New Socialist Group: CANADA: Does the U.S. control Canada’s economy?

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Does the US control Canada’s economy?
By Bill Burgess

Most socialists, anti-globalization activists and other progressive-minded people in Canada believe that the US controls Canada’s economy. US capitalists are often considered the “main enemy.”

If this was true, Canadian nationalist demands could play a positive role in working-class and other progressive struggles. However, the left-nationalist understanding of Canada’s economy is wrong on three inter-related points.

First, there is less US investment and control within Canada than is widely assumed. Second, capitalists in Canada are not so divided between industrial sectors or integrated with US capitalists that they lack independent interests at home and abroad. Finally, capitalist industrial development in Canada is not distorted or underdeveloped.

In other words, Canadian capitalists, not foreign capitalists control the Canadian economy. Capitalism here is Canadian.

Left-nationalists have argued for decades that Canada suffers from a distorted form of economic development flowing from foreign control. Their usual solution has been some form of “national industrial policy” to direct Canadian capitalism away from natural resource or “staple” production towards job-richer, “higher-end” manufacturing activities.

In fact, there is actually little to criticize about the comparative record of capitalism in Canada. Yes, Canada is more specialized in primary products than other G7 countries (US, Japan, Germany, Britain, France, Italy). However, this is not some kind of “staples” colony: the resource-extracting primary sector share of the economy (GDP) is less than six percent.

Nor is the relative scale of manufacturing in Canada very different than that in other imperialist countries. It accounts for the same share of GDP as in the US. Left-nationalists predicted that “free” trade with the US would “de-industrialize” Canada. In 1988 there were 1.99 million manufacturing jobs. There are now 1.93 million. Meanwhile, manufacturing employment in the US has fallen by 3 million.

What about the concern that, within the manufacturing sector, foreign ownership discourages high-tech, end-product manufacturing? Does Canada over-specialize in resource-intensive “intermediate” manufacturing products?

In fact, the “finished goods” portion of manufacturing output in Canada is the same as the equivalent “final product” share of manufacturing output in the US. Both are around one-half of total manufacturing. An OECD ranking of individual manufacturing industries by level of technology also shows that Canadian industry falls within the norm for advanced capitalist economies. “High” and “medium-high” technology industries in Canada in 1995 accounted for a smaller share of total manufacturing than in the US, but their share was greater than in France and Italy.

The ability to export highly-manufactured goods is often cited as a measure of capitalist competitive success. The trend here is exactly opposite to what left-nationalists have predicted for decades.

Figure 1 shows that the share of total exports from Canada made up of both primary product and semi-manufactured goods has declined from around one-third in the 1970s to one-quarter. Meanwhile, the share accounted for by fully-manufactured goods has risen from about one-third to one-half. This share of Canada’s GDP is now four times greater than in the US. In short, capitalist manufacturing in Canada has done what left-nationalists said it should, but could not, at least not without their “national industrial strategy.”

Yes, Canadian capitalism has vulnerabilities that constrain its ability to compete with imperialist rivals. But the core argument of left-nationalists – their basic pessimism regarding the comparative prospects for Canadian capitalist industrial development – is wrong.

What made left-nationalists think that Canada is so different from other imperialist countries? The answer is usually foreign investment. As political scientist Leo Panitch put it in 1985, Canada is marked by “the implantation within the social formation of a powerful fraction of foreign capital on a scale unmatched anywhere in the developed world.”

However, the extent of foreign investment within Canada is exaggerated. Left-nationalists then compound this error by ignoring factors that help the Canadian bourgeoisie retain domination of the domestic economy.

The best indicator of foreign economic penetration within a country is probably the share of corporate assets ultimately controlled by majority or large minority shareholders whose residence is foreign. For example, a corporation in Canada that is 51 percent owned by a corporation headquartered in France, that in turn is 51 percent owned by a family trust in the US, is considered US-controlled.

As illustrated in Figure 2, Statistics Canada reports that 78 percent of all corporate assets in Canada in 2003 were Canadian-controlled. Only 14 percent of corporate assets were US-controlled, less than usually assumed. Left-nationalists invariably restrict their attention to the non-financial half of the economy, where foreign control is higher.

While high foreign control in such industries is significant, it is not representative. Canadians control 85 percent of all corporate assets in the financial half of the economy. The 78 percent rate of overall Canadian control is significantly higher than the 71 percent over non-financial corporation assets, or the 49 percent control over manufacturing assets. And if non-corporate assets (residential, farm, institutional, government, etc.) were included, the rate of Canadian control over all assets in the country would total about 90 percent.

The strategic role of the very largest and most powerful corporations is also relevant here. Statistics Canada calls groups of corporations controlled by a common parent corporation or family an enterprise. It reports that in 1998, Canadians controlled 95 percent of the assets of the largest 25 of these enterprises. The 25 enterprises accounted for 41 percent of all corporate assets in Canada.

Figure 3 lists the 25 largest enterprises in 2003 ranked by assets, plus additional enterprises that complete the “top 25” ranking by revenues. Only two of the 25 enterprises ranked by assets are foreign-controlled. Seven are foreign-controlled when the “top 25” ranking is by revenues.

Another error by left-nationalists is to one-sidedly focus on periods and instances when foreign control increases. Data compiled by Statistics Canada on foreign control of non-financial corporate assets and revenues shows that foreign control over non-financial corporate assets declined significantly between 1970 and 1985. As in most countries it has since risen, but both trends should be considered. A more balanced view is also gained by considering long periods of time. This requires a different indicator of foreign economic penetration, the stock of inward foreign direct investment (FDI) relative to the size of the economy (GDP). Inward FDI in Canada is now equivalent to 32 percent of GDP, compared to 33 percent in 1926. By this measure, Canada is a little less foreign-dominated, less “globalized” than it was 8 decades ago.

Finally, it simply is no longer true that foreign investment distinguishes Canada from other imperialist countries. When one compares the ratio of inward FDI stock to host country GDP in 2003, it is found that foreign penetration of Canada’s economy is less than in the UK and Sweden. The FDI/GDP ratio in Canada grew 10 percentage points between 1980 and 2003, but it grew by an average 27 percentage points in Western European countries. Their 33% average rate is now very similar to Canada’s 32 percent.

Left-nationalists also pay very little attention to outward FDI from Canada. Canadian capitalists hold more direct investments in foreign countries than foreign capitalists hold in Canada. In other words, it is not large inward foreign investments that distinguish Canada as much as large outward investment by Canadian capitalists. Of the G7 countries, only the UK and France have exported more capital relative to their GDP.

Finally, Canada conforms to the imperialist pattern of investing in “Third World” countries. In 2002, Canada was one of the largest foreign investors in the Americas. In most of these countries the US ranked first, but relative to the size of its economy, Canada held more direct investments in these countries than the US.

The third key assumption by left-nationalists is that the Canadian capitalist class lacks independent interests. As economist Mel Watkins describes it, an unequal alliance between Canadian financial capital and American industrial capital prevails within Canada. This country never developed an independent capitalist class rooted in both financial and industrial sectors. Such a class is considered the domestic base for the imperialist form of capitalism.

In other words, Canadian corporations are assumed to be substantially integrated with foreign, especially US corporations. Part of the “Canadian” investment and control cited above therefore reflects foreign rather than Canadian interests. Left-nationalists complain that Canadian capitalists lack any real interest in defending Canadian sovereignty.

The main evidence for this line of argument was the pattern of directorship links between corporations, that is, when the same person serves on two or more Boards of Directors. Sociologist Wallace Clement claimed that only weak directorship links existed between Canadian financial and Canadian industrial corporations in the 1970s. He argued that inter-sector links within Canada were disrupted by extensive foreign ownership of industry.

However, international comparisons of directorship links in the 1980s clearly showed that the Canadian corporate network was relatively well integrated along a financial-industrial axis of Canadian-controlled firms. As sociologist Michael Ornstein notes, the Canadian network was actually one of the best integrated among advanced capitalist countries. William Carroll’s directorship studies confirm that the Canadian corporate network in 1996 was still far more integrated than that in the US. Carroll also tested for divisions along regional lines within the Canadian bourgeoisie, for example, whether the directorship links reveal a separate Western “oil bourgeoisie” allied with the US. They don’t. His results portray a predominately “national” corporate elite, linking finance with industry and East with West.

The significance of directorship links is not always clear, so it is also useful to look at links taking the form of share ownership. Among 600 large corporations in Canada in 2003 for which financial data is available, more than 70 percent had subsidiaries in both ‘financial’ and ‘industrial’ sectors. Of the 34 largest enterprises in Figure 3 ranked by assets and revenues, 23 include both large ‘financial’ corporations and ‘industrial’ corporations.

We know that most large corporations are Canadian-controlled. But even if Canadians own a majority of shares, could minority shareholdings by foreigners provide a link between foreign and Canadian capital, and vice versa? Such alliances could disrupt an independent Canadian corporate interest.

In fact, there were only 26 instances among the large 600 corporations where foreign-controlled corporations or their subsidiaries held significant shareholdings in Canadian-controlled corporations or their subsidiaries. And there were only eight instances where Canadian-controlled corporations were linked through significant share ownership with foreign-controlled corporations within Canada.

Among the 34 largest enterprises in Figure 3, only three foreign-controlled corporations (DaimlerChrysler, Ford and Exxon) had significant share-holdings in corporations associated with Canadian-controlled enterprises. Only three Canadian-controlled enterprises had significant shareholdings in US-controlled corporations within Canada.

In short, the evidence shows that left-nationalists are wrong to deny that independent Canadian financial-industrial capital exists. This class is closely allied with US capital on many points, but this is a choice. It reflects their perception of how to best advance their interests. It is not because they are better connected to foreign capital than to each other.

The assumptions regarding foreign control, the organization of capital and the industrial structure of Canada discussed above have traditionally provided the justification for Canadian left-nationalist politics. In recent years other reasons have been raised, but this perspective is logically and historically rooted in these three points.

They are wrong on each count. Left-nationalists underestimate the Canadian capitalist class and its imperialist character at home and abroad. This is also true of many anti-globalization activists. In practice, both tend to oppose foreign capitalists rather than Canadian capitalists and capitalism itself.

The Left needs to develop a more accurate understanding of Canadian capitalism. This will more clearly place us with the majority of humanity against imperialism. More truth is also essential to better identify the social forces that may join the struggle within the Canadian state for a workers’ and farmers’ government.