Trudeau Clip: There’s an opportunity for investments from China into Canada.
BC Legislature Clip: Today the innovation minister was forced to stand in this house and acknowledge that he misled when he said that the company he’s selling our BC retirement homes to was Canadian. It is going to be under Chinese ownership.
Jordan: You could be forgiven if you missed some of the stories that inspired today’s episode.
I mean, look, it’s my job to be tuned into all the big stories and I know I miss them. The fact that moves like this one, don’t register on most of our radars might be a problem. Right now, obviously, Canadian businesses are suffering. Not all of them are going to make it through COVID 19. And that makes some of them a tasty target for foreign buyers who are looking to acquire assets in a stable and relatively prosperous country.
And in some cases, those investments are badly needed. In other cases though, especially when the purchasing company has direct ties to a foreign government, there are real security concerns. I mean, why would a foreign government have interest in owning a failing Canadian business? So much interest that they are willing to pay more than anybody else.
What kinds of risks do we take on, when we allow Canadian companies to come under control of state owned businesses? How can Canada’s government balance the need for foreign investment, especially during an unprecedented economic crisis, with the red flags being waved by our security and intelligence agencies, and also just why don’t most of us know or care about this?
What part of the big picture is missing here?
I’m Jordan Heath-Rawlings, and this is the big story. Stephanie Carvin is an assistant professor of international affairs at the Norman Paterson school of International Affairs at Carleton university. She also has a book coming out this fall on U of T press, which is called Stand on Guard: Reassessing Threats to Canada’s National Security. Hi, Stephanie.
Jordan: I want you to start, if you can, by explaining a recent deal that kind of put this question in our minds and is why we reached out to you. Can you just tell me a little bit about the Hope Bay goldmine project and what it kind of means for national security in general?
Stephanie: So the Hope Bay gold mine was Canadian controlled. It was being run by TMAC resources incorporated, and it unfortunately, it was unperforming. It’s one of actually three mines that have been unperforming recently, where there’s been some kind of takeover. But this one kind of raised eyebrows because it’s been basically taken over by a company called Shandong Gold Mining company, which I think also goes by SD Gold. And the concern is that this company is considered to be a state-owned enterprise. The Chinese government has a 47% share in this company. And often when you look at the other owners, you can dig down and find that there’s actually probably more links to the state generally. So this seems to be a case of a Chinese state-owned enterprise taking over a Canadian natural resources firm, something that has raised concerns in the past, say in the last 10 years, and seems to be happening even in this COVID era, or perhaps because of it.
Jordan: Why does it raise concerns? I mean, pretend I know nothing. What’s wrong with it?
Stephanie: So this is a really good question. Canada is a small country, right? We’re a country of 37-38 million people, and that means we often need foreign investment in order to grow our economy, right? Especially up North. It’s very expensive to develop things up North. And we know that successive governments have wanted to encourage business up North to try and improve the lives and conditions of people who live there.
But we get concerned when we see a government company or a state owned or even state championed enterprises, coming into the market in order to provide that foreign investment. And sometimes they are the only companies that are interested in providing that financial assistance to get these companies going.
So the first concern is, for a long time we saw the government trying to get out of business. Privatizing various companies. But we’re seeing, despite the Canadian government getting out of these businesses, we’re seeing other governments take their place. And this is something that actually Stephen Harper warned about in 2012/2013. Canada has spent a long time trying to privatize its industry, but not in such a way that we want foreign governments coming in and taking over those businesses instead.
So, this is something that we’ve worried about for some time. And part of the reason that these state owned enterprises are problematic is that we often don’t understand what they are trying to do. Take a normal company, McDonald’s, any other company: you know, that they’re trying to make money. That’s what they do. But with state owned enterprises, is there some kind of geopolitical or geoeconomic objective that they have in mind, particularly in the natural resources sector, that we have to maybe be concerned about? Are they trying to strategically place themselves in such a way that they have control over a Canadian resource in a way that perhaps maybe Canadians or the Canadian government would be uncomfortable with?
Jordan: Do we have any examples of that happening that we can look at and say, ‘yeah, this was a mistake’. We shouldn’t have gone down that path.
Stephanie: So a really good example of this would probably be Nexen, that people would point to. Nexen is of course an oil company. It’s out in Alberta. And in 2012, it was kind of putting itself on the market, and it was taken over by CNOOC, which is a Chinese state owned enterprise, a petroleum company. And there was some concern that, do we actually, again, want these kinds of government owned enterprises owning these businesses? And it paid well over the market price in order to get access to Nexen. And although there was some national security concerns that were raised at the time, eventually the Harper government did let it go through. But a lot of the promises that were made as a part of the deal really haven’t gone very well. The business hasn’t been as profitable as was hoped.
There’s been some safety issues, some accidents with regards to Nexen owned critical infrastructure. And even recently we’ve seen a number of layoffs. There’s so many layoffs in that industry anyways. My heart goes out to the oil workers, but it really just hasn’t performed as well as hoped.
And this is one of the concerns that I think has often been raised, is that state owned enterprises can’t fail. They are backed by the state. They are not subject to the same pressures as a normal company. Again, going back to McDonald’s. You can’t fail if you can always turn to your home government and get a bunch of loans, get a bunch of deals, favourable conditions to keep going.
And that means you don’t have to operate competitively. And that’s not good for our economy. It’s not good for our businesses. So I think the Nexen example is an interesting one that we can hold up. It just really hasn’t delivered in a way that was hoped for originally, and again, it’s still not clear why that takeover actually happened in the first place.
Jordan: That was kind of going to be my next question. From China’s perspective, what do they get out of this? They overpay for a business that underperforms, to what end?
Stephanie: Well this is just it. We don’t know. And we have seen in a number of reports by our security intelligence service as the Canadian security intelligence service or CSIS, they’ve often put in their public reports that their concern is that a lot of these state owned enterprises or state championed enterprises, we don’t know what their eventual aims are.
Do they have particularly geoeconomic purposes that we don’t necessarily know or understand? It’s all very opaque. And this is a concern because it’s not that China is buying our gold or buying our oil, and I don’t think anyone would have a problem with that. I think the concern is they don’t just want to own the gold, they want to own the mine. They want to own the roads that get the mines to the ports, which they also want to own, and then ship it to China. So they kind of want control over the whole process.
And again, there’s some concerns here about what is the ends to which you’re eventually aiming? Are you going to employ Canadians? Are you going to bring in your own labor force? Is this going to be good for the Canadian economy? And so I think this is the difficulty. It kind of gets back to this whole thing that we need foreign investment to actually exploit our natural resources, particularly in the North.
But the companies that are best placed to do so, are ones where we don’t maybe understand everything that they are up to and to what ends that they are actually serving the states which in some cases own them, or that they perhaps are under the control of.
Jordan: So far the examples we’ve used have all been cases in which China was the investor. And I’m sure we’re probably going to talk about Huawei in a minute too, but are there any other nations around the world that are doing this, especially in Canada?
Stephanie: There have been concerns raised, I think about Russia, especially with regards to telecommunications. We hear a lot about, say for example, Huawei and spying, and we can talk about that. But also you worry about, say a country like Russia for example, would they try to invest in a telecommunications company, perhaps with the view that they would also try to serve Russian state ends in terms of spying or espionage, that could be a real problem. And Russia, like China in a lot of ways, has laws that require it’s telecommunications companies to actually help the state in its investigations.
So that’s also a concern for sure. So it’s not just China, it’s authoritarian states, that might be trying to gain access to Canadian critical infrastructure to serve their own ends. Whether it is to control the infrastructure itself or whether it is to get access to information or perhaps even intellectual property, which they can then use and buy at what they may see as a bargain, and then bring back to their own countries and then manufacture at a much cheaper level. Therefore undermining Canadian industry.
Jordan: I guess on the flip side of that question then, is Canada alone as a target? Is it a particularly good target? Why are we seeing this so much here?
Stephanie: So we are not alone. That’s a very interesting point. We have seen Chinese state-owned enterprises getting involved in Europe in particular, buying up technical companies in Germany, a lot for the purpose of getting access to that intellectual property that they can then bring back to China. And so they can manufacture particular high tech industry items there. So Canada is not alone in it. And it’s interesting. I have the opportunity sometime to meet with European embassies and they look to Canada actually to see how we’re handling it.
They’re curious as to what our policies are because they’re dealing with these issues as well. This is not just a Canadian issue. And so sometimes I actually have to scratch my head and I think, why aren’t Western companies cooperating on these issues more, with regards to how we deal with state owned enterprises, state championed to enterprises?
It’s definitely true that some European companies have their own investment firms. If you think of Norway, for example, it has a very large state owned investment firm. But we don’t worry about countries like Norway because they’re relatively transparent. We can kind of expect that they can adhere to the rule of law, or would at least respect Canadian law.
But with a country like China, or even perhaps Russia, that’s not a guarantee. So no, Canada’s not alone in doing this. I think that what we are seeing is that these state owned enterprises are taking advantage of the fact that we are so desperate for foreign investment to exploit our natural resources.
And so that particular sector is important. But for the sake of ‘is this just a Canadian problem?’ Absolutely not.
Jordan: Can you maybe walk me through the X’s and O’s, because I’m not familiar with these kind of deals at all, of what actually happens when one of these takeovers goes down and in particular, where do our rules and regulations in government come into play. What takes a look at these?
Stephanie: So the framework that we use to deal with state owned enterprises in foreign investment generally, is something called the Investment Canada Act.
And the origins of this act actually kind of interesting. In Canada, we’ve always needed for an investment, but in some ways we’ve always been afraid of it too. And if you think back to the 1970s ,1980s, we often used to hear concerns about the branch plant economy. That Canada would just somehow be the branch plant economy of the United States.
And as a result, Pierre Trudeau passed something called the Foreign Investment Review Act in 1974. And under this act, all new foreign acquisitions, establishment of businesses in Canada, required some kind of review and they had to demonstrate that there was a significant benefit to Canada. Moving ahead to the 1980s, you have Brian Mulroney come in, and he feels that no, actually foreign investment is a good thing.
So he turns the Foreign Investment Review Act, or FIRA, into the Investment Canada Act in 1985. And the significant benefit test, so proving that you really have to improve the Canadian economy, comes down to a net benefit test, so basically making it easier for foreign companies to come in.
And what was important about that, is that for the first few years there was no distinction between a state owned enterprise and a private company, which is kind of interesting given that Brian Mulrooney was really trying to promote a free market economy in Canada. But you know we have this framework, and it was really going well, it was in place.
But as we started seeing some of these state owned enterprises coming into Canada, particularly from China, it got modified by the Harper government a few times. The first was in 2009, where basically if there is reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security, the government can review an investment in a Canadian business by any non-Canadian. As we started seeing more companies being taken over by state owned enterprises, really the Nexen takeover was a bit of a breaking point. It also stood out to simply because it was so large relative to other investments.
So we did see the Harper government move in 2012, to actually increase the amount of security around foreign investments. And really that’s been in place since 2012 and we’ve been trying to kind of tinker with the details surrounding that.
Jordan: And how often does a really thorough review take place.
Stephanie: In reality, every single investment in Canada is subject to not just a net benefit test so that it would actually benefit our economy, but also a national security review.
Now, not everything goes for an enhanced review. Some of the more sensitive investments in Canada actually go through that process. I’m sure we’re all familiar with Huawei, which has just been going on for years at this point. But basically, it does happen with a fair number of companies that are being taken over by state owned enterprises.
Your listeners may be familiar with the Aecon takeover or attempt to take over. There was a Chinese state owned enterprise that tried to take over a major Canadian construction firm, one that’s heavily involved in major Canadian infrastructure projects, and the government eventually said, ‘no, that’s not okay’.
There was a satellite firm, however, that was producing some satellites, there was concerns that, would this actually give China sensitive military technology? But the Trudeau government let that one go through, just before that. So there’s quite a few of these cases. Some of them do become high profile, and it’s not always clear on the grounds which they are accepted and not accepted.
That’s deliberate. Because the government doesn’t want for potential foreign adversaries who want to control Canadian infrastructure or get access to a sensitive resource to know what those lines are, in order to perhaps try and sneak around them.
Jordan: So is Huawei then, this case that’s been under review for quite some time, and with the decision on Meng Wanzhou, is this the big litmus test for what’s going to happen to these kinds of things going forward? Like how big is this compared to all the rest?
Stephanie: Huawei is big because it has become such a geopolitical concern and you know, it’s interesting. It’s, again, it’s not just Canada that’s struggling with Huawei.
We have seen this in many countries and there are a lot of European countries in particular who are asking what Canada is going to do, because they know of our relationship with the United States, and some of the concerns that have been expressed there. But also how we’re going to balance concerns about security with our desire to have affordable telecommunications equipment, in the country generally.
So I think Huawei is actually the first of what is going to come in the future. This problem isn’t going to be going away anytime soon. We have seen, I would say, even more concern about foreign investment ever since the pandemic broke out. And in April of this year, the government actually announced even more scrutiny of foreign investments because they’re concerned that the Chinese state owned enterprises in particular, but even other authoritarians states, might try to take advantage of a weakened Canadian economy and poor environment for foreign investment to try and take over these companies in ways that we wouldn’t necessarily want them to. So there’s going to be even more enhanced scrutiny.
And interestingly, one of the issues identified was actually the health sector. Which has not traditionally been a national security concern, but now there’s concern that because everyone needs PPE, that everyone is trying to develop a vaccine that technologies that are being developed to actually fight this virus could be taken over by adversarial states and used in ways that perhaps we wouldn’t want to, or that would eventually disadvantage Canadians.
So it’s kind of interesting on how our understanding of national security and its relationship to the economy, is constantly changing based on global events.
Jordan: Well I feel like we never get through any of these episodes these days without asking how COVID-19 has impacted whatever we’re talking about.
And I guess I kind of expected it to play into this, but maybe not nearly that much.
Stephanie: I think that’s right. Again, if you had told me six months ago that the health sector would be securitized in this kind of way, I would have probably raised an eyebrow at you at the very least. The thing is, we need foreign investment. We can’t just say no to all foreign investment. And that includes foreign investment for China. And for a long time I think we probably would have said, well, the health sector is probably one area where we can actually use for an investment and not worry too much about it because PPE is not a satellite, it’s not a telecommunications network. It’s pretty easy for foreign governments to invest in this and not worry about it. But suddenly we’re in a different situation. And we’re having to securitize these kinds of things. So this is the problem, is that how do you balance our need for foreign investment with an understanding of national security generally.
And can we be nimble enough to make these decisions in time and in such a way that we can still hopefully have some kind of economy when this is hopefully over sometime in the next couple of months or years? And this is a real challenge. I think that the use of economic tools and how that relates to national security is going to be one of the most significant challenges that Canada faces in the next 10 years.
We don’t really have good strategies for this because our mantra for the past 40 years has been, let’s get the government out of the economy. We don’t want the government to interfere in the economy. Business knows best. But suddenly we’re realizing that actually national security has a role in the economy, but we haven’t really spent a lot of time trying to figure out what that is and asking some of the hard questions on, ‘when do we say yes? When do we say no and why?’ And can we develop nimble processes that will help us actually get through some of these difficult decisions in such a way that allows us to thrive, but at the same time protects some of our sensitive needs? Particularly in an age where we may see more global rivalry. So this is really, I think, a key challenge for Canada going forward.
And it’s not clear to me that, especially as we’re all distracted by this pandemic, that we’ve really put a lot of thought into how we need our national security to engage with the economy.
Jordan: How would you like to see that happen?
Stephanie: That’s a really good question. I think that, and I say this as someone who is definitely not an economist, but I think what we need to do is start doing more outreach.
And what’s interesting is that the Canadian Security Intelligence Service, in its annual report which was released last week, basically indicated that it now sees its role as doing more outreach and explaining to companies why that great investment deal might not be so great, and why that partnership where they give up or share their intellectual property might not be the best strategic move for them, even if it seems like a good idea in the short term.
So I think a lot more conversations have to take place. Security agencies are not very good at reaching out to businesses or sometimes they sit on intelligence mountain and they don’t really have a tradition of engaging or advising a private industry for example, on some of the threats that are out there.
So I think the first step, and we’re starting to see this now, is having our security services sit down with industry and at least explaining from their point of view why some of this behaviour by state owned enterprises might just be problematic for the Canadian economy.
Jordan: It’s nice to see the first step being taken at least.
Stephanie: Well, it’s one of the first baby steps. But again, the challenge really is, it’s easy for me to sit here in my basement on a hot day here in Ottawa and say that we need to worry about foreign investment, particularly in the North. But if I’m an indigenous person looking for a job in Nunavut, my concerns are very different.
My concerns are probably right now making sure I have food on the table and having good jobs, and developing my local economy. So this is a huge conversation also needs to take place place. How can we have this more security aware economy while also ensuring that firms that are up North can actually get the foreign investment that they need.
Because frankly, a lot of that investment is probably going to come from China.
Jordan: Stephanie, thank you for teaching me a lot about this. I feel like I learned a ton.
Stephanie: Thank you very much. It’s been a pleasure.
Jordan: Stephanie Carvin of the Norman Paterson School of International Affairs at Carleton university. You can find her book this fall. It’s called Stand on Guard: Reassessing Threats to Canada’s National Security. That was The Big Story. If you want more big stories, they are at thebigstorypodcast.ca and we are at @thebigstoryfpn on Twitter.
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Me and Claire read every single one. Speaking of Claire, she’s the lead producer for the big story. Her name is Claire Brassard. Ryan Clarke and Stefanie Phillips are our associate producers, Annalise Nielsen is our digital editor. Joseph Fish is our research assistant, and I am Jordan Heath-Rawlings. Thanks for listening.
Have a great weekend. We’ll talk Monday.
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