Minority governments and Canada’s confused foreign investment policy

In 1963, the government of Prime Minister Lester Pearson introduced a tax on the foreign takeover of Canadian firms. A decade later, in 1973–1974, Pierre Trudeau’s government created the Foreign Investment Review Agency (FIRA). Stephen Harper’s government later blocked the foreign purchase of two Canadian firms in 2008 and 2010. These cases have much in common: in all three instances, measures to restrict foreign investment were implemented by a minority government, with its eye focussed on public opinion. In no case did the prime minister appear fully convinced that limits on foreign investment were necessary. And in no case did the government maintain a long-term commitment to restricting foreign capital. Policy was based on conjecture rather than evidence, decisions were not carried out in a transparent way, and policy changed as politics dictated. Government policy was confusing and unpredictable.

Foreign investment has long been a fact of Canadian economic life. In the 1840s and 1850s, British capital helped finance railways and other Canadian infrastructure. In 1879 the government of Prime Minister John A. Macdonald introduced the National Policy, a bundle of high tariffs designed to force foreign manufacturers, particularly American companies, to establish factories in Canada. ¹ At the same time, provinces and municipalities attracted investors with tax breaks, cash incentives, and free land, water, and electricity. Beginning in the 1930s, successive Liberal governments slowly began dismantling the National Policy, first by negotiating trade agreements with the United States in 1935 and 1938, and then by taking apart multilateral tariff reductions under the General Agreement on Tariffs and Trade in 1947 and 1951. But governments continued to entice foreign investors, even selling several crown corporations to foreign buyers.

The politics of foreign investment began to change in the 1950s. The Canadian public became increasingly wary of the United States, including the American-owned companies that operated in Canada. The Royal Commission on Canada’s Economic Prospects, established in 1955 and chaired by businessperson Walter Gordon, questioned the value of outside capital. ² The media picked up on the issue, with newspapers inquiring about whether the government should allow Americans to develop Canadian resources. ³ Sensing a changing tide, politicians leapt into the debate. ⁴ The foreign investment issue drew an intense response from Canadians, particularly during the raucous pipeline debate of May–June 1956, when the House of Commons considered a Liberal plan to allow a largely American-financed company to build a natural gas pipeline from Alberta to Ontario. In the 1957 general election, the Conservative leader, John Diefenbaker, exploited both this sentiment and public disenchantment with the government of Prime Minister Louis St-Laurent to capture enough seats to become prime minister at the head of a minority government. In the next year’s election, Diefenbaker thrashed the Liberals, winning the largest majority ever held by a Canadian national political party. Yet Diefenbaker did little to face up to the foreign investment issue.

For Diefenbaker’s government, and many of those that followed, Canadian foreign investment policy was a balancing act. Governments wanted foreign capital, which mostly came from the United States, but they had to respond to the natural Canadian tendency to be wary of the American colossus. This was particularly true for minority governments, which needed to be finely attuned to public opinion if they wished to survive and eventually win a majority of seats in the House of Commons.

The 1963 foreign takeover tax

When Lester Pearson formed a minority government in April 1963, he appointed Walter Gordon as minister of finance in recognition of his organizational role in resuscitating the Liberal Party, particularly in Southern Ontario. This was the same man who had chaired the Royal Commission on Canada’s Economic Prospects, the same man who had sounded the alarm about foreign investment in the mid-1950s, the same man whose concerns had been ignored by the St-Laurent and Diefenbaker governments. Gordon was determined to act—and to act quickly. Like so many businesspeople who enter politics, he was impatient with the policy-making process, including the need to convince others.

Gordon was alarmed about foreign investment, but few others in Ottawa were. His ministerial colleagues thought the issue not particularly important, and Gordon made little effort to persuade them otherwise, never discussing his nationalist proposals in the cabinet. ⁵ Gordon showed little interest in the views of Finance department officials, who cautioned him to move slowly. “Walter suffered from … his lack of faith in his civil servants,” said Bud Drury, Gordon’s brother-in-law and cabinet colleague. “He felt he could get better advice outside the civil service.” ⁶ The belief that he could not rely on public servants led Gordon to recruit four like-minded advisers from the private sector to help him prepare his first budget. One of Gordon’s plans was for a 30 per cent tax on the takeover of Canadian firms by foreign buyers. The governor of the Bank of Canada, Louis Rasminsky, spoke against the tax in a meeting with Gordon and Pearson, but Gordon was unmoved. Pearson, knowing little about finance, left the matter in the minister’s hands. ⁷ Gordon seemed not to know—or care—that there was no consensus in Ottawa or in the Canadian public for limits on foreign investment. ⁸

Gordon presented his first budget on 13 June 1963, his 53rd day in office as finance minister. The proposed takeover tax was greeted with an uproar from the media and the business community. Even many of his own cabinet colleagues were unimpressed. “It was an amateurish budget,” Defence Minister Paul Hellyer later recalled. ⁹ With Pearson’s government in a precarious minority situation, Gordon had little choice but to withdraw the tax. He claimed that there were some administrative problems that needed to be addressed, but he never reintroduced the measure. ¹⁰

The tax was ill-considered. Gordon had not won over his colleagues, let alone the public, on the tax’s necessity. He never clarified what problem the tax was intended to solve or how it would do so. Neither the minister nor his officials talked with the presidents of the stock exchanges or with senior officials from the Investment Dealers Association of Canada about how the tax could be administered. Faced with outrage from the financial community and the media, and ever conscious of its minority standing, the government beat a hasty retreat. Afterward, Pearson admitted to journalist Michael Barkway that Gordon should never have been appointed to the finance portfolio. ¹¹

The creation of the Foreign Investment Review Agency, 1973–1974

The political climate had changed substantially by the time Pierre Trudeau became prime minister in 1968. Anti-American sentiment was growing rapidly, fed by the American war in Vietnam and racial conflict in the United States. American investment in Canada was becoming increasingly unpopular. ¹² Shortly after coming to office, Trudeau assigned the foreign investment issue to the Department of Industry, Trade and Commerce but was dissatisfied with the resulting report. The issue was reassigned to the Department of Finance, but the prime minister was no happier with that department’s work. ¹³ In March 1970, the cabinet’s Priorities and Planning Committee charged Herb Gray, a junior minister without portfolio, with establishing an interdepartmental working group of officials to draft a policy statement on the matter. ¹⁴ Looking for someone to chair the group, Gray approached Joel Bell, a young lawyer and economist who had been working as an independent contractor in Ottawa since 1968, writing government policy papers on labour policy and competition policy. Bell initially declined but changed his mind after he was asked for his thoughts on the group’s terms of reference and the prime minister accepted his formulation. The group’s other key members were two senior public servants: Harvey Lazar from the Department of Finance; and Roberto Gualtieri from Industry, Trade and Commerce. If there had been inadequate thought given to the 1963 measures, driven by a businessperson in a hurry, the measures of the early 1970s were painstakingly thought out, propelled by a thoughtful consultant and two cautious public servants who were willing to go back to first principles. They reported to Gray, a young politician, known for his caution. All of them were ambitious and in the early stages of long, successful careers.

In June 1971, after months of careful work, Gray submitted a 160-page summary of the report to the Cabinet. ¹⁵ It called for the creation of an agency to screen both incoming foreign investment and licensing or franchising agreements. The Cabinet Committee on Economic Policy met five times in July to consider the document, ultimately agreeing that the government should establish a screening process. ¹⁶ But the proposal met with hostility from the high ranks of the public service, particularly from three key deputy ministers: Jake Warren (Trade and Commerce); Simon Reisman (Finance); and Ed Ritchie (External Affairs). ¹⁷ Reisman, well known in Ottawa for his expansive and explosive personality, later recalled that he fought the Gray Report “right down the line.” ¹⁸ Gray met with deputy ministers on a Saturday morning to discuss the report’s recommendations but resisted their advice to water down the report’s proposals, not changing anything in the report as a result of the meeting.

In late July, the issue went to the full cabinet, where it again faced opposition. Gray, along with Science and Technology Minister Alastair Gillespie and others, favoured the creation of a screening agency, but many ministers were skeptical, including Mitchell Sharp (External Affairs), Jean Marchand (Regional Economic Expansion), Otto Lang (Manpower), Bud Drury (Treasury Board), and Arthur Laing (Public Works). ¹⁹ Ultimately, the cabinet agreed in principle with “the creation of a screening mechanism that would cover foreign takeovers of Canadian firms doing business in Canada.” ²⁰ The issue was not scheduled to come back to the cabinet until September but was delayed in August 1971, when United States President Richard Nixon’s administration sought to solve the country’s economic problems with a package of measures known as the “Nixon shock.” ²¹ These actions included a 10 per cent import surcharge, which would have its greatest impact on Canada, the largest trading partner of the United States.

The cabinet finally took up the proposed screening agency again in October and November 1971. ²² Gray was charged with drafting a public statement on the issue, but it was not clear what had been decided. ²³ Sharp believed that the consensus was to consult the provinces before making a decision. Gray thought otherwise. Finally, the cabinet agreed unambiguously that “foreign takeovers of Canadian firms should be registered with and screened by the federal government” and that such screening “should be performed by an agency to be established within the Department of Industry, Trade and Commerce.” ²⁴

The working group’s report was not complete, but someone in government—an individual or individuals whose identity remains unknown—decided that the issue had stalled and that the government needed a push. That person (or persons) leaked confidential documents to force the government’s hand. On 12 November 1971, Canadian Forum published an edited version of a compendium of the Gray Report’s sections, as they then stood, with some exploratory ideas still in the text. On 15 November, Sharp, speaking for the government while Trudeau was at a federal–provincial conference, denied that the cabinet had decided to screen foreign investment. He was contradicted the very next day, when the Montreal Gazette reported on a leaked record of the 29 July cabinet meeting, in which the government had agreed in principle to create a screening mechanism. ²⁵ Gray urged the cabinet to publish the complete report, arguing that Canadian Forum’s edits to the document “distorted the analysis seriously.” ²⁶ The government accepted Gray’s recommendation on 25 November, with a plan to release the paper before Christmas. ²⁷ Completing the report took much longer than Gray expected, with the result that the document was not ready until the new year. ²⁸ The cabinet accepted a draft bill to screen foreign investment and agreed that it would be given first reading in the Commons on 2 May—the same day the government would release the Gray Report. ²⁹ Because of disagreement in the cabinet, the bill’s scope was much narrower than the measures Gray had initially put forward. Under the proposed legislation, the government would confine itself to screening foreign takeovers of Canadian firms. It would not act on two other Gray Report recommendations: that the government review new investment in Canada; and that it examine licensing and franchise agreements. The report had also called for creation of a new agency to screen foreign investment. The bill did not create a new agency; instead, an existing government department would handle the screening process.

Government policy was shaped by Trudeau’s skepticism about nationalism, including economic nationalism. Before entering politics, Trudeau had established himself as a leading Canadian opponent of the nationalist ideology. When seeking the Liberal Party leadership in 1968, he singled out economic nationalism as “an excessive doctrine that tends to work against the best interests of a trading nation like Canada.” ³⁰ While the cabinet was debating a screening agency, Trudeau expressed his doubts to Alistair Gillespie, who became the minister responsible for the legislation in November 1972: “You know, I’m not a nationalist, and this is a form of nationalism, which I find suspect.” ³¹ Yet Trudeau did come to support the measure, if only for political reasons. Herb Gray described Trudeau’s approach to foreign investment as “more pragmatic than ideological.” ³² According to Gillespie, Trudeau came around in 1971, when an election was approaching, not because he was won over by economic arguments, but because of the “significance of the issue in vote-rich Ontario.” ³³ The prime minister had correctly judged the mood of the country: by 1972, for the first time in Canadian polling history, a majority of Canadians viewed American investment as a “bad thing.” ³⁴ In February of that year, 69 per cent of respondents to a Gallup Poll were in favour of screening foreign investment, and only 15 per cent were opposed. ³⁵

On 2 May 1972, the government released the 523-page Gray Report, titled “Foreign Direct Investment in Canada.” Two days later, Gray introduced the legislation that would allow the government to review and reject foreign takeovers of large Canadian firms. ³⁶ The reaction was immediate and negative. Nationalists believed that the government had not gone far enough. The Toronto Star, the country’s largest circulation newspaper and a tribune of the nationalist movement, denounced the proposed legislation, describing it as “a feeble timid gesture.” “To call this a policy on foreign ownership,” the Star argued, “is an insult to the intelligence of Canadians.” ³⁷ Criticism came from even within Liberal ranks. Thirteen Liberal members of parliament (MPs) told the Committee for an Independent Canada, a nationalist organization, that they wished the government had gone further. ³⁸ On 31 May, a reporter asked Trudeau about a possible revolt in the Liberal caucus, a question that made enough of an impression on the prime minister that he mentioned it in the next day’s cabinet meeting. ³⁹ Still, Trudeau appears to have thought that the government had done enough to placate the nationalists. On 11 May, the cabinet instructed Gray to begin working on steps to encourage Canadian ownership rather than discourage foreign investment. ⁴⁰ In the meantime, the bill slowly wound its way through the legislative process. When the federal election was called on 1 September, the bill had not yet been approved.

The election proved a shock for the Trudeau Liberals. In the campaign’s early days, the Gallup Poll showed the governing party 13 percentage points ahead of the opposition Conservatives. That lead shrank to six points only two weeks before voting day. ⁴¹ In response, the Liberals began announcing new grants and policies. On 17 October, the government published a document titled “Canada–US Relations: Options for the Future,” in which External Affairs Minister Mitchell Sharp vaguely suggested that the government would pursue measures to advance Canada’s economic and cultural independence from the United States. ⁴²

On election day, 30 October 1972, the Conservatives and Liberals appeared to be tied with 108 seats each, but subsequent recounts established a slim two-seat plurality for the Liberals. Trudeau now headed a minority government, which was dependent on support from the New Democratic Party (NDP). That party’s leader, David Lewis, had described the government’s original foreign investment bill as “one big zero” and now insisted on more vigorous measures. ⁴³ The cabinet began moving quickly on the file. Shortly after the Commons reconvened in January 1973, the government introduced legislation on foreign investment. ⁴⁴ The new bill differed from the old in that it would create FIRA rather than having the review process managed within a government department. The earlier bill dealt only with the foreign acquisition of Canadian firms. The new version called for the review of both takeovers and the establishment of new foreign-owned firms in Canada. On 26 November 1973, the Commons passed the bill unanimously on third reading with no recorded vote, an indication of the widespread popular support for the measure. The bill won swift approval in the Senate before receiving royal assent on 12 December.

FIRA began reviewing the foreign takeover of Canadian firms in 1974 and the establishment of new foreign-owned businesses in 1975. The agency could recommend that the cabinet reject proposed foreign investment when it did not provide a significant benefit to Canada. More often, the agency sought to negotiate with investors, requiring them to commit to use Canadian suppliers, maintain certain levels of employment, hire Canadian professional firms, and seek export markets abroad.

The government’s commitment to FIRA began to evaporate when the Liberals regained their majority in the general election of 8 July 1974. Public opinion and the political necessity of placating the NDP had pushed the government to create FIRA. But Trudeau had never accepted that it was economically necessary or even desirable. With a renewed majority, the government backed away from the agency. Herb Gray, FIRA’s champion, was dropped from the cabinet one month after the vote. In September 1976, Jean Chrétien became the Minister of Industry, Trade and Commerce, responsible for the agency. He privately told businesspeople in Canada and the United States that Canada welcomed foreign investment. ⁴⁵ Publicly, he promised to expedite the review process, saying, “I have never been too much of a nationalist.” ⁴⁶ “There are a lot of places in Canada where people don’t give a damn who owns what,” Chrétien explained. “They want a job.” ⁴⁷ Now on the backbenches, Gray complained publicly that the government, and particularly Chrétien, appeared to be using FIRA to encourage foreign investment, “contrary to the act’s purpose as stated by Parliament.” ⁴⁸ Much has been made of the later decision of Brian Mulroney’s Conservative government to rename the agency Investment Canada and to change its mandate to be responsible for encouraging foreign investment. What is seldom mentioned is that the idea of turning FIRA into Investment Canada originated with Ed Lumley, the Trudeau minister responsible for the agency in the early 1980s. ⁴⁹

The rejection of the MacDonald Dettwiler and Potash Corporation takeovers, 2008 and 2010

In 2007–2008, widespread discussion about the “hollowing out” of corporate Canada followed several high-profile foreign takeovers of Canadian firms, including Alcan, Dofasco, Falconbridge, IPSCO, Algoma Steel, Stelco, Harris Steel, and Inco. ⁵⁰ The worry was that foreign-owned firms would move their corporate headquarters abroad, though Canada was in fact experiencing a net increase in head offices. ⁵¹ In response to public concerns, the Conservative government of Prime Minister Stephen Harper created the Competition Review Panel, chaired by businessperson Lynton “Red” Wilson. The panel’s final report, released in June 2008, concluded that exposing companies to greater competition, both at home and abroad, would help increase the country’s economic performance. ⁵² This recommendation did little to assuage the fears of nationalists, who were calling for protectionist measures.

The issue reached a decisive point when Alliant Techsystems moved to purchase MacDonald Dettwiler’s space technology division. This was the division that built two important pieces of Canadian technology, the RADARSAT-2 satellite and the Canadarm, a mechanical arm used on space shuttles. Selling the division to an American company would have allowed it to bid on United States defence contracts. The media covered the deal extensively, while opposition grew and Conservative MPs began condemning it in public. Critics compared the transaction to the Diefenbaker government’s controversial 1959 decision to scrap the Avro Arrow fighter aircraft. ⁵³ John S. MacDonald, who had founded MacDonald Dettwiler in the late 1960s, argued that Canada’s aerospace industry took “about four decades to recover” from the cancellation of the Arrow. If Harper and Industry Minister Jim Prentice allowed the deal with Alliant Techsystems to go forward, they would “go down in history as the authors of the second Avro Arrow disaster.” ⁵⁴ Critics also asked whether the United States government could use satellite data from RADARSAT-2 when contesting Canada’s claims in the Arctic—this at a time when the Harper government was talking regularly about its commitment to Canada’s sovereignty in the far north. ⁵⁵ The deal’s opponents demanded that the government stop the takeover, using its authority under the Investment Canada Act. On 9 May 2008, the government blocked the deal, the first time in the 23-year history of the legislation that a government stopped the sale of a Canadian firm.

Two years later, the government used the act a second time to prevent a foreign takeover. An Australian company, BHP Billiton, proposed to purchase Potash Corporation. Initially, Harper downplayed the deal, pointing out that the company was already controlled by Americans. ⁵⁶ But the Saskatchewan government and a large number of influential westerners viewed the situation differently. Saskatchewan Premier Brad Wall, an important supporter of the Harper government, said that the company was a “Canadian icon” and that potash was a “strategic resource.” He invoked the 2006 election slogan of the Harper Conservatives, insisting that Ottawa had to “stand up for Canada.” ⁵⁷ The premier was also concerned about BHP Billiton’s refusal to commit that Potash Corporation would remain in Canpotex, the Saskatchewan-based marketing agency that maintains high potash prices. ⁵⁸ The provincial government had a crucial interest in this issue because the higher the potash price, the higher the province’s royalties. The Harper Conservatives were only too well aware that Saskatchewan would be a political battleground in the next election, particularly after electoral redistribution, which reduced the number of strictly rural ridings in which the Conservatives were strong. Potash Corporation commissioned a survey that showed the Conservatives would lose four to six Saskatchewan seats if the government approved the takeover, information that was quietly shared with Conservative MPs. ⁵⁹

Not wanting to be seen as betraying Saskatchewan, the Harper government scuttled the deal. Industry Minister Tony Clement issued an interim assessment, saying that the transaction would not meet the Investment Canada Act’s criteria that it provide a “net benefit” to Canada. BHP Billiton had 30 days to respond but chose not to do so, instead opting to walk away. Clement would not explain his decision, other than to say that he came to it “after consultation with Saskatchewan MPs and listening to the position of the government of Saskatchewan, based on the facts of the deal.” ⁶⁰

When rejecting the takeovers of MacDonald Dettwiler and Potash Corporation, the Harper government did not clearly explain its reasons. Yet both decisions appear to have been based on political rather than economic criteria. With an election always imminent, a minority government could not afford to take any risks. The 2011 election, in which the Harper government won a majority, changed the political algebra. Afterward, the Harper government blocked no further foreign takeovers.

Conclusion

The policy of limiting foreign investment in Canada has been driven by political not economic objectives. An examination of three moments when Canadian policy was in flux illustrates that point. Policy was made by risk-averse minority governments, hypersensitive to shifts in public opinion. Short-term political considerations played a paramount role in government decision-making. In all three cases, the prime minister went along with a policy of restricting foreign investment despite not being fully convinced of its economic merits. In all three cases, an ambivalent government ultimately backed away from initial efforts to limit the influx of foreign capital.

In recent years, the foreign investment issue died down. The government of Prime Minister Justin Trudeau has taken a relaxed approach to screening foreign capital. Investment Canada routinely approves the applications it receives for the foreign takeover of Canadian firms. The media pays little attention to the issue. The public seldom shows much interest. In 2018, the government of Prime Minister Justin Trudeau did use the Investment Canada Act to block the sale of construction company Aecon Group Inc. to Chinese buyers, citing national security concerns. Still, not a complaint was heard that same year when the government created Invest in Canada, a federal agency to attract foreign capital to Canada. The foreign investment issue may well re-emerge, but, if it does, politics will again be in the lead with economics trailing behind.