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The Progressive Economics Forum

Caterpillar and the Investment Canada Act

There’s been some good public debate about the need for changes to the Investment Canada process in light of Caterpillar’s incredible actions in London.  They showed up uninvited in 2010, took over a long-standing productive profitable plant, demanded money (from workers and government alike), then left — leaving behind a shuttered plant and a shattered community.

Clearly something needs to change in terms of how the federal government regulates this process: sorting out foreign investments that can add genuine value to our economy, from those which are beneficial to corporate interests and investors but ultimately undermine our capabilities to produce and innovate.

The claim that Ottawa is somehow “powerless” to do anything about Caterpillar’s aggressive actions (whether at the time of the 2010 takeover, or even now) is ludicrous.  A government that was interested in protecting its citizens clearly possesses the sovereign power to act.  When pushed politically (in the MDA and Potash cases), even the Harper government never let the fine print of the Investment Canada Act (ICA) stand in the way of forceful interventions.  I can’t imagine the government of Korea or Germany standing by as a foreign firm marched in, took over a strategic industrial asset, extorted the citizenry, and then walked back out the door they came in.  Danny Williams certainly didn’t, either.

The government, oddly, has presented two distinct rationales for why the original Caterpillar acquisition was not fully reviewed: that the purchase was too small (relative to the $299 million threshold for WTO investors that was in place in 2010), and/or that the purchase didn’t have to be reviewed at all because it consisted of an “indrect acquisition”  (whereby a foreign investor buys a firm that was already foreign-owned).  The specific wording of the ICA is clear as mud (to this non-lawyer, anyway) regarding which factors trigger a review, and the government’s inconsistent response has muddied the waters further.

As an interim measure, CAW President Ken Lewenza has asked the federal government to divulge the details of Caterpillar’s initial 2010 acquisition (contained in its notification under ICA rules), so that the government’s claim that the acquisition was too small to trigger a formal review can be independently assessed. 

Caterpillar stated that its takeover of Electro-Motive represented $1.3 billion in assets, and Electro-Motive Canada represented the most stategic manufacturing asset in the whole firm, and almost half its total workforce.  It seems unlikely that a fair value determination would put the whole Electro-Motive Canada operation under the threshold.

The ICA gives the government plenty of scope to revisit the 2010 acquisition if it turns out Caterpillar’s initial claim was unbelieveable (and I am curious to know whether Ottawa performed ANY due diligence on that notification … or did they just accept Caterpillar’s word for it?).

In the longer run, of course, the whole Investment Canada framework needs to be overhauled.  In theory the government will soon initiate a major review of its foreign investment policy.  Lewenza’s submission to Industry Minister Paradis also highlighted the major areas that will need to be reformed as part of that review.  Here are the relevant points from his letter.  In coming months, progressives will need to flesh out our arguments on these and other aspects of foreign investment, to push back against the predictable straw-man responses that we are somehow trying to cut off Caanda from world capital:

Improved Transparency:  Right now the review process is entirely secretive, with Investment Canada refusing to even divulge whether an application has been received, let alone the terms and effects of that acquisition.  This leaves other stakeholders (including workers, communities, and lower levels of government) entirely in the dark regarding an acquisition and its significance.  Our union was in this position, for example, at the time of the initial Caterpillar acquisition of Electro-Motive.  By the time we learned of it, it was a fait accompli.  There must be a more reasonable balance struck between the needs for confidentiality of acquiring businesses, and the needs for all affected economic stakeholders to know what could happen to them.

Stakeholder Input:  In a related vein, other stakeholders must have a legislative ability to provide their input to the foreign investment review process, through public hearings or other consultative mechanisms.  This is a fundamental prerequisite for economic democracy.

Tighten up Loopholes:  The idea that a $330 million acquisition (the current threshold for WTO investors) is “too small” to matter, and therefore should not be reviewed, is not credible – especially given a complete lack of transparency or independent verification regarding how that value is measured.  Similarly, the exemption of “indirect acquisitions” is an especially dangerous loophole, one that proved disastrous in the Electro-Motive Canada case.  Current discussions regarding a potential business combination between Glencore and Xstrata provide another current example of the potential dangers of exempting indirect acquisitions.  Indirect acquisitions should be fully reviewable by the Investment Canada process if they meet the other criteria for review. 

Defining and Measuring Canadian Costs and Benefits:  The concept that a foreign investment must provide a “net benefit” to Canadians in order to be allowed to proceed, is in principle a valid one.  The problem with the current ICA is that it provides no detail, transparency, or verification regarding how the costs and benefits of incoming foreign investments are to be contemplated, measured, and compared.  In practice, this “net benefit” test has been mostly meaningless, except that it allowed the government (when pressed by political forces) to overrule exceptional acquisitions (namely, the MDA and Potash cases).  The new legislation should recognize the many dimensions of cost-benefit analysis affecting foreign investments.  It should downplay the one-time benefit received by Canadian financial investors as a result of a potential acquisition, and focus instead on the long-run net impact of the acquisition on Canadian production, employment, investment, and exports.  The fact that a foreign investor might be willing at a certain point in history to pay a premium price for the shares of a Canadian company (as occurred with several Canadian resource companies at the peak of the last resource cycle) should not lead government to approve acquisitions which subsequently cause long-run damage to Canadian facilities and production (as we have experienced painfully in the aftermath of the takeovers of Inco, Falconbridge, Alcan, and Stelco).

Imposing and Enforcing Commitments and Conditions:  In the course of reviewing and approving foreign investments, an appropriately pro-active government would have many opportunities to negotiate commitments from the incoming investor that would enhance the net benefits to Canada.  These could and should include commitments regarding its future Canadian production footprint, technology transfer, minimum employment and training commitments, and targets for investment and innovation activity.  These commitments, once attached to an approved acquisition, must be divulged and be subject to a more genuine enforcement process (including the imposition of financial penalties up to and including annulment of the acquisition) than has occurred to date.  The embarrassing experience of U.S. Steel, which thumbed its nose at its Investment Canada undertakings (and then bought itself out of those undertakings through an insulting, minimalist out-of-court settlement) demonstrates dramatically that government must be prepared to use meaningful powers of enforcement to ensure that the Investment Canada process is more than a token hoop for foreign investors to jump through.

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Comment from T Manderly
Time: February 10, 2012, 9:42 pm

The Harper government is planning an all out assault on middle class wages

Comment from Paul Tulloch
Time: February 11, 2012, 3:14 pm

In order to get many of these changes, we will need a brand new direction in Governmenta nd a re-regulation over FDI. Of course this means a change from the last 30 years of assaulting the working middle class, brought on by the breakdown of the new deal. Liberal or Tory would never bring these changes about. Reading a good article by James Crotty- and the next big assault coming onto the working middle class called -austerity.

I wish I could say what I wanted about Caterpillar but it would take a book or two but I do think it is summed up in Crotty’s article here.

I ask progressive this question, Canada has a deficit at about 2.1% of GDP, way below most developed economies, like the US and the UK hitting near 10%. SO what is Harper trying to do?

1) exposing the manufacturing sector through a high dollar, even the Chinese are thinking of devaluing again as their economy is slowing (as stated by Roubini yesterday). Yet here we are with an over valued Dutch diseased dollar, plaguing the manufacturing sector, backed up by zero protection from the Government. Attacking the middle working class.

2) Attacking social safety nets like OAS, under the guise of a false crisis. Attacking the elderly.

3) Pillaging the public service and programs that are instrumental in the enabling and formation of a foundation for the middle class. (not just the fed level, provincial and municipal. attacking the middle class

4) cutting corporate taxes and personal taxes back to levels that make the austerity seemingly sell-able, yet compared to other countries, we are still at a mere 2.5 deficit which is perfectly acceptable given we are still making our way out of a recession. Again an attack on the middle class as taxation becomes less progressive.

5) in the end we have a situation where we could very easily drift into a further recession. In fact I am convinced these last moves at austerity and the continue pressure on our manufacturing sector will do it.

Obama started his state of the union speech last week with the words- rebuilding manufacturing is the key to overcoming these challenging times. Yet not a word from Harper, in fact in that same speach Obama hinted at some protectionist plans that could alter the course for US manufacturing, vis a vis China, yet where is Mr Harper? Signing a free trade deal with the Chinese. Say what, a communist regime in a free trade deal? A high waged workforce in a free trade deal with a country that notoriously keeps its dollar devalued for growth, and somehow we are going to enter into free trade. A population of 30 million going to up against a population of a billion?

The solution!

The NDP need to get themselves a very clear and engaging economic plan out to the masses and start into election mode right after the leadership convention. The NDP’s biggest goal? Selling Canadians that they can indeed bring about a successful transformation in the economy that allows a middle class to thrive. Good jobs and a vibrant public service and social transfers are the fundamental building blocks.

Which of the leaders within the NDP can deliver such.

Well many seem to think the selection of a leader is all about strategy- who can bring home that fickle Quebec vote? That might work for Quebec but the rest of the country need more and it needs to have an NDP that can lead and build a new economy.

The leader that can do both of those and is to me the one most suited to both goals- Peggy Nash.

She seems to be rated a distant third, but I just do not see Tom M. being able to deliver much different than a liberal economic platform, which as we know over the last 30 years. And when it comes to Mr. Brian T., well again he seems to be the older NDP’s safe counter to a MR. Tom M. form bringing the party to the center through the Quebec strategy. It is a big gamble as it seems as though the Quebec vote is about as fickle as ever.

Vote Peggy!

Comment from Paul Tulloch
Time: February 14, 2012, 9:44 am

I am still not convinced that capital is as mobile as the flat worlders think it is.

I would love to follow up with Caterpillar in a year and see what kind of locomotives come out of that new plant in Indiana- Quality and quantity.

I recall in my study of Phillips Cables in Brockville one half was fairly standardized work, and that part was successfully transplanted to Indiana as it was like making huge rolls of copper speghetti. However, the other half of the plant produced specialty cables, and the machines were quite complex and the workers had quite a bit of knowledge over the production process. The machine, the computer and the human all worked together, kind of an extension and integration of each that management as much as they wanted to turn key it all- into a black box for workers – quite simply could not.

So guess what happened, those workers successfully opened up their own small specialty cable plant about 18 months later.

I wonder if that should not be considered more in the case of these london locomotive workers. I was looking at some pics from google earth, that plant is massive, it is such a dramatic loss of abilities and livelihoods.

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