In Search of a Canadian Economy

An interview with Herb Gray, Canada's, Industry, Trade and Commerce Minister
After being out of power only a year, Canada's Liberal Party, led by Prime Minister Pierre Trudeau, returned to office in February, 1980 with the future of the Canadian economy foremost on the agenda. In their first eight months in office, the Liberals have set out to tighten the control on multinational corporations investing in Canada. At the same time, Trudeau and his government have struggled to hold together an increasingly fragile Canadian federation, which threatens to snap apart crisply on economic lines.
Among Western industrialized countries, Canada earns the distinction of being the country most penetrated by foreign multinationals; 54 percent of its manufacturing sector and 75 percent of its energy industry are foreign owned. The United States dominates the economy, accounting for 80 percent of all foreign direct investment in Canada-about U.S.$37.6 billion worth.
Canada's economy divides regionally: Ontario is the manufacturing center; Alberta, Saskatchewan, and British Columbia possess the natural resources. These differing economic bases lie at the center of the current constitutional crisis. Ottawa, with the backing of Ontario, wants a more centralized, unified Canada. The western provincial governments, anxious to maintain control over the exploitation of their natural resources, angrily dispute any attempts by the federal government to increase its power in the economic field.
This month, Multinational Monitor interviewed Herb Gray, Canada's Minister of Industry, Trade, and Commerce. Gray holds what is arguably the most critical portfolio in the Cabinet. He is responsible for proposing and enforcing policy toward foreign investors, and playing a lead role in shaping the Liberal party's position on the constitutional question.
For 10 years, Herb Gray has been at the forefront of economic nationalism in Canada. Serving as Minister of Consumer and Corporate Affairs for the Liberal government in the early 1970's, Gray was the author of the first comprehensive government study on foreign direct investment in the country. His findings, published in 1972 and popularly known as the Gray Report, led to the establishment in 1974 of the Foreign Investment Review Agency (FIRA). The agency is empowered to acceptor reject foreign bids to takeover Canadian firms or to form new businesses. Since 1978, Gray has strongly urged an expansion of FIRA's powers.

The Monitor's Jonathan Ratner and Matthew Rothschild interviewed Gray by telephone on October 27, the day before the Liberals announced their new energy program and revealed their budget plans-both of which contained messages of growing economic nationalism.

MULTINATIONAL MONITOR: The Liberals returned to power in February amidst promises to strengthen the Foreign Investment Review Agency (FIRA) in three ways- by publicizing takeover bids prior to approval in order to encourage Canadian competitors; by periodically reviewing foreign-controlled subsidiaries' efforts in the export promotion and research and development areas; and by granting loan' guarantees to Canadian firms. None of these three items appear to be in the works for this fall. And statistics of approval ratings for FIRA applications-94 percent approval of new ventures, 85 percent for acquisitions-suggest that FIRA under your leadership has not been strengthened significantly. Are you satisfied with FIRA's record during the past eight months?

HERB GRAY: The three measures you mention require legislative change and detailed legislative proposals are before Cabinet. I expect that measures in those areas will be before Parliament early in the new year, which is our original schedule. As far as whether or not the approval rates have changed, bear in mind that the purpose of FIRA is not simply to accept or reject proposals in the foreign investment areas covered by the agency, but also to improve the quality of new investments, to improve the benefits to Canada. The actual approval rates themselves do not necessarily indicate FIRA's performance.

MONITOR: Could you give us an idea of a particular proposal or venture that has been treated differently by your government?

GRAY: Well, the secrecy with which the act is presently administered gives me some difficulty in doing that. This lack of public discussion is an area I hope to change as part of our overall legislative updating of the act.

MONITOR: What are the prospects for the new FIRA proposals? We have heard mixed reports about how they were received by the Cabinet.

GRAY: The proposals were presented to Cabinet, but we have decided that the major priority has to be given to three other items: the new constitutional proposals, the new budget, and the comprehensive energy policy. We are focusing on these three this fall, although discussions have been under way on FIRA matters. Bear in mind that the three proposals you mentioned were not simply presented during the campaign, but were put forward in the Speech from the Throne setting out the government's program in this new session.

The proposals confirm what you mention: we are talking about performance reviews for the larger subsidiaries operating in the country.

With respect to assistance to Canadian firms that wish to provide alternatives to takeover bids by foreign firms or take advantage of opportunities to repatriate foreign assets, the exact form of financial assistance wasn't spelled out in the Throne speech, but it's likely to be in the loan guarantee area.

MONITOR: Even if FIRA's mandate is strengthened in the ways suggested, what sorts of enforcement tools do you expect it will be possible to muster to put some teeth into the guidelines? In a recent Business Week article, you were quoted as saying that, "One approach would be the filing of information by the companies periodically, and discussions between the companies and the government as to the way they are operating . . . " Is there anything more than jawboning that can be done?

GRAY: Well, there's more that can be done, but our approach with respect to performance reviews would be essentially to rely on the impact of the discussions on public opinion in responding to the published results of these reviews.

Performance reviews are a new concept here; we're talking of, say, jawboning, although the results of these reviews could well be a basis for further policy initiatives by government.

MONITOR: Several other sorts of enforcement mechanisms have been suggested. The Canadian Science Council has been a strong backer of the more strategic use of government purchasing policies. The New Democratic Party has gone as far, in the case of some of their plant closings proposals, to suggest the concept of expropriation of foreign assets without compensation. Could you comment on these two strategies?

GRAY: Plant closings are a matter that come, with very limited exceptions, under provincial jurisdiction. Only a very small segment of the labor force-about 10 percent-comes under federal jurisdiction in labor relations matters, so we're not talking about something that would come primarily or particularly under federal jurisdiction.

MONITOR: But if your review, say, yielded results that indicated that companies weren't acting as you'd expected them to when you allowed them to operate in Canada or to make acquisitions ...

GRAY:. We're not talking about more direct enforcement methods. The concept of expropriation of company assets is certainly not something we are considering at the federal level.

With respect to government purchasing, we are increasingly interested in using government procurement at the federal level, as an instrument of industrial policy development, and I would think increasingly the performance of companies in Canada will be matters taken into account.

MONITOR: To move on to the obvious number one on the agenda. Canada is in the throes of a general constitutional controversy over the division of power between the provinces and the federal government. How much of Canada's problems in extracting "significant benefit "from foreign investments stem from the economic divisions that exist among the provinces-the barriers to trade and capital flows that tend to fragment the Canadian market, which result in bidding wars in some instances among the provinces for foreign investment?

GRAY: Well, to the extent that there are barriers created by . provinces that inhibit the development of a strong Canadian economic union, it certainly in my view weakens the ability of Canada to compete effectively in world markets, and to the extent that there can be a bidding war in terms of playing one province off against another by multinationals, it certainly-weakens the ability of Canada as a whole-and not only Canada as a whole, but the regions in question-to maximize economic advantage from foreign investment.

But in point of fact, the existence of FIRA since 1974 has provided means of concentrating bargaining power and enhancing the ability of particular provinces to get a fair deal from foreign investment projects. While the provinces are very fully consulted about investment applications, FIRA is "a federal law and applies across Canada. The existence of the law I think certainly has helped to inhibit the possibility of multinationals playing one province off against another, and has given a level of bargaining power which no provinces had until then enjoyed.

MONITOR: Do you see any place, any role at all, for the granting by provinces of preferences or incentives to the residents or companies of their own jurisdictions?

GRAY: I do not believe there should be incentives or preferences which apply to the detriment of other Canadians who may not have lived in the particular areas, but I think there is room for what one might call programs of an affirmative action nature, to help disadvantaged groups or regions of the provinces where the incentives are not linked to whether or not the person seeking them has previously lived in another province. If one wanted to, let's say, help Northern Saskatchewan, I think it's quite acceptable for a province to give incentives to Northern Saskatchewan development, but that wouldn't prevent those incentives from being available to anybody who wanted to locate there.

MONITOR: Where is the current constitutional controversy heading? Prime Minister Trudeau was quoted last year as saying that "We need to retain and strengthen the Canadian common market and not permit provinces increasingly to seek self-sufficiency in this or that product but to consider that it is to the benefit of all Canadians to buy from each other rather than only to buy in one province." Recently, however, your government has withdrawn the clause from the proposed constitution calling for free movement of goods, services, and capital. What does this suggest about how things are shaping up in the battle?

GRAY: Our interests in this have not changed; we have not withdrawn the clause; we've decided to move ahead to finally situate the constitution in Canada. We should deal first with very basic fundamental matters. We think that since we're proceeding unilaterally to situate the constitution in Canada, we would deal with the most fundamental aspects, and when it comes to rights, we think that should be limited to rights pertaining to people, citizens wherever they live. All the other questions of distribution of powers and the others you mentioned should be dealt with as part of the ongoing process of constitutional review and renewal, which will certainly not end with this current measure becoming law.

MONITOR: Of course, the energy question dovetails with the whole constitutional issue, the issue of the provinces versus Ottawa. What is your view as to the ideal balance that could be struck between Ottawa and the provinces on energy and resources? In other words, do you believe the more control the federal government has over resource development and marketing, the greater the prospect of prosperity for Canada as a sovereign nation?

GRAY: I think that there's a role for both the national and provincial governments as regards development, bearing in mind that the scope of the problems connected with the energy situation and the international aspect of it generally, necessitates a very strong lead role for the national government.

MONITOR: The energy-rich provinces of Alberta and British Columbia have vehemently opposed any export tax on natural gas, and also want to allow the price of oil to rise toward the world OPEC price-a move which again puts them at loggerheads with Ottawa. What are the chances for resolution of this battle?

GRAY: We're presenting the first budget of our new government tomorrow night and I don't want to speculate prematurely on any of these things. We continue to believe that energy prices in Canada should be based on -a formula, taking into account costs in Canada of finding and developing ways to market their own resources, not linked with what we consider to be an artificial price set outside our borders on a basis that's not really related to market forces.

MONITOR:. How do you respond to the pundits who are predict inn the secession of the western provinces by the mid-eighties on this question of energy policy? What do you think is the prognosis for the survival of a unified Canada?

GRAY: The prognosis is very positive. No individual area, even those that appear to have great resource wealth prospects, will be able to focus as well on their own, on the world trading environment as they would as part of a larger Canadian national entity. I feel that we'll resolve these various problems and tensions between national and regional interests, which are part of our history, as they are of any federal state, and I'm optimistic they'll be resolved in a way that will be generally satisfactory.

MONITOR: If we could move onto the question of Canadianization of the energy industry. We . are wondering about the potential tensions between the goal of Canadianization of the industry and the other Canadian goal of energy self-sufficiency. U.S. oil executives have been warning that policies to encourage Canadianization may dry up sources of foreign capital and technology that might be particularly necessary in the off-shore -deposits of Hibernia.

GRAY: I don't recall the policies of a similar nature that Britain and Norway imposed had any effect whatsoever in drying up capital and technology from elsewhere, in so far as they were needed to bring about the development of their North Sea resources. In the past 10 years, foreign ownership of assets of Canadian oil and natural gas industries has moved from about 98 percent to 75 percent--a shift of 25 percent, and we want to move that another 25 percent, at least, within the next 10 years. I think it's quite a realistic goal, and a necessary one.

MONITOR: Do you expect that takeovers along the lines of the Pacific-66 acquisition in 1978 will be a major part of the policy, or do you expect it to become largely a question of new investments?

GRAY: Oh, it will be a mixture of , things, a mixture of takeovers, of new investments. It won't happen by any one single instrument. The national oil company, Petrocan, may well. be looking for opportunities for further investment-it's had major acquisitions in recent years, and there, may well be other ones. But that's a matter of negotiations between Canadian Petrocan and the owners of acquisition targets.

MONITOR: If we could ask a question on research and development. One of the intentions of your FIRA proposals is to promote research and development in Canada. Canada spends only 0.9 percent of its GNP annually on R&D;, that is one of the lowest percentages among Western industrial countries. You have said that you are working on "new concepts in the area of research and development. " Would it be possible for you to just outline for us what these concepts are?

GRAY: No, not in detail until they are announced. We already have extensive incentives in the tax system for research and development. There will be a range of new measures in such areas as direct funded programs, government procurements, and performance reviews.

MONITOR: Why has the figure remained so low to this point?

GRAY: Well, that's a good question. There are some who argue that the incentives in our tax system, though they've been upgraded extensively in recent years, still haven't been enough. There are others who argue that the pattern of control of much of our economy militates against decisions to situate more research and development here. We're again examining what the factors may indeed be, and how to deal with them.

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