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The story of potash is a microcosm of the wild ride that is Canadian economic history.

Discovery. Exploitation. Nationalization. Privatization. And now, perhaps, strategic selection.

The blocking of Anglo-Australian miner BHP Billiton's $38.6-billion (U.S.) bid for Potash Corp. of Saskatchewan Inc., is forcing a reckoning for the Harper government on its stance toward foreign investment, and the quarter-century-old rules governing policy in that area.

Until Potash Corp. came along, Ottawa largely judged foreign takeovers with the keen eye of an accountant. Add jobs here, boost production there, and keep the head office in Canada. Who really cares who the owner is? Indeed, that was the design of the Investment Canada Act. Tally up the benefits, and then let's make a deal.

But the furor over fertilizer has forced Ottawa into an uncomfortable place where it must consider a less tangible question, one that isn't calculated in dollars or jobs, and isn't even mentioned in the Investment Canada Act: What is a strategic asset?

The Harper government appears to have bought into Saskatchewan's argument that potash is too strategic a commodity to just let anyone waltz in and buy the world's largest producer. But since no one has ever defined what makes an asset strategic, the decision sets a precedent - a new line in the sand - that could have sweeping implications for the next Canadian champion that goes on the block.

Think Suncor, Research in Motion, Bombardier or Magna.

"The potash thing is a bit of a gut check," says economist William Robson, president of the Toronto-based C.D. Howe Institute and an avowed proponent of open borders. "Something like this comes along and you find yourself taken aback and re-evaluating. Do I really believe what I think I believe?"

Policy-makers are now facing the challenge of engineering a strategy that leverages the natural assets so in demand around the world - water, energy, food and minerals - to everyone's maximum benefit, from farmers in Saskatchewan to investors in Toronto, London and Beijing.

To do that, they will need to seek a Third Way - one that shields Canada's most precious resources, and companies in a world of scarcity, while still promoting foreign investment in these very sectors - investment that is needed if companies are to become more competitive internationally.

And in crafting those new rules, the Harper government will finally have to go beyond the so-called "net benefit" test and address the question that took centre stage this week: Which assets are too strategic too sell?

It goes both ways

Canada has what everyone wants: water, energy, food, and minerals. The world's appetite for these resources has driven the country's recovery from the Great Recession, and has also spurred a string of high-profile takeovers of Canadian resource companies in recent years.

But investment flows both ways, and any policy on foreign investment in Canada needs to recognize the importance of that two-way flow. While the world was gobbling up iconic Canadian companies like Stelco, Inco, Alcan, Dofasco and Falconbridge, Canadian companies have been greedily expanding abroad, capitalizing on the suddenly muscular loonie to scoop up foreign assets.

"The bottom line is that we own more of the world than foreigners own of us," explained Stephen Gordon, an economics professor at Laval University in Quebec City.

Since the 1990s, Canadian companies have been net exporters of capital - meaning we've invested more abroad than foreigners have invested here. And there's no evidence that Canada is being gobbled up and hollowed out by foreigners. Between 2004 and 2008, Canada ranked 46th among 90-plus countries in per capita foreign direct investment, and 23rd in outbound investment. Roughly 20 per cent of Canadian business assets are in the hands of foreigners.

But capital is one thing, stuff in the ground is another. Natural resources strike a chord with many Canadians. Our forests, minerals and farm fields are what built the country, and to a large extent, they continue to sustain us today.

Ottawa is clearly tapping into that feeling and signalling that potash is too strategic a resource to let fall into foreign hands. In a world of food shortages, a resource like potash - a key fertilizer ingredient - might be the New Age gold. Potash is vital for producing more food for a swelling global population on a planet with dwindling arable land. And Canada happens to be the Saudi Arabia of the pink-hued mineral, home to nearly 40 per cent of global potash production and an even larger share of reserves still in the ground.

"We are going to have to come to grips with a growing demand from the rest of the world to either invest or buy outright these types of commodities," Agriculture Minister Gerry Ritz told the House of Commons this week.

"At this time and place, we are standing and saying no."

It's a strange twist: the government of a staunchly free-enterprise Prime Minister channelling the ghost of Tommy Douglas.

Seizing on Mr. Ritz's theme, the federal New Democrats want the foreign investment regime overhauled to explicitly ban foreign takeovers aimed at gaining "control of a strategic Canadian resource."

That's where the challenge lies for policymakers. There's nothing about natural resources that suggests Canada must keep them out of the hands of foreigners to enjoy the fruits of their exploitation.

"We need to take the emotion out and look at the economics," argues Glen Hodgson, chief economist at the Conference Board of Canada. "You don't need to own a resource to control it."

Saskatchewan, for example, is free to tinker with its royalty and tax regime to ensure it gets a decent return, no matter who taps its potash reserves.

A more troubling question is how to ensure that foreign companies live up to the commitments they make to Investment Canada when they pitch a takeover. Critics complain that several recent foreign purchasers, including U.S. Steel, which bought Stelco, and Brazil-based Vale S.A., which acquired Inco, have reneged on job pledges and pushed workers to costly strikes. The key, Mr. Hodgson suggested, is more transparency around the foreign investment rules and conditions demanded of potential buyers, including the job pledges they make to get deals approved.

An ambivalent history

Canada's attitude to foreign investment has been a moving target. Nationalization was in vogue in the 1960s and 1970s amid growing concern that this country was rapidly ceding its economic sovereignty, mainly to the United States. Canada's response was to create the Foreign Investment Review Agency (FIRA) in 1974, whose job was to carefully vet takeovers to make sure they would provide "significant benefit" to the country. Canada also erected barriers to protect its banks, airlines and various cultural industries.

FIRA was despised in the business community and the Mulroney government replaced it with the current Investment Canada regime in 1985. The more obtuse "net benefit" test replaced the "significant benefit" language of FIRA.

For the past 25 years, Canada's door was essentially wide open. The federal government has reviewed more than 1,600 takeovers since 1985, rejecting just one - a bid in 2008 by U.S.-based Alliant Techsystems for Vancouver-based MacDonald Dettwiler & Associates Ltd.'s satellite and space businesses. And in that case, the rationale for saying no was "national security," not because it wouldn't benefit the country economically.

Until the Potash Corp. takeover came along, it looked like Ottawa was poised to open the door even further, not padlock it. The Harper government pledged in 2008 to implement many of the recommendations contained in a blue-ribbon panel that explored Canada's place in the world, chaired by former BCE Inc. boss Lynton (Red) Wilson. Mr. Wilson's Competition Policy Review Panel recommended knocking down key lingering barriers to foreign ownership in airlines and telecommunications, and raising the threshold for deals that require Investment Canada review to $1-billion (Canadian) from the current $299-million.

Herb Gray, the former Liberal cabinet minister, spent much of his career worrying about how to ensure Canadians got the most out of foreign ownership. As a young minister in Pierre Trudeau's government, he authored the seminal 1972 report on foreign investment that led directly to the creation of FIRA. He later served as industry minister, overseeing the agency.

What troubles Mr. Gray now is that Canada isn't making sure its companies are treated the same way in foreign markets as it treats foreign companies here. "There isn't reciprocity with many countries," Mr. Gray says.

The danger

Tightening the rules, and turning foreign investors such as BHP Billiton away, could also could trigger a backlash from key trading partners.

Saving Potash Corp. might give some Canadians the "warm and fuzzies," Laval's Prof. Gordon said. But we'll all foot the bill because blocking foreign takeovers defies economic logic. Restricting takeovers, he said, invariably leads to higher prices, lower quality products, less competition and weaker management.

Even Mr. Robson of the C.D. Howe Institute said that while the string of recent takeovers has forced him to reflect on his open market beliefs, it hasn't changed his fundamental convictions. Strip away the emotion, he said, and blocking the Potash Corp. takeover remains a bad idea.

"Canadians behaving badly is no better than foreigners behaving badly," he said. "It really doesn't make sense to fixate on ownership."

Barrie McKenna is a member of the Globe and Mail's Ottawa bureau.