Industry Committee on June 15th, 2020

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

Jim, do you have any thoughts on this?

[Jim Balsillie]

I will just echo what I said in my comments. We have a decades-outdated framework for this that doesn't bear any relationship to the economic and security structures of the contemporary economy. Every thoughtful nation has long updated its approach to this. Even the U.S. right now is going through distinct and broad sectors to list the various technologies and companies, and how they are going to review it.

We're woefully out of date, and our framework does not apply to the issues at hand for the contemporary economy.

[Nathaniel Erskine-Smith, Liberal, Beaches—East York, ON]

I see that our chair has put up the yellow card, so as I run out of time, I'll say that I love all of my colleagues but, Bobby Morrissey, I miss you most of all. It's good to see you online.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Mr. Savard-Tremblay, you have the floor for six minutes.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

Thank you, Madam Chair.

Mr. Balding, you mainly painted a picture of the Chinese power, which is apparently managing to take advantage of certain bankruptcies. Although the Chinese model is that of a market economy, it is still a system of collusion between large industrial groups and the state. So it is a very aggressive model.

However, there is also a form of collusion with large industrial groups from those same liberal democracies. For example, the Chinese model often works hand in hand with foreign multinationals.

At the end of the day, doesn't the issue come from us being dependent on China? That was on display with medication and rare metals, among others.

Is this not also an issue of collusion between the Chinese state and Canadian and U.S. companies?

[Christopher Balding]

I think there is a lot of truth to that. For instance, in key sectors what you will frequently see is that the CEO of, for instance, the first China telecom will become the CEO of China Unicom, who will become the CEO of the next Chinese telecom company. They are really all one company.

That's one of the things I think is very important to note. A lot of times, a company of any size from China, if they are investing in Canada with any significant amount of money, they clearly have the state blessing and they have been provided funds from Chinese banks in different ways, as well as access to foreign capital.

When you talk about that level of state and enterprise collusion, that's a relatively accurate statement. There's this marriage between business and the state. That's why I said earlier that they are essentially given industries that they need to go out, and if they are investing abroad, there's a certain list of industries they are supposed to be investing in.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

What can be done now?

For instance, although China is a member of the World Trade Organization, it is not a founding member, and although it is part of it, we can say that the way it operates contradicts the World Trade Organization's model. So what can be done?

The relationship between Canada and China may have been excellent in the past, but that is no longer the case. Just a few years ago, there was talk of concluding a free trade agreement between Canada and China, and now the idea has been dropped completely. The relationship has turned sour. However, despite everything, this form of collusion continues.

Once again, what can be done?

[Christopher Balding]

If we're focusing on investment in Canada, the basic question is what we think of as national security. This is a question that countries around the world, especially in light of COVID, are re-examining right now. Even six months ago, if somebody had said that basic medical equipment like PPE was to be considered national security, nobody would have taken that person seriously. Now, that is front and centre in everyone's thoughts.

I think one of the first things that we have to think about.... I notice that today we're on Zoom. Zoom is basically a Chinese company. All of their encryption, everything goes through China right now. My understanding is that this video is going to be made public, but if it were preferred to be private or secure in some way, this could cause real problems for the Canadian government.

I think one of the things is that—and I would agree with some of the other witnesses who have spoken about this—there's a double-edged sword here. There needs to be transparency as to the rules and what the procedure is. It also needs to be noted that China uses that transparency against governments like Canada's and has taken steps to make sure that its investments avoid scrutiny or regulatory detection, and then, after they're forced to divest or something like that, they already have the necessary data or IP to go off and make their own product.

There needs to be a balance struck between the necessary transparency, which I agree with the other witnesses on, and keeping certain information confidential for the government.

[Simon-Pierre Savard-Tremblay, Bloc, Saint-Hyacinthe—Bagot, QC]

I see that my time is almost up.

I still want to say that you have provided a pretty evocative example. Although there have been warnings about the Chinese threat for such a long time, the Canadian Parliament is meeting through a Chinese application. What a mild paradox.

Thank you.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Our next round of questions goes to MP Masse. You have the floor for six minutes.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Madam Chair.

Briefly but importantly, I want to thank Mr. Erskine-Smith for bringing that motion forth. I'll be supporting that motion.

It's unreal that during this time, when our system of monopolization has resulted in significant revenues for grocery stores, this would take place. I'm hoping we can do a further analysis with regard to a riding like mine, where there is disproportionate reduction in service in poor and more challenged areas, versus more economically advantaged areas. That is also reflected in staffing, consumer supports, pricing, the way the facility looks and its overall business plan for the area. In fact, some areas are not even serviced by some of these chains because of the challenges they present. I hope we can have a good discussion about that because nutrition is important for equality, and there is a problem of systemic discrimination among these chains with regard to some of the services they're providing in certain neighbourhoods.

With that, my first question is for Mr. Wakil and Mr. Krane. Keeping the status quo is, for the most part, what you're advocating, so what specifically has Canada gotten right that other countries are doing wrong? I ask this because an analysis of this shows that we're different. What tangible results and specific statistics can you point to that have economically advantaged us, either through the creation of new products and services or GDP, because of the type of system we have, which is different from those of other countries?

Maybe Mr. Krane could answer first, and then Mr. Wakil.

[Joshua Krane]

Sure. Thank you very much, Mr. Masse.

You know, we've had a national security process in place now for about 11 years, and the process has actually worked quite well. The government has issued repeated guidance to investors to come in early when they have transactions that raise national security concerns, and for the most part investors have heeded that guidance.

[Brian Masse, NDP, Windsor West, ON]

I'm sorry to interrupt. Do you have some statistical information to back that up? That is what I'm looking for.

[Joshua Krane]

I've been told that more than half of investments are pre-notified before closing, but that's a figure you should try to obtain from the investment review branch because they track that information. It's not available publicly, but they would have that information if you require it.

The other thing to note is that Canada receives notice of about a thousand investments every year, and only a handful of those investments are ultimately reviewed on national security grounds, which shows that the vast majority of foreign direct investments into Canada are not subject to a national security review, and only a handful are. This suggests to me that either investors are being prudent about the types of investments they are making or that the government has accurately identified the types of investments that raise national security issues.

[Brian Masse, NDP, Windsor West, ON]

I'm sorry, that wasn't really what I was looking for.

Mr. Wakil, maybe you can take a shot at that. I'm not trying to be disrespectful to Mr. Krane. I was talking about what Canada was doing differently from other countries and how the net benefit really should have shown statistically for either investments or opportunities.

Mr. Wakil, can you take a shot at that, please?

[Omar Wakil]

I'll try to take a shot at it, sure. I think my first response is that Canada is highly unusual compared to other jurisdictions in having an economic net benefit type of review for foreign investment. The vast majority of countries have either a national security review of foreign investments or no review of foreign investment whatsoever. Canada, along with Australia and a handful of other jurisdictions, is in a highly unusual and small group of countries that review certain inbound investments for benefit.

Second, with respect to your specific question, you're asking for information that, to my knowledge, has not been collected or analyzed by the government, which would be very difficult or challenging to do. Part of the reason that it would be challenging to provide you with an answer to that—that is to say, on the benefit of the net benefit regime—is that we don't know the “but for” scenario. We don't know what would have happened to that Canadian business if the foreign investment hadn't happened.

I can tell you from personal experience, anecdotally, that there are a lot of investments that have worked out very well. There are a lot of investments where, as I said in my opening remarks, the alternative to the investment was insolvency, and the foreign investment, the injection of foreign expertise, the injection of foreign capital, helped the Canadian business and saved jobs, and so—

[Brian Masse, NDP, Windsor West, ON]

Thank you. I'm sorry, Mr. Wakil. I need to move on, because I want to go Mr. Balsillie—

[Omar Wakil]

Fair enough.

[Brian Masse, NDP, Windsor West, ON]

I do appreciate that, and it's a fair assessment of what I'm asking for. It's just that when we hear about keeping the status quo, the arguments in that regard often really don't have any evidence. They're not empirically analyzed, and we often hear the fear of change argument, of this being a violation of trade agreements and so forth.

Really quickly to Mr. Balsillie—we only have a few seconds—is there something that Canada can do with regard to the low-hanging fruit right away to at least ebb the tide of the exodus of some of the critical foreign companies that are smaller right now?

[Jim Balsillie]

Absolutely. You need to have an updated framework that factors in the nature of the spillovers and the consequences in a cross-cutting fashion of the contemporary economy, and we don't use that right now, so when you calculate the benefit, you don't calculate it properly. You calculate it with an anachronistic approach.

[The Chair, Liberal, Sherry Romanado]

Thank you very much. We'll now move to round two of our questions.

Our first round goes to MP Dreeshen. You have the floor for five minutes.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Thank you very much, Madam Chair, and hopefully my Internet connection stays hooked up.

This is to both Mr. Balsillie and Professor Balding. The rest of the world seems to understand the importance of what is happening as far as IP is concerned. Perhaps after Wednesday's vote with regard to the UN Security Council, we can get back to focusing on Canadian jobs and giving proper attention to policies for Canadians.

Professor Balding, you mentioned the following in a tweet: “Beijing has made it clear for sometime it wants to do away with the liberal international order. Continued multilateral steps toward openness and respect for human rights are dead if you accept the Chinese vision.”

As someone with intimate knowledge of the Chinese government and their economy, I wonder if you could put this into the context of our study on the Investment Canada Act. We've heard testimony, for example, that suggests that Canada needs to clarify its foreign investment rules, and as the COVID-19 pandemic puts the country at heightened risk of strategic takeovers by aggressive foreign actors like China, the suggestion has been made that potential takeovers by Chinese state-owned enterprises in particular could be used on behalf of the Communist Party of China to advance its foreign strategic interests.

Over the short and long terms, could you expand on what you believe are the foreign strategic interests of the Chinese government? What are the risks to Canadian assets? Should we impose a complete moratorium on these investments, or at the very least significantly strengthen the national security provisions of the ICA?

[Christopher Balding]

Thank you very much for that question, Mr. Dreeshen.

I think that is an accurate statement I tweeted. Let me start by explaining a little about how the Chinese economy works and their strategic investment objectives, which play into this.

Every year, they are given a list of prioritized sectors. Right now they have nine sectors that are prioritized. We see these sectors getting vast sums of money to invest abroad and domestically. The sectors that we see being prioritized are politically motivated sectors. We see this fundamentally in the performance of the firms. Believe it or not, Chinese firms, especially the SOEs, have very low return on assets and equity, some of the lowest in the world. Large cap companies in the Chinese stock market have been yielding about 1% annually for the past 25 years.

Then we also see this in how capital is allocated within the country and abroad. As a simple example, they have prioritized sectors like big data and facial recognition, primarily for domestic security concerns. When they are talking about things like artificial intelligence at the University of Toronto and some of the other highly skilled areas, they're using that technology in ways that liberal democracies might not appreciate.

Even if it is not necessarily a firm that is purchased, with the jobs being relocated out of Canada, at the very least it probably bears a second look at what some of these Chinese companies are doing, especially with technological resources and how they are being used in places like Xinjiang.

In how Chinese companies are investing abroad, we see very clear examples where they will work through venture capital firms to access the technology of a target firm and gain access to its technology and then either copy or license that technology—there are many different patterns this has taken—so that the technology can essentially be exported to China and used there. We've seen examples in the United States and other countries where they have not submitted to a national security review.

We see this as the behaviour we're dealing with, and when we talk about a rules-based order and the standard economic practices that we take for granted, they are not something that China abides by, typically.

[Earl Dreeshen, Conservative, Red Deer—Mountain View, AB]

Thank you very much.

I see that the chair's yellow card has come up. I was going to ask Mr. Balsillie similar questions about his concerns about state-owned enterprise legislation, which we believe is necessary, but I will have to leave that for another time.

Thank you so much.

[The Chair, Liberal, Sherry Romanado]

Thank you very much.

Our next round of questions goes to MP Ehsassi.

You have the floor for five minutes.