Canadian officials today defended the government's foreign investment review policy, which has been found to violate international trade agreements because of a requirement that foreign-owned companies in Canada buy Canadian raw materials.
A supervisory committee of the General Agreement on Tariffs and Trade (GATT) ruled that this provision violated the GATT code, in a decision that has not been made public but which has been circulated to both the Canadian and U.S. governments.
While U.S. officials applauded the findings as a victory for the free flow of trade and investment, the Canadian government has pointed to a second ruling by the committee as upholding another aspect of Canada's Foreign Investment Review policy. FIRA can require Canadian subsidiaries of multinational companies to export a portion of their output, according to members of the GATT committee--representatives of three neutral nations.
Although FIRA has been in operation for 10 years, the complaint against it was not taken to the GATT until early 1982 by the Reagan administration, which was becoming alarmed by the increasingly nationalistic economic policies of the Canadian government under Prime Minister Pierre Trudeau. It was especially concerned with FIRA and the national energy program, which gave Canadian energy companies preferential treatment in oil and gas exploration and production.
The United States, whose companies have $106 billion invested in Canada, has been concerned that FIRA's screening of the acquisition of Canadian-owned companies by U.S. companies and of new foreign investment in Canada impeded the free flow of international capital by its time-consuming and often capricious procedures.
FIRA, which has never published a codified set of requirements for foreign investors wishing to invest in Canada, has usually asked investors to agree to "undertakings," the details of which, although subject to approval by the Canadian Cabinet, are seldom made public.
In its grievance to GATT the United States argued a relatively narrow case, that two types of undertakings commonly demanded by FIRA broke the GATT code. And the panel ruled that FIRA violated Article 3 of the GATT, which provides that exporters must be treated in the same way as domestic suppliers, by requiring that Canadian subsidiaries of U.S. companies buy materials in Canada as a condition of acquiring or setting up businesses in Canada.
But the panel also found that FIRA did not break Article 17 of the GATT by requiring Canadian subsidiaries to export a portion of their production, a FIRA provision aimed at forcing multinationals to establish larger plants in Canada than they otherwise would.
"They have found that we're at fault on one aspect of their examination," Canada's external affairs minister Allan MacEachen said. "It doesn't change the basic validity of FIRA." And Canada's international trade minister Gerald Regan argued that the ruling should not be overestimated. "It doesn't question the basic role of FIRA in any way," he said.
A Canadian official added that the decision was "complex" and was still being studied by Ottawa. However it was indicated by officials that no modification of the law under which FIRA operates would be required for Canada to comply with the panel's ruling. Since the requirement to buy Canadian is simply one item on a list of administration standards against which prospective investment is judged, Canada can satisfy the U.S. complaint simply by dropping the requirement from the list.
The panel's ruling must now be ratified by the 88 member GATT council, which is slated to meet next on Oct. 3. But according to one U.S. Embassy official there is already some indication that the panel's judgment might not be considered at the October meeting. Some other GATT members, whose own foreign investment screening procedures might be jeopardized if the GATT council ratified the panel's ruling, would be happier if Canada avoided a GATT vote by resolving the grievance before the council meets.
In recent months, senior officials of the U.S. Embassy in Ottawa have said that many of the concerns that both the administration and the U.S. business community have had with FIRA have been satisfied by changes made by the Canadian government last summer which were designed to speed up the processing of applications.
Since last fall, when Edward Lumley, a close friend of U.S. special trade representative William Brock took over the responsibility for FIRA from Herbert Gray, the most economically nationalist member of the Trudeau Cabinet, the backlog of FIRA applications has been cleaned up and the agency has approved just over 95 percent of applications, the highest rate of approval in its history.