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Inside Ottawa’s decision on foreign takeovers

Prime Minister Stephen Harper leaves after a news conference on Parliament Hill Friday regarding rules on foreign investment.

CHRIS WATTIE/REUTERS

When Ottawa crafted its tough new rules on takeovers by foreign state-owned enterprises, it had one thing in mind: giving Canada more leverage in its relationship with China.

Senior federal government officials told The Globe and Mail that Prime Minister Stephen Harper has been increasingly concerned with how Canada might gain more bargaining power to open up markets for Canadian companies in China.

The Conservatives, they say, feel that the two-way investment relationship is overwhelmingly in Beijing's favour right now.

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Senior officials say the federal government wants more reciprocal benefits for Canadian investors in the Asian market of one billion people. They say Canada's foreign-investment review process has been too formulaic and affords Ottawa insufficient international clout to demand better treatment abroad.

As an open-market economy with relatively few restrictions on foreign investment – save for a handful of key sectors – Canada has few levers for trying to gain equal access for its companies in China, where the state can still frustrate North American investors' efforts to gain a foothold.

The Harper government considers it essential, senior officials insist, that Canada gain more advantage in this relationship. The Chinese by virtue of tremendous state influence in their economy, have significant bargaining power, while Canada, Ottawa feels, is left with little influence.

By declaring that it has no intention of allowing foreign state-owned firms to lock up control of Canada's oil sands – and toughening up scrutiny of investments by these entities across the rest of the country's economy, Ottawa is giving itself more discretion to reject or approve future transactions by Chinese government-controlled companies.

China is hungry for foreign resources and technology, and Ottawa is betting that works in Canada's favour because firms are still beating a path to its door. Business experts have forecast that Chinese firms will be looking to invest $1-trillion to $2-trillion abroad in the next decade – and significant portions of this will be in the hands of state-owned firms, given their prevalence in the Asian economy.

The challenge to China will be that, if it wants to keep pouring money into Canada, it must remove barriers that prevent Canadian companies from cracking the Chinese market.

Government insiders familiar with Friday's announcement say Mr. Harper is not planning tit-for-tat horse-trading on every investment. But they insist that as Chinese investment grows in Canada, Ottawa will expect to see Canadian investors afforded more opportunities in China. Canada expects Friday's announcement will anger Beijing, senior officials say.

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The Canadian government anticipates the Chinese government will push back hard, and the senior officials say Ottawa is prepared to ride out a backlash.

The betting among officials familiar with Friday's announcement is that the Chinese will eventually accept the new Canadian policy and come to appreciate what Ottawa is trying to accomplish.

The Canadian government is taking this route because it cannot, under law, insist on strict reciprocity between China and Canada. That is, it cannot overtly demand, for example, that Beijing grant Canadian banks the approvals they need to gain market share in China.

But the new discretion allows Canada to conduct itself as if it does have bargaining power or leeway as it scrutinizes future foreign state-owned takeovers across the economy. In a related move on Friday, Ottawa gave itself the power to extend the time necessary to review foreign takeovers for national-security implications.

Ottawa has not outlawed future investment by Chinese state-owned companies in the oil sands, senior officials noted, but only signalled that Canada will not allow Beijing to buy the four or five largest companies that mine the tarry bitumen.

The Harper government has had a complicated relationship with China since it took office. In 2006, the Prime Minister said he would not "sell out" human rights in search of improving trade relations. However, over time, the Conservatives have grown increasingly concerned about expanding two-way investment and commerce with the Asian giant.

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As of the end of 2011, Canadian direct investment in China was valued at nearly $4.5-billion, according to the Department of Foreign Affairs. Chinese foreign direct investment in Canada was $10.9-billion.

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About the Author
Parliamentary reporter

Steven Chase has covered federal politics in Ottawa for The Globe since mid-2001, arriving there a few months before 9/11. He previously worked in the paper's Vancouver and Calgary bureaus. Prior to that, he reported on Alberta politics for the Calgary Herald and the Calgary Sun, and on national issues for Alberta Report. More

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