Montreal, November 15, 2010 • No 283


Adam Allouba is a business lawyer based in Montreal and a graduate of the McGill University Faculty of Law. He also holds a B.A. and an M.A. in political science from McGill.



The Aussies Are Coming!
Of Potash and Protectionism


by Adam Allouba


          On paper, the Investment Canada Act prohibits large-scale investments by foreigners in Canada unless the government is satisfied that they are “likely to be of net benefit to Canada.” In practice, the power to block foreign investment had lain nearly dormant for decades under both Tory and Liberal governments. Ottawa would use this authority as leverage to extract concessions from foreign investors, but by all reports it never simply said no.


          All that changed when Stephen Harper’s Conservatives came to power in 2006. Two years later, the government invoked national security to block an American company’s proposed acquisition of a division of MacDonald, Dettwiler and Associates, designers and builders of the Canadarm and owners of satellite technology supposedly crucial to safeguarding Canadian sovereignty in the Arctic. Having broken new ground in the annals of Canadian protectionism, the Conservative government further buttressed its impressive statist credentials on November 3 of this year by rejecting the proposed takeover of Potash Corporation of Saskatchewan (PCS) by Australian mining giant BHP Billiton.

          The decision came after intense lobbying by Saskatchewan Premier Brad Wall, who warned that the takeover would lead to fewer jobs and higher taxes. Wall adopted a strong nationalist tone, asking, “Do we want to add PotashCorp to that list of once-proud Canadian companies that are now under foreign control?” Wall’s message resonated with both average Canadians and the country’s economic elite.

          Opposition to the sale centered around three arguments, each of which merits further scrutiny. First, it would harm Canada economically. Second, it would cause Canada to lose control over a strategic resource. Third, PCS is a Canadian success story that should not fall into foreign hands.

It’ll Leave Us Poorer

          The economic argument is the most understandable: if foreign takeovers are turning us into a mere “branch office” (as BHP’s former chairman, of all people, referred to us in 2008), shouldn’t the government do something? Fortunately, this argument is an empirical one and if the facts do not support it, we can safely set it aside. Even more fortunately, we have research to help us evaluate the situation.

          One helpful study, published in January 2010, is “Dispelling Canadian Myths about Foreign Direct Investment” by Walid Hejazi of the University of Toronto’s Rotman School of Management. Among Hejazi’s findings:

  • Foreign ownership of the Canadian economy has held steady at about 30% since the late 1990s.

  • Canadian manufacturing-sector workers employed by foreign multinationals earn more than their counterparts at domestic firms.

  • “The presence of foreign affiliates in Canada has positive effects on domestic job growth and, more importantly, contributes to the diffusion of innovation and technology to domestic firms.”

          What about head offices? Isn’t there a “branch-office” phenomenon taking place, whereby foreigners snap up Canadian firms and then relocate the corporate headquarters and all the well-paying jobs that come with them? With apologies to Apple, there’s a study for that, namely, a Statistics Canada paper imaginatively titled, “Head Office Employment in Canada, 1999 to 2005.” What did it determine?

  • Between 1999 and 2005, the number of head offices in Canada rose by 4.2% while their number of head-office employees grew by 11%. Both these increases were due to growth in corporate foreign-controlled headquarters.

  • Changes of control from domestic to foreign ownership resulted in net job creation, while changes from foreign to domestic ownership resulted in net job losses.

  • “Much of the dynamism in Canada’s head office sector actually comes from foreign-controlled firms. The head offices of foreign-controlled firms contributed to all of the gains in the number of head offices over the past 6 years and accounted for 6 out of 10 new jobs created. The effect of foreign takeovers has not been to reduce the number of head offices in Canada nor head office employment. As a result of foreign takeovers, more new head offices were created than lost and employment in head offices was as high after the takeovers had occurred than [sic] before.”

          Let’s also bear in mind that by rejecting a potential acquirer of PCS (and, presumably, any other would-be foreign suitor), Ottawa has reduced demand for PCS shares, which can only push their price down. Indeed, since November 3 those shares have dipped by over 3%, representing a loss of more than $1.3 billion in equity. If Canada develops a protectionist reputation and foreigners become less interested in trying to invest in our economy, there may be similar downward pressure on the value of all Canadian businesses. Devaluing the assets of Canadians hardly seems like a recipe for prosperity.

It’s Ours, All Ours!

          The second objection, that potash is a “strategic resource,” is much less cogent. For one, no one seems to have bothered defining just what a strategic resource is or explained what that designation entails. Is potash important for the global economy? Sure it is. But what about iron? Coal? Uranium? Oil? Lumber? Wheat? Is anything that contributes to human prosperity a strategic resource? If so, the concept seems rather meaningless.

          Assuming that potash is a “strategic resource,” what does that imply? Presumably, BHP’s critics want the state to retain control over who may buy and sell it. If what they want is to make sure that we can keep the potash here in Canada, aren’t they really saying that they want the ability to choke off fertilizer supplies to other countries—which would probably lead to mass starvation? The critics would doubtless be horrified by that suggestion, but just what do they mean by calling potash a strategic resource if not, “we want the government to be able to hoard Canadian potash for Canadians”—with consequently disastrous effects on the global food supply?

"If Canada develops a protectionist reputation and foreigners become less interested in trying to invest in our economy, there may be downward pressure on the value of all Canadian businesses. Devaluing the assets of Canadians hardly seems like a recipe for prosperity."

          In any case, what difference does it make to the state’s authority who owns PCS shares? Even if BHP’s take-over bid was successful, the government could still regulate the potash industry, tax it, impose royalties on it, shut it down, or even nationalize it. The identity of the shareholder(s) of Canada’s largest potash producer would probably not matter to any federal or provincial government hell-bent on asserting control over that sector of the economy.

          The confusion inherent in this line of reasoning is evident in the words of Ralph Goodale, who warned that “one transaction could take away the whole of this strategic resource for good.” Now, as the provincial government itself has pointed out, “By conservative estimates, Saskatchewan could supply world demand at current levels for several hundred years.” Even so, the Liberal Party’s deputy leader is apparently worried that BHP is plotting to cart all that potash to Australia.

We Can’t Sell the Crown Jewels!

          The third objection, that PCS should not be allowed to “fall into” the hands of foreigners, is at best illogical and at worst, offensive.

          For one thing, PCS is already in those nefarious hands. PCS’s top 10 shareholders own over 83 million of its shares, or just over 28% of the total. Of that total, more than 60 million (or 20% of total PCS shares) are held by foreign institutions. So at least one-fifth (and doubtless much more) of PCS is already under foreign control. Not to mention that PCS’s largest equity holder (at over 7%, more than double any other shareholder) is a US-based investment management company. Not to mention, either, that its CEO is an American. So if it’s foreign domination you’re worried about, you’re a bit late to the party.

          For another thing, PCS currently has a board made up of 12 directors. Of those, precisely two are from Saskatchewan. If Premier Wall is truly concerned about foreign control of PCS, why do his concerns only apply to the imaginary line that surrounds Canada and not the one around his own province? Is repatriating profits to Melbourne worse than taking them to Calgary? Is relocating a head office to Sydney worse than moving it to Toronto? If geography is so important, provincial borders should matter just as much as national ones. Then again, why stop with provinces? Shouldn’t Saskatoon be worried that PCS will head down the road to Regina?

          Most fundamentally, isn’t there something disturbing about the notion that “foreignness” is a danger to be feared? After all, a Canadian company could buy PCS and move its headquarters to the US. It could stream its profits to Britain. It could shut down some operations or cut salaries. It could—and would, if it thought it profitable!—pile all of PCS’s assets into a heap and set them on fire. But the possibility of a Canadian doing those things doesn’t seem to worry economic nationalists. Exchange the buyer’s Canadian passport for an Australian one, though, and suddenly we have to man the barricades to defend ourselves against the foreign menace, because God knows what they’ll do once they get their hands on our precious resources.

          Many believers in economic nationalism probably think of themselves as worldly and tolerant, but xenophobia comes in many forms. An irrational fear of foreigners doesn’t necessarily mean that you dislike them personally—sometimes it simply means that you dislike their money. (For an example of irrationality in this debate, see "Just say ‘No’ to Potash deal" by Paul Hellyer, a former defence minister.)

The Story Behind the Story?

          As Thomas Walkom points out in the Toronto Star, one suspects that the main reason behind Brad Wall’s opposition is BHP’s plan to increase potash production and to withdraw from Canpotex, Saskatchewan’s marketing agency for the mineral. These moves would have lowered the price of potash (and, consequently, global food prices), cutting into royalties that represent about 10% of the provincial budget—hence Wall’s warning of higher taxes if the sale proceeded. As for the federal Conservatives, the search for an explanation need go no further than strong Saskatchewanian opposition to the deal combined with the party’s need to keep its hold on 13 of the province’s 14 seats in the House of Commons.

          With all the fuss over economic worries, protectionism, strategic resources and foreign control, we should not forget that the right to sell one’s property is a fundamental component of ownership. Ultimately, there is only one fact relevant to this discussion: PCS belongs to its shareholders. Whether and to whom they sell their shares should be entirely up to them. No one else has the right to interfere with that decision.