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Ottawa will approve Nexen deal because it can’t afford not to

Stephen Harper must have known that something like CNOOC's bid for Nexen was coming. Now the question is: What will the Prime Minister do about it?

The likely answer: He will let the sale go ahead, for two reasons: one specific to this sale, and one that's more a sign of the times.

For those who missed it, the China National Offshore Oil Company, which is state owned, has offered to acquire Canadian oil and gas producer Nexen Inc. for $15.1-billion. The federal government must approve the sale.

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Back in 2010, the Conservatives moved to block the proposed hostile takeover of Potash Corp. because the company was a crucial player in the potash sector. (And because Brad Wall howled at the jobs and influence Saskatchewan would lose.)

That isn't likely to happen this time.

"I think that the chances are pretty high that the Harper government lets this transaction proceed," said Chris Feltin. He is managing director of oil and gas research. at Macquarie Capital Markets Canada.

Nexen doesn't have anything like the prominence in the Canadian petroleum sector that Potash Corp. had in potash. While Nexen has significant assets in Alberta and British Columbia, much of the company's value is located in assets overseas.

If Ottawa were to reject this takeover, it would be signalling to the Chinese government, which owns CNOOC, that no investment in Canada from their state-controlled companies will be tolerated.

And that's a message that this country simply can't afford to send.

Canada is a small country that exports natural resources, which means it has always depended on foreign capital to develop those resources.

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For decades, most of that foreign investment came from the United States, which brought endless hand-wringing from nationalists who feared we were selling our sovereignty to the American juggernaut.

Canada remains sovereign, but now there are other juggernauts. Uncomfortably, some of them practice a form of state capitalism, with corporations operating more or less independently, but with government often the owner rather than simply the regulator.

It's not our way; it may not be the best way for China and other economies over time. But right now it's the way of the world.

Canada is anxious to sell oil, minerals and other resources to China and other emerging powerhouses. Pursuing expanded trade with China while consistently freezing out Chinese investment in Canada would send the worst possible signal.

We have entered a stage in globalization in which Western capitalism – based on private capital, free markets and government oversight – competes with emerging-market capitalism, which is often based on state ownership and markets that are only partly free.

There is much not to like about the emerging-market model. Who is really behind these corporations? How well are they run? Whose interests do they serve?

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There is every reason to believe that the Western model, with all its faults, is superior to the dirigiste Chinese approach. But that's a contest that could take decades to resolve.

For now, Canada needs capital, and the emerging companies and countries have much of it. The federal government has little choice but to let them in.

The alternative is to leave the stuff in the ground, until someone nicer comes along. That could be a long wait.

Send your questions about CNOOC's bid for Nexen to, along with your name, age, city and province. The Globe will pose the best questions to our panel of experts and publish their responses.

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