout the world.
So, our international image in trade and economic circles will again be defined by our resources profile, which can seriously downplay our many other strengths, such as in high technology and agriculture, and in financial and other services.
There are many consequences to this, ultimately distorted, view of the Canadian economy, but one deserves special attention. Decisions, especially negative ones, surrounding bids such as those for Petronas and CNOOC, take on more weight and gravitas than they deserve. They can shape foreign-investment expectations for the longer term, and well beyond the resources sectors.
As an example: Chinese ambassador Zhang Junsai last month appeared to suggest that approval of CNOOC/Nex-en would smooth the way toward an FTA negotiation between Canada and China. Beyond doubt, Nexen is a large and important energy company, but the final decision approving or rejecting the CNOOC bid should hardly be a determinant of the bilateral strategic relationship between our two countries.
Admittedly, however, such a rejection, and whatever clarification of “net benefit” to the Investment Canada Act may accompany it, will have a huge impact on international perceptions of Canada’s FDI policies, including in business sectors far from resources. This message will be read especially closely in Asia, where government policies are believed to carry both implicit and explicit significance and meaning. Negative decisions will be seen in some quarters as a blanket rejection of FDI, making it more difficult for Canadians and their government to claim that Canada is indeed open for business.
Joseph Caron is a former envoy to China, Japan and India, and a distinguished fellow with the Asia Pacific Foundation of Canada.