Are we raising the drawbridge on foreign investment?

Arecent policy change by the Trudeau government relating to the Investment Canada Act underscores how COVID-19 is affecting even obscure policy areas. That act governs the review and potential blockage of foreign investment in Canada on national security grounds. The government announced that, until the pandemic abates, it will closely scrutinize all proposed foreign investment in the public health sector or in suppliers of “critical goods and services” — a term it left undefined. This move requires no parliamentary approval since it falls within the government’s discretionary power under the law to alter the scope of national security reviews as it sees fit. Though it likely will affect very few Canadians directly it highlights an increasingly relevant issue in these times of political and economic upheaval.

Until now, the Trudeau government appeared comparatively relaxed about whether foreign investment weakens national security. The last major overhaul of the Investment Canada Act took place nearly a decade ago under the Harper government. The world has changed considerably since then and Australia, France, Japan, Finland, Germany, the U.K. and the U. S. have all cited evolving geopolitical concerns as justification for more stringent foreign investment oversight. In fact, the relevant U.S. legislation was the rare issue capable of commanding bipartisan support in Congress in the Trump era.

It is easy to see why the pandemic has prompted Ottawa’s change of approach. The current situation has depressed asset prices and highlighted significant gaps in Canada’s domestic healthcare supply chains. There are fears that opportunistic foreign investors will exploit these circumstances to acquire businesses at significant undervalue or to divert critical supplies away from Canada. Yet, the government’s decision to frame this problem in national security terms raises broader issues worth considering.

First, we need a discussion about which industries are critical to national security. Historically, reviews of this kind have focused on manufacturers of defence equipment or technology with both civilian and military use. Some countries now scrutinize investment in critical infrastructure or in companies controlling sensitive personal data. A public health emergency certainly undermines national security, but how broadly should we define the health sector? Already there are questions about whether the federal government should have blocked a Chinese insurance company’s acquisition of a chain of long- term care facilities in British Columbia in 2016, purportedly over the objections of the province’s

Ministry of Health. What about food suppliers? Sometimes, concerns don’t even relate to the target itself. In 2013, the Harper government rejected a proposed plan by a Chinese company to build a manufacturing plant in Quebec, allegedly due to concerns about the site’s proximity to the Canadian Space Agency’s headquarters. The risk of such restrictions is that they are applied too broadly, with the result that important parts of the economy become anti- competitive or are cut off from access to the foreign capital they need to grow.

A second important question is whether the law should treat all foreign investors equally. Some governments avoid naming particular “countries of concern” but others single out China. It is increasingly difficult to uncouple China’s role as a source of investment capital from its rise as a strategic competitor, particularly when Beijing has shown a propensity to weaponize trade and investment to gain leverage over foreign governments in geopolitical disputes. One solution is to give preferential treatment to Canada’s allies and free trade partners. Canada, the U. K. and Australia are the only three countries whose investors received broad exemptions under the new U. S. foreign investment review process. In spelling out a hierarchy of risk in foreign investment, the government can demonstrate that these national security reviews are being applied both proportionately and effectively.

Finally, it’s important to ensure that Canada’s foreign investment policy accords with its broader economic needs. The current pandemic is causing political leaders around the world to question whether globalization has reached its limits. Systemic changes leading to any form of global autarky would be disastrous for Canada’s export- driven economy. There is a delicate balance to be struck between protecting vital segments of the national economy and reaffirming the importance of an open and competitive global economy.

The recent changes in the application of the Investment Canada Act are exclusively designed to address an immediate consequence of the COVID-19 pandemic. But they expose an issue that was previously often ignored. Even before the current health emergency, the world faced resurgent economic nationalism and geopolitical competition that raised questions about the merits of certain foreign investment. Canadian political and business leaders need to join their peers in other parts of the world and take a hard-headed look at both the sources and targets of foreign investment and be astute in identifying where our interests and vulnerabilities lie.

First, we need a discussion about which industries are critical to national security.