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Cablegate: Responses to Canada's Competition Policy Review

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TAGS: ECON EFIN EINV ETRD CA
SUBJECT: RESPONSES TO CANADA'S COMPETITION POLICY REVIEW
PANEL AND THE LIKELY RESULTS FOR CANADA'S ECONOMY

1. (U) Summary: On June 26, the government-appointed
Competition Policy Review Panel released its final report
entitled &Compete to Win.8 The Panel was created in July
of 2007 and tasked with reviewing Canada's competition and
foreign investment policies in order to issue recommendations
to the Minister of Industry on how to increase Canada's
global competitiveness. The five member panel found that
greater competition in Canada's domestic market will boost
economic performance and lead to a higher standard of living
for Canadians. The report included 65 broad recommendations
to which the government has yet to issue a detailed response.
Many reports addressing similar issues of competitiveness
have appeared in the past and although most were met with
approval, they have, with one exception, created few tangible
results. In light of these past reports and the broad-based
nature of the current report, it seems unlikely that many of
the recommendations will translate into direct policy
changes. Many critics contend that even if the report's
recommendations are adopted, they will do little to change
what has been described as the ingrained Canadian distaste
for competition. End Summary.

&Compete to Win8: Recommendations
---------------------------------
2. (U) The Competition Policy Review Panel was created on
July 12, 2007 by the federal Ministers of Industry and
Finance and charged with producing a report by June of 2008
examining Canada's global competitiveness based on panel
research and consultations. The government formed the panel
after a string of foreign takeovers in 2006 and 2007 raised
questions about Canada's ability to maintain ownership of its
economic base. For example, Hudsons Bay Company, Canada's
oldest and most iconic retailer, was bought by South Carolina
billionaire Jerry Zucker in 2006; in the biggest foreign
takeover in Canadian history, aluminum giant Alcan was sold
to British mining conglomerate Rio Tinto in 2007; and also in
2007, The Four Seasons hotel chain was purchased by Prince
Alwaleed of Saudi Arabia. The panel received input from
approximately 300 businesses, law firms, governments,
individuals, academics, unions, and cultural and public
interest groups in Canada, as well as others from abroad. In
addition, the members conducted research studies on various
subjects and reviewed best practices with officials from the
U.S., Australia, EU, and OECD. While the majority of
recommendations are aimed at government and business, the
panel hopes the report will be read by all Canadians so as to
foster a renewed national competitive mindset. The Panel
includes members from diverse regions of Canada with
experiences in a variety of industries and is chaired by L.R.
"Red" Wilson, a senior executive with both public and private
sector experience and former CEO of Bell Canada Enterprises
Inc.

3. (U) The final report's overarching proposition is that
being open to competition is in Canada's national interest.
To accomplish this, the report recommends the removal of
legal, regulatory, and policy barriers to competition as well
as the adoption of conditions to create a business
Qas the adoption of conditions to create a business
environment that allows Canadian companies to compete
globally. Some of the Panel's major recommendations to
remove these barriers include raising the dollar threshold
for takeover bids requiring federal approval; lower and
&smarter8 taxes; easier entry for foreign firms into
certain sectors; and removing the ban on bank, insurance, and
cross-pillar mergers in the financial services industry. The
report proposes that the responsibility placed on the bidding
firm to prove that a foreign takeover is of net benefit to
Canada be shifted to the government to show why the deal is
contrary to the national interest. As evidence of the
&everything but the kitchen sink8 approach taken by the
Panel, the report also extends its recommendations to
streamlining immigration policy, improving the post-secondary
education system, increasing innovation and R & D funding,
and harmonizing provincial and federal regulations. For
example, by hastening the immigration process for skilled
foreign workers and producing more university graduates with
advanced degrees in specialized fields, the report asserts
that Canada will have the advantage of a highly educated,
skilled, and flexible workforce crucial to attracting
investment.

OTTAWA 00001115 002 OF 005

4. (U) The panel stresses that the recommendations of the
report are not meant to solve short-term economic issues, but
rather to ensure Canada remains competitive into the future.
To this end, the report also suggests implementing a
long-term Competitiveness Agenda for Canada. As part of this
agenda, the panel proposes the creation of a Canadian
Competitiveness Council under the Minister of Industry that
would monitor and ensure the country's progress and make a
yearly report to Parliament.

&Compete to Win8: Reactions
---------------------------
5. (U) The majority of initial reactions to the Panel's
report have been positive. According to Ailish Johnson,
Senior Director of Competition Panel Response at Industry
Canada, the report was well-received by Prime Minister Harper
and Minister of Industry Prentice. Prentice is currently
studying the report, and the government is expected to issue
a formal response in the near future, although there is no
definite timeline for its release.

6. (U) A broad coalition of business groups issued a
statement applauding the report. Thomas D,Aquino, President
of the Canadian Council of Chief Executives, praised its
&comprehensive, deep, and far reaching8 nature and agreed
that the best way to address concerns about increased foreign
acquisitions is by encouraging Canadian companies to compete
globally rather than by intensifying protectionism. The
Canadian Manufacturers and Exporters support the recommended
regulatory changes, but like many of the business
organizations, think that the responsibility and mechanisms
to increase competitiveness lie squarely in the hands of
policymakers, referring to the report mainly as a &call to
action8 for governments. In addition to these two groups,
the coalition included the Air Transport Association of
Canada, the Canada-China Business Council, the Canada-India
Business Council, the Canadian Association of Petroleum
Producers, the Canadian Bankers Association, The Canadian
Chamber of Commerce, Canada's Chemical Producers, the
Federation des chambers de commerce du Quebec, the Forest
Products Association of Canada, the Insurance Bureau of
Canada, and Canada's Research-Based Pharmaceutical Companies.


7. (U) Academics and think tanks are also overwhelmingly
supportive of the recommendations outlined by the panel, as
the call for increased Canadian competitiveness has been one
that many of these groups have been making for years. Anne
Golden, President and CEO of the Conference Board of Canada,
sees the report as an &important contribution to what must
be a nationwide effort to make our country a more creative
and successful competitor in the world8 and says that the
report's proposals are fully consistent with the Conference
Board's past decade of research on the subject. Finn
Poschmann, Director of Research at the C.D. Howe Institute
(Canada's preeminent economic think tank), agrees with the
implementation of the panel's recommendations and even urges
the government to step beyond them in some areas.

8. (U) Among those expressing dissatisfaction with the report
were members of the opposition parties in Parliament and
Qwere members of the opposition parties in Parliament and
consumer groups. President of the Canadian Labor Congress,
Ken Georgetti, called the report &a waste of time8 that
reflects only business interests and not what would benefit
all Canadians. The New Democratic Party's industry critic,
Peggy Nash, said the report neglects the real issues
affecting citizens and firms, such as the high dollar, rising
fuel prices, and deteriorating infrastructure, and &seems
like a wish list from the Canadian Chamber of Commerce and
Council of Chief Executives taken off the shelf.8 The
Canadian Federation of Independent Businesses, while
supporting the need for a comprehensive competition policy,
criticized the recommendation to allow mergers in the
financial sector, and said that this, along with a focus on
large corporations, would harm SME growth.

9. (U) Indeed, many reactions focused specifically on the
recommendation to allow mergers of financial services
companies. While financial industry players call the

OTTAWA 00001115 003 OF 005


proposal &realistic and practical8 and cite domestic
mergers as key for corporations with a small home market to
succeed globally, consumer advocates say this would lead to a
drop in domestic competition, higher fees, and less customer
service for average Canadians. For his part, Finance
Minister Flaherty has noted that lowering the bar to allow
bank mergers is not a priority for the government.

Background: The Canadian Economic Environment and Past
Reports Addressing its Shortcomings
--------------------------------------------- ---------
10. (U) The Canadian problem of lackluster competitiveness is
not new, and neither are reports that attempt to solve it.
In her book &Why Mexicans don't Drink Molson: Rescuing
Canadian Business from the Suds of Global Obscurity,8
business writer Andrea Mandel-Campbell attributes the
beginnings of Canada's penchant for government protectionism
to Sir John A. Macdonald,s National Policy of 1879. As
Canada's first prime minister, Macdonald sought to nurture
Canada's &infant industries8 by enacting high protective
tariffs, a plan which Mandel-Campbell asserts, &(encouraged)
the creation of coddled state-sanctioned monopolies while
entrenching a clique of well-connected businessmen trained to
seek government favor.8 However, she says that what really
embedded the National Policy into the Canadian way of
thinking was &its ability to equate the protection of vested
interests with a nationalistic endeavor to protect the
Canadian identity.8 This paved the way for the
highly-regulated and government-dependent business
environment as well as the prevalent supply management
regimes existent today. Farmers in the dairy and poultry
industries must participate in the supply management system
by buying quota in order to be able to produce and sell their
product. Those who grow wheat must sell it to the
monopsonistic Canadian Wheat Board, which defends its
necessity by saying that without the Board, farmers would be
unable to get a competitive price for their crop. Both
systems, their critics argue, ensure that demand always
exceeds supply and consequently, consumers pay higher prices.
Furthermore, supply management provides no incentive for
farmers to increase innovation or efficiency.

11. (U) While government intervention is still present in
many sectors of industry, in the recent past Canada has taken
steps to privatize some of its state-owned enterprises.
Former federal entities include the Canadian National
Railroad (privatized in 1995), Air Canada (privatized in
1988), Canadair Aerospace (privatized in 1986), and
Petro-Canada (privatized in 1991).

12. (U) Although the current Panel's report is the most
broad-based review yet undertaken of competition policy and
its effect on the Canadian economy, many reports addressing
related issues have been produced in the past by both
government appointed panels and think tanks. The 1982 Royal
Commission on the Economic Union and Development Prospects
for Canada, also known as the MacDonald Royal Commission, was
the first and clearly the most significant blue-ribbon
committee to explicitly address competition issues. The
Qcommittee to explicitly address competition issues. The
panel was appointed by Prime Minister Trudeau due to concerns
about a slowing economy and a political process which seemed
ill-equipped to generate effective policy solutions.
Released in September of 1985, the final report recommended a
shift from government intervention to market forces and
greater social equality while maintaining the welfare state,
along with the implementation of a free-trade agreement with
the U.S. While no government consensus was ever reached to
act upon the other recommendations, the report was
instrumental in building momentum for the eventual
U.S.-Canada Free Trade Agreement of 1988 and set a precedent
for successive overarching reviews of Canadian economic
performance.

13. (U) The most comprehensive study released prior to
2008,s &Compete to Win8 came out of &Canada's Innovation
Strategy8 that was pursued by the Liberal government from
2001 to 2005 and generated the paper entitled &Achieving
Excellence: Investing in People, Knowledge and Opportunity.8
This, along with its accompanying report &Knowledge
Matters: Skills and Learning for Canadians,8 concentrated on

OTTAWA 00001115 004 OF 005


ways to increase innovation in the Canadian economy by
investing in continuous education and training for Canadian
people. The House of Commons Standing Committee on Industry,
Natural Resources, Science and Technology held meetings with
witnesses from a variety of sectors during this time to
gather different views on the reports. The Innovation
Strategy was already gathering dust when Parliament was
dissolved in November of 2005, and was effectively aborted
when the Conservative government took power in February of
2006. In addition, think tanks and the Conference Board of
Canada have released various papers on the benefits to the
Canadian economy of increased competition.

14. (U) While the reactions to these previous reports were
also generally positive, in hindsight, they were largely
academic exercises, as few tangible policy changes or
increases in the global competitiveness of Canadian companies
resulted from their publication. The 2001 "Achieving
Excellence" report was criticized for being too broad, which
was cited as a primary reason for its failure to instigate
any real change. While those who undertake the studies
believe, or come to believe, in the benefits of competition,
there is no actual momentum from outside the primarily
academic or policy communities to increase Canadian
competitiveness. Furthermore, the business leaders that are
part of this community of supporters see it as the
government's job to foster competition policy and have not
made significant changes to the way they do business.

Likely Results of &Compete to Win8: What (if anything) will
it do for Canada's economy?
--------------------------------------------- --------------
15. (U) Although the Conservatives have stated that they will
take the panel's report seriously, it will likely take much
more than just the support of the current government to bring
forth the changes necessary to make Canadian companies into
global players. To increase Canadian competitiveness, the
country will need the cooperation and initiative of
provincial and federal governments, business, and the
Canadian public. However, as Mandel-Campbell points out, at
the heart of the issue is a Canadian ideology that is
indifferent, if not adverse, to competition; a problem which
the panel touches on briefly, but whose reversal is truly the
key to unlocking Canadian competitiveness and paving the way
for the full thrust of the report to be realized. Jeffrey
Simpson, The Globe and Mail's national affairs columnist,
agrees with Mandel-Campbell, saying that, &the prime answer.
. . is the Canadian mindset.8

16. (U) While the general public has yet to realize that it
even plays a role in stimulating Canadian competitiveness,
businesses, for the most part, simply refuse to recognize
theirs. Business leaders use the lack of government movement
on competition policy reform as an excuse for why their
companies are not competitive abroad. Roger Martin, dean of
the Rotman School of Management at the University of Toronto
and chair of the Institute for Competitiveness and
Prosperity, says, &too many of our business leaders and
QProsperity, says, &too many of our business leaders and
government polices are aimed at preserving what we have
rather than playing to win.8 Mandel-Campbell makes the case
that instead of finding ways to compete globally in spite of
government regulation, many rely on the government both as an
explanation of why they are not global players and as a
source of protection from foreign corporations who are
increasingly competitive in the global marketplace. With
some Canadian firms lobbying for the government to increase
competitiveness and others wanting to remain under its
protectionist policies, in the absence of a strong public
opinion outside of academic circles, the government is stuck
between the lobbies of industry with no incentive to
decisively choose between the two.

17. (SBU) Comment: With such a broad report and no strong
public impetus to move forward with competition policy, it is
difficult to see how government policymakers managing
important but only indirectly related areas addressed by the
panel, such as higher education and immigration, will be
inclined to make reforms solely with the goal of increasing
competition. While in the short-term, Canada's place in the
North American economy is unlikely to change drastically, a

OTTAWA 00001115 005 OF 005


failure to address the various non-competitive facets of the
domestic market will position Canada at a disadvantage for
the future and will be increasingly more difficult to correct
as the global marketplace expands. End Comment.

Visit Canada,s Economy and Environment Forum at
http://www.intelink.gov/communities/state/can ada

WILKINS

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