Why China’s bid for Canada’s Aecon makes sense: Olive

The takeover of Canada's Aecon by China's state-owned CCCC could only help the companies and the country.

Aecon Group has been involved in a number of high-profile construction projects, including the CN Tower, Hwy. 407 and the St. Lawrence Seaway.  (Randy Risling / Toronto Star File Photo)  

The proposed takeover of Canadian construction firm Aecon Group Inc. by a state-controlled Chinese company has put the Trudeau Government in a quandary.

The venerable Aecon helped build the St. Lawrence Seaway, the CN Tower and Vancouver’s SkyTrain, and has a contract to help upgrade the Darlington nuclear power complex.

Would the takeover of Aecon by China Communications Construction Co. Ltd. (CCCC) give Beijing undue sway over Canada’s infrastructure? Would it prompt a Sino-phobic U.S. President Donald Trump to scuttle talks to renegotiate the North American Free Trade Agreement?

And would a Chinese-owned Aecon be frozen out of Trump’s proposed $1.3 trillion in infrastructure spending? (All figures in Canadian dollars.)

On the flip side, an Ottawa rejection of the Aecon deal could jeopardize nascent talks in forging a Canada-China free trade zone.

Beijing has signaled the importance it attaches to the Aecon deal. It took the unusual step last week of having its Ottawa embassy issue a statement asserting China’s good standing as a corporate citizen.

As it happens, in the “net benefit” analysis that Ottawa conducts on foreign takeovers, this transaction makes sense for Canada.

• Aecon needs to be part of a bigger entity

Aecon acknowledged as much by putting itself on the auction block last summer. That there were no Canadian bidders for Aecon is also telling.

Aecon peers SNC-Lavalin Group Inc. of Montreal and Edmonton’s Stantec Inc. passed on the chance to pad their revenues by Aecon’s $3.2 billion in sales overnight because the Canada-focused Aecon wouldn’t mesh with their business model of global reach and operational diversity.

The multinational SNC-Lavalin generated about two and a half times Aecon’s revenues last year. And Stantec’s operations on six continents yielded a 2016 profit of $131 million to Aecon’s $47 million, though the two firms are roughly equal in revenues.

If Ottawa approves this deal, Aecon becomes part of a CCCC that is one of the world’s biggest construction enterprises, with revenues last year of $82.2 billion. Backed by the immense financial and diverse technological resources of CCCC, Aecon’s workforce – currently 1,866 employees – would be better able to bid on Canadian contracts while also gaining a passport to the vast Chinese market.

• The Trump factor

Trump could indeed cite the Aecon deal in aborting the already stalled NAFTA talks. Then again, who knows? During his brief time in office, Trump has repeatedly vowed to rip up NAFTA (most recently while renegotiation talks were underway); has proposed the non-starter of a new NAFTA that primarily benefits the U.S.; and has mused about a U.S.-Canada deal that abandons Mexico.

Canadian trade policy can only suffer as a hostage to an addled U.S. chief executive. There’s no need of that, given that Capitol Hill, and not the U.S. president, has the power to abrogate a treaty. And a Capitol Hill controlled by Republicans, traditionally and currently the U.S. party of free trade, has consistently demanded that NAFTA be “repaired, not repealed.”

For that matter, with a Mexican election and “off-year” U.S. elections in 2018, there’s no certainty that even a successfully renegotiated NAFTA would gain the required legislative approval in all three countries. The NAFTA drama may amount to sound and fury over nothing.

As for a Chinese-owned Aecon denied access to the U.S. market, Aecon has never shown a significant interest in the U.S. or any non-Canadian market.

And Trump’s ballyhooed infrastructure renaissance is likely a pipe dream. The G.O.P.’s obsession with huge tax cuts will deepen America’s already troubling deficit. That makes a costly Trump infrastructure scheme that would expand the deficit still further DOA on Capitol Hill.

• The China factor

Rejecting a Chinese acquisition of a second-tier Canadian construction company might not sabotage a possible Canada-China free trade agreement. But it certainly wouldn’t help. Rejection of the deal, or subjecting it to a full national-security review, would be perceived in Beijing as a hostile act, as China’s political leadership has already made clear.

Canada lost its chance at greater access to Pacific Rim markets – the world’s fastest-growing – with Trump’s impulsive withdrawal of the U.S. from the proposed Trans-Pacific Partnership (TPP). The TPP, to which Canada is a signatory, is not dead, but is showing few signs of life.

In a Canada-China deal modeled on the Canada-E.U. Comprehensive Economic and Trade Agreement (CETA), Canadian exporters would gain greater access to a China that is already our second-largest trading partner.

The Trudeau Government has already approved, in the past year alone, three Chinese takeovers of Canadian enterprises. At least one of those deals has more national-security implications than the Aecon transaction.

Blocking the Aecon deal would be inconsistent with that policy, signaling a new antagonist regard for China that Ottawa has neither acknowledged nor possesses. Quite the contrary.

Despite its preoccupation with Washington, the Trudeau government has been strengthening Sino-Canadian relations.

An important marker is Canada’s decision this year to join the two-year-old, Beijing-led Asian Infrastructure Investment Bank (AIIB). The controversial AIIB is intended as a counterpart to the Washington-based World Bank that the U.S. looks on with suspicion.

• The honeypot

Exports to China helped ease Canada through the Great Recession. Canada runs a trade deficit in goods with China of about $30 billion a year. That hints at the upside potential for Canadian exporters should more of them summon the grit to compete in the world’s biggest growth market.

In the midst of its Industrial Revolution, China still requires scores of billions of dollars’ worth of social and physical infrastructure creation and upgrading.

China is also embarking on history’s biggest proposed infrastructure program, a pet project of Chinese President Xi Jinping called One Belt One Road (OBOR).

OBOR, to which China has already committed more than $125 billion, would use new rail lines and other infrastructure to link China with economic centres elsewhere in Asia, and in Europe and Africa.

As wealthy and resourceful as the modern China is, China does not have sufficient capital or engineering and other capabilities to build the sprawling OBOR network on its own.

Canada also has export strengths in agribusiness, financial technology, telecommunications, energy, medical and educational services and in other sectors that match China’s needs, says Glen Hodgson, economist at the Conference Board of Canada.

The real downside for Canada lies with a rupture in Canada’s gradually improving relations with the world’s second-largest economy. On an ominous note, Hodgson is not alone in warning that North American trade is approaching the “maturity point” – that is, it’s poised to flatten out.

So, keeping our eyes on the ball requires maximum attention to shifts in Chinese political sensibilities and economic priorities, and less to the musings of an erratic U.S. president.