Crouching beaver, hidden dragon policy Implications of Chinese Investment in Canadian Resource Companies

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Policy Implications of Chinese Investment

in Canadian Resource Companies
Erin M. K. Weir

Recently, corporations controlled by the Chinese government have sought to buy Canadian resource companies. In the mining sector, China Minmetals negotiated to take over Noranda and its controlling interest in Falconbridge. The Globe and Mail reports that “several state-owned Chinese energy players have expressed a desire to buy their way into Alberta’s oil sands” (Stewart 2005, B1, B7). Most notably, the Chinese National Petroleum Corporation bid to purchase Husky Oil. Although neither the Noranda deal nor the Husky deal went through, both reflect a trend that appears likely to continue. According to China’s Foreign Minister, “The Chinese government is encouraging Chinese enterprises to make investments in Canada, particularly in the field of resources exploitation” (York 2004, A1). The Government of China’s desire to buy Canadian resource companies poses a major new public-policy challenge for the Government of Canada.

As the Petroleum News observes, “the Noranda purchase would [have been] China’s largest foreign acquisition to date and represents the first time any state-owned Chinese enterprise has made a bid for a Canadian company” (Park 2004). Because this issue is unprecedented, it has not been subject to much academic scrutiny. The Chinese ‘dragon’ remains largely hidden from Canadian decision-makers. As a result, the Canadian ‘beaver’ remains crouched in its passive position of welcoming foreign investment. Indeed, the Government of Canada has responded to trade disputes with the US by promoting greater economic relations with China.

Analysis of China’s global drive for control of foreign resource production has focussed on the emerging struggle between China and the United States, particularly over fossil fuels (Economist 2005[b], 35). The American government blocked the Chinese government’s recent bid to buy Unocal and presumably opposes Chinese-state ownership of Canadian resource companies. However, there has been little assessment of Canada’s interests. This paper uses political and economic theory to analyze how Chinese-state ownership could affect Canadian interests and what policies the Government of Canada could pursue to protect them.

The paper examines government policy using three main paradigms. Pluralism, the dominant framework in North America, conceives of the state being propelled by the diverse interests and beliefs of many different individuals and groups. By contrast, Marxism presents policy as a function of the economic substructure, rather than of the political superstructure. Material factors are the driving force in this second view. Institutionalism offers a third perspective, presenting the state as an autonomous actor, rather than as a product of underlying political or economic forces. Policy is shaped by policy elites - politicians, civil servants, and intellectuals - and by public institutions.

Debates about foreign ownership, which are not new to Canada, clearly reflect these paradigms. Pluralism does not generally regard foreign ownership of industry as a problem: since business is but one of many social actors, business ownership is not decisively important. Foreign enterprise will succeed in domestic markets only because it performs economically useful functions in them. In fact, having both foreign and domestic firms in the same market facilitates mutually beneficial “spillovers” of technology, human capital, and managerial techniques (Globerman 1999, 3-4; Eden 1994, 41).

Marxism argues that ownership of the means of the production is critically important. To the extent that Marxists differentiate between national bourgeoisies, they see foreign ownership as a relevant issue. But, ultimately, Marxist theory sees distinctions based on nationality as being far less important than cleavages based on economic class (Anderson 1991, 3-4).

Most concern about foreign ownership in Canada emanates from the institutional school. Critics argue that the structure of foreign firms biases them toward transacting with other foreign agents rather than with domestic entities (Globerman 1999: 4-5). Foreign ownership substitutes imported components for available domestic inputs, truncates domestic entrepreneurship, locates head-office functions outside the country, and exacerbates imbalances of market power. Such criticisms seemed particularly salient with respect to the oil industry, and helped motivate the federal government to “Canadianize” it through Petro-Canada and the National Energy Program (Laxer 1983: chapters 1 and 3-5; Clark-Jones 1987, 30-31).

While the traditional debate about the merits and demerits of foreign (mainly American) ownership in Canada remains important (Hurtig 2002), it is not particularly relevant to the current question of Chinese investment. Since Canada’s resource sector is already largely foreign-owned, a Chinese takeover would not necessarily alter the balance of foreign versus domestic control. Although Noranda is largely Canadian-owned, Husky is owned by a Hong Kong businessman. While the traditional issue was foreign-private ownership versus domestic ownership, the current issue is foreign-state ownership versus foreign-private or domestic ownership.

Several politicians and journalists have raised China’s human rights record as cause for concern about its interest in Canadian companies (Park 2004; York 2004; Stueck and Reguly 2005). But there is no presumption that Chinese corporations would violate human rights in Canada. If there is such a concern, it can “be answered on the domestic front by Canadian law.” If Canada wishes to sanction China economically for domestic human-rights abuses, this approach would affect any or all Canadian business with China. So far, the Government of Canada has promoted greater economic links with China and other countries with dubious human-rights records (Conference Board 2004, 3, 5). Unless this policy is reversed, Chinese human rights would be of no particular relevance to a Chinese purchase of a Canadian company.

The implications of Chinese-state investment in Canada do not hinge on the fact that it is foreign, nor on Chinese domestic policy. The crucial question is how the Chinese state would run its Canadian operations. To answer this question, one must understand China’s interest in Canadian resources.

The Chinese government’s desire to invest in Canada is part of its global drive to control resource extraction outside its borders. China has sought to acquire oil-producing assets in several countries, including Australia, Chile, Ecuador, Mongolia, Nigeria, Peru, Sudan, and the US. China has secured long-term supply contracts with Iran and Venezuela. Most notably, China financed Russia’s nationalization of the Yukos oil company in exchange for guaranteed supply from the newly nationalized firm (Ross 2005; Meyer 2005, B3; Brethour and Chase 2005, B1).

The Chinese Foreign Minister explains this trend in general terms: “Given our rapid economic growth, we’re facing an acute shortage of natural resources” (York 2004: A1). Certainly, China is a massive consumer of resources: “China devoured nearly half the aluminium, nickel, zinc, and lead sold on international markets [in 2004]” and “accounted for as much as one-third of the increase in global oil demand over the past three years” (Stewart 2005: B1; Economist 2005[a]). But China’s domestic demand does not explain why Chinese leaders wish to purchase foreign resource producers, rather than simply purchasing resources from them on world markets. Supposedly, economic globalization means that “capital is borrowable, raw materials are buyable and technology is copyable” (Lester Thurow quoted in Courchene 2001, 43). There is no suggestion that Canada is restricting, or would restrict, resource exports to China, so why is the Chinese government intent on directly acquiring Canadian resource companies?

Since China is not democratic, pluralism is not very helpful in explaining its government policy. Of course, the Chinese government must take some account of pluralist factors to maintain power: “the bottom line for perhaps all [Chinese] economic policy is maintaining employment, particularly in urban sectors, a bottom line drawn by fear of social instability that would result from large-scale urban unemployment” (Breslin 2000, 394). Chinese leaders preempt political challenges by seeking to maintain acceptable material conditions in China’s cities.

A pluralist approach quickly leads to an examination of material factors. In any case, a Marxist framework, which is materialist by definition, seems more appropriate to China. An analysis of material factors generates three possible explanations of how acquiring Canadian resource companies would strengthen, or at least protect, Chinese industry.

The key question for Canadian policy-makers is whether China’s motives threaten Canada’s public interest. The Canadian public benefits both from the economic activity, including international exports, associated with a prosperous resource sector and from the government revenues collected from this sector. While the appropriate tradeoff between industry activity and government revenue is a subject of intense debate, there is a clear consensus that these are the two principal benefits that Canadians derive from their resources (Cairns 1985; Kierans 1973; Weir 2002).

The first material explanation treats a Chinese-government purchase of Canadian resource companies as a “consumption” decision, seeking to provide Chinese buyers with resources at low prices. The second explanation treats the decision as “economic development” to expand resource processing and/or extraction in China. The third explanation treats the decision as “investment” to insulate China against future resource-price increases (Pass et al. 2000, 92, 125, 279-281). Whereas China’s possible consumption and development goals would threaten Canadian interests, the investment goal would not. Since, in financing the Yukos takeover, China opted for guaranteed oil supplies from the firm rather than for partial ownership of the firm (Meyer 2005), the consumption explanation seems most likely, but development and investment must also be considered.

The consumption explanation draws on theory elaborated by Murray Fulton (1989) in “The Economics of Resource Purchasers Investing in Saskatchewan’s Resource Industries.” By expanding its output, a “resource producer” gains more resources to sell, but this increase in total supply reduces the price at which all its output is sold. A standard resource company will produce at the level that maximizes its profit based on this tradeoff. However, a “resource consumer” investing in resource production benefits both from “the profits that will be generated from the production of the resource” and from “the savings that result when it is able to purchase its inputs at a lower price.” A lower price reduces the former, but increases the latter. Since a resource consumer engaged in resource production loses less (or gains more) from a lower price than a standard producer, a resource consumer will choose a greater quantity of output than would be optimal for a standard producer.

Writing in the late 1980s, Fulton observed that foreign-state-owned electrical utilities controlled much of Saskatchewan’s uranium-mining industry and that the governments of India and China, both major potash importers, considered investing in potash mining. During the early 1970s, Central Canada Potash (CCP) broke the Saskatchewan potash industry’s cartel. Since CCP was largely owned by American farm cooperatives that imported potash as fertilizer, this firm preferred more output and lower prices than standard potash producers (Richards and Pratt 1979, 197, 297).

Resource consumers expand resource production to drive down price and obtain “a less expensive supply of the product.” Typically, no single private firm buys enough resources to gain appreciably from the small global price reduction it could engineer by investing in production. But non-private agencies, like national electrical utilities or co-operative farm associations, that buy vast quantities of resources stand to gain significantly from this strategy (Fulton 1989, 136, 142).

Almost all Canadian resource companies, whether domestic or foreign-owned, are standard producers seeking maximum profits from production. By contrast, government-controlled firms ideally maximize social welfare, rather than their own profits. Critics allege that such firms actually serve state interests, rather than maximizing profit or social welfare (Allan 1989). Depending on which view one takes, the main function of China’s state resource companies would be to supply cheap resources to either the entire Chinese economy or only to the state-owned part of it. Since China, or even just its state-owned industry, is a massive resource consumer, the Chinese government has strong incentives to depress global resource prices.

Resource prices are volatile because resource extraction tends to be inelastic with respect to price (Pass et al. 2000, 410). In other words, a relatively small expansion of output would significantly reduce price. If the Chinese government bought Canadian resource companies and operated them as suggested above, Canada’s resource sector would be made somewhat larger and substantially less prosperous. Lower resource prices would erode Canada’s overall trade surplus, which is mostly from resources (Foreign Affairs 2005). Since provincial royalties are set as percentages of resource prices, and since federal and provincial corporate-income taxes are set as percentages of profit, lower prices would reduce the resource revenues collected by Canadian governments, forcing them to reduce public expenditures or increase other taxes.

But this analysis is more applicable to some resources than others. As Fulton emphasizes, his theory presumes that particular resource companies occupy large enough shares of the global industry’s output that their individual production decisions affect world-market prices. “By definition, a competitive industry is one in which each producer is so small that changes in its production have no impact on the market price.” Clearly, the uranium and potash industries are “noncompetitive” (Fulton 1989, 138-139).

Canada produces such a large share of the world’s base metals, especially nickel, that the production decisions of companies like Noranda and Falconbridge could change world prices (Gunton and Richards 1987). Moreover, since most of the global mining industry is headquartered in Canada (Conference Board 2004; Stewart 2005), the Chinese government could gain control of mines around the world by buying Canadian companies. Chinese investment in Canada’s mining sector could depress world metal prices to Canada’s detriment.

While world oil markets are not perfectly competitive, Canada’s petroleum industry is too small to influence world prices. Clearly, Canadian producers are price-takers, not price-setters. Even if Chinese owners increased a Canadian oil company’s output by a proportionally large amount, the world price of oil would be unaffected.

Saudi Arabia has sufficient productive capacity to independently raise and lower world oil prices (Morse and Richard 2002). The development of Alberta’s tar sands could give Canada’s oil industry sufficient market power to influence world oil prices. The oil reserves recoverable from Alberta’s tar sands at current prices are second only to those of Saudi Arabia. Tar-sand production and leasing are such that only a few major firms will dominate these reserves (Cattaneo 2005: FP 4). A firm controlled by the Chinese government would expand tar-sand extraction more than an “uncompetitive” Canadian producer (in Fulton’s sense). In the future, the Chinese state could conceivably lower world oil prices by controlling a Canadian oil company engaged in tar-sand extraction.

More immediately, Chinese corporations could ship Canadian oil back to China at prices below the world-market price. A standard resource producer sells its output at the highest price the market will bear. A resource consumer engaged in resource production will choose a lower price that balances profits from production with savings on consumption.

Rather than obtaining cheap resources by driving down world prices, China may do so through transfer pricing. This approach would artificially weaken Canada’s trade balance with China and reduce the profits reported in Canada by the Chinese-owned firm, but would not otherwise affect Canada’s resource sector. But since provincial and federal resource taxes are percentages of prices and profits, transfer pricing would diminish the revenues collected from Canadian production under Chinese control.

But this issue is not new. Arguably, the possible erosion of Canada’s tax base through transfer pricing is a problem caused by all multinational corporations, rather than one attributable to prospective Chinese investment. Virtually all of Canada’s energy exports, and most other Canadian resource exports, flow to the US. Since Canadian corporate tax rates are now lower than American rates (Finance Canada 2005), firms would not generally shift taxable profits from Canada to the US through transfer pricing. Therefore, transfer pricing would be a problem connected to Chinese-state ownership, rather than an omnipresent issue.

The second material explanation relates to economic development. The Chinese government may purchase Canadian resource companies not (only) to obtain a cheap supply of resources, but to relocate the extraction and/or processing of these resources from Canada to China.

The Canadian Auto Workers’ (CAW) Union (2004), which represents Falconbridge employees, feared the closure of “mills, refineries, and mines” in Canada and “the export of unprocessed ore and concentrate to Chinese-based secondary facilities.” Similarly, “tens of thousands of Alberta jobs are dependent on the upgrading, processing, and refining of bitumen” from the tar sands. Alberta’s Energy Minister fears this raw material being “diverted out of the country for upgrading and processing [in China]” (MacNamara 2005, FP 1). The Globe and Mail reports that “China hopes to import unrefined oil from Husky’s fledgling oil sands projects” (Brethour and McNish 2004, B5).

Relocating resource processing to China would be consistent with Chinese economic policy (CAW 2004), and it is generally feasible to situate processing near consumers rather than near primary extraction (Richards and Pratt 1979: 247). Of course, existing technology would not permit the transport of raw bitumen from Alberta to China (Brethour and McNish 2004, B5).

The Chinese government may also wish to use Canadian capacity to explore for, and develop, natural resources in China. For example, a Chinese-state firm has employed Husky to explore oil deposits in the South China Sea. Relocating primary extraction and/or secondary processing from Canada to China will reduce economic activity in Canada and the tax revenues collected from it.

In summary, the Chinese government may buy Canadian companies to obtain resources at less expense and/or to transfer some of their activities to China. The Chinese could depress world metal prices by somewhat increasing mining output, and could easily relocate its processing. As the tar sands, and technologies related to them, are developed, it may become possible for China to depress world oil prices and to refine Alberta bitumen in China. Even without these prospects, Canadian interests in the energy sector are vulnerable to Chinese transfer pricing and to the relocation of exploration and development activity to China.

Conversely, the Government of China may buy Canadian resource companies simply as a passive investment, which would not alter a company’s operations nor threaten Canadian interests. In macroeconomic terms, the public sector functions as an “automatic stabilizer.” If a drop in aggregate demand slows the economy, social-welfare spending will naturally rise and tax receipts will naturally fall. The excess of spending over taxes bolsters aggregate demand, mitigating the downturn. Such demand-side management is ineffective against supply-side shocks. In fact, the oil-price spikes of the 1970s helped discredit Keynesian demand management (Pass et al. 2000, 23, 294-295).

Ownership of resource companies could conceivably function as an automatic stabilizer against supply shocks. Rising resource prices would decrease the profits of Chinese industrial firms, but increase those of Chinese-owned resource firms. The Globe and Mail reports that China is interested in Husky partly because of “the hedge its oil and gas sales offer against rising petroleum prices. With Husky in its control, China could cushion the blow of oil price hikes with rising profits at the Calgary company” (Brethour and McNish 2004: B5).

But if China’s goal were to offset cyclical fluctuations in resource prices, it would not seek to purchase resource companies at a time of peak prices. The Chinese government’s desire to buy makes sense as an investment strategy only if it expects prices to continue rising. It might have formulated such expectations based on projections of future Chinese demand.

Typically, the fact that higher prices reduce demand limits price increases. But world commodity prices, which are generally set in US dollars, have been able to rise so much partly because the US dollar is falling. Most significantly, “the U. S. dollar’s decline has protected non-dollar importers from the rise in dollar-denominated oil prices” (Mackey and Murphy 2005, B5). In Europe and Japan, for example, demand for resources has not been reduced by the need to pay progressively more American dollars for them.

But the Chinese renminbi (or Yuan) is not rising against the American dollar. Although China runs huge trade surpluses with the United States, the People’s Bank of China (PBOC) uses these earnings to buy American bonds to hold the US dollar up relative to the renminbi. This practice keeps Chinese exports competitive in the American market, sustaining the trade surpluses (Ferguson 2005, 19-20).

Although some suggest that this arrangement is unsustainable, a major devaluation of the US dollar would devalue the massive stock of American securities now held by the PBOC and reduce the appeal of Chinese products to American consumers. As Niall Ferguson explains, “A fall in exports would almost certainly translate into job losses in China at a time when millions of migrants from the countryside are pouring into the country’s manufacturing sector. . . . the PBOC has every reason to carry on printing renminbi to buy dollars” (Ferguson 2005, 19-22). This analysis fits with Breslin’s characterization of Chinese economic policy.

If the appreciation of most currencies relative to the US dollar facilitates rising global demand for resources, and if the Chinese state continues holding the renminbi down relative to the US dollar, the prices paid by China to import resources could increase almost indefinitely. In this context, the Chinese government’s expectation of rising prices and desire to invest in resource companies are well founded.

China presumably also wishes to maintain its sizeable trade surplus with Canada (CAW 2004). Using renminbi to buy major Canadian companies would impose downward pressure on the renminbi relative to the Canadian dollar. Increases and decreases in the Canadian dollar’s value help and hurt Canada’s economy in different ways. The debate about whether Canadians are better served by a strong or weak currency is far beyond this paper’s scope (Stanford 1999; Harris 2000). Other than its effect on exchange rates, a Chinese investment strategy of this sort would not harm Canadian interests.

A final possible explanation is that the Government of China’s desire to purchase Canadian resource companies is driven not by pluralist or material factors, but by institutional ones. The Chinese may simply view state ownership as the institutional arrangement best able to ensure “security of supply.” Indeed, this concern was the Government of Canada’s major rationale for establishing Petro-Canada (Economic Council 1986, 93-100). More broadly, it is plausible that the Chinese government simply “prefers to deal with state-controlled industry” (Brethour 2005, B1). This view is consistent with Breslin’s (2000, 397) description of “the Chinese approach to controlling integration with the global economy.” If China’s interest in Canadian companies is motivated only by such institutional concerns, it poses no threat to Canada’s interests.

How should the Government of Canada address the prospect of Chinese-state ownership of Canadian resource companies? The pluralist framework would tend to emphasize the ability of many different actors to protect Canadian interests, downplaying the need for federal action. For example, provincial governments have the capacity to defend their resource-tax bases against transfer pricing. Although provincial royalty legislation sets royalties as percentages of price, it allows the relevant minister to stipulate the price to which these royalties apply, if he or she suspects a producer of selling resources for below-market prices (Richards and Pratt 1979, 288). But, since provincial royalties are deductible from federal corporate income taxes, aggressively using royalties to defend provincial tax bases would further undermine the federal tax base. Of course, the federal government could then not allow the Chinese-owned company to fully deduct provincial royalties from its corporate tax.

In addition to not protecting any Canadian interests other than public revenue, tax changes specifically targeting Chinese-owned companies could cause diplomatic problems. Since good relations with China are of significant economic value to Canada, such problems would be costly. The perils of an uncoordinated, pluralist response are obvious.

Some groups that normally advocate a pluralist, laissez faire approach to economic policy recognize that pluralism can neither explain the Chinese government’s desire to buy Canadian companies nor adequately respond to this prospect. For example, the Conference Board of Canada (2004, 6) suggests that the federal government modify the Investment Canada Act to “more carefully scrutinize foreign governments . . . when they invest in Canada. Canada could even consider forbidding takeovers by foreign government-controlled firms, or could restrict them to a certain size or a certain percentage of a company’s shares.”

As Industry Minister, David Emerson suggested changes to the Act that could “make it easier to block the proposed Minmetals [Noranda] deal” (Tuck 2004, B2). He has also proposed limiting share ownership: “Chinese-controlled companies that want to buy major Canadian assets such as mining or energy operations should be required to issue shares on Canadian stock markets” (Stueck and Reguly 2005, B1).

However, Canadians would not know the true motives of particular Chinese takeover bids. Blocking or restricting all such bids would protect Canadian interests against takeovers motivated by consumption and economic development, but would also prevent takeovers motivated by investment and institutional considerations, which pose no threat to Canadian interests. The crude approach contemplated by the Conference Board and by Emerson could deprive Canada of the economic benefits that would flow from benign Chinese takeovers. This approach would certainly damage Canada’s relations with China.

Chinese investment in Canada’s energy sector is related to the Gateway Pipeline, which Enbridge and the Chinese government will build across Alberta and British Columbia to a Pacific port to export Canadian oil to China. As long as these exports are not used to depress world oil prices, or sold for less than world prices, this pipeline will be an economic boon to Canada. Exporting oil across the Pacific would help diversify Canada’s trade and reduce its dependence on the US.

In any sector, blocking potential buyers would reduce the value of Canadian assets. The prospect of Chinese takeovers clearly increased the price of Noranda and Husky shares (Stueck and Reguly 2005, B1; Brethour and McNish 2004, B5). When governments privatize public assets, greater restrictions on who may buy them, or on what proportion of shares they may hold, correspond to lower sale prices (Allan 1998). Logically, this dynamic also applies to foreign takeovers of private assets. Unnecessarily restricting Chinese takeovers of Canadian resource companies would unnecessarily lessen the market value of these companies.

If it were known whether or not Chinese investment threatens Canadian interests, either permissive, pluralist policies or crude, materialist policies would be appropriate. In the face of uncertainty, the Government of Canada must develop an institutional framework that defines and protects Canadian interests, whatever the Government of China’s motives. Such institutional change would not require the creation of new institutions. The federal government should focus on reviving latent institutions.

The replacement of the Foreign Investment Review Agency with Investment Canada in 1985 shifted the federal government’s focus from screening foreign investment to promoting it (Eden 1994, 15-17; Hurtig 2002, 12). Although no foreign investment has been rejected under the current Investment Canada Act, the legislation empowers the federal government to review foreign takeovers worth more than $237 million (Conference Board 2004, 1). The major resource companies in question are worth far more.

The CAW (2004) points out that the Government of Canada could use the existing Act to impose “performance requirements” on a Chinese-government firm as a condition of approving its takeover of Canadian assets. Representing the interests of Falconbridge employees, the union advocated requirements that Minmetals maintain and expand the company’s primary-extraction and secondary-processing capacity in Canada. Essentially, the CAW’s proposals would guard Canadian interests against Chinese economic-development motives.

Protecting Canadian interests against Chinese consumption motives would require controls on export pricing, rather than on production location. The National Energy Board Act prevents Canadian oil and gas from being exported without a federal-government licence and empowers the government to prescribe “the price at which or the range of prices within which that oil or gas shall be sold” (Part VI of the Act). Since free-trade agreements exempt the US, Mexico and Chile from the Act’s pricing provisions, and since virtually all of Canada’s energy exports flow to the US, these provisions have fallen into disuse. But proposed oil shipments from Canada to China would be subject to regulation by the National Energy Board. Such regulations could easily be extended to base metals. In fact, Emerson cited “export controls” as a condition that could have been attached to the Chinese government’s proposed takeover of Noranda (Park 2004).

A federal policy of using the Investment Canada and National Energy Board Acts to protect the Canadian interests outlined above would deter Chinese-government takeovers motivated by consumption and/or economic-development considerations, but would not impede those motivated by investment and/or institutional considerations. The use of existing legislation that generally applies to foreign countries would not discriminate against China. As the CAW notes, such rules are similar to “measures which the Chinese government routinely imposes on multinational companies which invest in China.” Exercising the Investment Canada and National Energy Board Acts would impose no more strain on relations with China than would be necessary to safeguard important Canadian interests.

Protecting economic activity and jobs by regulating production could conflict with protecting tax bases by regulating price. Requiring that certain facilities be maintained or expanded in Canada may increase the Chinese-owned firm’s costs, thereby reducing its taxable profits. However, the notion that production and processing requirements reduce the public-revenue potential of resource exploitation is not a new challenge, but an established concept in resource policy (Gunton and Richards 1987).

The prospect of Chinese-government investment in Canada’s resource sector poses a new policy challenge that alters the traditional debate about foreign ownership. Canadian decision-makers should critically assess China’s interest in buying Canadian resource companies, rather than blindly promoting it in pursuit of increased foreign investment and international trade. Chinese takeovers motivated by consumption and/or economic-development considerations would harm Canadians, whereas those motivated by investment and/or institutional considerations would not. In the current era of trade and investment liberalization, the Investment Canada Act and the National Energy Board Act have fallen into disuse. Rather than forgoing the possible benefits of benign takeovers by impeding Chinese-state acquisitions, the federal government should revive the institutional framework associated with these Acts to protect Canadian interests. Such a policy would impose no unnecessary strain on Canada’s relationship with China.


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