Risks from Chinese takeovers mean Canada needs tougher investment rules: experts

Canadian officials should tighten rules on foreign investment by state-owned entities from authoritarian countries, such as China, and consider making permanent rules imposed on takeovers during the coronavirus pandemic, experts say.

The House of Commons industry committee is holding hearings on whether there should be a freeze on large foreign takeovers of Canadian businesses and whether the Investment Canada Act needs changing.

As part of those hearings, the committee heard on Monday about the need to balance the impact any regulatory changes could have on investor confidence with the threats posed by allowing Chinese firms either owned by or tied to the state to takeover Canadian businesses.

However, the concept of how “strategic” should be defined remains a key question and one MPs should try to define more clearly as they recommend how the government should move forward, experts said.

“We’re not here to make China any favours. We especially shouldn’t at this time. But some investments might still be in the interests of both and we should cautiously pursue those while restricting others,” said Daniel Schwanen, vice president of research at the C.D. Howe Institute, before the committee.

“Maybe this crisis is an opportunity for us to ask, what is strategic? What is national security? And maybe have a broader view of what that entails.”

3:26 Coronavirus outbreak: Freeland says government will protect Canadian companies from hostile foreign takeovers

The uncertainty of the coronavirus pandemic has wrought economic turmoil as countries around the world have put their citizens under months of lockdowns and struggled to craft policies that will keep their economies from collapsing under the chaos.

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That impact has hit across economic sectors, roiling stock markets and leaving even large companies strapped for cash and rolling out massive layoffs.

All of that uncertainty has prompted fears that Canadian businesses, particularly those deemed critical or strategic for national interests, could become attractive targets for hostile foreign takeovers.

The Canadian Security Intelligence Service warned about exactly that in its most recent annual report.

The agency said that while many foreign investors are not hostile, those from state-owned enterprises and firms with close ties to governments or intelligence services need to be weighed very carefully.

“Corporate acquisitions by these entities pose potential risks related to vulnerabilities in critical infrastructure, control over strategic sectors, espionage and foreign influenced activities, and illegal transfer of technology and expertise,” the report stated.

“As difficult as it is to measure, this damage to our collective prosperity is very real.”

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Foreign takeovers of Canadian businesses are evaluated under the Investment Canada Act, which weighs the “net benefits” of proposed takeovers with an eye to things like potential jobs versus potential risks.

To weigh those risks, national security agencies like CSIS and the RCMP can share their concerns with the government and when the federal cabinet shares those concerns, it can block takeovers.

Effectively, it forces officials to ask the question: jobs might be created, but at what cost?

Charles Burton, senior fellow with the Macdonald-Laurier Institute, was also a witness at the hearing on Monday. He said while would like to see a moratorium on all foreign investment from Chinese state-owned enterprises, he thinks the guiding principle for tightening up the Act itself should be reciprocity.

“They’re able to acquire things in Canada that we would not be able to acquire in China,” he said, pointing to strict Chinese rules banning the foreign takeovers of things like mines and high-tech companies on the grounds of national security.

Burton said while he thinks enhanced screening measures put in place in April were prudent, he thinks the government should put a temporary moratorium on all Chinese state-owned investment until the criteria for review under the Act can be more permanently strengthened.

Those new rules said the government will put under extra scrutiny “foreign direct investments of any value, controlling or non-controlling, in Canadian businesses that are related to public health or involved in the supply of critical goods and services to Canadians or to the government.”

As well, those extra screenings will also apply to “all foreign investments by state-owned investors, regardless of their value, or private investors assessed as being closely tied to or subject to direction from foreign governments.”

“Some investments into Canada by state-owned enterprises may be motivated by non-commercial imperatives that could harm Canada’s economic or national security interests, a risk that is amplified in the current context,” the notice of the rules stated.

Patrick Leblond, an associate professor of international politics with the University of Ottawa, told the committee that while there’s room to “improve the process,” there are also reasons to be cautious about making any rule changes more permanent.

“If we’re constantly changing the rules of the game, we may not be able to have the right investors that will build a competitive business environment and that could slow down economic growth,” he said.

“I think the Act is strong enough as it is right now with the current guidelines.”

Finance Minister Bill Morneau has not yet committed to keeping the tougher rules in place.

They are currently set to last “until the economy recovers from the effects of the COVID-19 pandemic.”