New rules needed for investments by foreign governments

In an effort to secure United States access to key critical minerals, the Trump administration has purchased sizable stakes in two Canadian mining companies — Trilogy Metals and Lithium Americas Corp (LAC). These aggressive moves create a dilemma for Ottawa.

Since news of the investments broke, the Carney government has been quiet, saying only that it “welcomes foreign direct investment that benefits Canada’s economy. As part of this process, reviews of foreign investments in critical minerals will be conducted in the best interests of Canadians.”

Lithium, which LAC produces, is included in Ottawa’s list of critical minerals  “essential to Canada’s economic or national security.” And the Investment Canada Act (ICA) requires the government to scrutinize all foreign investments by state-owned investors on national security grounds. Indeed, it specifically flags the potential impact of an investment on critical minerals and their supply chains.

Since the lithium will be mined and processed in Nevada and (presumably) used in the United States, the Trump administration’s investment will likely have little impact on Canada’s critical mineral supply chain. But if the Carney government does initiate a review, that may enrage President Donald Trump at a critical moment in the bilateral relationship as both governments prepare to renegotiate the Canada-U.S.-Mexico Agreement (CUSMA).

A second dilemma is whether the Carney government should apply the ICA’s “net benefits” test, which tries to measure the investment’s impact on Canadian employment, innovation, productivity and economic activity. The investment must also be consistent with Canada’s industrial, economic and cultural policies.

The Trump administration’s investment in LAC could very well fail the ICA test, since the main benefit to Canada is that Canadian investors in LAC have been substantially enriched by the U.S. government’s initiative. A week before the administration announced its investment, LAC’s shares were trading at around US$3; two days afterward, they were at US$8.50. But, shortsightedly in the view of many, the ICA has never viewed capital gains by Canadian investors as a benefit to Canada.

As for Trilogy Minerals, its share price surged some 200 per cent after the Trump administration announced its investment to support Trilogy’s mineral exploration in Alaska. Again, under the ICA’s current “net benefits” rules the benefit to Canadian shareholders is irrelevant.

In reality, of course, such inflows of foreign capital augment domestic savings, which, in turn, provide financing for domestic business investment in Canada. And the prospect of realizing capital gains from acquisitions made by foreign investors encourages startup Canadian companies.

So, what should the Carney government do? It should revise the ICA so that national security grounds are the only basis for approving or rejecting foreign governments’ investments in Canadian companies. In particular, it should eliminate the net benefits test — or at least recognize that foreign investments that enrich Canadian shareholders convey benefits to Canada. Even under these revised rules a reform may not sit well in Washington, but the prospect of retaliation by the Trump administration must not prevent Canada from applying its sovereign laws.

These recent investments by the Trump administration may not be unique. Hundreds of Canadian-owned mining companies operate in the U.S. and around the world, and future investments in some of these companies, whether by Washington or other foreign governments, are quite possible. Canada’s review process needs be serious and robust and at the same time recognize all the benefits of foreign investment.

Steven Globerman is a senior fellow at the Fraser Institute.