Canadian Policies on Direct Foreign Investment: The Issues behind the Legislation

CANADIAN POLICIES ON DIRECT___ FOREIGN INVESTMENT: THE ISSUES BEHIND THE LEGISLATION David G. Staples HROUGHOUT the late 1970s and early 1980s, tensions increased in Canada-U.S. relations because of two Canadian acts concerning direct foreign investment in Canada. These two acts—the Foreign Investment Review Act (fira) of 1973 and the National Energy Program (nep) of 1980—prompted adverse reactions from American investors and, later, from the U.S. government itself. Congressional hearings were held in 1975-76 and again in 1981 on these policies and regulations, and many diplomatic exchanges and U.S. attempts to influence Ottawa's repeal of certain provisions of the acts were initially unsuccessful.1 In 1982 the United States government finally asked the council of the General Agreement on Trade and Tariffs (gatt) to create a panel to consider whether certain demands imposed by Canada's Foreign Investment Review Agency were in violation of international trade agreements. The American opposition to both acts is fueled by the perception that they discriminate against foreign investors and are therefore contrary to the Organization for Economic Cooperation and Development's (oecd) Declaration on International Investment and Multinational Enterprises , which stipulates national treatment for foreign investors in host1 . The first congressional hearing, "Canadian Foreign Investment and the Role of Foreign Investment in the Canadian Economy," was held before the Subcommittee on Inter-American Economic Relationships of the Joint Economic Committee in 1975 and 1976. The second hearing, "Impact of Canadian Investment and Energy Policies on U.S. Commerce," was held before the Subcommittee on Oversight and Investigations, Consumer Protection, and Finance of the House of Representatives Committee on Energy and Commerce in 1981. For a more complete discussion of the diplomatic tensions over these Canadian policies, see Canada and the Reagan Challenge by Stephen Clarkson (Toronto: James Forimer & Company, 1982). David G. Staples received his master's degree in Canadian studies and international economics from SAIS in 1984. 135 136 SAIS REVIEW country legislation. Although the declaration is nonenforceable, both Canada and the United States are signatories. The United States therefore claims that Canada is violating both the spirit and the letter of the oecd agreement.2 fira is thought to be contrary to the gatt because of requirements on some foreign owners to purchase equipment and supplies from Canadian suppliers rather than importing them. There are further requirements that foreign owners must agree to export from their Canadian plants in order to gain approval. Both stipulations are viewed as being in violation of two gatt articles. Article 3 requires countries, as mentioned above, to offer foreign traders "national treatment " in domestic markets, and article 17 provides for nondiscriminatory treatment by state-trading enterprises of exports and imports. It is also deemed unfair because of the extraterritorial reach of some provisions of the legislation: Foreign takeovers of foreign-based firms with operations in Canada are subject to fira approval in order to continue operating in Canada.3 In addition, specific sections of both acts impose requirements and restrictions on investments made before the legislation was on the books, and the fira process appears arbitrary because it takes a case-by-case approach. In the broader context, Canada's legislation on foreign investment coincided with similar moves by other countries, including Mexico and Brazil, to introduce or tighten existing legislation on investment.4 Canada, the single largest recipient of U.S. direct foreign investment (approximately 20 percent, or $50 billion), may therefore have been viewed by U.S. officials as continuing a dangerous precedent. These policies undoubtedly raised serious concerns for many American investors. The U.S. government had also just completed the 1980—81 Tokyo round of gatt negotiations, during which tensions had reached a peak, and was just beginning to explore the possibility of an agreement on international trade in services for future multilateral-trade negotiations.5 These Canadian regulations struck at the heart of what many, both in and out of government, were only just beginning to express concern over: government restrictions on trade in services. It is a little more difficult to explain in just a few short paragraphs why Canada passed the legislation in the first place. Many factors, both political and economic...