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Canada tightens foreign investment scrutiny, citing economic impact of COVID-19 – The Globe and Mail

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The Peace Tower on Parliament Hill in Ottawa is seen, in the midst of the COVID-19 pandemic, on Saturday, April 18, 2020.

Justin Tang/The Canadian Press

The federal government is following the lead of other countries and tightening scrutiny of foreign takeovers of Canadian firms whose values have plummeted due to the COVID-19 pandemic.

The goal, according to the Saturday policy statement is to “ensure that in-bound investment does not introduce new risks to Canada’s economy or national security, including the health and safety of Canadians.”

Rules already in place to vet foreign direct investment from state-owned enterprises, or state-connected entities, will now apply to all investments, no matter their value said the weekend policy statement. The government will also pay close attention to “investments of any value, controlling or non-controlling” in businesses involved in public health or the supply of critical goods and services.

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According to the statement, the broader lens Ottawa is applying to state-linked entities is because the pandemic amplifies the concern that they may be “motivated by non-commercial imperatives that could harm Canada’s economic or national security interests.”

The new policy will stay in place until the “economy recovers from the effects of the COVID-19 pandemic.”

The change follows in the footsteps of countries like Australia, Germany, Spain and France that have taken steps to limit or further scrutinize takeovers from foreign investors. A month into the pandemic, innovation and legal experts say Canada’s move comes late and that it shouldn’t just be limited to the pandemic’s time-frame as COVID-19 has laid bare the country’s vulnerabilities when it is too reliant on international players for critical goods.

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Innovation, Science and Economic Development Minister Navdeep Bains was not available for an interview Saturday.

In a statement, he said the enhanced scrutiny is needed to put a buffer between economically weakened companies and “opportunistic investors.”

Mr. Bains’ office did not say whether it has already identified foreign entities trying to take advantage of the lower valuations of many companies, but the Canadian Chamber of Commerce said it was not aware of any opportunistic buying so far. Still the chamber’s senior director of international policy, Mark Agnew, said the pandemic has shown the country needs to protect key sectors.

“Naive thinking will leave us ill prepared for future pandemics,” Mr. Agnew said in a statement

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He cautioned that the domestic economy still needs foreign capital and the move by Ottawa could have a “chilling effect.” The chamber also called on Ottawa to more widely publicize the changes, which were announced on a federal government website and flagged to some journalists.

Boarded up clothing stores are seen on Robson Street, in Vancouver, on Thursday, April 16, 2020.

DARRYL DYCK/The Canadian Press

The federal government should be clear about which sectors will be subject to the broader scrutiny, Mr. Agnew said.

Paul Boothe, a retired professor and former associate deputy minister at Industry Canada, said the policy statement puts companies “on notice” that the government will be taking a closer look at some transactions.

Attracting foreign investment has been a big focus of the Liberal government since is was first elected in 2015. To push its agenda Ottawa established Invest Canada in 2018. Saturday’s policy marks a departure from the federal government’s previous stance.

The new policy was panned by Jim Balsillie, chairman of the Council of Canadian Innovators, who said it’s not adequately thought through and falls short on several measures.

Jim Balsillie speaks at The Globe and Mail’s Canada Future Forward Summit, June 26, 2019, in Toronto.

Glenn Lowson/The Globe and Mail

“It confuses foreign direct investment with foreign portfolio investment, its short term applicability ignores the sustained capacity a sovereign country requires, and its narrow scope ignores the breadth of strategic assets required to protect Canadians’ interests,” Mr. Balsillie said.

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“Whoever developed this policy needs to talk to innovation policy experts who understand how strategic technologies are developed, commercialized and move across borders.”

Natalie Raffoul, an Ottawa patent lawyer with Brion Raffoul LLP, said the pandemic has revealed the vulnerability in becoming too dependent on international sources for critical goods. To prevent a repeat, she said more focus needs to be put on developing and protecting Canadian-made patents and other intellectual property so there is more domestic control over supply chains — not just for health and safety, but for the country’s overall prosperity and security.

“It’s great to see the government doing this, but I hope that it’s not just a COVID-19 specific measure and that they’re going to be now long-term looking at scrutinizing foreign direct investment,” Ms. Raffoul said. She stressed the distinction between foreign direct investment, which leads to foreign control, and foreign portfolio investment, which gives Canadian companies access to cash without forfeiting control.

Saturday’s statement comes a day after Prime Minister Justin Trudeau announced $1.2 billion in help for startups and small businesses. Given that companies, weakened by the pandemic-sparked economic crisis, are already desperate for cash, Ms. Raffoul said Ottawa is late implementing the new measures.

Prime Minister Justin Trudeau speaks during his daily press conference on the COVID-19 pandemic, in front of his residence at Rideau Cottage on Saturday, April 18, 2020.

Justin Tang/The Canadian Press

“We waited now a month,” she said, “so hopefully these programs can now move quickly to ensure that our innovative companies are going to be protected so we don’t lose the ground that we already have.”

The heightened scrutiny of foreign takeovers during the pandemic is also missing protections for patents, according to Jim Hinton, a Kitchener-Waterloo-based intellectual property lawyer with Own Innovation. Cash-strapped companies can boost their coffers by selling their patents or save money by letting patents lapse, which risks Canada losing even more of its domestically-made intellectual property and doing so at a discount, he said.

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“The tide has gone out and we are now shown that we don’t have the innovation capacity that you need to weather both economic and health storms,” he said.

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Economy

Canadian retail sales slide in April, May as COVID-19 shutdown bites

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december retail sales

Canadian retail sales plunged in April and May, as shops and other businesses were shuttered amid a third wave of COVID-19 infections, Statistics Canada data showed on Wednesday.

Retail trade fell 5.7% in April, the sharpest decline in a year, missing analyst forecasts of a 5.0% drop. In a preliminary estimate, Statscan said May retail sales likely fell by 3.2% as store closures dragged on.

“April showers brought no May flowers for Canadian retailers this year,” Royce Mendes, senior economist at CIBC Capital Markets, said in a note.

Statscan said that 5.0% of retailers were closed at some point in April. The average length of the closure was one day, it said, citing respondent feedback.

Sales decreased in nine of the 11 subsectors, while core sales, which exclude gasoline stations and motor vehicles, were down 7.6% in April.

Clothing and accessory store sales fell 28.6%, with sales at building material and garden equipment stores falling for the first time in nine months, by 10.4%.

“These results continue to suggest that the Bank of Canada is too optimistic on the growth outlook for the second quarter, even if there is a solid rebound occurring now in June,” Mendes said.

The central bank said in April that it expects Canada’s economy to grow 6.5% in 2021 and signaled interest rates could begin to rise in the second half of 2022.

The Canadian dollar held on to earlier gains after the data, trading up 0.3% at 1.2271 to the greenback, or 81.49 U.S. cents.

(Reporting by Julie Gordon in Ottawa, additional reporting by Fergal Smith in Toronto, editing by Alexander Smith)

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Economy

Canadian dollar notches a 6-day high

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Canadian dollar

The Canadian dollar strengthened for a third day against its U.S. counterpart on Wednesday, as oil prices rose and Federal Reserve Chair Jerome Powell reassured markets that the central bank is not rushing to hike rates.

Markets were rattled last week when the Fed shifted to more hawkish guidance. But Powell on Tuesday said the economic recovery required more time before any tapering of stimulus and higher borrowing costs are appropriate, helping Wall Street recoup last week’s decline.

Canada is a major producer of commodities, including oil, so its economy is highly geared to the economic cycle.

Brent crude rose above $75 a barrel, reaching its highest since late 2018, after an industry report on U.S. crude inventories reinforced views of a tightening market as travel picks up in Europe and North America.

The Canadian dollar was trading 0.3% higher at 1.2271 to the greenback, or 81.49 U.S. cents, after touching its strongest level since last Thursday at 1.2265.

The currency also gained ground on Monday and Tuesday, clawing back some of its decline from last week.

Canadian retail sales fell by 5.7% in April from March as provincial governments put in place restrictions to tackle a third wave of the COVID-19 pandemic, Statistics Canada said. A flash estimate showed sales down 3.2% in May.

Still, the Bank of Canada expects consumer spending to lead a strong rebound in the domestic economy as vaccinations climb and containment measures ease.

Canadian government bond yields were mixed across a steeper curve, with the 10-year up nearly 1 basis point at 1.416%. Last Friday, it touched a 3-1/2-month low at 1.364%.

(Reporting by Fergal Smith; editing by Jonathan Oatis)

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Economy

Toronto Stock Exchange higher at open as energy stocks gain

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Toronto Stock Exchange edged higher at open on Wednesday as heavyweight energy stocks advanced, while data showing a plunge in domestic retail sales in April and May capped the gains.

* At 9:30 a.m. ET (13:30 GMT), the Toronto Stock Exchange’s S&P/TSX composite index was up 16.77 points, or 0.08%, at 20,217.42.

(Reporting by Amal S in Bengaluru; Editing by Sriraj Kalluvila)

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