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inside the market

A Canadian flag blows in front of the Peace Tower on Parliament Hill in Ottawa, Ont., Wednesday, Oct. 24, 2012.CP

For all the criticism Prime Minster Stephen Harper is taking over his government's decision to close the door on takeovers of Canadian energy assets by state-owned enterprises, he might be onto something: A British think tank (via Financial Times) has just published a report arguing that rising demand for commodities, combined with economic nationalism, make a bad mix.

"High and fluctuating prices are spurring new waves of resource nationalism and making unilateral and bilateral responses more attractive," said a report by Chatham House.

But this response can make things worse. Competition for scarce resources can increase, along with price volatility and economic pressure. The problem is greatest among countries that are dominant players in a particular commodity. Canada is highlighted for its potash and nickel resources, but the report could have also highlighted the country's energy resources – and its new response to them.

Canada's oil patch has become a popular destination for foreign money. However, on Friday, Mr. Harper announced that the country would no longer welcome money from state-owned companies looking to snap-up energy firms.

"When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments," he said in a news conference.

Far from tapping into resource nationalism, this response appears to fit in with a movement against such nationalism – in that Canada wants to keep resources out of the hands of governments. Mr. Harper's announcement followed a high-profile offer for Canada's Nexen Inc. by China's CNOOC Ltd., which Mr. Harper approved even as he put up barriers to future deals.

As the Chatham report says: "The proliferation of SOEs or sovereign wealth funds in overseas resource sectors has generated renewed fears that they will serve as blunt instruments for the interests of foreign governments. SOEs are criticized for having non-commercial objectives, such as tying up deals overseas to feed their domestic economies with cheap resources."

Still, the Canadian government response appears to be more out of concern about the future than any particular evidence of bad things happening right now. Indeed, the Chatham report concludes that the extent to which state-owned enterprises are being directed by governments varies considerably. This might be why, in its 10 recommendations, the think-tank doesn't goes as far as Mr. Harper in condemning takeovers by SOEs.

"Physical ownership of assets and supply chains could indeed be an advantage in times of major crisis," the report said. "For most countries, however, access to functioning global markets remains the best source of resource security."