Post Aecon - The next steps towards a better understanding

    Commentary article by John Gruetzner

    By John Gruetzner on June 13, 2018

    The opinions expressed by authors in this commentary do not necessarily represent the views of the China Institute or the University of Alberta.

     

    The reasons for the Government of Canada to approve or not approve the investment proposed by China Communications Construction in the Aecon Group were complex. The application to invest was denied and now the national debate on Chinese investment is temporarily suspended.

    To prepare for the next Chinese investment controversy it would be prudent for the Government of Canada to develop a  more detailed public domain inbound investment catalogue, as is the case in China, to guide potential investors’ analysis on investment options. Canada also needs to formally explore, at the Parliamentary level, whether the structure used by or the Committee on Foreign Investment in the United States (CFIUS) or an independent Foreign Investment Review Board model used in Australia are better or worse platforms for  objective professionals to balance real economic benefits and national security risks with temporary political forces.

    Country of origin is a factor if the applicant is state owned, but should not be the sole focus of the analysis or discussion.  Even though Investment Canada Act does not fully consider reciprocity it should be part of the weighting in the approval process for all international investments into Canada.

    By law, Chinese investment outside of the country, by both private and state-owned enterprises, requires approval from the National Development Reform Commission, the Ministry of Commerce and the State Administration of Foreign Exchange. In addition, state-owned enterprises (SOEs) require national or provincial level approval from the State-owned Assets Supervision and Administration Commission (SASAC) before making an outbound investment application.

    Proponents of the pro-Chinese investment side of the debate cannot in good faith argue that outbound investment from China is divorced from government decision making. This fact itself does not disqualify state-owned or private sector investment.  In many of the sectors that are important to Canada, such as mining and oil and gas, China’s SOEs have a higher level of regulatory compliance, labour and environmental standards than Chinese citizen’s private sector resource companies do in China. Canada would benefit by opening up green and brownfield investment in the resource sector to SOEs. The off-take of concentrate and energy resources back to China would also help address the structural trade deficit in China’s favor which, as is the case in the United States, if not addressed risks being politicized in Canada.

    Numerous Canadian investments in China over the last 40 years of economic reform have been curtailed by the Minister of Commerce and the National Development and Reform Commission or in some instances restricted by provincial and local government policy to the point of insolvency after the investments are made.

    Not every Chinese investment in Canada will meet the criteria set by the Canadian government under the Investment Canada Act. The Canada-China Foreign Investment Protection Act is quite explicit that investments that have not yet been approved are not covered under the Act.

    Making each investment approval a litmus test of the Canada and China bilateral relationship is counter-productive and should be avoided. The country-to-country and people-to-people relationship is broader, healthier and more complex than one company driven transaction should damage. Canada’s political class should not revert backwards to asking whether or not we should engage China, but should rather reflect on how we can better engage China. To improve Team Canada’s success rate will require further investment and development of more China qualified executives and experts in business, law, economics and national security.

    There will always be aspects of China’s government domestic and international practices that concern Canadians. Important differences are best addressed though the United Nations, bi-lateral diplomacy and people-to-people interaction and not the arena of investment reviews. Delivery of these conditions for transparent environmentally sustainable cross-border business co-operation is important to the well-being of both countries citizens.

    Additional exposure will ideally foster a greater appreciation within China’s diplomatic corps of the important role the Investment Canada Act and the work of the Investment Review Division performs. Decisions made by the Investment Review Division are the equivalent to inbound investment approvals into China granted by the National Development and Reform Commission and the Ministry of Commerce in China.

    For China, to increase investments in Canada will also require greater sharing of experience prior to and post-investment between inbound, but not yet approved, Chinese companies in the private and public sector with private and  SOEs already operating in Canada. Some of these lessons learned by the first group must be transferred to companies that will be making investment applications. SOEs seeking investment approvals should invest more funds in government relations, consider or make investments in Canada’s social capital and undertake objective engagement with the public and media.

    China-based investors must realize that within Canada one should endeavour to walk softly and carry no stick.

    The commercial and legal technical aspects of the application under the Investment Canada Act are similar to the process that China has imposed on international investors since it embarked on its successful ‘open-door strategy’ under Deng Xiaoping. One key difference being that part of Canada’s review is in the public domain which requires scrutiny by Parliament and the public including the media. This forces the seller and buyer in high profile cases to convince the government that a specific investment is in the overall national interest as well as address the needs of other industry stakeholders and the general public. Currently China is moving on the regulatory front to permit its publically traded companies to seek greater levels of international investment. The takeover in 2011 of a Sichuan domiciled publically listed spirits company Shuijingfeng’s by the British firm Diageo is an early example of this future trend.   Therefore, as it is inevitable foreign investment proposals will be debated by China’s netizen and in China’s media the investment environments in terms of the public relations challenges will merge over time. 

    During the Aecon debate the overriding original commercial motivation for the investment was not effectively, in my view, made to the Canadian public. Investment reviews must be graded calculating or improving upon the proposed net commercial benefits and compliance to law.  In some instances it will be more productive to explore with the investor the securing of additional negotiated benefits to make the deals palatable. In the future carving out contracts, technologies or divisions will potentially permit greater flexibility to find the right balance between protecting national security and keeping Canada open to investment will arise.

    In many instances when nation security issues have precedence there will always be information that the Government of Canada considers that is not in public domain.  National security by logic includes economic security. The views of the White House and the State and Commerce Departments during a NAFTA renewal process with Canada and a trade review with China in the United States are a cause for reflection both by China and Canada. These larger strategic goals for all three economies must be factored into China’s goals in Canada and Canada’s response.  Canada and China need to work effectively together but Canada also needs to manage its own respective relationship with the United States. The same applies to Canada’s partnership with the EU as the Canada Europe trade agreement’s impact evolves.

    The political leaders and media, in Canada and China, albeit for different reasons, are increasingly prone to analyze their bilateral relationship in binary or black and white terms. Commercial protectionism punishes the poor and the middle class in both countries. Both business communities thrive best only when Global Affairs Canada and the Ministry of Foreign Affairs in China and their respective Embassies focus on bilateral regulatory constraints and permit private sector focus on the transaction specific obstacles.

    Engagement by both government and private sector organizations requires more in-depth knowledge of each other’s political system, economy and legal system to progress. Greater sophistication and more nuances in the public dialogue are essential to best manage a complex set of bilateral and multilateral global, bilateral and domestic interests. The relationship is not a binary equation of only negative or positive.

    Just as Canada suffers from its own cognitive bias towards China it is equally valid to note that China also suffers from its own cognitive or ideological bias towards Canada.  Bias will not overcome the potential for cross-border trade and investment until both parties focus on the merits of the business case rather than the respective merits of their own philosophy of government.

     

    John Gruetzner is the Managing Director of Intercedent Limited.