Snap Summary, CUSLI Conference Panel 3 – The Great Lakes-St. Lawrence Region in the Era of Global Competition

The Canada-U.S. economic relationship is fundamentally different with the raise of new major economic powers.  And public policies, whether workforce training or deciding how much foreign State-owned industries (read: China) can buy into domestic industries.

The panel participants:

Jim Dickmeyer, U.S. Consul General in Toronto (Chair)

Renato Discenza, C Suite Leader in Private and Public Sector

Kasi V. P. Rao, Kasi Rao Consulting Inc.

P. Kelly Tompkins, Executive Vice President for Legal, Government Affairs and Sustainability, and Chief Legal Officer,  Cliffs Natural Resources and President, Cliffs China

Christopher Smille, Senior Advisor, Government Relations and Public Affairs at Building and Construction Trades Department, AFL-CIO

Douglas Porter, BMO Capital Markets

The Global and Canada-U.S. Economic State of Play:  U.S. Looking Up, Canada Down a Touch, Great Lakes is a Critical Economic Player

Douglas Porter, of BMO Capital Markets, kicked off the panel with a presentation on the state of the global economy.

G&M: "The 2000s were a lost decade for Canadian exports to the United States"

Yes, the a budget dropped in Ottawa.  

But I'm finding Michael Burt's Globe and Mail article a bit more significant to the Canada-U.S. relationship's overall trajectory:

In short, Canada and the United States are becoming less dependent on one another, and, in most cases, China is the X factor. The Conference Board of Canada discusses these trends, their causes and implications in its recently published report, Walking the Silk Road: Understanding Canada’s Changing Trade Patterns.

The most resilient industries in terms of Canada’s share of U.S. imports are generally service industries. A highly educated work force, similar cultures, and a shared language have helped Canadian firms maintain their competitive position in the U.S. market. In contrast, Canada has generally lost the largest market share in manufacturing industries where labour is a major share of total costs, such as furniture manufacturing, printing and textiles. Industry specific issues can be an additional factor, such as the shift in consumer demand for flooring and cabinets away from traditional hardwood products toward those made from bamboo or more exotic hardwoods.

The link above goes to a webinar; if you want to access the actual December 2012 report, go here. 

 A summary of the report and webinar will be up by next Monday.

CNOOC Nexen Bid Part 3: Macleans Talks With Debra Steger

Check out Erica Alini's great Q&A with UOttawa professor, and former trade negotiator for Canada, Debra Steger.

Two main Steger snippets:

Compared to the U.S. and Australia, Canada’s Act, with the two review processes for “net benefit” and “national security,” is confusing and difficult to apply in practice, as in this case involving CNOOC. The “national security” process is also highly non-transparent in that there are no criteria specified for a review and no decisions are ever made public. The U.S. has one test for direct acquisitions: national security, with a list of 12 factors. These are wide-ranging and include: domestic production for national defence requirements, potential effects on U.S. technological leadership in areas affecting national security, potential effects on critical infrastructure in the U.S., long term projection of U.S. requirements for energy and other critical resources and materials. The U.S. approach is more specific, transparent, and integrated than the Investment Canada scheme. The U.S. CFIUS model also requires nine agencies to work together to carry out reviews. This would appear to allow for a broad range of views and better decision making than the Canadian approach in which Industry Canada plays the lead role.

...

My prediction is that the government will allow the investment, albeit with a requirement for undertakings designed to ensure that the resulting business operates in a transparent and commercial manner in accordance with Canadian corporate governance norms and likely to provide net benefit to Canada.

CNOOC's Nexen Bid: North Sea Oil Chinese Concentration? And Waiting for Canada's New 'Net Benefit' Test Parameters

By Keith Edmund White, Editor-in-Chief

If Nexen bid is approved, would China have a worrisome extent of control over Canada's largest North Sea oil field?

Owing to the surge of interest in CUSLINexus's last post on Canada's "net benefit test" and it's impact on CNOOC's takeover bid of the Canadian energy company Nexen, readers may be interested in (1) an update on revisions to Canada's "net benefit" rule and (2) a news exclusive regarding CNOOC's Nexen bid.

What to really watch for in a new Canadian "net benefit" test

WSJ reports on suspicions that changes to Canada's "net benefit" rule test will be very similar to Austrailia's approach.  But huge missing link in the article:  whether Canada adopts an Austrailian-like "net benefit" test or keeps its own, both are basically subjective tests.   The one seemingly change:  the national security review and "net benefit" review may be combined into one process, though if they are run by two different agencies that wouldn't be a huge reform.  

From WSJ:

Charles St-Arnaud, foreign-exchange strategist and economist at Nomura, said in the report that Canada’s new guidelines are likely to mimic Australia’s template in how that resource-rich economy judges foreign investments. The Australian criteria include: national security, which is already incorporated as part of Canada’s foreign-investment review; antitrust issues; the impact on tax revenue; jobs and a possible “fair return” for the local community; and the “character” of the investment, which is a catch-all category that considers the investor’s transparency and corporate structure.

Mr. St-Arnaud noted that Australia has a special provision governing state-owned enterprises, such as Cnooc and Petronas, in which policymakers consider whether the planned investment is of a commercial nature or done for “political or strategic objectives.” Matters that could support a SOE-led takeover in Australia include the investor’s willingness to list shares on the local stock exchange. As it happens, Cnooc promised to do just that when it unveiled its initial bid for Nexen in July.

Nomura’s suggestion that Canada might follow the Australia example comes after a Calgary think tank, the Canadian Defence and Foreign Affairs Institute, warned Ottawa not to follow the path of another resource-rich nation–Mongolia–that scared off international investors when it introduced new foreign investment guidelines last spring.

Instead of obsessing over name-changes to Canada's open ended "net benefit" test, the key is to look at whether (1) the test becomes more objective and (2) if the "net benefit" test and national security review are streamlined into one test, or if fewer federal agencies are responsible for foreign takeover bid reviews.

Would Approving CNOOC's Bid for Nexen Give China to Much North Sea Oil Control? 

And, while Canada is still reviewing the CNOOC bid under its current "net benefit" test, Bloomberg obtained a briefing memo prepared for Prime Minister Harper on the Nexen bid that emphasizes the considerable amount of control China would have over Canada's North Sea oil operations.

Courtesy of iPolitics, but from Bloomberg:

CNOOC Ltd.’s $15.1 billion takeover of Nexen Inc. would give the Chinese company the largest stake of an oil field in the North Sea that “has increasingly influenced” global oil prices, according to a memo sent to Prime Minister Stephen Harper by Canada’s top government worker.

...

It also cites the commitments CNOOC promised at the time, including establishing Calgary as its North and Central American head office, maintaining Nexen’s employment level and management, and enhancing Nexen’s capital spending.

The memo says the bid would mean the Chinese government would own a 16 per cent share of Syncrude, Canada’s biggest oil- sands project in production, with China Petroleum and Chemical Corp., known as Sinopec, owning 9 per cent and CNOOC acquiring Nexen’s 7 per cent.

From previous reports, it still appears the Nexen bid will be approved.  But, as reported in yesterday's Montreal Gazette, Canada has no problem extending (for a third time) the review process, and it's clear Alberta's provincial government wants its voice heard in the "net benefit" review process.

Canada’s Asian Trade Strategy & the Trans-Pacific Partnership

By Thomas H. Au, Staff Writer

Critics concerned that key Canadian interests in intellectual property, pharmaceuticals and agriculture were impaired by ‘sitting out’ of Round 14 of the Trans-Pacific Partnership (TPP) are focused on a relatively insignificant scene within a much larger mural. Rather, the issue is whether the TPP compliments other Canada trade agreements, or if it conflicts with the function and purpose of other bilateral agreements. Only then can we determine whether the TPP is part of a cohesive, beneficial trade strategy in Asia, or a fractured approach that will create confusion for Canadian businesses operating overseas.

First, this piece outlines the calls for a more aggressive Canadian trade strategy in Asia. Second, it discusses the implications of Canada’s lacking a true seat at the TPP negotiating table in Round 14. Third, it addresses other potential bilateral trade agreements with China and Japan. It concludes that the TPP functions as a baseline to expand trade, upon which other more specific trade agreements can be built, such as those with Japan or China.

Calling for a More Aggressive Asian Trade Strategy

In the last six months, there have been increasing calls for Prime Minister Harper to adopt a more aggressive Canadian trade strategy in Asia.[i] The underlying impetus appears to be a perception that “Canada must negotiate solid, ambitious trade agreements...to help replace declining trade with the USA.”[ii] However, individual initiatives, including the TPP and bilateral trade agreements with China and Japan have received harsh criticism from political opponents[iii] and interest groups.[iv] These mixed messages create a challenging political environment where leaders can be faced with what appears to a “no-win” situation in domestic Canadian politics.

Looking Back at TPP Round 14 and Forward to TPP Round 15

Initially, Canada’s so-called “absence” raised the important question of whether it will “lose” by sitting out Round.[v] At the heart of this issue is Canada’s agreement to abide by the texts that have already been negotiated and agreed upon by the nine current TPP members.[vi] However, this absence has not harmed Canadian interests on key issues including intellectual property, pharmaceuticals, and agriculture.

Canada’s “absence” is simply explained by the fact that each negotiating country must first ratify Canada’s participation through their own internal, domestic processes. This process was only completed on October 9, 2012.[vii] Now that Canada has formally joined negotiations, the key is to look forward towards Canadian goals and aspirations for what the TPP should look like in the end.

TPP: A “High Standard” Trade Agreement In Canada’s Interests? 

Some Canadians have raised concerns that not only is the TPP mostly beneficial to the U.S., but that the TPP is redundant in light of other Canadian trade agreements.

First, many consider the U.S. to be the driving force behind the TPP’s most restrictive obligations.[viii] Of the nine countries currently negotiating the TPP, the United States has some of the ‘highest’ levels of regulation across a number of economic sectors. Likewise, the United States is well known for viewing the TPP as a vehicle for a “state-of-the-art” or “high standard” trade agreement.[ix] While not confirmable, the inference that could be drawn is that the United States may attempt to use the TPP either to develop unique “high standards” (think not of NAFTA-2, but more likely something akin to a next generation Paris[x] or Berne Convention[xi] or to conform the rights and obligations available in other nations with those available under existing U.S. law. This has created political friction in Canada. Critics are concerned that participating in a “high standard” agreement means radical changes in Canadian policies, ranging from “drugs [pharmaceuticals], copyright, [to] environmental and public health rules.”[xii]

Second, some dispute that the TPP actually adds any benefit that Canada does not already receive through NAFTA or other bilateral trade agreements (consider Chile and Peru).[xiii] Simply, NAFTA already includes the United States and Mexico, which “make up the lion’s share of the TPP” in terms of market size and trading power.[xiv] This leads to a legitimate question: “How much more free access can yet another [multilateral] free trade agreement provide?[xv]

While the draft texts of the TPP are not public, official statements from the United States do not suggest that any extensive agreements were reached on the issues most pressing for Canadians. For instance, the United States Trade Representative’s press release on the Leesburg Round noted “progress” on issues including market access, customs, rules of origin, technical barriers to trade, sanitary and phytosanitary standards, cross border services, telecommunications and government procurement.[xvi] However, the release only reported a “continued focus” on intellectual property issues.[xvii]

If more extensive agreements had been reached on intellectual property rights, it is likely that these issues would have been listed in the first “progress” or “mov[ing] forward” statements. This suggests that no major agreements were reached regarding intellectual property rights. On the other hand, it is not clear from this statement what types of agreements where reached regarding key Canadian agricultural products, such as dairy, grain, and (loosely defined) lumber. Again, while pharmaceuticals were not directly mentioned, it is unlikely that any significant progress was made on these issues. However, pharmaceutical issues are frequently addressed as a component of intellectual property rights, or even investment or manufacturing (depending on how one wishes to address these issues). This should relieve Canadian concerns, indicating that Canada still has time to make its positions clear and exert significant influence over the outcome of the TPP.

TPP Negotiations: Multilateral, Bilateral, or Other? 

On September 24, 2012, the Office of the USTR held a hearing regarding Canada’s entry into TPP negotiations.[xviii] While seen as a forum for discussing specific interests and objectives,[xix] what is peculiar about the hearing is the official silence from the Canadian government. In fact--during, immediately prior to, and immediately after the 14th Round (as well as the USTR’s public hearing on Canada’s entry into the TPP), there were no official news releases on the subject from Prime Minister Stephen Harper, Foreign Affairs and International Trade Canada (Canadian Ministry), or the Embassy of Canada in Washington, D.C. One would think that participation or comment on these proceedings would give Canada the opportunity to publically advocate for its most important values (for both domestic and international audiences) as well as exert pressure just before Round 15.

In fact, on the eve of Canada’s official joining to the TPP, Ed Fast, the Canadian Minister of International Trade and Minister for the Asia-Pacific Gateway only released a short statement, remarking that “[o]pening new markets and increasing Canadian exports to fast-growing markets throughout the Asia-Pacific region is a key part of our government’s plan to create jobs, growth and long-term prosperity.”[xx]

Canadian Bilateral Trade Agreements with China and Japan 

In Canada’s view, Japan and China are two markets that have remained largely untapped. In 2011, the Canadian-Chinese trade relationship was valued at approximately $46.8 to $65.6 billion USD.[xxi] Similarly, a joint study concluded that a bilateral free trade agreement between Canada and Japan could add $4.4 to $4.9 billion to Japan’s GDP and $3.8 to $9.0 billion to Canada’s GDP.[xxii] While Canada has had a tepid response to Chinese calls to begin a bilateral trade negotiation,[xxiii] Canada and Japan have announced that their first round of negotiations in support of a bilateral trade agreement will commence on Nov. 26, 2012.[xxiv]

---

[i]Don Campbell, Paul Evans & Pierre Lortie, A Coherent Strategy Towards Asia Needed (Sept. 12, 2012), http://www.asiapacific.ca/editorials/canada-asia-viewpoints/editorials/coherent-canadian-strategy-towards-asia-needed.

[ii] Peter Clark, TPP Negotiations Present Far More Questions Than Answer, iPolitics (Oct. 12, 2012) http://www.ipolitics.ca/2012/10/12/peter-clark-tpp-negotiations-present-far-more-questions-than-answers/.

[iii] CTVNews Video, Opposition Grills Harper Over China-Canada Trade Deal,

http://www.theglobeandmail.com/news/news-video/video-opposition-grills-harper-over-china-canada-trade-deal/article4796558/.

[iv] Heather Scoffield, Investment Deal with China Would Leave Canada a Resource Colony: Opponents, Canadian Business (Oct. 30, 2012), http://www.canadianbusiness.com/article/104651--investment-deal-with-china-would-leave-canada-a-resource-colony-opponents; Sheila Harrington, Trade Agreements Costly for Taxpayers, Canada.com (Nov. 2, 2012), http://www.canada.com/Trade+agreements+costly+taxpayers/7487585/story.html.

[v] See, e.g., Inside U.S. Trade, Canada, Mexico To Join TPP Talks In October After Leesburg Round, World Trade Online, August 31, 2012, available at http://insidetrade.com/Inside-Trade-General/Public-Content-World-Trade-Online/canada-mexico-to-join-tpp-talks-in-october-after-leesburg-round/menu-id-896.html.

[vi] CBC News, What Is the Trans-Pacific Partnership? CBC News World, June 20, 2012, available at http://www.cbc.ca/news/world/story/2012/06/20/f-trans-pacific-partnership-explained.html.

[vii] Press Release, Honourable Ed Fast & Foreign Affairs and International Trade Canada (Oct. 9, 2012) available at http://www.international.gc.ca/media_commerce/comm/newscommuniques/2012/10/
09a.aspx?view=d.

[viii] Peter Clark, TPP Negotiations Present Far More Questions Than Answer, iPolitics (Oct. 12, 2012) http://www.ipolitics.ca/2012/10/12/peter-clark-tpp-negotiations-present-far-more-questions-than-answers/ (“The TPP could result in extra-territorial application of U.S. laws, particularly in the Intellectual Property area including criminalization of non-commercial infringement.”).

[ix] See, e.g., USTR, FACT SHEET: The United States in the Trans-Pacific Partnership: Increasing American Exports, Supporting American Jobs, June 19, 2012, available at http://www.ustr.gov/about-us/press-office/fact-sheets/2012/june/us-tpp-increasing-american-exports-supporting-american-jobs; see generally, Banyan, Parners and Rivals, Another Ambitions Trade Agreement Gets Bogged Down, Sept. 22, 2012, http://www.economist.com/node/21563292.
[x] World Intellectual Property Organization, Summary of the Paris Convention for the Protection of Industrial Property (1883), WIPO.int, http://www.wipo.int/treaties/en/ip/paris/summary_paris.html (last visited Nov. 13, 2012). 

[xi] World Intellectual Property Organization, Summary of the Berne Convention for the Protection of Literary and Artistic Works (1886), WIPO.int http://www.wipo.int/treaties/en/ip/berne/summary_berne.html (last visited Nov. 13, 2012).

[xii] Brent Patterson, NEWS: Council Critiques Canada’s Entry into the Trans Pacific Partnership Talks, Council of Canadians, June 20, 2012, available at http://canadians.org/blog/?p=15828; but see UPS, Canada Using Global Trade to Grow Economy, Says UPS COO (June 19, 2012) available at http://pressroom.ups.com/Press+Releases/Archive/2012/Q2/ci.Canada+Using+Global+Trade+to+Grow+Economy,+Says+UPS+COO.print.

[xiii] John Hancock, The Wrong Trade Agreement, Canadian Int’l Council, June 21, 2012, available at http://www.opencanada.org/features/blogs/roundtable/the-wrong-trade-agreement/.

[xiv] Id.

[xv] Id.

[xvi] USTR, Progress Continues in Trans-Pacific Partnership Talks, USTR.gov, Sept. 15, 2012, available at http://www.ustr.gov/node/7751 (emphasis added).

[xvii] Id.

[xviii] USTR, USTR Holds Public Hearing on Canada and the Trans-Pacific Partnership, USTR.gov, Sept. 24, 2012, available at http://www.ustr.gov/about-us/press-office/press-releases/2012/september/USTR-hearing-Canada-TPP.

[xix] See, e.g., John Kelly, Clay Hough Testifies on Canada Joining TPP Talks, IDFA.org, Sept. 26, 2012, http://www.idfa.org/key-issues/category/global-markets/details/7689/.

[xx] Press Release, Canada Formally Joins Trans-Pacific Partnership, Foreign Affairs & International Trade Canada (Oct. 9, 2012), http://www.international.gc.ca/media_commerce/comm/news-communiques/2012/10/09a.aspx?view=d.

[xxi] Economic Partnership Working Group, Canada-Chinese Economic Complementaries Study. 3.4.1, Foreign Affairs & International Trade Canada (Oct. 29, 2012), http://www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/china-chine/study-comp-etude.aspx?view=d#cn-tphp.

[xxii] Randall Palmer, Canada, Japan to Start Trade Talks Next Month, Reuters (Oct. 29, 2012), http://ca.reuters.com/article/domesticNews/idCABRE89S19320121029.

[xxiii] Paul Vieira, Canada Trade Min: Committed to Deeping Trade/Investment Ties with Canada, WSJ (Oct. 1, 2012), http://online.wsj.com/article/BT-CO-20121001-708453.html.

[xxiv] Plamer, supra note 20. 

For a distinctive take on the China-Canada Investment Trade Deal, check out this Rick Mercer Report:

Canada-China Bilateral Investment Treaty: Smart Stepping Stone, or Bad Deal for Canada?

By Keith Edmund White 

Editor-in-Chief

Two reports on iPolitics show the interesting tug-of-war over the policy wisdom of the Canada-China Bilateral Investment Treaty (BIT).  (Note:  These type of treaties are also called Foreign Investment Promotion and Protection Agreements or FIPAs.)  In short, it's clear Canada is not getting an even deal with China on investor protections.  But, in return, Canadian businesses may be rewarded with greater access to the Chinese market in the future.  And in a time where international competition for China is stiff, and the strong role of the Chinese government in the Chinese economy, Canada may (1) have gotten the best deal it could and (2) be effectively playing the trade long-game.

iPolitics brings out Scott Sinclair’s concerns over the Canada-China BIT.  Summed up, Sinclair laments the lack of debate over—let alone public knowledge—the deal.   Here are Sinclair’s concerns, boiled down:

• Not Reciprocal on its Face. The big trade-off?  Performance requirements on foreign investments.  China “can continue to impose conditions on foreign investors, such as requirements to use local suppliers, take local business partners, train local workers and management, and transfer technology.”  Under NAFTA, Canada is already boxed out of this.   The lingering question?  Why would Canada negotiators give China such a considerable gimme? 

• Is investor-state arbitration really an equal benefit to Canadian investors in China and Chinese investors in Canada?  With “the persuasive role…of the Chinese government in all facets of its economy, it would be a brave or foolhardy Canadian investor would invoke investor-state arbitration against the Chinese government.” 

• Chinese investors could take Canadian environmental regulations to arbitration.

• Weaker transparency requirements for arbitration rulings. 

So, the big question:  Why is the Harper government so pumped to push the deal through?   It may be the first step to a bigger deal between Canada and China.  iPolitics gets some great China-Canada BIT context from John Bosariol, one of the authors of a great primer on the deal.   In short, Bosariol talks up just getting China to agree to arbitral tribunals and suggests that the China-Canada BIT could open the door to a larger agreement down-the-road:

In other words, the investment treaty is really just a stepping stone to something larger — potentially dealt with in a free trade agreement — though Minister Fast said on Monday that it’s a little early to start talking about that.

“When that happens, you’ll see that we’ll have an investment chapter in that agreement and that’ll supersede this. But still the principle here that China has opened itself up to being sued in front of an independent arbitral tribunal — I think is a big step for Canada.” 

Unsolicited and perhaps simple insight on trade negotiations with China:   with China’s market is so much bigger, and sought-over by other nations, it seems clear any trade deal—whether on investments only or on bigger trade deals—will always be slightly titled in China’s favor. 

But the DeSmogBlog.com does show the regional aspect of this investment deal in Canadian politics.  Osgoode Law Faculty member Gus Van Harten notes that this deal isn't really designed for Canadian manufacturers (read:  think Ontario and Quebec), but rather for Canadian energy producers (read:  Alberta).  Naturally, the Conservative Party finds its greatest strength in Canada's central region--so it's no surprise that the party's economic growth plan would be pegged to the energy economy, which can often be at odds with pro-manufacturing policies.  From Carol Linnet's excellent series of interviews with Gus Van Harten:

Yes, I mean, it’s pretty clear that the Harper government does not have as its priority support for the established manufacturing sector, and that its higher priority is to get investments into the resource sector to get the resources out of the ground and generate economic activity in that way. It’s not a bad short-term strategy if you want to create some growth, but as a long term strategy it’s not good because it puts too many of our eggs in one basket. And because resource prices are notoriously unreliable, and finally because if the resource extraction activities are owned by foreign companies, then over the long term they will be earning the profits from the exploitation of our resources rather than Canadian companies. (Note:  Emphasis taken from the original posting.)

But, then again, there's another way to look at this.  Canada wants access to China's market.  What does Canada offer China?  Energy.  So Harper is opening the door with the carrot, in hopes of getting a more balanced deal in the future.  Is this the right way to go?  For a middle power like Canada it seems like, overall, yes.  Now on the particulars of the deal, could Canada have gotten a better deal?  Well, that's for a post-Harper government policy book that explores, with the actual decision-makers, the Harper government's trade and economic strategy.  (Shameless plug:  I, for one, would be thrilled to help put together such a work!)

In any case, CUSLI-Nexus gives props to iPolitics and DeSmogBlog.com for bringing some needed attention to the China-Canada BIT/FIPA.

Friday Morning News Wrap

By Keith Edmund White, Editor-in-Chief 

Liberals Can’t ‘Centerize’ Themselves To Victory. Paul Wells at Maclean’s gives some sober advice to a Canadian Liberal Party still on the ropes: 

In fact, if the country’s assorted Liberal parties are in the mood for advice from the “department of easier said than done,” they should waste no more time seeking to present themselves as the middle ground between extremes. Instead they should find some extreme worth defending. What social end is so important that it’s worth taxing to achieve? What fights are worth fighting?

The decline of Liberal parties in Canada produces a kind of optical illusion. The centre isn’t disappearing, it is becoming crowded. Nothing about the Liberal name ensures the endurance of Liberal parties. Loyalty will not save them. Wit and heart will, or nothing will.

Two First Nations Tribes Territorial Dispute May Delay Major Canadian Wind-Energy Project.  The Anishinabek and Batchewana tribes are arguing over their territorial lines, which were set by the Robinson Huron Treaty of 1850. At risk: the 36-turbine, 80 km/~50 mile Bow Lake Wind Farm Project. Check out The Globe and Mail’s report.

Cyber Espionage Part of Doing Energy Business in China? TheStar.com reports on increased Canadian cybersecurity spending, but notes the skepticism of Queen’s University cyber-security expert David Skillicorn. And iPolitics.com reports on espionage as part of doing business in China: 

There are plenty of anecdotal examples of cyberespionage in the energy sector and some consider it part of the business.  

“One of the companies we deal with makes power plants,” said a source familiar with the Canadian energy sector. “They built a power plant in China and all the intellectual property was stolen.”

CNOOC-Nexen Deal In the Greater Canada-China Economic Context.  Conventional wisdom says that the CNOOC-Nexen deal will be approved. But the real story, at least according to Asia Pacific Foundation President and CEO Yuen Pau Woo, is what strings Canada puts on future Chinese acquisitions of Canadian companies. What I find surprising? Woo’s advocacy for ‘smart’ state economic planning in Canada. From The Globe and Mail: 

An opportunity was missed a few years ago when there was a bidding war for Inco. At the end of a convoluted series of offers and counteroffers, two bidders were left standing – Vale of Brazil and Teck Resources of Vancouver. Vale was the much bigger player, and Teck’s offer came as a surprise. Since the acquisition was subject to government review, Ottawa had a chance to weigh in. Support for Teck would have resulted in a much enlarged Canadian company ranking in the top five of global mining giants.

But Vale prevailed, and another Canadian icon went into foreign hands. To be sure, Teck is Canada’s largest diversified mining company and still a global player, but an opportunity for a “national champion” to enter the top tier of mining companies was missed.

The point of this example is not to bemoan foreign ownership but to bring clarity to the goal of building national champions. Blocking foreign investment in and of itself won’t create globally significant Canadian companies. By the same token, a purely hands-off approach to market transactions is no guarantee of success. If this sounds complicated, it’s because economic statecraft is complicated. Beware of those who would boil it down to just a few easy rules. 

Detroit-Windsor Crossing: Harper’s Hard Press & Michigan’s Messy Ballot Battle. The Harper government, in their proposed 2013 budget, is exempting a second-planned bridge crossing between Windsor and Detroit from environmental review. We’ll see if that sticks, or if the NDP or Liberals can make political hay out of it. But, perhaps more importantly, Michigan voters may decide the pace any new international crossing is made—and it’s bringing out colorful local politics. The owner of the Ambassador Bridge, Manuel ‘Matty’ Moroun, is pushing Proposal 6, which—if passed—could create legal hurdles for the planned construction of the Detroit River International Crossing Project. And he seems happy to deal for votes from both ends of the political spectrum.  Will an international bridge crossing be tangled by an unlikely coalition of ballot voters this November?  And how is this issue, unlike the Keystone XL pipeline, not getting any national political attention?  From The Windsor Star:

Critics say Moroun already has a deal in play with the group Americans For Prosperity, buying the group’s support on Proposal 6 by bankrolling its campaign on Proposal 5 — a ballot initiative to limit taxes.

Last week, the Detroit Free Press reported on Moroun bartering with the United Auto Workers for the union’s support on Proposal 6 in exchange for Moroun financially backing Proposal 2 — the union’s ballot initiative on collective bargaining.

Reportedly under pressure, UAW leadership backed away from the deal, with union president Bob King saying the UAW would remain neutral on Proposal 6. 

The UAW’s recent hints of support for Proposal 6 were made all the more embarrassing by the revelation that earlier this summer, King wrote a letter to the U.S. federal government extolling the benefits of a new bridge crossing.

Colbert Talks Declining Arctic Ice, Arctic Resource Race, and Russia's Consecration of the North Pole

Don't believe China wants to be considered a 'near-Arctic' nation?  Check out Colbert's latest Smokin' Pole installment, a running 'news' segment that explores the Arctic resource race, and the silly geo-political nationalism it has inspired.

Oh, and Arctic ice is melting fast.

Key Colbert-esque turn of phrase:  "moo moo gai panning it."

And, yes, Russia really did consecrate the North Pole via a "holy memorial capsule."

Thanks to staff writer Gene Puerta for the catch.  Check out his recent post on the Arctic race.

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The Race for Arctic Resources: American Ambivalence, Russian Rhetoric, and a Canadian Comeback

By Gene Puerta, Staff Writer

The layer of ice that covers the Arctic Circle is melting, causing the nations that border it (Canada, Russia, Norway, Denmark, United States, Iceland, Sweden and Finland; all members of the Arctic Council) to tap the Arctic’s natural resources. But there are other factors at play: For some, this race is partly fueled by national security concerns; and for others, a chance to stake long held territorial claims.  In a race for resources, all of these Arctic nations are doing their best to achieve the pole position by granting companies’ rights in territory already claimed, advancing scientific findings, or by conducting military operations in the Arctic Ocean region. Even China, a nation that does not even border the Arctic, wishes to participate in this race, arguing that the resources under the North Pole are “the inherited wealth of all humankind.”

The race begins. A recent search for “Winning the Arctic Race” on Google (as of 20 September, 2012) offered just over 68 million results.  Upon investigation, this plethora of search results indicates that there is a race for resources under way in the Arctic Ocean and that, depending on the nationality of the information source, Canada is either in the Arctic Race to win it (by annual displays of military strength) or lags behind Russia and the United States.  The articles vary widely on the state of the race for resources in the Arctic, with Der Spiegel (quoting a USCG Admiral) that the United States is dead last in the Arctic race; while other sources like Forbes's Matthew Hubert, think that the U.S. is in a better position than Russia because U.S. oil companies are “sitting pretty” when the time comes for natural resource extraction.  Moreover, various news articles report that even China, a non-Arctic nation, is clamoring for a spot before the starting gun goes off.

According to a 2011 report by the Wall Street Journal, Canada is warming up for an aggressive display of control over the Arctic Circle.  Canada’s Arctic push, propelled by displays of military capability, is feasible only as long as Canada can back up its intent with the considerable financial resources needed to build infrastructure in the Arctic’s remote and challenging environment.  The economic value of the Arctic Circle can be found by companies willing to venture into an area that requires not only a particular technical know-how, but extensive financial investment as well.  Companies that are willing to undertake such investment have a losing track record when it comes to extracting the various non-renewable resources under those cold waters (just ask Russia’s nationally-owned Gazprom or publicly-traded Shell Oil).  But the Arctic's harsh environment, which offers up polar ice caps that shift dramatically with the changing seasons, sheets of ice that drift along with the tides, and extreme operating temperatures, mean the costs of merely preparing to tap the Arctic's energy resources can go into the billions.  And then there are concerns over the region lacking the major seaports necessary to both spur further Arctic development and contain spills similar in scope to Deepwater Horizon (the most recent oil leak off the coast of Louisiana).

US takes the lead and stumbles.  As of September 2012 the current US efforts have been stalled by ice floes, fall whale hunts, and underwater dome repairs.  Shell Oil has invested a total of U.S. $4.5 billion into developing the Chukchi Sea region (just north of Alaska).  Shell's investment in the American Arctic shows that the United States plans to use corporate partners to take the lead in the Arctic race, even though not one drop of oil has been extracted.

The Russian and Canadian long game.  The view of the Russian Foreign Ministry, U.S. oil companies and the expanding domestic American shale oil market may be beating Russian nationally-owned corporations in the Arctic race.  But Russian claims to significant swaths of Arctic territory matter most, in the long run, to the success of Russia’s Arctic strategy. Russia believes that territorial claims are more valuable than a company exerting its economic actions over an area.  Canada seems to be, literally, left out in the cold with regards to its efforts to develop the Arctic’s remote and challenging climate, efforts which require major infrastructure upkeep costs.  But Canada is trying to make up for this through a beefed up military presence, a noticeable omission from a recent Forbes article written by Matthew Hulbert.  Mr. Hulbert concludes that because the big oil corporations (like Italy’s ENI making its presence known north of Norway) and nationally owned companies (owned primarily by China and Russia) are doing their best to position themselves in the Arctic, the U.S. has the gold, Europe the distant silver, and Asia the bronze in the Arctic race.  Russian claims to the Arctic and Russian Tu-95 bomber flights aside, it seems that Russia owning a bigger share of the circle will not be enough for Putin and Co. to compete in the Arctic race.  Though, in the long run, Canada and Russia may actually have the upper hand.  Russia's icebreakers and territorial claims will likely serve as a force multiplier.  And Canada’s increased military presence will protect any investments in their vast territory of Nunavut.

An uncertain Arctic finish.  There are several opinions (stretching back to 2009) that predict that the end result in the Arctic has already been decided:  big Arctic players (the United States, Canada, and Russia) have “agree[d] to disagree” about certain boundaries in the Northwest Passage, while the smaller players (Denmark, Norway, and economically, Russia) stake their continental shelve claims to the United Nation’s Convention on the Law of the Sea:

There is no ‘endgame’ in the Arctic. Cooperation – not conflict – is the more accurate paradigm. With the exception of Hans Island, there are no sovereignty disputes over land in the Arctic. The unresolved differences concern a) coastal state jurisdiction over shipping in the Northwest Passage, b) the delimitation of maritime boundaries in the Barents, Beaufort and Lincoln Seas, and c) the extent to which each of the five Arctic Ocean countries has sovereign rights over the continental shelf more than 200 nautical miles from its shore.

There is no great cause for concern. Canada and the US have “agreed to disagree” over the Northwest Passage while cooperating on maritime surveillance and pollution prevention. They – along with Denmark, Norway and Russia – have also agreed that overlapping continental shelf claims will be resolved according to the rules in the UN Convention on the Law of the Sea.

Canadian resolve pushes forth a militaristic footing.  Does Ottawa have what it takes to secure its Arctic claims?  Canadian Prime Minister Stephen Harper thinks so.  His three day “arctic sovereignty tour” is aimed at quelling any Russian claims in the Arctic Ocean.  And just last month, Canadian Foreign Minister Peter Mackay stated Canada's intent to placed in the Arctic race's pole position:

"There is no question over Canadian sovereignty in the Arctic. We have made that very clear. We have established, a long time ago, that these are Canadian waters and this is Canadian property," said Mackay. The Canadian prime minister's trip, which involves stops in half a dozen communities in Canada's far north, is intended to reinforce Ottawa's claim to more than 1.2 million square kilometers of Arctic seabed.

Prime Minister Harper does not intend to lose the Arctic race; rather, he intends to win the Arctic race by using a three prong approach:  (1) making territorial claims according to the UN Convention on the Law of the Sea, (2) highlighting scientific findings that find Canada’s continental shelf extends far into the Arctic Circle and (3) launching Canadian expeditions such as Operation Nanook.  Since 2010, Canada has been participating in annual “sovereignty operations” such as Operation Nanook in the Arctic to show the international community that Canada has an interest in maintaining control over the Arctic Circle, an interest Ottawa has also expressed by not placing a moratorium on oil exploration.

A lumbering start.  For an area of the world that is literally heating up, the marathon race for Arctic resources is off to a slow start.  With non-renewable energy sources becoming more scarce and subject to hikes due to war, demand, and natural disasters, the Arctic Circle has become a focal point for resource hungry nations.  However, the race for natural resources is not without projected environmental risk.  Furthermore, only the nations that are willing to put forth the considerable military, infrastructure, and other financial investments can hope to win the Arctic resources race.  The Russian and Canadian Arctic strategies seem to rest upon how far their continental shelf extends and how many military operations they can execute until they have the capital necessary to fortify their Arctic infrastructure.  This is especially true of Russia, where companies are either experiencing cost overruns or simply waiting to see how Shell performs north of Alaska.  Despite the setbacks experienced by Shell Oil, the U.S. is currently leading the way, albeit by nary a hair, for not one well has been tapped by the U.S.-based subsidiary in the cold waters of the Northwest Passage. 

CNOOC’s Nexen Bid & “Net Benefit” Test: What the Legal Test Betrays About Canadian Politics and the Harper's Economic Agenda

By Eskor Edem, Staff Writer 

A Chinese state-owned company, CNOOC, wants to take a controlling interest in Canadian energy company Nexen. The hang-up? The bid must satisfy the “net benefit” requirement that Canadian law imposes on all foreign direct investments exceeding C$299 million. Critically, while the “net benefit” test is—on paper—a six-pronged legal test, a political figure—Minister of Industry and member of the Stephen Harper cabinet member Christian Paradis—applies the test. Thus, political, not the legal, factors will likely determine if CNOOC’s bid passes the net benefit test. CUSLI-Nexus staff writer Eskor Edem reviews the “net benefit” test, identifies the three political factors critical to Mr. Paradis’ decision, and concludes that CNOOC’s bid will likely pass the “net benefit” test. But that won't be the end of the story:  the CNOOC bid still has other administrative hurdles to clear.

“Net Benefit” Test

Although established as statutory law, the “net benefit” rule is really more a political test allowing the seating administration the block foreign investment injurious to its policy vision. Under the Investment Canada Act transactions are reviewable when they exceed the threshold of C$299 million. The final decision of whether a transaction is a “net benefit” is made by the Minister of Industry. As the Minister is an appointed political position, the economic policy of the governing party plays a prominent role in reaching an answer to the “net benefit” question. In determining whether foreign direct investment is a “net benefit”, the Minister of Industry considers a number of factors related the potential economic and cultural impact of the investment. The economic factors weighed range from the potential impact on domestic jobs, the participation of Canadians in the venture, and the impact on Canada’s global competitiveness. Cultural factors can be seen as a catch-all for a range of politically sensitive, non-economic topics—like a foreign investment’s impact on Canada’s indigenousness population, the First Nations. 

Lessons from Canada’s “Net Benefit” Rejection: BHP Billiton and Potash

In 2010, then Minister of Industry Tony Clement rejected BHP Billiton’s proposed hostile takeover of the Canadian mining company PotashCorp. The negative impact of BHP’s proposed takeover on Saskatchewan’s mining economy was the determinative factor in Minister Clement’s rejecting the bid on “net benefit” grounds. Saskatchewan is home to 1/3 of the global potash market. Naturally, this means that the government derives significant revenues from potash mining companies—15% in 2008. But the province also plays a critical role in potash pricing: with a Canadian industry body, Canpotex, the sole distributor for Canadian potash that is marketed outside North America. Canpotex’s exclusive control over the marketing of Canadian potash provides price stability on which Saskatchewan can rely in estimating its future revenue stream. 

PotashCorp. made up 54% of Canoptex’s output at the time of BHP’s bid to acquire it. As such, BHP’s insistence that it would take PotashCorp. out of Canoptex would have dealt a significant, if not fatal blow, to Saskatchewan’s influence on the price of potash on the international market. Opening up Canada’s potash market posed a serious threat to the Canadian economy and, perhaps more importantly, Saskatchewan’s finances. A law firm advising the Province on the matter in Jan. 2011, Jones Day found: 

[T]here was a risk of significant job losses by other Canadian potash manufacturers as a result [of] BHP’s plans to run its Jansen mine “flat out” and its threatened departure from Canpotex… Saskatchewan could [have] los[t]up to CAN $6 billion in tax revenues if BHP operated PotashCorp mines at full capacity.

Independent marketing could have potentially resulted in the (1) the loss of price setting abilities which the province had enjoyed to date; (2) a significant decline in the potash prices largely due to BHP’s level of production; and (3) a significant decline in tax revenue. 

Given the high level of public disapproval of the takeover, approving BHP’s bid carried significant political down side for the Harper administration. On top of public disapproval, Conservative provincial officials voiced their avid resistance to the transaction. In making their case against BHP, provincial officials argued that an “increasingly strategic” resource required maintaining Saswatchan’s influence over global potash prices. According to some, approving BHP’s takeover held the potential of reducing Canada’s food and energy security.

The “Net Benefit” Test’s Political Factors and Why CNOOC Passes the Test

A decision in CNOOC’s favor would provide credibility to Prime Minister Harper’s policy of strengthening Canada’s economic ties with Asia. Minster Paradis’ final determination will be guided by Prime Minister Harper’s goal of ensuring Canadian natural gas and oil producers get access to China's growing energy appetite. As such, application of the “net benefit” rule to CNOOC will likely diverge from the strict letter of the law. In reaching his decision, Paradis will likely consider three political factors:  (1) the nature of the targeted company; (2) The level of provincial support for the CNOOC’s acquisition; and, (3) the possibility of greater market access for Canadian firms operating in China.

Unlike Potash, Nexen is not uniquely dominant in Canadian industry. Nexen only ranks as a middling player in Canada’s oil and gas sector. John Manley, a former Liberal Minister of Industry, made clear if a larger Canadian oil and gas company was at stake, the government would be likely to block a takeover bid on “net benefit” grounds, in this Bloomberg Sept. 2012 article:

‘[If Suncor were the target company]…you would have a different set of questions being asked, simply because of [Suncor’s] scale and…importance in the Canadian context,’…Suncor is Canada’s ‘biggest independent, and that puts it in a somewhat different category.’

CNOOC’s takeover of Nexen does not threaten Alberta’s finances. Unlike the Potash market, in which Canoptex plays a price setting function, factors inherent to the oil and gas markets prevent any single player from determining market prices. In the oil and gas market prices are largely set by supply and demand, with spontaneous political events playing an influential role in short-term price volatility. As such, Alberta does not have the ability to set the market price its oil and gas producers get for their output. Hence, in this regard CNOOC’s acquisition of Nexen will not affect Alberta’s royalty stream; thus, CNOOC’s bid avoids a major point of contention in BHP’s bid.

Furthermore, unlike the Potash bid, the provincial government of Alberta supports CNOOC’s bid. During a recent interview, Alberta’s Premier Alison Redford spoke favorably of CNOOC’s acquisition of Nexen, stating:

At the end of the day, our view is that if this is in Alberta’s interest, it should go ahead. And we think there’s a lot of benefit for Alberta and Canada in this deal.

And in discussing CNOOC’s bid, public commentators have stressed a potentially large up-side for Canada if the bid is approved: If Canada grants China market access within the energy sector, other Canadian companies may find it easier to get access to the burgeoning Chinese marketplace. As reported by the Wall Street Journal, DBRS debt rating agency has found:

‘This transaction would dramatically improve Canada-China relations, which could in turn provide greater economic trade between the two countries.’…add[ing] that approval could also open the door for Canadian businesses in China.

And, obviously, CNOOC’s Nexen bid would strengthen energy ties between China and Canada. Given Canada’s unease with the Obama administration’s reluctance to approve the Keystone XL project, laying the foundation for substantial growth in Sino-Canadian energy trade has become a major policy objective of the Harper administration.

Conclusion

The CNOOC bid, albeit not without some belly-aching, is very likely to pass Canada’s “net benefit” test. First, while superficially a 6-pronged legal test, the “net benefit” rule is really more a political test: giving the Canadian government a way to block foreign investment that may compromise core Canadian economic interests. And as BHP’s failed bid shows, the political variables at play are: (1) the size and scope of the targeted Canadian company, (2) support on the provincial level for the acquisition, and (3) the economic rewards of approving the bid. With Nexen a relatively small player in the Canadian oil and gas industry, Alberta’s support of CNOOC’s bid, and the Harper government’s eagerness to open up the lucrative Chinese marketplace to Canadian firms, CNOOC’s bid for Nexen is very likely to clear the “net benefit” hurdle.

Will Trans-Pacific Partnership Talks Update or Downgrade NAFTA?

By Keith Edmund White, Editor-in-Chief

New Zealand's trade minister thinks Trans-Pacific Partnership (TPP) trade talks could be a springboard for opening up NAFTA.  Is he right?  CUSLI-Nexus looks at how TPP talks could update NAFTA, but then asks the tough trade question:  do bilateral and regional free trade agreements help international trade, or do they just kick the can on the big divides within the international trading system?  Thanks to iPolitics, Rabble.ca, Skynews.com.au, and Tax-News.com from their excellent reporting that stretches from Toronto to Singapore.

On Monday, New Zealand’s trade minister—at a convention hosted by the Canadian Council of Chief Executives—“said the TPP [Trans-Pacific Partnership] talks could allow negotiators for Canada, the United States and Mexico to update the 18-year old NAFTA deal.”

How would TPP update NAFTA?  From an excellent iPolitics report by Elizabeth Thompson:

In an interview with iPolitics following his speech, [NZ trade minister Tim] Groser said changes to NAFTA wouldn’t be part of the formal TPP agenda but the TPP agreement could trump NAFTA provisions the same way NAFTA superceded the original Canada-U.S. free trade deal.

So what is there to update in NAFTA? U.S. chicken and dairy sectors want more access to the Canadian market, with other U.S. industries wanting to keep pushing Canada on strengthening their intellectual property regime. From a Rabble.ca Wednesday article reviewing the lingering Canada-U.S. trade barriers in the NAFTA-era:

U.S. industry groups, including the main poultry and dairy associations, complained about Canada's supply management policies and intellectual property regime during a Monday hearing at the United States Trade Representative on Canada's entry to the ongoing Trans-Pacific Partnership trade negotiations. Meanwhile, in its presentation to the USTR, the AFL-CIO urged the U.S. government to incorporate "a new approach to trade policy, one that prioritizes benefits for working families, not simply benefits for multi-national or global enterprises (MNEs)."

Reuters reported Monday that the U.S. dairy and chicken sectors are sore they never received access to Canada's market as promised in NAFTA. High tariff walls and low quotas prevent exports of these goods from any country from flooding the Canadian market, which is supplied mainly by Canadian farmers and farm production.

Now getting a TPP agreement is by no means a sure thing.  From an excellent article in today’s SkyNews.com.au emphasizing that 2013 will be the make-or-break year for TPP:

While it's believed around half of the TPP's 29 chapters are finished, Australian Trade Minister Craig Emerson concedes most of the low-hanging fruit has been picked.

'It'll be 2013 when the big negotiations on the hard issues are conducted,' Emerson told AAP on the sidelines of the APEC Summit in Russia this month.

Emerson points to market access as the toughest nut to crack.

And, of course, what about the macro-question:  Do ‘small’ regional trade pacts or possibly ‘big’ regional trade pacts like TPP good or bad for encouraging a free-flow of trade world-wide?  From this there’s perhaps no better—if perhaps biased—source than Pascal Lamy, the Director General of the World Trade Organization (from today’s Tax-News.com):

While noting that the increased negotiation of regional trade agreements has contributed to freer trade, he drew attention to the fact that regional trade agreements have sprung up due to an impasse in global free trade talks under the auspices of the Doha Development Agenda.

He reiterated that on average, each member of the WTO belongs to no fewer than 13 separate preferential trade agreements. "This means that in addition to their multilateral commitments, WTO members on average have to manage an additional 13 separate trade regimes. I do not think you will disagree with me that this cannot be the most efficient way to trade and to do business across national frontiers."

In addition, Lamy—talking at a Singapore event hosted by the European Chamber of Commerce—lists five drawbacks of pursuing free trade agreements (FTAs) on a bilateral and regional level, skipping over WTO talks:

• FTAs create trade costs:  multiple, overlapping trade pacts create their own trade costs.

• New FTAs undermine old FTAs.  Newer FTAs-instead of building on past ones--lower of the value of existing trade pacts.

• The FTA box-out factor:  If you’re not in the FTA club, the FTA is—in effect—now a trade barrier to non-members.

• FTAs reward procrastination:  Countries are selectively picking how to pursue free trade, skipping over tougher issues, which mainly impact smaller, weaker members of the world trading system.

• FTAs Undermine WTO consensus:  the more bilateral and regional FTAs you make, the harder it can be to get countries to agree to world-wide agreements on trade.

Naturally, there's an easy rejoinder these concerns:  let's have freer trade where we can have it. 

In any case, international trade may be the big, under-reported story of 2013.  And it will be interesting to see if TPP can be finalized, and what impact a finalized TPP agreement--a trans-Pacific trade pact that would exclude China--might have on trade disputes between China and the United States, and--from that--on divisions at the WTO.