If Canada is serious about attracting investment, we need to remember that remaining competitive is not a one-time act, writes Adam Taylor.
By Adam Taylor, March 16, 2018
An interesting feature of today’s global economy is how our closest political and military allies are also our fiercest economic competitors. Virtually every single one of Canada’s closest allies is undertaking initiatives to aggressively attract investment. So, earlier in the week, it was welcome news that Canadian Trade Minister Francois Champagne announced the creation of Invest in Canada, a new agency that will seek to attract Foreign Direct Investment (FDI) to Canada.
The announcement couldn’t be timelier. According to Statistics Canada, FDI into Canada dropped in 2017 to the lowest level in nearly a decade. Investment in Canada’s oil sands has all but dried up, and the Trump administration’s proclivity for protectionism and coolness toward NAFTA has created an environment of uncertainty – not exactly inspiring confidence for would-be investors in Canada. But other more self-inflicted factors are at play; after all, lately Canada has denied investors two of the things they crave most: predictability and competitiveness.
As promised, the federal government has put a national price on carbon, hoping it will appease oil sands skeptics who oppose pipelines. But the government has been sending mixed signals. It cancelled the Northern Gateway pipeline but backed Kinder Morgan’s. The confusion even led Calgary-based TransCanada to shelve its Energy East project, frustrated by delays, rising costs, regulatory confusion and politics. Who can blame foreign investors? Investors simply want to know if Canadian oil will have the transportation network required to move it to offshore markets.
Lately Canada has denied investors two of the things they crave most: predictability and competitiveness.
Policy incoherence crosses party lines. The policy changes on foreign ownership of oil sands companies undertaken by the previous Conservative government did not send the signal that Canada was open for business either. While that was more about restricting state-owned enterprises from China, it too had a chilling effect on FDI. Policy-making will always be driven by politics and therefore somewhat arbitrary, but we need to find better ways to send investors appropriate signals over the medium- and long-term.
This was the goal of successive Liberal and Conservative governments in cutting business taxes. Starting in 2000 under Prime Minister Jean Chrétien, the federal corporate income tax rate fell from 28 percent to 21 percent. The Harper government took it one step further with a corporate tax reduction schedule that saw the combined federal-provincial rate fall from nearly 43 percent in 2000, to 25 percent in 2013 – a substantive 72 percent. This put Canada firmly in the global pack of countries actively lowering business taxes precisely to attract investment.
However, remaining competitive is not a one-time act. It must be a constant focus of policy-makers looking both outward and inward. What was a competitive advantage for Canada a few short years ago is now merely middle of the pack and threatens to soon be well below the OECD average. The passage of major tax reform in the US will further erode this advantage. We cannot afford to assume the cost of doing business in a jurisdiction is not top of mind for would-be investors and business leaders. Of course it is.
What was a competitive advantage for Canada a few short years ago is now merely middle of the pack.
At the same time, other factors will help attract new sources of FDI. Canada has plenty of advantages including world-class banks, a diverse, highly skilled talent pool and a sound post-secondary education system. If the new Invest in Canada agency helps showcase our hard and soft advantages, it certainly can’t hurt (though a cost-benefit analysis might still prove the spending questionable). But our competitors are aggressively moving now to attract the FDI that is crucial to any country’s prosperity. And they’re doing so with policies rooted in the realism that the global economy is fiercely competitive and FDI is finite.
Some critics observed that while the Trump administration is cutting taxes and removing regulations, while encouraging US companies to ‘reshore’ to American soil, Canada’s 2018 budget focused on symbolic items more in line with the federal government’s so-called progressive agenda. That’s not to say that those items aren’t appropriate for policy-makers to consider, but they don’t scream ‘budgetary’ and they completely ignore competitiveness concerns.
If we’re truly serious about reversing the slump in FDI, we need to be equally aggressive as our friendly competitors, using all of the tools at our disposal – and we need to do it sooner than later. When it comes to competitiveness, like so many things, the first step to recovery is admitting we have a problem.
Adam Taylor is a principal at Export Action Global, an Ottawa-based trade consultancy and a former senior advisor to Conservative Trade Minister Ed Fast.
