Most foreign acquisitions not a national security threat: report

OTTAWA — The vast majority of foreign takeovers from China — but not all — pose no national security threat to Canada, says a new report that proposes Ottawa apply a three-step test to determine what is in the country’s interest.

OTTAWA — The vast majority of foreign takeovers from China — but not all — pose no national security threat to Canada, says a new report that proposes Ottawa apply a three-step test to determine what is in the country’s interest.

The report by Theodore Moran, a professor of international business at Washington’s Georgetown University, to be released Monday by the Canadian Council of Chief Executives, comes at a time of growing Chinese interest in Canada’s resource riches.

In a recent visit to China, Prime Minister Stephen Harper was expansive about broadening the economic ties between the two countries and said the government was anxious to build a pipeline through British Columbia that would ship Alberta oilsands crude to the country.

Moran’s report does not advocate selling off resources to foreign interests, but does say that national security considerations should not be an impediment in most cases.

“The predominant impact of Chinese procurement arrangements does not support popular concerns about Chinese ’lock up’ of world resources,” the report states.

It said its review of the record shows most Chinese foreign acquisitions have been for an equity, not controlling, stake, and of 35 investments examined, 23 helped diversify supply and increase competition.

That is not always the case, however, citing the recent controversy of China’s self-serving policies over “rare earth” minerals.

Moran proposes Ottawa set a standardized test of three threats to determine when a foreign acquisition, whether from China or any other country, jeopardizes Canadian national security.

— Would the proposed takeover make Canada dependent on a foreign supplier that might delay, deny or place restrictions upon a provision of goods or services crucial to the economy?

— Would the acquisition transfer technology or expertise that could prove harmful to Canadian interests?

— And would the presence of a foreign company in Canada pose a risk of infiltration, surveillance or sabotage?

Moran said codifying the test would lead to a principled determination of the true national interest and help take politics from influencing the decision.

Earlier this year, PetroChina became the first Chinese company to have full ownership of an oilsands project, when it bought out Athabasca Oil Sands Corp.’s (TSX:ATH) remaining stake in the MacKay River project.

The agreement followed a list of deals last year that included Sinopec’s purchase of conventional oil and gas-focused Daylight Energy Ltd. and CNOOC’s takeover of struggling oilsands junior Opti Canada.

China Investment Corp. also holds a roughly 20 per cent stake in Vancouver-based Teck Resources Ltd. (TSX:TCK.B), Canada’s largest publicly traded miner and a key supplier of copper and coal used for making steel.

Surprisingly, Moran said using his framework would have given Ottawa justifiable reasons to block two foreign takeovers that were indeed halted, but nevertheless elicited accusations the government was bowing to pressure.

The report argues that Ottawa was justified in blocking BHP Billiton’s hostile bid for PotashCorp (TSX:POT) because it would have “transferred control of a major world source of supply to foreign hands rather than helping to expand, diversify and make more competitive the world supplier base.”

Blocking U.S. Alliant Techsystems’ acquisition of Vancouver-based MacDonald, Dettwiler and Associates (MDA) might also have been justified, said Moran, because it would have transferred control of Radarsat-2, a high-resolution satellite with an unusual polar orbit.

“Alliant could not promise that the U.S. government would refrain from imposing controls on information-sharing in the event of a dispute between the United States and Canada focused on Arctic sovereignty,” Moran said.

Ottawa formally added “national security” to the Investment Canada Act in 2009, but has yet to spell out what standards it is using in applying the test.

“Application of this framework in Canada could — as elsewhere — help to discourage politicization of individual cases, and lead to swift and confident approval of those acquisitions where genuine national security threats are absent,” said Moran.

The council of chief executives, which represents 150 of Canada’s largest corporations, commissioned the report as part of its review on possible impacts of Asia’s emerging economic power.

Although council head John Manley advocates strengthening economic links with China, the council said in an accompanying news release that the report does not “necessarily” reflect its own position.