Industry Committee on May 3rd, 2023

[Andy Fillmore, Liberal, Halifax, NS]

Thank you very much, Mr. Chair.

As you know, in this review process, we have to define “prescribed business activities”. There is some question around whether we should define “prescribed business activities” in legislation, or whether they should be in regulation—for example, through the guidelines on the national security review of investments.

Do either of you have any sense where these definitions should live? Is it in regulation or legislation?

[Malcolm Bruce]

I would be so bold as to describe them in the act itself.

Thanks.

[Andy Fillmore, Liberal, Halifax, NS]

In the act....

[Dr. Ian Lee]

That will certainly make it more transparent but less flexible at the same time. I agree with what you just said, but I think it will be more rigid. Again, you know how long it takes to slow down to amend a bill. It can take years. It will certainly introduce a further rigidity in the decision-making process.

[Andy Fillmore, Liberal, Halifax, NS]

Okay.

I thank you both.

[The Chair, Liberal, Joël Lightbound]

Thank you very much.

Mr. Lemire, the floor is yours.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Thank you, Mr. Chair.

Mr. Leblond, when you appeared before this committee in 2020, you said we needed to distinguish between what is strategic and what is not. You said that the Investment Canada Act has to be robust in the long term and that its mission is twofold: attracting foreign investors and businesses, but also protecting national security. Do you feel that Bill C‑34, which we are considering today, does a good job of answering those questions?

[Dr. Patrick Leblond]

Thank you for your question, Mr. Lemire.

My interpretation of the bill focuses a lot on the process and not necessarily on the content. We were just discussing how to define material assets. We are told that a list will be produced by the department. Should that be in the act or somewhere else? On that point, I share Mr. Lee's opinion. If it is in the act, it becomes very rigid. We know technology is evolving rapidly. It therefore seems preferable to me that it be in regulations or directives rather than in the act.

In this case, the bill seems to me to be very focused on process. So how do we try to improve the process to make sure we are better able to protect national security in connection with investment by non-Canadians? Regarding notification, for example, rather than letting the government decide by itself what falls under national security, the bill requires that everyone do it.

However, as I said earlier in my opening statement and my answers to Mr. Perkins, when the act refers to une unité exploitée—in English, it uses the term “business”, which, to my mind, has a slightly different definition from the French term—why not put the emphasis directly on the assets or information? In this regard, I wonder how effective the bill can be.

If you can circumvent the process by saying you have acquired not an entity carrying on operations, but simply assets or information—for example, the source code for an application, not even the application itself—is this kind of acquisition a threat to national security? Personally, I think it is. So maybe that type of transaction has to be mentioned.

The other aspect mentioned deals with the way we can enforce the undertakings given by non-Canadian investors to reduce or eliminate the risk of injury to Canada's national security. If we are not capable of enforcing those undertakings, either because the economic penalties are too low or because we are unable to compel or threaten divestment, we are even further reducing the effectiveness of the bill, and ultimately of the Investment Canada Act, as a tool to protect Canada's national security.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

There is the national security problem and at the same time the supply chain security problem. We agree that since the start of the pandemic, the international dynamics have changed, particularly in this regard.

The last time you were here, we discussed the transaction involving Rona, which was then taken over by Lowe's. Today, that asset has been sold by Lowe's to an investment fund. At the time of the transaction, Lowe's had undertaken to protect a majority of the jobs and keep the company's headquarters in Boucherville, Quebec. Four years later, what have the net benefits of allowing that sale been for Canada, in your opinion?

[Dr. Patrick Leblond]

I can't comment because I don't know the details, but given Lowe's lack of success after acquiring Rona, we might doubt that it has been beneficial. Of course, the question is whether the same obligations still exist since the acquisition of Rona by an investment fund. As I said, since I don't know the details, I am not in a position to say whether the undertakings given by Lowe's were honoured and whether they have been maintained by the investment fund.

That needs to be monitored. What happens if those undertakings are not honoured? As I understand it, in cases like that, a minister or a department has relatively little power to enforce that kind of undertaking. Lowe's could have said that the company was bankrupt and it could no longer honour its undertakings. In the deal made with the investment fund, does it say the undertakings are abandoned? Rona was not necessarily a business in a strategic sector, but it was nonetheless a jewel in Quebec's economy.

In the circumstances, I think something has to be done beforehand; when it's too late, it's too late. We have to do something beforehand, before things deteriorate, to make sure the undertakings are honoured.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Do you feel that this bill allows for more enforcement?

[Dr. Patrick Leblond]

As I said, my training is in economics, business administration and political science, and those are the perspectives from which I read the situation. I'm not a lawyer.

I think the bill does not allow it. In fact, it is not clear. From my understanding of the Investment Canada Act, the minister or department does not have the power to go back, to threaten to cancel everything or force a sale, but, in my opinion, that is a power they should have. It should be clearly included in the bill. As well, I think the economic penalties should certainly be much higher than $500,000. In many cases, that is a symbolic amount.

[Sébastien Lemire, Bloc, Abitibi—Témiscamingue, QC]

Thank you.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Lemire and Mr. Leblond.

Mr. Masse, the floor is yours.

[Brian Masse, NDP, Windsor West, ON]

Thank you, Mr. Chair.

Thank you to the witnesses.

Mr. Lee, I'm glad you raised the issue over investment maybe leaving our country and going to the United States. You seemed to have been suggesting that it's a lot easier.

I guess I'm going to ask, then, your assessment. CFIUS, the committee on foreign investment in the United States, actually has 16 departments that oversee foreign investment. It was created by Gerald Ford in 1975. In the 1980s it really emerged significantly, dealing with Japanese semiconductor issues in American supplies. In 1988, the Exon-Florio arrangement gave them the option to outright reject mergers or acquisitions. CFIUS right now does not have to have a public review. It doesn't even have to engage the parties that are looking to take over. They do not exercise any public commentary of the decisions they make.

I'm just wondering. Given that, are you suggesting that our current laws in this current bill would give us equivalency or stronger powers than CFIUS?

[Dr. Ian Lee]

I haven't looked at CFIUS, but I want to respond in a slightly different way because of the way I've been teaching the strategy course for some 30 years. I've increasingly turned away from theory. I'm not putting down theory. Theory is very important, but I'm increasingly evidence-based. Let's look at the data. What is the actual data saying? Look at the actual FDI flow. It's not my opinion. It's the actual flow.

C.D. Howe put out a wonderful paper about a year ago called “Decapitalization”. They have the comparative metrics normalized to share of GDP for investment FDI, Canada versus the States, and—

[Brian Masse, NDP, Windsor West, ON]

I'm going to go to the other witnesses if you don't want to comment on that. I want to get commentary from the other witnesses on CFIUS directly, because I'm trying to look for it. I don't mean to be rude, and I'll try to get back around to it, but I would like to hear from the other witnesses.

This is kind of a comparable sister law to what we would have here in Canada. We're looking at a minister and maybe cabinet and a few other things.

Mr. Leblond or Mr. Bruce, perhaps you could provide some commentary. With these amendments that we're looking at, how does that compare with the United States? Again, my personal opinion from doing an assessment...and what I'm getting from my American colleagues is that they're looking at us and saying, “Are you serious?”

Perhaps Mr. Leblond first and then Mr. Bruce could provide something with regard to that.

[Dr. Patrick Leblond]

Thank you, Mr. Masse.

Certainly with where we are now, and then including this bill, I think the CFIUS process remains much tougher than what we're seeing here and what we have currently in terms of protecting national security. I'm not necessarily saying I agree with it. I think the fact that it has zero transparency and does create uncertainty is a problem. In fact, CFIUS has pretty much killed any Chinese investment in the United States as a result of its process. A lot of companies are looking at this and are asking whether they want to go through that only to find out in the end that their investments are not going to happen.

On the other hand, referring to the previous comments, the fact that CFIUS can retroactively force disinvestment in the name of national security is something I think is worth considering. There's the famous, obviously now well-known, case of Grindr, which is the matching application for homosexuals. They found out that this was bought by a Chinese company and it could potentially be abused. People could be blackmailed, for instance, if they had not come out, or something like that. Retroactively, it forced the sale of the company.

You might question the fact whether, once the data has been transferred, it really matters if you force the disinvestment. It's kind of too late. Once you have the assets, whether it's the data or whether it's the technical information, disinvestment itself—forcing Grindr to be sold to an American, European or Canadian company—to me...the ship has sailed. It's too late, but, at least, it's potentially a threat that could be used, especially in the case of commitments that are made and they're not respecting those commitments.

I think the CFIUS process might be, in a way, too opaque for my liking.

[Brian Masse, NDP, Windsor West, ON]

Thanks.

I'll go to Mr. Bruce and let him get in on this if he has an opinion.

The Grindr one was really about limiting damage control and also whether they, later on, would get more acquisitions as well. That's a very good point.

Mr. Bruce, do you have anything on this?

[Malcolm Bruce]

No, I'm actually not going to comment any further. I think most of those points have been addressed.

[Brian Masse, NDP, Windsor West, ON]

I will go back to Mr. Leblond.

You mentioned Rona not being strategic, but when you look at some of the consumer stuff out there, as an economist.... I'm just looking at lack of competition being a big issue. Zellers was bought by Target, and Zellers was making a profit. It actually had benefits for its workers and so forth. Target is now gone. Future Shop was bought by Best Buy, and it closed up. Stone Canyon in Windsor bought Windsor Salt. They also bought an American firm, and now there are strikes and stuff like that.

With Rona and Lowe's, I guess I would argue that, for a strategic industry, these are consumer products that have intrinsic values in our economy for businesses and consumers. How do we relate that?

I'm not taking offence to your comment and saying it's not strategic. I want to challenge that assessment in the sense that the lack of competition by losing consumer products that are connected to small and medium-sized businesses becomes a problematic thing for our economy.

[Dr. Patrick Leblond]

My comment in terms of what is strategic, and going back to my testimony from 2020, is that again it was more in the context of a threat to national security. I think what you're referring to is more on the net benefit analysis within the Investment Canada Act. Obviously, to me, you're absolutely right that competition should be part of that analysis. Now it is not clear to me whether it is. It's one of the things that are obviously or supposed to be considered, but often we don't know.

That's one of the issues in terms of transparency. Often we get the decision and say it's a net benefit, but we don't really know how the decision was reached and what part competition had in it. That's why I think, in general, it would be nice to have more transparency. Obviously, there are things you don't necessarily want to put out in the public, but then again, maybe parliamentarians should be part of that process and should have some kind of ability to review some of those decisions or at least get the information.

[Brian Masse, NDP, Windsor West, ON]

Hence, you have valid criticism of or concern with CFIUS as a response mechanism, although it does include many more departments and governmental oversight. However, still, there's a secrecy behind it. You don't really know what the magic formula is, and we don't know what it is in terms of a decision by the minister.

Thank you, Mr. Chair.

Thank you for the testimony.

[The Chair, Liberal, Joël Lightbound]

Thank you, Mr. Masse.

You have the floor, Mr. Williams.

[Ryan Williams, Conservative, Bay of Quinte, ON]

Thank you, Mr. Chair.

I want to jump on a lot of the testimony. This is a good discussion with Mr. Masse.

Mr. Leblond, do you believe that part of the net benefit review should involve competition and that we should be looking at competition as one of the aspects?