Aussies Are Coming! Of Potash and Protectionism (Print Version)
by Adam Allouba*
Le Québécois Libre, November
15, 2010, No 283.
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
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
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
Foreign ownership of the Canadian
economy has held steady at about 30% since the late 1990s.
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,
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]
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?
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
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
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.