Globalization: If he really loves her, he’ll be back

In Criticism, Financial, Fresh, Popular Posts on November 10, 2010 at 8:11 AM

If Globalization is like dating, Canada has some gorgeous features that make some countries jealous, and other countries eager. This allows her to get away with a lot. If he shows his desire openly, she makes him prove it. When he gets fed up, she’ll wait until they’ve both had time to cool off and then send a coy text message: how r u feelin?

There are laws, rules and theories when it comes to globalization, but learning what you can really get away with comes with experience. Canada’s recent decision to reject a corporate takeover has shocked the global community. The New York Times and the Economist have declared this as a clear message that Canada is not open for business. It is only the second time in the last 25 years that the Canadian government has rejected a foreign takeover.

The Globe and Mail is playing the role of an overly concerned mother. The government interfered with BHP Billiton Ltd.’s hostile, lowball bid to takeover Saskatchewan’s Potash Corp. Their reporting interprets the rejection of the bid as Canada sending a strong protectionist message to the world community. Mom won’t stop talking about it.

Traditionally, globalization issues centre on trade disputes. Softwood lumber was an iconic example of how globalization works. Americans accused the Canadian government of not charging the lumber industry enough of a fee for harvesting timber from public land. Americans viewed this as an unfair subsidy. They reacted by charging an exorbitant duty on Canadian lumber to make it unaffordable to American business.

The dispute lasted throughout the massive housing boom where lumber was in peak demand. NAFTA and the WTO concluded that the duties charged by the US were inappropriately high. Even after the decisions, America refused to drop the duties. The global community agreed that America was unfairly protecting its own lumber industry, yet it did it anyway. The US used the indirect Canadian subsidy as an excuse and milked it for as long as it could, to protect its own industry.

There are countless examples of how flexible the rules of the game really are. The most obvious is that China still sets its own exchange rate, which is unheard of in a global economy. But there are many small examples that get overlooked.

Canada recently introduced a law to prohibit flavoured cigarettes. The logic behind this law is that children are more likely to get addicted to a vanilla tasting smoke, as opposed to smoke tasting smoke. In reality, what children get addicted to is the knee-buckling lightheadedness that comes with that first drag, not the vanilla. However, the measure eliminates foreign cigarette choices and keeps Canadians buying Canadian tobacco. That, in practice, is how globalization works.

Potash is a key ingredient in fertilizer and because the world grows its food en mass, it’s considered a key ingredient for the future. Potash Corp alone is estimated to be sitting on 25-30% of the world’s supply. The company is a major employer in Saskatchewan. By rejecting the deal, Canada loses nothing. They keep the jobs, the existing infrastructure and pricing scheme in place. By declaring potash a “strategic resource,” they have blocked free movement of capital in a global economy. They are preventing a really large company from taking over another really large company in order to retain control over potash.

Mom, the Globe and Mail, has accused the government of acting irrationally. Without any rhyme or reason, Canada has declared potash a strategic resource and made up an excuse not to marry Potash Corp. with BHP. What was a corporate match made in heaven has been canceled despite economic logic.

Which raises the question: Is there truly an economic consequence of rejecting the takeover?

The logic holding up Globalization is capitalism, which says that there is a price to be paid. In theory, by restricting free movements in capital, the long run will bring about weaker competition. Weaker competition entails inefficient management and higher prices. However, this pricing inefficiency already exists – and it’s not a bad thing for Canada.

When you set aside all the politics, price remains the central issue with Potash. Currently, all Saskatchewan companies that sell Potash benefit from a jointly owned marketing company called Canpotex. This marketing company sets the price that foreign customers can purchase Saskatchewan Potash for. This entails that under the current structure, Canada is selling potash for more than it is worth.

BHP’s plan was to dismantle this arrangement and subject Saskatchewan’s potash to market prices, which would invariably lower the price of potash and reduce company revenues, provincial royalties, and tax revenues.

Canada’s current arrangement is like a potash cartel. Because they can set the price, they are by definition an inefficient operation. They are commanding more money for the product they are selling, and that inefficiency is being used to support jobs that a lean efficient potash machine would not tolerate.

Economically speaking, Cartels trump Capitalism. Despite their inefficiencies, it’s a hell of a business model. Take the Organization of Petroleum Exporting Countries (OPEC) as an example. Their power in the world community stems from controlling a single scarce resource through a cartel.  Canada has a nice hand and she plans to milk it.

There is the traditional Capitalistic argument that one doesn’t need to own the resource to control it. After all, potash is in the ground. The province of Saskatchewan can simply raise or restructure its royalty fees so that as potash is taken out of the ground, the province is handsomely compensated. The province can make sure BHP promises to keep or perhaps even expand employment in Saskatchewan as part of the takeover bid. Many believe such promises were the missing element from BHP’s bid, causing it to be rejected. Ultimately, it shouldn’t matter who owns the resource, Canada should benefit regardless, provided the deal is right.

However, the world has lost such blind faith in long term Capitalistic ideology. Think intuitively: the best way to ensure control over something is to own it. Years down the road, should potash prices soar, royalty agreements may be deemed excessive by the global community. Control in this situation comes from the board of directors; eight of the twelve are Canadian. If the takeover had occurred, Canada would have been assured of only one seat on the board.

The Canadian government is currently suing US Steel over its failure to keep promises related to jobs and production when it purchased Stelco, a Canadian steel company. The disadvantage of not owning the company is that you have to chase after justice. Owning a resource is the surefire way to control it.

Mom has a point though. Playing the strategic resource card was a lot like saying, “let’s just stay friends,” after you were the one that insisted on dating in the first place. It was low. It hurt BHP and business owners everywhere. It is making the entire world rethink whether she’s really worth it. Without clearly defined rules as to what constitutes a strategic resource, everyone is left to wonder what Canada wants.

But now isn’t the time to feel insecure. Times are tough and the economic security that potash brings Canada should be held closely. If he really loves her, he’ll be back.

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