Representatives of the Canadian and U.S. governments are conferring on how to end the incentives game in which provinces and states compete for companies by offering subsidies.The practice has allowed corporations to play a secretive poker game by holding their expansion investment cards close to their chests while shopping around for the best multi-million-dollar government subsidy.
Last year, Ford Motor Co. took the spoils of a bidding war between Ontario and Ohio and decided to build a new plant near Windsor after receiving offers of grants from the Ontario and Canadian governments totalling $68 million. General Motors of Canada is considering building a $600 million cast aluminum auto parts plant near Montreal, with the Quebec and Canadian governments offering a $100 million bait. But GM also is considering other locations in the United States and in Mexico -- where exactly remains a mystery.
Canada soon may be involved in another fight to win a multi-million-dollar contract from GM for the world's largest industrial airlift which may be worth as much as $4.5 million a week. A joint venture by Air Canada and the Venezuelan Airline Viasa is said to be the front runner for the contract, although two U.S. carriers and a U.S. airport also are under consideration. a
The Ford deal was a sort of watershed which actively launched Ontario as a serious player in the incentives game, and competitive bidding has been further heightened by Canadian companies taking ever larger investment steps into the United States, where states and municipalities have been offering a wide variety of incentives such as reduced real estate taxes, low-interest bonds, preferred borrowing rates and regional development grants.
However, in spite of general condemnation and a desire by officials on both sides of the 49th Parallel to get out of these location wars, corporate planners -- who know the rules of the game and have learned to leverage the knowledge that investment is mobile and will move, given the right package of incentives -- can expect to choose from the variety of incentives until a satisfactory agreement is reached. Some critics of business have labelled this practice corporate blackmail, but incentives are becoming a fact of life.
An indication of the Canadian government's concern has come from Robert de Cotret, until recently minister of Economic Development, who says U.S. officials "don't like the practice, and we don't like it, so I hope we can move toward a resolution. It's a mug's game. Sometimes you win and sometimes you lose, but overall no one really wins."
Former U.S. ambassador to Canada Thomas Enders voiced the U.S. government's concern: "It is equally urgent for the two governments to find a means of mutual disarmament in the subsidies area."
One possible vehicle for this disarmament is the Multilateral Trade Negotiations. Agreements are being discussed to recognize subsidies for certain policy objectives such as regional development, research and development and industrial restructuring. What may be needed is a set of guidelines on what constitutes legitimate subsidies to corporations looking for industrial locations.
But such guidelines have their own inherent problems. Don McEwan, a spokesman for the Ministry of Industry, Trade and Commerce, said "a big hurdle is Washington's lack of control over its states and municipalities. bOur fiscal policy prevents our municipalities and provinces from going the tax route. In effect, our federal government has some degree of control over the provinces, but unless there's some control over the individual states -- some of which are pretty powerful -- an agreement would be ineffective. If they were willing, everyone would be willing to back down."
There's also the problem of how to define special policy objectives.
Regardless, it seems both governments went out because the location wars are expensive irritants that play into the hands of highly solvent companies.
The current furor has its roots in the mid-seventies when southern U.S. state representatives came to Canada with intentions of attracting potential Canadian investors. Pat Lavelle is president of the Automotive Parts Manufacturers' Association of Canada, which would like to see an Automotive Investment Corporation set up to attract investment through direct loans at competitve rates of interest. "These representatives, especially from Tennessee, enticed Canadian companies to go south by wining and dining company officials," Lavelle said.
"They offered funds through municipal tax-exempt bonds. No particular sector was focused upon, but they were very interested in the auto industry. This practice has now settled down, but the trust has escalated up to the Ford deal."
Washington expressed anger over the joint $68 million grant -- $40 million from the Canadian government and the rest from Ontario -- to Ford to build a new engine plant that otherwise would have gone to Ohio. The Canada-Ford deal was estimated as being several times greater than what Ohio offered and 12 percent more than the largest incentive ever offered in the United States -- the $59 million given Volkswagen of America Inc. by Pennsylvania in 1976.
The fact that Canada, a relative neophyte in the sophisticated game of incentives grants, beat the U.S. jurisdiction at its own game and is now offering close to $100 million in regional grants to GM, has only exacerbated the dispute. "The American government doesn't look to kindly on foreign government subsidies," an ITC spokesman said.
Ontario's plunge into the game came as a result of an urgent need "to make Ontario competitive with neighboring jurisdictions," as one provincial official put it. Citing certain conditions which traditionally keep costs higher vis a vis the United States, and a need both to ensure stable long-term employment and to stimulate export development, the Ontario government said it was forced to protect its interests by helping to tilt investment decisions in its favor.
As part of a new industrial development strategy to face external competition for exports and to attract new and expanded production facilities, the government created the Employment Development Fund -- Ford's $28 million from the province is being drawn from the fund's $200 million allotment -- and revamped its Ministry of Industry and Tourism. This indicated a marked departure from Ontario's hitherto benigh approach to fostering industrial development.
Premier William Davis, in response to these initiatives, said, "We are not particularly enthusiastic about the need to use public funds to induce industrial development in Ontario in competition with other provinces or states. But as long as the current 'rule-book' is being used, we do not intend to loose out through lack of effort."
Although Ontario's stakes are more modest than some of those being offered by U.S. states, Davis emphasized the necessity of his government's action, saying "others have started it and we intend to compete for our share." a
The new free-enterprise-learning Conservative government also has revamped its top economic ministries to achieve a more integrated approach to industrial and trade policies. Like the Ontario government, the federal government's stand on the bidding wars is simple and goes something like this: Involvement in competitive subsidization is a no-win proposition. But pending the successful outcome of negotiations, the Canadian government will not stand by while substantial investment is lost as a result of incentives available in other jurisdictions.
Although the federal government may be new to these location-war grants, grants in general are becoming a growth industry. Within the government, about 30 departments and agencies administer more than 300 programs and services assisting business. The visible hand of a patronizing government is becoming as permanent a feature of the system as taxes. Economic development is the name of the game, and the government provides more than $8 billion a year in grants, loans and loan guarantees to promote this aim.
Joe Armstrong, a senior incentives officer for the Department of Regional Economic Expansion (DREE) -- the grandaddy of grants programs -- said "the Canadian investment environment is one of the best in the world, and access to funding is relatively straight-forward. DREE is looking for any domestic or foreign company interested in expansion or modernizing facilities. The socio-economic criteria include job-creation capabilities, technical evolution and export potential."
He claimed that the Foreign Review AGENCY (FIRA), set up to screen foreign takeovers and expansion, is "responsive to most foreign investments." There were 620 foreign applications in 1978, and the FIRA approved 576 of them, including 92 percent of the takeover proposals and 93 per cent of the new proposals.
The provinces also compete vigorously with one another for new investment by offering additional incentives of their own. However, de Cotret said he will oppose any attempt by Alberta to lure Ontario industries by offering cut-rate energy prices, thus bringing on an interprovincial war. Ontario, Quebec -- where an uncertain political situation is causing government agents to desperately seek new investments -- british Columbia and Alberta are very active.
However, the United States may have delivered a setback to Canadian incentives programs when the Treasury ruled earlier this year that Canadian grants to Honeywell Ltd. -- $300,000 in 1974 for research and development -- were export subsidies and thus subject to countervailing duties. dExpressing Canada's concern, Peter Woolford of the ITC said "the implications are are [that] anything we do to support industry may be countervailed and a lot of our programs will be seriously undermined."
What may be at stake is the survival of Canadian high technology that is so dependent on R&D money from Canadian governments. Talks at the MTN may lead to developement of ways to regulate countervailing duties by permitting certain subsidies and hearings in which the plaintiff will have the responsibility of proving injury. In light of this, Honeywell's payments are being held in escrow.
Ironically, coutervailing duties may help to stop the bidding wars. It's not known how many businesses may have shied away from DREE and other grants because of fear of these duties.
The relative lack of R&D is of great concern to the automotive sector -- an overall deficit of almost $3 billion in Canada's trade account with the United States is expected. Management functions have become increasingly located in head offices in the United States, while the principal efforts of subsidiaries in Canada are devoted to production. And critics of the auto pact feel this situation is further aggraved by U.S. incentives which tend to encourage both U.S.-owned and Canadian-owned vehicle and parts producers to retain new investment in the United States.
The APMA would like to see mechanisms set up to help Canadian jurisdictions to be more competitive. Lavelle said "the lack of a specific program for the auto sector is costing us both domestic and foreign investment."
For a variety of reasons, including incentives, Canadian companies continue to pour large sums into the United States. According to the U.S. Conference Board, Canadians accounted for 59 of 358 direct investments in the U.S. manufacturing sector last year, ranking Canada third behind Britain and West Germany as the major foreign investors.