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Thinking Outside the CNOOC-Nexen Box

August 21, 2012

By DANIEL POON

iPolitics

The $18.2B CNOOC-Nexen proposition, potentially the largest Chinese overseas acquisition to date, is CNOOC’s first attempt to purchase a North American concern since Unocal in 2005, which failed due to a political backlash from the U.S. Congress. Ottawa may not yet be lashing back, but a survey of reactions and commentary on the CNOOC-Nexen deal suggests that Canada’s opinion-makers could benefit from a broader perspective of policy options.

Canada has signaled the desire to ‘look east’ to attract Chinese capital and diversify our energy exports. The current deal, along with other Chinese forays into the oil sands, would give life to the Harper government’s much-touted ‘Asian-hedge’. In 2010, only 10 percent (by value) of Canada’s exports to China consisted of mineral fuels, compared to 20-30 percent of our exports to the U.S., Japan and South Korea, respectively. With adequate infrastructure in place, there is room to boost exports to meet China’s energy appetite.

The strategic aspects that underscore the CNOOC-Nexen deal go beyond the prospects for Canada’s energy and raw materials export sectors, to encompass economy-wide policy implications. As shown in research by Mark Carney, Governor of the Bank of Canada, in the past decade, Canada’s share of world exports nearly halved. For a proud ‘trading nation’, this kind of trend is unsettling to say the least. For continued Canadian prosperity, there is an imperative for the active engagement of emerging markets.

Although transactions of the CNOOC-Nexen genre push Canadian production further towards resource extraction, the role of manufactured exports, albeit diminished, still matters greatly to Canada’s trading performance. While the long term sustainability of manufacturing in North America is in some doubt, assuming its demise is probably premature.

It should be recognized that Chinese oil companies are just one facet of the country’s ‘Going Out’ strategy, with other Chinese firms in value-added sectors not far behind in seeking-out a global competitive edge. Using the CNOOC-Nexen deal to deftly access this feature of China Inc. may offer unprecedented strategic opportunities for Canadian value-added manufacturing and services firms.

For example, one of Canada’s surviving national champions, Bombardier, recently signed a ‘definitive agreement’ with the Commercial Aircraft Corp. of China (Comac), initially covering common strategic areas like electrical systems, advanced materials standards, and cockpit interfaces, to their respective programs to build single-aisle jets for 100+ passengers. The head of Bombardier’s aerospace program contended that working with Comac “evens up the field” with Boeing and Airbus: “We’re a small company … that competes against two giants. They will do everything so that we don’t destabilize the duopoly.”

China Inc. is not a monolithic entity, but the competitiveness imperatives of the Chinese government often involve degrees of strategic coordination among its firms – particularly as it tries to aggressively create its own national champions through efforts like ‘indigenous innovation’ campaigns that are designed to boost domestic manufacturing, high-technology and R&D capabilities. After all, the main shareholder of both CNOOC and Comac (among 115 other firms) is the State-owned Assets Supervision and Administration Commission of the State Council. Comac itself is a consortium of state firms, including the China Aluminum Corp., Baosteel Group, Sinochem Group, and the Aviation Industry Corp. of China, which is already the joint venture partner of Bombardier (as well as with Airbus, Boeing, and Embraer).

Support for national champions is often portrayed as anachronistic in Canada, but not all would agree. An Airbus official divulged, “Of all the newcomers [Comac] will be strongest – not because they have the skill base today, but because they have more financial firepower than anybody else.” Fred Hochberg, Chairman of the U.S. EX-IM Bank opined, “China and other countries will not be shy about using any tool – as much as they can and for as long as they can … State-owned enterprises, sovereign wealth funds, state-directed capital – they will leverage every single one in an attempt to outcompete us.”

Has Bombardier found a backdoor into Beijing’s ambitious ‘indigenous innovation’ industrial policy? A strategy that if handled carefully, would benefit the Canadian economy. Given prevailing weaknesses in China’s economic structure and our own, what other bilateral strategic commercial partnerships could be actively pursued to bolster our own competitiveness through the exploitation of Chinese industrial ambitions? As Dominic Barton, Global Managing Director at McKinsey suggested, “the government could actively support strategic sectors that can help drive re-orientation of Canada’s economy towards Asia.”

Ultimately, rather than quixotically demanding full reciprocity with China Inc., what about reciprocity with ‘Chinese characteristics’? Occasions like the CNOOC-Nexen deal place Canadian policy-makers at a crossroads that, if handled creatively, could indeed be a watershed moment not only for the oil sands, but also in re-invigorating our own brand of capitalism to the benefit of all Canadians.

Daniel Poon, Researcher with the Global Flows and Decent Work team, focuses on the increasing engagement of emerging markets in developing countries, and the resulting economic impacts. Prior to joining NSI he was a visiting scholar at the Institute of World Economics and Politics at the Chinese Academy of Social Sciences in Beijing. He held a similar position in South Africa with the research institute Trade and Industrial Policy Strategies. In 2007-2008, he worked at the Embassy of Canada in Beijing, within the foreign and economic policy divisions. Mr. Poon holds a Master’s degree from Carleton University’s School of Public Policy and Administration (development policy), and a BA from McGill University (political science and economics).