Pretend the Canadian shoe was on Chinese feet. Suppose a big, privately owned Canadian energy company sought to buy a Chinese energy company lock, stock and barrel. It offered a lot of money, perhaps more than the company’s current value, in anticipation of a higher value in the future. It promised to keep in place all of the Chinese employees and executives.
Would the deal happen? Not a chance. China plays by one set of rules, Canada and other open economies by another. Their state-owned companies can buy here and elsewhere, while our private companies can’t buy there in sectors the state considers vital to its future.
Beijing-based writer Ian Johnson, in discussing James Fallows’s book on the aviation industry in The New York Review of Books, explains how the Chinese view certain sectors. “Along with energy, telecommunications and defence, aviation is a sector over which it [the Chinese state] will maintain ‘absolute control.’ ” The state, he says, will maintain “strong influence” over automobiles, machinery, information technology, metals and chemicals.
If Canada wants to sell Lululemon clothing or foodstuffs or something not deemed vital to the state, Canadian companies can go right ahead. If they want to move into other areas, they quite often discover they’re required to have Chinese partners for joint ventures or the deal won’t proceed. In areas deemed sensitive for security reasons, such as energy, China isn’t going to allow anything the state now owns to be purchased by foreigners.
This double standard is worth remembering in connection with the Chinese National Offshore Oil Corp.’s proposed takeover of Calgary-based energy company Nexen Inc. If an American company, say, had bid for Nexen, that bid might be good or bad for the company and Canada’s energy industry; but a Canadian company could do likewise in the United States if the terms of the purchase were right for both parties. But there’s no price a Canadian company could pay for a state-owned Chinese company, because the state deems them vital to the country’s future and thus off limits for purchase.
That’s been China’s strategy for years: Use state-owned enterprises to buy supplies of energy and other raw materials around the world and make them act like private-sector companies up to listing them on international stock exchanges, but remember that the state always runs the show.
The Chinese have recently suggested that Canada should entertain the idea of free-trade negotiations. It’s an alluring prospect, given the size of China’s market and its anticipated future size. It’s alluring, too, because only New Zealand has such an agreement.
New Zealand was easy for China. It’s small, and it exports what China needs: food products. New Zealand’s exports of, say, dried baby formula and dairy products don’t threaten anything in China, especially anything deemed vital to national security.
Canada, however, is strong in energy, telecommunications, automobiles, aviation and metals – all products that China considers largely off limits to foreigners. Any free-trade deal for Canada would have to involve access in these sectors. It would also need to provide guarantees for patent protection (intellectual property) because Chinese firms are notorious (let’s be blunt here) for stealing patented technology and adapting it to their own companies. And the rule of law protecting private property is wobbly in China. As for the new investment treaty between Canada and China, only time will tell whether it’ll resolve these challenges. It’s worth noting that the protections contained in the agreement apply only to companies already operating in China.
Free-trade negotiations, in principle, are not to be dismissed lightly. The structure of the Chinese economy, the erratic respect for the rules of property law, and the off-limits areas of the Chinese economy mean that any talks would be long and laborious, with no guarantee that the Chinese government would agree to rules found in free-trade deals that Canada has signed with other countries.
The bid for Nexen is now being reviewed by the Harper government, with the nebulous term “net benefit” before a takeover is approved still unclear. If one part of the “net benefit” became “Can we do there what you’re proposing to do here?” the takeover would never be approved. Quite likely, the government will eventually approve the deal, but the condition of reciprocity won’t be there.