OCTOBER 15, 1985 - VOLUME 6 - NUMBER 14
Who Controls Canada?
by Matthew Bregman and Daniel Belle Mare
Canadian Prime Minister Brian Mulroney has said that Canada doesn't get mentioned in Washington, D.C. absent Wayne Gretsky (the great ice hockey player with the Edmunton Oilers) or a good snow storm. This sentiment, however, belies Canada's importance to the United States-Canada is the United States' single largest trading partner.
Although its population and economy are only one tenth the size of the United States', many of Canada's economic dilemmas are, like its geographic area, even bigger than those of its southern neighbor. The Canadian unemployment rate remains at over 11 percent and the national budget deficit, at U.S. $25 billion, is relatively larger than the U.S. budget deficit, equal to over 7 percent of Canada's Gross National Product (GNP) while the U.S. deficit is less than 4.5 percent of the U.S. GNP.
Having developed so close to, and so much later than, the United States, Canada was exceptionally reliant on the richer nation for its capital formation. And, as Jorge Niosi points out in Canadian Multinationals, "the Canadian Market was an easy place for American companies that were ripe for international expansion to get started, as language, geographical proximity, income levels and consumer habits made the Canadian economy a natural extension of the American." Nearly every sector of the Canadian economy quickly came under foreign (usually U.S.) control and has remained there since. Five of the top 10 largest companies in Canada are actually subsidiaries of American corporations. Two of Canada's largest industries-oil and iron ore-as of 1980 were 70 percent foreign controlled. And the manufacturing sector was 48 percent foreign owned, according to the 1985 Financial Post 500.
Foreign control has diminished since the mid 1970's as a result of continental economic shifts and heightened manufacturing in the Third World, but it is still quite high. According to the Financial Post, 32 of the top 100 Canadian corporation were over 50 percent foreign owned, including three of the top five. Many Canadian economists and politicians are disturbed by the high levels of foreign control because research and development, actual production, and capital reinvestment can all occur outside of Canada and therefore benefit only the controlling country. Furthermore, the country from which the parent company originates often attempts to influence Canadian politics. The United States reportedly tried to pressure Canadian subsidiaries of U.S. corporations to comply with the U.S. embargo against Nicaragua. Canada, which provides aid to Nicaragua, refused.
The Progressive Conservative Party, under Prime Minister Brian Mulroney, however, does not see foreign control as a problem. In fact, it is actually taking steps to increase the level of foreign investment in the Canadian economy.
The persistent economic problems that Canada faces, the Conservatives claim, are due for the most part to the isolationist economic policy of former Prime Minister Trudeau and the Liberals, who sought to break away from strong U.S. cultural and economic influence. Both parties seem to agree that maintaining an independent Canadian culture is of major importance, but what actually threatens an "independent" Canada is where the two differ. Trudeau's economic approach to ensure independence was most notably manifested in the Foreign Investment Review Agency (FIRA) of 1974. Any corporation seek ing to invest in Canada had to apply first to FIRA which had the power to deny the application if it found that the corporation would not be of significant benefit to Canada. In this way, Canada could actively weed out detrimental U.S. or other foreign interests.
The oil and gas industry was of special concern to economic nationalists in Canada and warranted separate attention. Canada had a large petroleum supply, with oil revenues climbing from $1.2 billion in 1970 to $11.1 , billion in 1980. Despite sophisticated exploration and development technologies and an abundance of oil, Canada remained vulnerable to the whims of OPEC and the world energy market because of foreign control. In 1979, 17 of the top 25 petroleum companies were more than 50 percent foreign owned and controlled, accounting for 72% of total sales. In that same year, all of the top 6 firms (Imperial Oil, Gulf, Texaco, Shell, Amoco, and Mobil) were foreign controlled.
In 1980, the Canadian government set up the National Energy Program (NEP) with the goal of achieving energy self sufficiency by balancing domestic oil supplies with domestic demand by 1990. More specifically, the NEPs goals were to:
The National Energy Program, a detailed 115 page report, outlined very specific, concrete means for achieving these ends, including price controls, preferred taxation, economic incentive programs, legislation in regard to land acquisition, and conservation programs.
Both U.S. corporations and the U.S. government were unhappy that the Canadian government was attempting to increase Canadian influence in the oil industry. Over the next several months, several bills surfaced in the U.S. Congress aimed at pressuring the Canadian government to rethink its new energy program. Despite such opposition, the NEP was somewhat successful. Domestic ownership increased dramatically and Petro Canada-the Canadian national oil company-became increasingly prosperous.
The conservatives, however, condemned the NEP in both theory and practice for deterring foreign investors and for giving Canada an inhospitable reputation throughout the business world. After his election in September of 1984, Prime Minister Mulroney began actively pursuing renewed liberal trade ties with the United States. He promised to remove FIRA and replace it with the Investment Canada Act so as to attract new foreign capital, especially U.S. investment, to Canada. Foreign investment means foreign capital and that makes for an expanding economy which can only benefit Canada, argued the conservatives.
Pierre Gosselin, the Minister Counselor (Commercial) with the Canadian Embassy in Washington said, "they (the present government) changed the basis on which investment is looked at-from where you have to demonstrate that there is significant benefit to where that is assumed. It is as if you change your legal system from presuming one is guilty to presuming one is innocent." Many of FIRA's supporters, however, would contend that eliminating FIRA is more like eliminating the judicial system altogether. The purpose of FIRA, they claim, was not to deter investment but to insure that it occurred on terms beneficial to Canada, that the potential good points (e.g. employment, domestic investment, tax revenues) were maximized and the potential bad points (plant closings, capital exports, pollution and dependence on foreign research and development) were minimized. Beneficial investment was more than welcome, but FIRA was necessary to determine whether the investment was indeed beneficial to Canada. As Honorable Lloyd Axworthy, a Liberal Member of Parliament, stated, "I think its the quality of foreign investment: are they going to set up a competing hamburger stand, buy up a small firm and take over its technology, or are they going to set up a fairly active, ongoing corporation." FIRA was enacted to deter the former and encourage the latter.
Nevertheless, the agency was criticized by both the left and right. Many people to the left of the Liberal Party considered the agency "toothless" while conservatives condemned it for deterring foreign investment altogether. Both sides site the agency's overall 92 percent approval rate as grounds for criticism. Supporters of FIRA concept argued that such a high approval rate illustrates FIRA's ineffectiveness while the conservatives complained for a different reason. "It approved 92 percent of the cases, but you don't know how many investors didn't come forward because the system was so onerous and so complex that people didn't even enter into the game," said Gosselin.
The Liberals disagreed. "I don't think it was a strong deterrent to investment, but it did require that foreign acquisitions or new investments be able to demonstrate economic value to Canada," said Mr. Axworthy.
FIRA's ability to deter investment, like its ability to control corporate behavior, is immeasurable and therefore open to speculation. Although it had no mechanism to enforce the agreements it reached, it could deny applications until the potential investors outlined an arrangement more beneficial to Canada. And according to a study conducted by the Economic Conference Board, benefits to the Canadian economy were 40 percent better in resubmitted proposals to FIRA. Despite the debate over FIRA's effectiveness, the question of how much foreign control is acceptable or desirable in the Canadian economy remains.
"The present government has decided that the level of foreign ownership is not the problem that it used to be-it has delineated several sectors as being sensitive and that's largely the cultural areas," said Gosselin. "But as far as the rest is concerned, they feel that the economy has reached a point where it can compete successfully with foreign entrepreneurs and therefore would rather let that happen."
The conservatives see deregulation as transcending national boundaries. The increased stability of the Canadian economy will allow the free market to determine the future of Canadian business ownership. In any event, the benefit to Canada is assumed.
To Mr. Axworthy, the solutions are not so simple. Although down since 1975, the level of foreign control is still detrimentally high, and the need to monitor that control remains. The Investment Canada Act, which solicits foreign investment, does not have safeguards to insure that an incoming foreign corporation will act in Canada's best interest.
"By not having the same requirements to prove substantial benefits, then the foreign companies can come in with a free license," warns Mr Axworthy. "If they want to come in, buy up a Canadian company, strip its technology, and take it back home and leave a distributing shell, there's nothing to stop them from doing it."
With the Investment Canada Act and suggestions for unrestricted trade between Canada and the United States, Mulroney's Conservative government seems to be opening the U.S. investment spigot without regard to the potential ramifications.
"The economy should be expanding," says Mr. Axworthy, "but the current administration is going in the opposite direction. By cutbacks and restrictions I think they're setting a stage where public investment will be restricted and Fm afraid its going to lead to higher unemployment."
Regulation to encourage beneficial investment and reinvestment in Canada is essential, argue the Liberals. Offset arrangements, wherein foreign corporations promise to spend a designated amount of money on job creation, domestic research, or other programs beneficial to Canadians, are one possibility to keep consumption on a par with production. The replacement of FIRA with Investment Canada might be, as University of Toronto Economist Mel Watkins suggests, nothing more than an exercise in symbolic politics, announcing-but not causing-the death of an agency which had been growing weaker and weaker for several years. Nevertheless, the onslaught of multinational investment which Mulroney seems to be inviting portends an unfortunate social, political, and economic future for Canada. Acquisitions of control through conglomerate mergers could jeopardize small business survival, economic growth, and diminish consumer and small business influence.
Matthew Bregman, a former intern with the Multinational Monitor, is vice chairperson of the New York Public Interest Research Group. Daniel Belle Mare is a freelance writer currently based in Laval, Quebec.